Date: April 12, 2013
Topic: The Shrinking Pyramid: Implications for Law Practice and the Legal Profession
Location: Georgetown University Law Center, 600 New Jersey Avenue NW Washington DC 20001
Sponsor: Georgetown Center for the Study of the Legal Profession
Symposium Description:
A consensus seems to be emerging that lower demand for law school graduates will become a permanent
feature of the legal market. This is most notably the case in large law firms whose business model has been
based on a large number of associates at the bottom of a pyramid with a small number of equity partners at
the top. Firms of all size, however, are affected by this trend.
Lower demand reflects the impact of forces such as intensified client insistence on cost-effective legal
services, the growth of more widespread expertise in mapping and disaggregating legal work, the use of
increasingly sophisticated technology and communication systems, the development of new forms of
collaboration between clients and outside lawyers, the provision of a larger portion of legal work by in-house
counsel in some corporations, and the emergence of networks and supply chains as basic units in the
provision of legal services.
This symposium will explore the potential implications of this major shift in how legal work is organized and
provided, and how careers in the law are unfolding.
Table of Contents
I. General Information ........................................................................................................................................... 3
Program Agenda and Room Locations
Things to do in Washington, D.C.
Restaurant Guide
II. Collaboration and Innovation in the New Normal ..................................................................................... 8
Moderator: Reena Sengupta
Panelists: Kim Koopersmith, Stephen Denyer
III. Re-Engineering Legal Services Collaboration and Innovation in the New Normal ......................... 11
Moderator: Tanina Rostain
Panelists: Lisa Damon, Mitch Kowalski, Paul Lippe
Even in a Digital, Data Driven World, We Still Need Travel Agents… and Lawyers
The Dilemma of Technology Use and Relationships
IV. Lunch Panel: Legal Services in Emerging Countries: Brazil, India, and China ............................... 66
Moderator: James Jones
Panelists: David Trubek, Sida Liu, Jay Krishnan
V.Corporate Clients and Outside Law Firms: Procurement or Partnership? ......................................... 69
Moderator: Ellen Rosenthal
Panelists: Leslie Turner, Matthew Biben
Deconstructing Big Law Abstract
The Stanford Law School Research Project on the Future of the Legal Profession
General Counsel with Power?
Resource Co-Specialization and Supplier Concentration in Plural Sourcing
VI.Sustainable Law Firm Models: Beyond the Pyramid? ............................................................................ 147
Moderator:Aric Press,
Panelist: Paul Smith, Blane Prescott, StevenJ. Harper
Variation in Large Law Firm Career Paths
Limiting the Damage of Lateral Partner Movement
I
PROGRAM AGENDA & ROOM LOCATIONS
The Shrinking Pyramid: Implications for Law Practice and the Legal Profession
April 11-12, 2013
Georgetown University Law Center | Washington, DC
Thursday, April 11
6:00-7:30 pm
Opening Cocktail Reception – Hotung 2001
Friday, April 12
8:15-8:45 am
Registration & Continental Breakfast – Gewirz 12th Floor
8:45-9:00 am
Welcoming Remarks – Gewirz 12th Floor
9:00-10:30 am
Collaboration and Innovation in the New Normal – Gewirz 12th Floor
Moderator: Reena Sengupta, RSG Consulting
Panelists:Kim Koopersmith, Chair, Akin Gump Strauss Hauer & Feld LLP; Stephen
Denyer, Global Markets Partner, Allen & Overy LLP
(1) Collaboration: A Challenging but Strategic Imperative for Today’s Law Firm
Heidi Gardner, Harvard Business School
(2) Changing Career Models and Capacity for Innovation in Professional Services
Michael Smets, Aston Business School; Timothy Morris, Saïd Business School, University of Oxford;
Namrata Malhotra, Imperial College Business School
10:30-10:45 am
Break – Gewirz 12th Floor
10:45 am-12:15 pm Re-Engineering Legal Services – Gewirz 12th Floor
Moderator: Tanina Rostain, Georgetown Law
Panelists: Lisa Damon, National Chair, Labor & Employment Law Practice, Seyfarth
Shaw LLP; Mitch Kowalski, author, Avoiding Extinction: Reimagining Legal Services for
the 21st Century; Paul Lippe, Legal OnRamp
(1) Even in a Digital, Data-Driven World We Still Need Travel Agents – and Lawyers
Renee Newman Knake, Michigan State University College of Law and ReInvent Law Laboratory; Silvia
Hodges, Fordham University School of Law and TyMetrix Legal Analytics; Andy Daws, Riverview Law;
James Peters, LegalZoom
(2) How Does New Technology Affect Workplace Relationships? Evidence from Knowledge Management
Systems Implementation in a Corporate Law Firm
Forrest Briscoe, Penn State Smeal College of Business; Marion Brivot, Université Laval; Wenpin Tsai,
Penn State Smeal College of Business
Georgetown Law Wireless Information
Network: gulaw events
Passcode: gohoyas!
12:15-12:30 pm
Lunch Distribution - Gewirz 12th Floor
12:30-1:45 pm
Lunch Panel: Legal Services in Emerging Countries: Brazil, India, and China –
Gewirz 12th Floor
Moderator: James Jones, Georgetown Law
Panelists: David Trubek, University of Wisconsin Law School; Sida Liu, University of
Wisconsin Department of Sociology and Law School; Jay Krishnan, Indiana University
Maurer School of Law
1:45-2:00 pm
Break – Gewirz 12th Floor
2:00-3:30 pm
Corporate Clients and Outside Law Firms: Procurement or Partnership? – Gewirz
12th Floor
Moderator: Ellen Rosenthal, Chief Counsel, Pfizer Legal Alliance and Vice-President
and Assistant General Counsel, Pfizer
Panelists: Leslie Turner, General Counsel, The Hershey Company; Matthew Biben,
General Counsel, Chase Consumer Businesses and Senior Legal Adviser, JPMorgan
Chase
(1) Deconstructing Big Law: The Future Market for Corporate Legal Services – Preliminary Results
Molly Selvin, Stanford Center on the Legal Profession, Stanford Law School and Southwestern Law
School; Patrick M. Hanlon, Stanford Center on the Legal Profession, Stanford Law School
(2) Lawyers Between Market and Hierarchy: Evidence from Fortune 500 Companies
Mari Sako, Saïd Business School, University of Oxford
3:30-3:45 pm
Break – Gewirz 12th Floor
3:45-5:30 pm
Sustainable Law Firm Models: Beyond the Pyramid? – Gewirz 12th Floor
Moderator: Aric Press, American Lawyer Media
Panelists: Paul Smith, Partner, Eversheds and Eversheds Consulting; Blane Prescott,
Chief Executive Officer, Brownstein Hyatt Farber Schreck, LLP; Steven J. Harper,
publisher, The Belly of the Beast; author, The Lawyer Bubble: A Profession in Crisis
(1) The Economic Crisis: What Happened to Associates and What Does the Future Hold for Them?
Lisa Rohrer, Georgetown Law; Peter Sherer, Haskayne School of Business, University of Calgary
(2) Limiting the Damage of Lateral Partner Movement: Exit Quantity, Geographic Focus, and Multiple
Movers
Rhett Brymer, Farmer School of Business at Miami University; Len Bierman, Mays School of Business,
Texas A&M University
5:30-6:30 pm
Cocktail Reception – Gewirz 12th Floor
Georgetown Law Wireless Information
Network: gulaw events
Passcode: gohoyas!
Things to do in Washington, D.C.
Washington Monument: Constitution Ave. & 15th St. NW. Reserve tickets to ride the elevator to the top (free at
kiosk on grounds, or reserve in advance for $1.50) for a great view of the city.
Smithsonian Museums: Pick up a map at the “Castle,” the Smithsonian Institution Building. Museums open
daily from 9am-5:30pm. Great for kids: Natural History Museum and National Air and Space Museum.
Jefferson Memorial & Tidal Basin: 15th St. SW. Great for a walk, especially during cherry blossom season.
Open 8am-midnight.
Lincoln Memorial: 23rd Street NW (Between Constitution and Independence Ave). Open 8am-midnight.
The White House: 1600 Pennsylvania Ave NW. Tours are only available though contacting one’s member of
Congress in advance. However, at the White House Visitor Center at the corner of 15th & E St. NW, learn about
the history, visit the gift shop, and watch a video on the President’s home.
U.S. Capitol Building: Constitution and 1st St. NE. Guided tours conducted 9am-4:30pm, Monday-Saturday.
Get free tickets from the Capitol Guide Service Kiosk at 1st St. NE & Independence Ave.
U.S. Holocaust Memorial Museum: 100 Raoul Wallenberg Place, SW. Permanent exhibit NOT
RECOMMENDED FOR CHILDREN UNDER 11. Open 10am-5:30pm daily; extended hours to 7:50pm on
Tuesdays and Thursdays, April to mid-June.
Arlington National Cemetery: At the west end of the Memorial Bridge in Arlington, VA. Guided tours for $6,
or tour the grounds on your own. See burial sites of Presidents William Howard Taft and John F. Kennedy, and
many others. Open 8am-7pm daily, April to September; 8am-5pm daily October to March.
The National Building Museum: Free access to the Great Hall, historic building tours, Museum Shop, & café.
Monday - Saturday: 10 am - 5 pm; Sunday: 11 am - 5 pm. 401 F Street NW.
The Newseum: An interactive news museum; great for children and adults alike. 9 am- 5 pm, daily.
Purchase advanced tickets online to receive a discount. 555 Pennsylvania Ave.
United States Botanical Garden: 100 Maryland Avenue, SW.
Martin Luther King Jr. Memorial:
1964 Independence Avenue, SW.
The Phillips Collection: Encounter superb works of modern art in an intimate setting at The Phillips Collection,
an internationally recognized museum in Washington's vibrant Dupont Circle neighborhood. 1600 21st St., NW.
Transportation
Taxis:
Diamond Cab (202) 387-2600
Yellow Cab (202) 544-1212
Silver Cab (202) 484-8125
Metro: The closest stations to Georgetown Law are Judiciary Square (E & 4th St NW) and Union Station
(1st St. & Massachusetts Ave. NE). Both are on the Red Line; pick up a map of the Metro at the station.
Circulator Bus: Catch a $1 ride across town on these big, red buses. The stop at 2nd & Massachusetts Ave.
NW will take you west to the Georgetown neighborhood. Other routes service the National Mall, Nationals
Stadium, and the Convention Center. Pick up a map on board.
Restaurants
Walking Distance from Law Center
Article I: Located in the Hyatt Regency Hotel, this restaurant offers upscale classic American cuisine and libations. Moderate. 400
New Jersey Avenue. 202-737-1234. *Ask for the D.C. Neighborhood Business Discount*
Art & Soul: Art Smith’s renowned fresh and modern regional cuisine with a Southern accent. Inside The Liaison Hotel. ModerateExpensive. Located in The Liaison at 415 New Jersey Ave. 202-638-1616
Billy Goat Tavern: Burgers and sandwiches. Do you recall the Saturday Night Live sketch in which a short order cook would yell out
to incoming patrons: "Cheezborger! Cheezborger! No fries, cheeps! No Pepsi, Coke!"? Inexpensive. 500 New Jersey Avenue.
202-783-2123.
Bistro Bis: Fabulous French food, lots of seafood and great desserts. Blonde wood, big booths and a neat view of chefs at work
through the glass wall that covers the kitchen. Expensive. Located in The Hotel George at 15 E Street. 202-661-2700.
Charlie Palmer Steakhouse: Sleek and sophisticated restaurant offering steaks and seafood. Views of Capitol Hill and the Mall from
its rooftop terrace. Expensive. 101 Constitution Avenue. 202-547-8100.
The Dubliner: Traditional Irish pub and restaurant. Has outdoor dining in good weather. Inexpensive. 520 North Capitol Street.
202- 737-3773.
Kelly’s Irish Times: Irish pub. Looks rather run down, but always packed for lunch. They have great specials. Inexpensive. 14 F
St., NW. 202- 543-5433.
Subway: Patrons can choose from a variety of signature subs. Subway also serves salads, soups, and dessert items. Very inexpensive.
Located on the 2nd floor of the Georgetown Law Sport and Fitness Center.
Sunspot: A very casual sandwich shop and salad bar. Outdoor seating area. Very inexpensive. 601 New Jersey Avenue. 202783-8331.
Union Station: The lower level of Union Station offers many casual dining options. It resembles a very large mall food court.
Upstairs, there are also sit-down restaurants including:
B.Smith’s: Southern style cooking with a great dessert menu, located in the former Presidential train station waiting room.
Expensive. 202-289-6188.
Pizzeria Uno: This busy pizza chain serves up Chicago deep-dish style pizza, pastas and good appetizers. Inexpensive.
202-842-0438.
Chipotle: Endless options of overstuffed burritos. Made to order with only the freshest ingredients. Very inexpensive. 202706-5935.
Potbelly Sandwich Works: Toasty warm sandwiches, hand-dipped malts and milkshakes - and warm homemade cookies have made this sandwich shop a local favorite. Very Inexpensive. 202-408-9583.
Chop’t Salad: Fresh ingredients and homemade dressings help you create your own crisp meal. Very inexpensive. 202-6680330
West Wing Cafe: Serves a variety of bagels, sandwiches, wraps, hot panini, focaccia, and salads.
1111 Pennsylvania Ave. 202-628-2233.
Cab Ride from Law Center
Old Ebbitt Grill: Steps from The White House, this restaurant features upscale American saloon food. Popular with political
insiders. Moderate. 675 15th St NW. 202-347-4800.
Tosca: Award-winning northern Italian fare, in a sophisticated downtown venue. Expensive. 1112 F St. NW. 202-367-12990.
Ten Penh: Asian fusion at its best. Best known for their lobster. Moderate/Expensive. 1001 Pennsylvania Ave. NW. 202-3934500.
II
The Shrinking Pyramid: Implications for Law
Practice and the Legal Profession
Collaboration and
Innovation in the New
Normal
Friday April 12th, 9:00-10:30 am
Moderator: Reena Sengupta, RSG Consulting
Panelists: Kim Koopersmith, Chair, Akin Gump Strauss Hauer & Feld LLP; Stephen
Denyer, Global Markets Partner, Allen & Overy LLP
(1) Collaboration: A Challenging but Strategic Imperative for Today’s Law Firm
Heidi Gardner, Harvard Business School
(2) Changing Career Models and Capacity for Innovation in Professional Services
Michael Smets, Aston Business School; Timothy Morris, Saïd Business School,
University of Oxford; Namrata Malhotra, Imperial College Business School
There are no materials
for this session.
III
The Shrinking Pyramid: Implications for Law
Practice and the Legal Profession
Re-Engineering Legal
Services
Friday April 12th, 10:45 am-12:15 pm
Moderator: Tanina Rostain, Georgetown Law
Panelists: Lisa Damon, National Chair, Labor & Employment Law Practice,
Seyfarth Shaw LLP; Mitch Kowalski, author, Avoiding Extinction: Reimagining
Legal Services for the 21st Century; Paul Lippe, Legal OnRamp
(1) Even in a Digital, Data-Driven World We Still Need Travel Agents – and
Lawyers
Renee Newman Knake, Michigan State University College of Law and
ReInvent Law Laboratory; Silvia Hodges, Fordham University School of Law
and TyMetrix Legal Analytics; Andy Daws, Riverview Law; James Peters,
LegalZoom
(2) How Does New Technology Affect Workplace Relationships? Evidence from
Knowledge Management Systems Implementation in a Corporate Law Firm
Forrest Briscoe, Penn State Smeal College of Business; Marion Brivot,
Université Laval; Wenpin Tsai, Penn State Smeal College of Business
DRAFT IN PROGRESS—PLEASE DO NOT CITE WITHOUT AUTHOR PERMISSION
EVEN IN A DIGITAL, DATA-DRIVEN WORLD,
WE STILL NEED TRAVEL AGENTS…AND LAWYERS
Andy Daws, Riverview Law
Silvia Hodges, Fordham Law School, TyMetrix Legal Analytics
Renee Newman Knake, Michigan State University College of Law, ReInvent Law
James Peters, LegalZoom
Introduction
The mid-1990’s witnessed the peak for retail travel agents and brick-and-mortar
law firms the likes of which are unlikely to be experienced again. Over 20,000 travel
retail locations closed in the past two decades, and the legal profession shed thousands of
jobs. Both of these professional service industries were disrupted by technological
innovation, in particular sophisticated online access and high-level data aggregation.
There are lessons to be learned from travel agents for lawyers at all levels of service,
from solo practitioners to large, traditional firms. The reality is that travel agents are no
longer necessary to secure the lowest airfare or most desirable seat on the plane. Instead,
the store-front travel agent has been largely replaced by intuitive, user-friendly search
engines and strategically curated websites targeting travelers of every budget for any
destination. Online search has made travel planning available to the masses, tapping
latent markets and creating new standards through customer-based travel review sites.
User adoption has been overwhelming—Orbitz.com alone facilitates 1.5 million flight
searches and 1 million hotel searches daily. Even in the Oribitz.com, Expedia.com,
Jetsetter.com and Kayak.com world, however, a cadre of travel professionals has carved
out niche specialties where individual, human interaction is desirable and sought.
The travel industry channeled disruption into new models for personal service
that law is only now beginning to attempt. We have yet to see a parallel explosion in
online services and data-driven analysis in the legal profession, though a number of new
organizations are emerging in response to the changing landscape created by the so-called
shrinking pyramid and the associated economic pressures. For example, the market share
of the three leading legal process outsourcing companies (LPOs) has grown significantly
at a time when most law firms felt the pain of recession and had to adjust their
expectations of growth and profitability. The market size of the LPO business is hard to
estimate, but industry sources believe it to be worth between $500 million and $900
million in revenue. Bullish forecasts guesstimate that the industry will surpass $2 billion
in 2012 and reach $4 billion in 2015. What’s noteworthy is that the client list of these
LPOs significantly overlaps with those of traditional leading law firms.
Consider also online retailers. LegalZoom, founded in 2001, competes with
smaller law firms. An article in Forbes warned that as Craigslist decimated the
newspaper industry by taking away its low-end but profitable classified-ad business,
LegalZoom targets the high-volume, low-cost business of providing basic consumer and
business documents,1 and is moving higher up the value chain with its new addition of
legal plans, discussed more fully below. A more recently launched online legal service,
1
Daniel Fisher, Entrepreneurs versus lawyers, Forbes, 10.05.11 (October 24, 2011), http://www.forbes.com/forbes/2011/1024/entr epreneurslawyers-suh-legalzoom-automate-daniel-fisher.html
1
Rocket Lawyer, received $18.5 million investment from Google Ventures. Rocket
Lawyer charges $9.99 to $39.95 a month to review documents and give legal advice. In
the UK, private equity firms have started buying equity stakes in law firms. For example,
Palamon Capital Partners now owns majority stakes in Quality Solicitors, a network of
so-called “High Street” law firms, i.e. primarily consumer law firms. The investment is
thought to be upwards of GBP 70m or $111m2 It was the first outside investment after
the Legal Services Act liberalization in October 2011. 3 The Legal Services Act 2007
allows UK law firms to finance externally and even to float. With the help of Palamon’s
investment, Quality Solicitors wants to become a household name and improve its
operations. A partner at the private equity firm said that Quality Solicitors represents an
unparalleled opportunity to gain market share in the legal industry and create a successful
legal franchise chain. 4 The private equity firm has done this before with Integrated
Dental Holdings, the UK’s largest dental chain, and with Towry, the UK’s biggest
independent group of financial services advisors. 5 Their choice of chairman for Quality
Solicitors, the former chief executive of the flower delivery network Interflora, speaks
volumes. In September 2012, Quality Solicitors announced an exclusive partnership with
LegalZoom to provide legal advice to customers of LegalZoom’s new UK site, set to
launch in 2013. According to Quality Solicitors’ founder Craig Holt, the partnership
“brings the best of both worlds, combining the speed, convenience and value
LegalZoom’s technology brings, with the comfort and confidence provided by knowing a
local QualitySolicitors expert lawyer is on hand to help at any point.” 6 Similarly,
Riverview Law, which is part-owned by DLA Piper, offers fixed-price packages for
businesses of all sizes, ranging from one-off matters including litigation, through to
annual and multi-year contracts for what it calls Legal Advisory Outsourcing. Riverview
is cultivating a significant on-line presence for the small-to-medium sized commercial
market, and offers free legal document templates, free access to its online legal advice
library and a free phone consultation with the legal team.
What contributes to the changes in the legal profession is two-fold: (1) open
access to vast amounts of information free-of-charge or at a low-cost; and (2) the
involvement of procurement in the purchasing of professional services. More and more
individuals are able to create their own legal documents online or seek out a range of
lawyers through online review sites and retail portals. More and more companies take a
structured and rigorous approach to selecting firms with the goal to ensure that the
relationship continues to deliver expected outcomes. Individuals and companies are
beginning to engage in intelligent purchase. For companies, this shift is particularly seen
at the initial instruction phase, when they bring in procurement professionals to help
evaluate providers and negotiate fee structures. In-house lawyers who once had free rein
to engage, select and pay outside counsel now must report to executives, who are not
lawyers, and who now insist on predictability as to legal expenses.
This article explores ways that the legal profession can learn from the travel
industry’s path of innovation in an era where significant components of law practice have
been (or soon will be) displaced by technology and do-it-yourself services. We identify
and assess two of the early entrepreneurs in online retail and in-house procurement of
2
Jane Croft, Palamon Capital invests in Quality Solictors, Financial Times, (October 21, 2011), http://www.ft.com/intl/cms/s/0/0ec0c6f4-fbce11e0-9283-00144feab49a.html#axzz2OSbscVNY
3
Id.
4
Id.
5
Catherine Baksi, Private equity buys into QualitySolicitors, The Law Society Gazette, (October 20, 2011),
http://www.lawgazette.co.uk/news/private-equity-takes-stake-qs
6
http://www.thelawyer.com/legalzoom-to-tie-up-with-qualitysolicitors-for-british-launch/1014411.article
2
legal services based upon data aggregation, concluding with several recommendations for
the profession drawn from the travel industry’s experience. Part I of the paper provides
an overview of the travel industry’s response to the Internet-boom during the 1990’s,
comparing the legal profession’s reaction at that time and suggesting six lessons that law
can learn from travel. Part II then examines emerging models and markets for legal
services, offering three case studies: (1) the emergence of legal process outsourcing and
data-driven procurement in American big law; (2) LegalZoom as first-mover in the
online, do-it-yourself legal services market; and (3) Riverview Law’s new model for
business representation in the wake of the UK Legal Services Act. Part III concludes that
in order to thrive in the wake of the shrinking pyramid, lawyers, like travel professionals,
must begin engaging in more deliberate innovation to preserve opportunities for the
application of complex judgment, while simultaneously leveraging the advantages of
online technology and complex data analysis. Our article offers a unique perspective on
these issues, drawing from the authors’ varied backgrounds—collectively we represent
two law schools and three industry innovators in the new legal marketplace.
Part I: Six Lessons for Law from Travel
The technology advancements of the 1990s led to significant disruption for
professional service and information industries. Consumers gained access to information
that previously had been the exclusive province of the industry expert. At the same time,
one of “the most notable transformations in the U.S. labor market since World War II”
was occurring in the form of “the rising share of employment in the services industry and
the declining share in manufacturing.”7
One of the earliest and hardest hit service industries was travel. During the first
half of the 1990s the travel industry lost a collective $15-20 billion in profits.8 Yet, by
the end of the decade “[t]he net profits of all scheduled airlines worldwide rose from $4.5
billion in 1995 … to $8.5 billion two years later.”9 Not only did technology innovation
impact travel agents and service providers, but airline deregulation compounded the
stress on the industry. “Prior to airline deregulation, the US airline industry operated
similarly to a public utility company with each carrier’s routes and prices set by a
governing body, the Civil Aeronautics Board.” 10 Under the Carter administration,
“Congress [passed] the Airline Deregulation Act in 1978, making the airlines one of the
first consumer industries to be deregulated. The resulting reforms applied free market
principles to the U.S. airline business, which spurred a dramatically larger, more
accessible and, some say, a more affordable travel industry.” 11 By contrast, others
“argue[d] that whereas inflation-adjusted airfares have dropped 37 percent in the 22 years
since deregulation, they were also falling just as much and just as fast in the 22-year
period before deregulation.” 12 Similarly, the lower prices, while reflecting significant
discounts, were seen by some as lower quality, “saddled with restrictions” and
constituting “a different product quality.” 13 The role of the travel agent was especially
Joseph R. Meisenheimer, The Services Industry in the Good versus Bad Debate, Monthly Labor Review, pgs. 22 – 47 (Feb. 1998).
See The sky’s the limit, The Economist (Mar. 10, 2001), http://www.economist.com/node/525723/print, (“first few years of the 1990s” the travel
industry lost $15 billion); The Airline Industry, http://adg.stanford.edu/aa241/intro/airlineindustry.html (The International Air Transport
Association’s “member airlines suffered cumulative net losses of $20.45bn in the years from 1990-1994”).
9
Id.
10
Harrel Associates, The Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 8.
11
Id.
12
Id.
13
Id.
7
8
3
hard hit, particularly since an agent’s “revenue was derived almost exclusively from
commissions.” 14
The airlines that previously had “outsourced the labor-intensive
process of research and booking travel to travel agencies in the late-1970’s” turned to the
Internet and travelers themselves for outsourcing, “let[ting] the travelers do the work
without the help of any airline employees or intermediaries, thus significantly lowering
the airlines’ costs once again.” 15 “By the mid-1990s, three important factors and gained
momentum to drive the aggressive migration to and adoption of Internet-based travel:
high distribution costs – and the obvious value-for-dollar question that was raised based
on system bias; new technology that offered a cheaper alternative to … direct access to
customers; and a consumer population receptive and eager to take control of their own
destinies.”16
Legal services, by comparison, went relatively unscathed through the 1990s and even
into the early part of the 21st century. The massive layoffs and un(der)employment for
law did not hit full force until over a decade after travel. For example, according to the
“LayoffTracker” from the blog Law Shucks, from January 2008 to December 2011 “over
15,435 people have been laid off by major law firms (5,872 lawyers/9,563 staff).” 17 It is
worth noting, however, that this data does not include layoffs that occurred in small or
mid-sized firms, solo practices, or government, nor does it include layoffs before 2008 or
after December 2011, although according to Law Shucks the layoffs have now slowed
significantly: “2011 has been even slower, with just 439 people let go, of which merely
12 were lawyers.”18 From 2010 to 2012, over 130,000 new lawyers entered the legal job
market, predicted by the U.S. Bureau of Labor to offer only 73,600 new lawyer jobs over
ten years, 2010-2020.19
Beyond the employment situation for lawyers is the “‘justice gap’: millions of
people who need legal representation cannot afford or access a lawyer. The
overwhelming majority of this country goes without much-needed legal help because
they simply cannot afford to pay a lawyer three-figures-per-hour for multiple hours, but
they also do not qualify for the limited legal aid programs available.” 20 Lawyers struggle
to “develop sustainable models for delivering legal services that are affordable, accessible
and, importantly, adopted by clients who utilize them on a regular basis.”21 At the same
time, we have a “surplus of lawyers,”22 with thousands of lawyers seeking employment
and law schools continuing to add new attorneys to the mix. It seems that “every state
but Wisconsin and Nebraska (plus Washington, D.C.) is producing many more lawyers
than it needs. … In fact, across the country, there were twice as many people who passed
the bar in 2009 (53,508) as there were openings (26,239).”23 One key to solving the
delivery and matching problems is user-adoption. “The profession must offer personal
legal services that are affordable, accessible, and—importantly—adopted by clients/users
14
Harrel Associates, The Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 21.
15
Id. at 24-25.
16
Id. at 24
17
Layoff Tracker, LAW SHUCKS : LIFE IN AND AFTER BIGLAW, http://lawshucks.com/layoff-tracker/ (last visited Mar. 20, 2013).
18
Id.
19
Elizabeth Lesly Stevens, Will Law Students Have Jobs After They Graduate?, WASH. POST (Oct. 31, 2012),
http://articles.washingtonpost.com/2012-10-31/lifestyle/35498320_1_law-schools-law-jobs-legal-career-professionals.
20
Renee Newman Knake, Why Law Students Should Be Thinking About Entrepreneurship and Innovation in Legal Services, Bloomberg Law
(Nov. 2012), http://about.bloomberglaw.com/practitioner-contributions/innovation/.
21
Id.
22
Catherine Rampell, The Lawyer Surplus State by State, N.Y. Times (June 27, 2011, 11:35 AM),
http://economix.blogs.nytimes.com/2011/06/27/the-lawyer-surplus-state-by-state/).
23
Id.
4
on a consistent, sustained basis. The unmet need for legal services must be channeled
into a demand for legal services.”24 The travel industry has become adept at cultivating
adoption in this way through technology, data-driven decision making, marketing,
branding, and beyond.
While legal services are increasingly offered via new technologies, the legal
industry has yet to experience the wide-spread adoption that has occurred in the travel
industry. Moreover, where the role of travel agent was in many ways destroyed by
deregulation and technology, the travel industry is experiencing a rejuvenated demand for
personalized rather than computerized service. The travel industry’s evolution in a
digital, data-driven world offers lessons for lawyers at all levels from legal aid to Wall
Street to not only avoid displacement but also capitalize on existing and emerging
technology advancements. We suggest six lessons below.
A. Online Can’t Be Ignored
Consider that travel agents are no longer necessary to secure the lowest airfare or
most desirable seat on the plane. Instead, the store-front travel agent has been largely
replaced by intuitive, user-friendly search engines and strategically designed websites
targeting travelers of every budget for any destination. As Internet access became more
publicly available, rather than resist the movement, “the travel industry was one of the
earliest to go online.”25 Online search has made travel planning available to the masses,
tapping latent markets and creating new standards through customer-based travel review
sites. User adoption has been overwhelming—Orbitz.com alone facilitates 1.5 million
flight searches and 1 million hotel searches daily. The travel industry channeled
disruption into new models for personal service, outsourcing much of the travel planning
work previously done by agents to the customers themselves.
The travel industry knew early on that online service cannot be ignored, for both
sharing information with customers and collecting information about customers. “One
big advantage of the Internet is that it gives consumers access to better information about
what is on offer. Conversely, as more people buy their tickets online, the airlines get to
know more about their customers’ needs and preferences.” 26 This data has enhanced is
what is known as “customer relationship marketing,” where the airline induces customer
loyalty “by offering tailor-made deals reflecting his known preferences.”27 Where once a
travel provider might have simply offered information, through online tools, most
airlines, for example, “offer customers reservations, electronic tickets, seat selection, inflight merchandise, reward points and sometimes discounted fares unavailable elsewhere.
In addition, they may offer lodging, transportation-package deals and cruises through
their alliance partners.”28 Online also allowed for the removal of intermediaries through
direct-access software, fundamentally altering the traditional players in the travel supply
chain. 29
24
Renee Newman Knake, Democratizing Legal Education, forthcoming Connecticut Law Review (2013).
Harrel Associates, The Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 26.
26
The sky’s the limit, The Economist (Mar. 10, 2001), http://www.economist.com/node/525723/print.
27
Id.
28
Id.
29
Harrel Associates, The Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 26.
25
5
The legal industry is witnessing some of the same phenomena. For example, as
seen in the LegalZoom and Riverview case studies below, new entrants into law are
highly focused upon the user/client’s online experience. Providers like these are altering
the traditional supply chain for services, as is the new role of the general counsel in
navigating legal process outsourcing and procurement, also discussed as part of the case
studies in Part II. The lesson that follows from the need to embrace the online
experience, of course, is that service industries must invest in high quality technology for
the long term.
B. Investment In High-Quality, Long-Term Technology
The travel industry also recognized that “[t]o meet the requirements of their
increasingly discerning customers, [it had] to invest heavily in the quality of service …
offer[ed], both on the ground and in the air. Ticketless travel, new interactive
entertainment systems, and more comfortable seating are just some of the product
enhancements being introduced to attract and retain customers.”30 The legal profession,
by contrast, has been slow to adopt technology both for practicing attorneys and,
importantly, for the clients. One notable exception is newcomer Clearspire, which
recently announced a plan to hire 50 to 100 “former BigLaw lawyers each year for the
next five years,” into its “nontraditional legal services model.” 31 Clearspire, formed
in2009, is known for investing in a “$5 million online platform that connects lawyers and
clients through virtual offices and high-end videoconferencing systems.” Both legal
services providers profiled in the case studies below are other exceptions. In the case of
Riverview, the core team understood the value of investing in high-quality, long-term
technology at the outset and were able to leverage 12 years’ experience and expertise
gained while building a proprietary case management platform in a previous business.
Similarly, LegalZoom has gone to great lengths to make their online process easy to use
and understand for their customers. In addition, when faced with the prospect of
integrating attorneys into their offerings through new legal plans, LegalZoom developed
membership portals through which customers could manage their consultation requests
(including scheduling consultations online), peruse user reviews of plan attorneys and
utilize other LegalZoom benefits in one place. On the other side of the equation,
LegalZoom’s systems allow participating law firms to manage the administrative
requirements of providing consultations and even refer out certain matters easily.
C. Marketing and Branding Matter More than Ever
The ability to differentiate one’s service through marketing and branding matter more
than ever, a lesson learned early on by travel providers. Indeed, there is general
recognition in (the business school) academia and practice that marketing addresses the
increased need to compete for business. 32 Marketing is important since organizations
need to be aware of their competition and aim to satisfy their customers in order to be
successful. This is particularly true for service industries due to the direct interaction they
have with their customers. While the rationale for marketing might be unquestionable,
professional services firms, in particular law firms, traditionally resisted the diffusion of
30
The Airline Industry, http://adg.stanford.edu/aa241/intro/airlineindustry.html.
Rachel Zahorsky, New-model firm plans hiring spree, ABA Journal (Jan. 17, 2013, 12:25PM),
http://www.abajournal.com/lawscribbler/article/firm_seeks_to_liberate_lawyers_50_to_100_each_year/.
32
Silvia Hodges, I Didn’t Go to Law School to Become a Salesperson – The development of Marketing in Law Firms, forthcoming Georgetown
Journal of Legal Ethics (2013).
31
6
the marketing concept or market(ing) orientation.33 Little marketing used to occur in the
legal profession, and lawyers began to adopt marketing “unenthusiastically” or not at
all.34
It has been argued that, from a microeconomic point of view, a law firm is
essentially a service business like any other: it renders services to clients from whom it
receives payment. 35 Like any other business, a law firm combines resources in order to
produce services and adheres to the basic principles of economics—profitability and
financial liquidity, to ensure continuity. The “growth in the size of the profession, the size
of firms, and the volume of the market, has led . . . [to] lawyers having to treat the
practice of law as a business.”36 Access to justice requires not only that the legal advice
given be sound, but also “the presence of the business skills necessary to provide a costeffective service in a consumer-friendly way.” 37 Customers are the lifeblood of any
commercial organization. Without them, a business has no revenues, no profits, and
therefore no market value. In fact, the basis of a business is its ability to create and keep a
customer.38 “[T]he law is a service business, and satisfaction can only be measured by the
client.”39 As the satisfaction of customer needs is the main business goal, businesses have
only two basic functions, or processes, that are performed to carry out their mission:
marketing and innovation. 40 Nevertheless, lawyers historically have not embraced
marketing. Marketing was almost non-existent among lawyers as it was not only
“disliked,” but also considered “profoundly unprofessional and inappropriate.” 41 While
these observations are now dated, the strong influence of tradition and history in the legal
profession, the perception of and the attitude towards marketing were substantial barriers
to the advance of marketing in this field.
By comparison, the UK’s Legal Services Act has focused investors on the
sizeable opportunity that exists to create powerful brands in an industry which has grown
up without them. At a consumer level, new UK entrants such as Quality Solicitors and
Cooperative Legal Services are plowing huge sums of money into brand creation and
management in an attempt to gain early-mover advantage. Riverview Law was the first
commercial firm to launch after the UK liberalization fully took effect, and is similarly
seeking to capitalize on the absence of household brands in the B2B arena and hoping to
establish itself as the “go-to” firm for fixed-fee value-based legal services. More details
of its approach can be found in the case study below. Being a very early mover,
LegalZoom executives learned early that brand was particularly important in online legal
services. The company reported marketing and sales spending of over $30 million in
See Lloyd C. Harris & Nigel F. Piercy, Barriers to Marketing Development in the Barristers’ Profession, SERV. INDUS. J., Oct. 1998, at 19, 20;
see also WERNER PEPELS & BRUNHILDE STECKLER, ANWALTS -MARKETING [LAWYER MARKETING] 2 (2003); Angela Vickerstaff, Legal Sector
Marketing: A Contested Case, 38 MGMT. DECISION 354, 356 (2000). "Market orientation" is a strategic worldview whereby a firm focuses on its
selected client base (its "market") in all it does. Serving that market is the focal goal of all functions in the business. The market, i.e. the client s, is
the organizing principle for the firm and information about clients is used at all levels across all functions to steer the company in the right
direction. “Marketing orientation,” as truly distinct from market orientation, is more tactical: in a marketing oriented firm, the marketing function
has the power and drives the company ethos and pecking order. E.g., the firm might have a tradition of hiring leadership from the marketing
function.
34.
See Lisa O’Malley & Lloyd C. Harris, The Dynamics of the Legal Market: An Interaction Perspective, EUR. J. MKTG. 874, 875 (1999).
35.
See PEPELS & STECKLER, supra note 3, at 1.
36.
STEPHEN MAYSON, MAKING SENSE OF LAW FIRMS 15 (1997) [hereinafter MAYSON, MAKING SENSE].
37.
SIR DAVID CLEMENTI, REVIEW OF THE REGULATORY FRAMEWORK FOR LEGAL SERVICES IN ENGLAND AND WALES 5 (2004) [hereinafter
CLEMENTI, REVIEW] available at http://www.jambar.org/clement_report.pdf.
38.
See PETER F. DRUCKER, MANAGEMENT, TASKS, RESPONSIBILITIES, PRACTICES 20 (1974); see also THEODORE LEVITT, THE MARKETING
MODE 10 (1969). Both sources emphasize the importance of focusing on the customer, and hence, the importance of marketing within any
organization.
39.
John O. Cunningham, Getting the Most Out Of Outside Counsel 4 MIDWEST IN-H OUSE 1, 25 (2007).
40.
See DRUCKER, supra note 9, at 20.
41.
See Harris & Piercy, supra note 3, at 20.
33.
7
2009 and 2010 and topped $40 million in 2011. Brand recognition is historically very low
in the legal services industry, yet the services provided are ones for which trust is very
important. As detailed below, LegalZoom has focused intently on building a recognized
and trusted brand since its very early days and continues to do so.
D. High-End, Personalized Service is Still in Demand
Despite the massive paradigm shift from human to machine in the travel industry,
a demand for travel agents still exists, even in this digital, data-driven world. A cadre of
travel professionals has carved out niche specialties where individual, human interaction
is desirable and sought after. Even with the online capabilities to secure one’s own travel
plans, users find that they need recommendations, direction, and an expert who can
navigate the overwhelming array of choices. 42 Indeed, notwithstanding the “bloodletting
the industry has experienced since the onset of D.I.Y. booking more than a decade ago” it
turns out that now “[n]early one in three leisure agencies is hiring … [a]nd in 2011 travel
agencies experienced a second consecutive year of growth; their bookings account for a
third of the $284 billion United States travel market.”43 To be sure, the composition of
the travel industry looks much different today than it did two decades ago—during “the
mid-1990s, there were about 34,000 retail locations booking trips. Today, there are
14,000 to 15,000.”44
Interestingly, travel agents “still play a relevant role,” at least in part due to “the
drawbacks of the Web”45 and the overwhelming amount of information available, some
of which may be unreliable or not trustworthy. This has created a demand for “a new
breed of tech savvy, specialized and collaborative agent.”46 The client, of course, has
done research and is better informed, yet still needs an expert’s guidance. “Agents today
also know they must set themselves apart from the Web by offering special experiences
that consumers can’t easily get on their own.”47 Indeed, “in a recent test of agents versus
online search engines[, a]gents won ‘nearly every time … on both price (the objective
part of the test) and service (what you might call the essay question). In other words, the
agents suggested alternate routes, gave advice on visas and just generally acted, well,
more human than their computer counterparts.”48
Similarly, lawyers can position themselves as “tech savvy, specialized and
collaborative” advisors. Some law schools are beginning to prepare students for this
role. 49 Individual attorneys and law practices should similarly develop this expertise as a
supplement to increasingly online services.
E. Democratized Service Can Cultivate New Markets
Michelle Higgins, Are Travel Agents Back? NY TIMES at TR1 (Apr. 20, 2012) (“I needed recommendations and someone to steer me in the
right direction,” said Ms. Griffin, who opted to work with an agent after years of making her own reservations because she needed a getaway
suitable for a toddler and had little interest in scrolling through endless and conflicting user hotel reviews online. “There are so many,” she said.
And with every site displaying beautiful pictures and tantalizing offers, “it can be overwhelming.”).
43
Michelle Higgins, Are Travel Agents Back? NY TIMES at TR1 (Apr. 20, 2012).
44
Id.
45
Id.
46
Id.
47
Id.
48
Id.
49
For example, at Michigan State University College of Law’s ReInvent Law program, courses include Quantitative Methods for Lawyers,
Entrepreneurial Lawyering, Legal Information Engineering, and Lawyer Ethics and Regulation in a Technology-Driven World. See
www.ReInventLaw.com (last visited Mar. 20, 2013).
42
8
Technology and online access democratized travel, making it not only more
affordable but also leading to highly individualized experience through unbundled
services and amenities. This also impacted the way travel agents priced their services, for
example a “fee for issuing a ticket or a nominal fee for changing it … or charging for
information management, on-site pass port or back-office processing. Many travel agents
invested in electronic servicing capabilities either independently or with technology
partners, which had the two-fold objective of reducing their own service costs as well as
providing entry into the new electronic market.” 50 These changes also “led to a
redefinition of who the customer is at each stage of the process, and aligning costs and
revenues accordingly.” 51 Prior to the 1990s, “the customer paid nothing explicit for
travel services. The cost of the service was bundled into the cost of the air ticket.” 52
After the Internet-revolution, “the cost of services – in the form of service fees – is now
apparent.”53
The concept of unbundled services for legal services is only beginning to be
explored. Unbundled legal services involves “an agreement between the client and the
lawyer to limit the scope of services that the lawyer renders.” 54 Unbundling can occur
vertically, “break[ing] up the lawyer’s role into a number of limited legal services,
empowering the client to select only those needed” or horizontally, “limit[ing] the
lawyer’s involvement to a single issue or court process.”55 A range of activities can be
offered as unbundled services: advice, research, document drafting, negotiation, court
appearances, or the handling of isolated matters. While legal has been much slower than
travel to incorporate unbundled services, some predict that “[d]ue to customer education
and demand, by 2032, law firms of all sizes will be proactively offering unbundled
services in all areas of law and to clients of all demographics.” 56 Unbundling may also
alter the way lawyers offer service, shifting from reactionary to “a preventative approach
that will be used symptomatically and asymptomatically.” 57
While unbundling holds the potential to open new markets for legal services,
whether through lower-costs for traditional services or through new services such as
preventative approaches, there are regulatory barriers constraining the legal profession
that were not at issue for the travel industry. These barriers include unauthorized practice
restrictions on who may provide legal services and prohibitions on partnership and coownership/investment with nonlawyers. The ban on external ownership and investment
by nonlawyers is particularly devastating for lawyers who want to “deliver en masse
representation to the general public for routine wills, child custody, divorce, mortgage
foreclosure, standard contracts, small business needs, immigration, bankruptcy, housing
disputes, and other basic matters.” 58 “But the American Bar Association, the entity
50
Harrel Associates, The Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 27.
51
Id.
52
Id.
53
Harrel Associates, The Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 32.
54
Forrest S. Mosten, Unbundled Legal Services for Today – and Predictions for the Future, Family Advocate Vol. 35, No. 2 (Fall 2012) at 14.
See also Stephanie Kimbro, LIMITED SCOPE LEGAL REPRESENTATION: UNBUNDLING AND THE SELF -HELP CLIENT (2012) (“In this rapidly
changing economic and legal climate, lawyers are seeking new methods for delivering their services efficiently and effectivel y while attracting
new types of clients. For many firms, limited scope representation--also known as à la carte or unbundled legal services--may be the solution. By
providing representation for a clearly defined portion of the client's legal needs, such as preparing a legal document or making limited court
appearances, lawyers can market their practice to an entirely new client base and give their firm a competitive advantage.”).
55
Id. at 14
56
Id. at 15.
57
Id.
58
Renee Newman Knake, Democratizing the Delivery of Legal Services, 73 OHIO ST. L.J. 1, 5 (2012).
9
responsible for drafting the Model Rules of Professional Conduct, refuses to engage in
any meaningful reform and few jurisdictions have taken steps on their own.”59
F. Beyond the Role of Trusted Advisor: The Lawyer as “Trusted Curator”
The travel industry was one of the first to contemplate assuming the rule of
curator. “The Web democratized the ability to spot things … [making] curated
consumption … a kind of business, because of the sheer quantity of decisions people
have to make around buying things.” 60 The idea of curation, or acting as a curator,
contemplates a method for “individuals [to] share their knowledge and passion on any
subject not only be creating original content about it, but also by scouring the web and
curating the best content into a single location.” 61 Some of the best known and most
successful online travel curators include Orbitz and Jetsetter. Jetsetter.com presents an
interesting example of curated travel, because in a very crowed space (and in an industry
that was utterly decimated by the Internet-boom in the 1990’s—the travel agent) we see
the rise of a totally new service provider that distinguishes itself not by offering a new
kind of hotel room, but by altering the way the same hotel room is offered.
A number of recent entrants to the legal services market are taking on a similar
sort of role, one beyond that of the traditional trusted advisor—“the lawyer as trusted
curator.”62 In an era of information overload, this seems to be an important role for an
attorney. While the Model Rules of Professional Conduct do not specifically use this
terminology of 'trusted curator,' this seems to be in the spirit of the Preamble to the Model
Rules, which observes that “a lawyer should cultivate knowledge of the law beyond its
use for clients, employ that knowledge in reform of the law and work to strengthen legal
education. In addition, a lawyer should further the public's understanding of and
confidence in the rule of law and the justice system.” 63 This guidance contemplates that a
lawyer can and should be acting as a curator to educate the public, beyond developing the
lawyer’s client base. A number of recent entrants to the legal services market employ
aspects of curation. 64 Much like the curator of an exhibit in a museum, these legal
services providers combine law with art, design, technology, gamification, humor, and
news from other fields to provide a rich user experience. They also offer at least a
See Knake, supra note __, at 41–42 (discussing the ABA’s resistance to reform that would allow practice with or investment from nonlawyers).
Only two jurisdictions have experimented with liberalization of the non-lawyer ownership and practice restrictions. Washington D.C. permits
limited partnerships with non-lawyers (see D.C. Rules of Professional Conduct, Rule 5.4) and Washington state permits limited law practice for
non-lawyers (see Washington Supreme Court Admission to Practice Rule 28, Limited Practice Rule for Limited License Legal Technicians).
60
Simon Dumenco, Why Calling Yourself a Curator is the New Power Move, Details, March 2011, available at http://www.details.com/culturetrends/critical-eye/201103/curator-power-move-trend.
61
Rohit Bhargava, Why The Future of Travel & Destination Marketing is All About Curation, Influential Marketing Blog (Feb. 15, 2011)
http://www.rohitbhargava.com/2011/02/why-the-future-of-travel-destination-marketing-is-all-about-curation.html
62
For further discussion of “the lawyer as trusted curator,” see Renee Newman Knake, The Lawyer as Trusted Curator, Legal Ethics Forum Blog
(Mar. 17, 2013), http://www.legalethicsforum.com/blog/2013/03/the-lawyer-as-trusted-curator.html.
63
ABA Model Rules of Professional Conduct, Preamble (2012).
64
See, e.g., AxiomLaw you will find case studies and a map of legal services to explore; Inspired Law Practice uses Tumbler to collect and share
information for lawyers to discover balance and happiness in their law practices; LegalZoom was an early mover in providing on-line legal forms
for personal and business use; Legal365 is a UK competitor offering similar services; Riverview Law offers a free library of legal information
and uses social media like Twitter to educate the public about legal service; ScotusBlog is not a law practice, but provides a great example of
lawyers curating specialized information—the website offers a wealth of information about Supreme Court cases in an user-friendly, accessible
website; The State Decoded is the brainchild of a nonlawyer, Waldo Jaquith, but has inspired some beautifully designed websites for state
statutes, including Virginia Decoded and MiLaws; Velawsity is a recently launched law practice management system, but already has over 3,000
followers on Twitter from its curated legal news and commentary; Westaway Law is a law firm for social entrepreneurship, and devotes a blog to
all things related to that field.; LegalForce’s new retail presence – the BookFlip Store. Most of these examples are online curation, but
LegalForce is banking on its online success with Trademarkia.com to open a beautifully designed store-front historic offering books, electronic
tablets and, of course, a highly-curated legal services experience where customers can do-it-yourself with books and a computer kiosk or meet
with one-on-one with an on-site attorney; and QualitySolicitors is a branded group of law practices throughout the UK, including in kiosks at
WHSmith Stores.
59
10
portion of their curated information for free, letting users establish some form of
relationship before taking it to the level of becoming client.
To better understand these lessons, this paper next explores the emerging role of
legal process outsourcing and data-driven procurement followed by case studies of two
innovators in online legal services—LegalZoom and Riverview Law.
Part II. How Law Can Apply the Lessons from Travel—Three Case Studies
Part II takes up three case studies to examine how some lawyers and legal service
providers are already applying the lessons from the travel industry, and to suggest how
other segments of the legal profession might consider doing so. While the use of case
studies as a research method is not necessarily all that unusual for other disciplines, this is
a less-explored realm in legal scholarship. Writing together as a group of academics and
industry professionals we endeavor to respond in a meaningful way to those who critique
the utility of law review articles. 65
A. Case Study #1: The Emergence of LPOs and Data-Driven Procurement in
American Big Law
The entrance of legal process outsourcing and data-driven procurement have
impacted big law and fundamentally altered the role of the general counsel (GC). Top
management around the world puts increasing pressure on its general counsel. There is no
doubt that the economic crisis forced most companies to scrutinize costs in ways they
have never experienced before. From today’s management point of view, legal
departments are cost centers and need to be managed as such. The legal department has to
be a better corporate citizen, no more ‘legal is different’ explanations are accepted.
Instead, legal is expected to create value for the business units and the organization it
serves. Value can be demonstrated in many ways, including members of legal
departments participating in committees alongside business managers and provide
training to their internal clients. This connects lawyers with business people, possibly
circumvents legal issues, and raises awareness of the work—and value—the legal
department provides. In any case, like the rest of the organization, the legal department is
expected to be efficient, do more with less, save money and reduce risk.
This fundamentally changes the way a legal department has to be run. Legal now
must manage its workflow, inventory, documents, and knowledge, it must budget,
exercise cost control, closely monitor and analyze legal spend. In an effort to rein in cost,
GCs consolidate the number of firms their company regularly works with, negotiate
discounts and freeze rates, and demand fixed fees or caps or other alternative fee
arrangements. They hire legal operations people to support them with these tasks and
even collaborate with procurement to ensure they get the most value from their law firms.
In short, they are turning to data and analytics to understand and make many of these
decisions, much like travel did in evolving from a desks of booking agents to rows of
computer processors.
The new champion in this environment is the GC as the leader of change: change
towards professional management of the legal department itself as well as its
relationships with internal clients and outside counsel. “Three years of cost-cutting has
65
[cite Justice Roberts, others on this]
11
created a new dynamic in the relationship between law firms and their clients,” found
Financial Times research report A New Dawn: Lessons for Law Firm Management in the
Post-Crisis World.66 Rather than maintaining a cozy relationship with law firms on an
ongoing basis, more and more companies are taking a rigorous approach to selecting
firms and ensuring that the relationship continues to deliver expected outcomes.
A central tool to actively manage the relationship with one’s law firms, electronic
billing, is common practice in the U.S. today. EMEA countries are following suit. In
addition, some legal departments choose non-traditional ways of collaboration with their
law firms, an approach e.g. Pfizer and Deutsche Bank have taken. Companies with UK
legal work now can also benefit from new model law firms such as Riverview Law
discussed more fully in the final case study or organizations such as BT, who offer
specialized legal services. Others set up their own pool of lawyers in less expensive
locations: British construction services company Carillion for example, hired paralegals
in northern England. To ensure cost savings were achieved, both Carillion’s in-house
lawyers as well as the company’s panel firms, including Slaughter & May, were expected
to use the paralegals’ services. Two innovations for legal services in big law illustrate
how travel’s lessons can assist lawyers: legal process outsourcing and procurement. Each
is taken up in turn below.
1. Legal Process Outsourcing
More common is hiring legal process outsourcers (LPOs) for specific projects or
tasks, bypassing law firms for routine work. According to Aaron Harmon, the ‘stigma’
once associated with using LPOs is dissipating and more organizations are exploring—or
already using—it.67 The global LPO market currently employs almost 9,000 people and
has reached $1.1bn of annual sales in 2012 according to The 2012 Legal Outsourcing
Market Global Study. It saw an average growth of 32 percent in each of the last 3 years.
Further 30+ percent growth is expected for the coming three years, which means that the
market will double in size by 2015. It is projected to reach $3bn (or £2bn) by 2015. As
LPOs make up only 0.25 percent of the overall the global legal services market, there is
likely to be “considerable room for growth.” According to the before mentioned Study,
even existing users of legal outsourcing have only outsourced about 5 percent of what
they could potentially outsource. 68
Legal process outsourcing is the process of contracting out legal tasks to less
expensive third party vendors. They are typically based in places far away, such as India
and the Philippines. Looking to reduce inefficiencies, maximize profitability, and gain or
retain competitive advantages, many businesses started outsourcing essential functions in
the early 1990s. This included back office administrative work, IT, human resources,
accounting etc. This process is called business process outsourcing (BPO). In the mid1990s, legal services were outsourced for the first time. The LPO industry evolved most
rapidly in India. Harmon suggests that due to “British colonization, many Indian workers
speak English fluently, thereby facilitating an East-West synergy more easily than other
countries.” 69 In addition, India utilizes a common law system similar to what is practiced
66
http://aboutus.ft.com/2011/06/28/financial-times-study-highlights-mutual-misunderstandings-between-law-firms-and-their-clients/
Aaron R. Harmon, The Ethics of Legal Process Outsourcing to India—Is the Practice of Law a “Noble Profession,” or is it Just Another
Business 13 U. of Fl. J. Tech. L. & Pol’y 41 (June 2008).
68
Edward Brooks, The 2012 Legal Outsourcing Market Global Study; http://www.legalfutures.co.uk/latest-news/lpo-warning-law-firms-generalcounsel-freeze-out.
69
See Id. at 2.
67
12
in the United States and Britain, a result of British colonization.
LPOs started out offering transcription and word processing, and other routine,
back-office paralegal tasks. Over time, they moved to include more substantive issues
such as patent applications and e-discovery. Increasingly, LPOs offer higher-level types
of work traditionally handled by junior associates for a fraction of the price of U.S.
lawyers. If the BPO development is any indicator for the LPO development, this is
unlikely to stop: services offered have become more technical and sophisticated over
time. Harmon understands that the first phase of offshoring involved company-owned
(captive) units where basic and repetitive “back-office” tasks were sent by companies.
During a second phase, non-captive service providers began to emerge, and as more and
more companies set up back offices in India, venture capitalists began to fund start-up
companies to provide similar services to third party clients.70
While LPOs offer their services to law firms, GCs increasingly buy directly from
LPOs, cutting law firms out. However, while currently few law firms see LPOs as a
threat to the law firm’s core offering, the legal industry would not be the first to
mistakenly dismiss low-end competitors: In The Innovator's Dilemma: The Revolutionary
Book That Will Change the Way You Do Business Clayton Christensen warns that like
other industries before, incumbent suppliers (such as traditional law firms) run the risk to
be replaced, hurt or significantly changed by low-end competitors (such as LPOs).
“The new products were low-end, dumb, shoddy, and in almost every way inferior. But
the new products were usually cheaper and easier to use, and so people or companies who
were not rich or sophisticated enough for the old ones started buying the new ones, and
there were so many more of the regular people than there were of the rich, sophisticated
people that the companies making the new products prospered. Christensen called these
low-end products “disruptive technologies,” because, rather than sustaining technological
progress toward better performance, they disrupted it. After studying a few exceptions to
the pattern of disruption, Christensen concluded that the only way a big company could
avoid being disrupted was to set up a small spinoff company that would function as a
start-up, make the new low-end product, and be independent enough to ignore what
counted as sensible for the mother ship.” 71
This scenario becomes even more palpable since buyers who switch to LPO suppliers
“are unlikely to switch back to Law Firms to have that work done in the future,”
according to the 2012 Legal Outsourcing Market Global Study.72 Despite the possible
threat, the Study noted that law firms have taken few steps to protect themselves against
their clients’ changing buying pattern. In fact, it remarks that “inaction by Law Firms is
one of the biggest threats.”73
2. Procurement
Collaboration with procurement is a more recent development, taking part in
large corporations, particularly in Fortune 100 companies. Historically, procurement
70
Id.
Larissa MacFarquhar, Profiles, “When Giants Fail,” The New Yorker, May 14, 2012, p. 84
http://www.newyorker.com/reporting/2012/05/14/120514fa_fact_macfarquhar#ixzz2McKZaqSd; Clayton Christensen, The Innovator's Dilemma:
The Revolutionary Book That Will Change the Way You Do Business.
72
See Id. at 2.
73
Id.
71
13
focused on the purchasing of raw materials, production items as well as maintenance,
repair and operations supplies. In the last decades procurement made inroads in
professional services, including accounting, engineering, information technology, and
consulting. Each of the professions protested against procurement getting involved in
sourcing their services, arguing its distinction from “normal” business. In fact, until
recently, the legal department was considered sacred, the last holdout allowed to source
without the involvement of procurement. Procurement has been monitoring legal spend,
noting its high degree of spending and lack of transparency. 74
Today, procurement is involved in the purchasing of legal services to discover
savings, negotiate more efficiently, measure best value, and provide more objective
comparisons. When effectively using procurement, legal departments do not simply hand
over all power to their procurement colleagues. Procurement is rarely the final decision
maker: Selecting law firms is still the legal department’s prerogative. 75 Rather,
Procurement is mainly responsible managing the sourcing process; for negotiation and
contract development; pre-purchase evaluation of legal services providers (which may or
may not be traditional law firms); as well as developing sourcing criteria and purchasing
strategies. Procurement professionals are “buyers” in the classic sense: they are
responsible for the engagement letter/retainer or framework agreement and negotiations.
They are also influencers, in the sense that they try to affect the outcome decisions with
their opinion. Additionally, procurement professionals also act as gatekeepers for the
legal category—they help manage and direct the flow of information between the service
provider and client. 76
“Effective legal [procurement] sourcing initiatives create ways to articulate and
define the specific legal expertise needed, and then objectively assess which outside
counsel has that expertise. Initially, these definitions of expertise and legal skill only
reside in the minds of the in-house counsel. But a robust sourcing approach will ensure
that the specific needs are formally articulated,” notes Jason Winmill. 77 What’s more,
procurement professionals are involved not only in purchasing routine services and legal
“commodities,” but also in complex and high value legal services. This means, that there
is not a lot left in which procurement is not involved. Exceptions may be emergency
situations, where procurement’s timeframe does not fit.
As expense pressures have grown in the last few years, and procurement
professionals have developed more experience sourcing professional services, some GC
welcome procurement’s advice and support. Forward-thinking GCs like Dan Troy of
GSK turn to procurement for help, and it pays off. “In the nearly four years since
GlaxoSmithKline looked to revamp the way it hires and pays for outside legal services,
the pharmaceutical giant has saved tens of millions of dollars in legal fees.”78
An opportunity for collaboration between the legal department and procurement
is exploring whether legal services can be ‘unbundled’ to borrow a lesson for travel and
74
Jason Winmill, Working with In-House Lawyers: A Significant Sourcing Opportunity, Inside Supply Management, Legal Briefs: Supply
Management’s Legal Issues, Vol. 19, No. 9, pages 36-37.
75
Id.
76
Silvia Hodges, Legal Procurement: Sourcing is a team Sport, Bloomberg Law, http://about.bloomberglaw.com/practitioner-contributions/legalprocurement-sourcing-is-a-team-sport/
77
Id at 7.
78
Gina Passarella, GlaxoSmithKline Saves Millions in Legal Fees With Value-Based Programs, The Legal Intelligencer, (July 9, 2012),
http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1202561658766&GlaxoSmithKline_Saves_Millions_
in_Legal_Fees_With_ValueBased_Programs
14
whether some activities traditionally carried out by counsel should be outsourced to nontraditional law firms or LPO providers. In-house counsel and procurement have to work
together to balance the company’s cost-cutting needs with their preferences for outside
counsel. GCs are advised to quantify legal services to steer procurement toward
measuring results, not just costs. This can be achieved by benchmarking costs, comparing
savings in the industry in general or looking at outside counsel savings affected by better
practices or better technology.
Governmental agencies have been using the so-called Two-Step Procurement
Process for competitive contracting since the 1950s. This process combines sealed
bidding and negotiation. Typically, procurement sends out a request for proposals (RFP),
describing the client’s requirements. After procurement receives and evaluates the
proposals, procurement asks the firms whose offers they found acceptable to submit their
price proposals based on their initial terms. Only then will procurement conduct
negotiations with the parties, now comparing “apples to apples,” leading to the award of a
contract to the lowest responsive offer.
Sourcing legal services requires a significant degree of trust between lawyer and
client, something that does not come easily with procurement approaches. Legal services
are, after all, expertise- and judgment-based services, not fungible commodities. It is
hence important to understand the requirements, dependencies, cost structure and the
environment in which the services are used. For example, procurement must understand
if the firms serve a unique geography or mostly operate in a tier 1 market. This can make
a big difference according to the Real Rate Report®’s 79 regression model. Based on
actually paid data, the model says that the location of a lawyer in a tier 1 market, such as
New York, Chicago, and Washington DC etc. raises the hourly rate of a lawyer by $161.
However, rather than moving work away from the most expensive locations, it is
important to understand why the work is being done there and what value is offered. It
may be worth the additional cost. Again, it is helpful to ‘unbundle’ activities that have
traditionally been treated as single matters to determining how to move some tasks to
other less expensive–providers, such as LPOs creates different risks to manage.
Also according to the Report, law firm rates have continued to increase
regardless of the larger economic situation. Although rate increases were somewhat
restrained during the recession, in the past two years, rates have resumed growing well
past inflation. What’s more, rates for the highest billing lawyers have been growing
nearly three times faster than those of the lowest billing lawyers: a 75 percent increase
since 2009. Rates for lower priced lawyers, however, have only seen a slow increase as
they have been facing greater competition from LPOs and contract attorneys. The vast
majority of lawyers, 90 per cent, billed different rates to different companies for similar
types of work. Data from the Real Rate Report® showed that some practice areas—such
as M&A—had the highest proportion of lawyers billing companies different rates, while
other areas—e.g., Corporate and General Business—showed less variation. Although
many companies thought they were receiving the lowest available rates with law firms,
many were not. More transparency in the market is likely to mean that rates will be less
variable in the future as firms will likely face tougher negotiators. Of course, rates should
be evaluated in the context of outcomes to as great an extent as possible. Analyzing total
79
The Real Rate Report® is the legal industry's only benchmark report for law firm rates using actual legal invoice data instead of self-reported
survey responses. This report — the only of its kind — has been developed by TyMetrix and the Corporate Executive Board’s Legal and
Compliance practice as a guide to the pricing of services throughout the legal industry. http://tymetrix.com/products/legal-analytics/2/2012-realrate-report/
15
cost per matter often—but not always—discloses that higher combined rates result in
lower overall cost. For litigation matters, comparisons preferably include loss results,
accounting for disposition type and venue. Again, benchmarking one’s results against
industry experience will add information and insight.
Developing a negotiation strategy often includes a preferred provider program,
hourly rate structure per timekeeper, per type of practice, per region, volume price
agreement (VPA), rebates, payment terms, and agreement internal billing guidelines. A
well-designed, fact-based approach for reviewing legal spend can be very beneficial to an
organization. Corporations will benefit from optimizing the number of firms used, their
ability to leverage spend across the business, standardized rates, documented processes
for engaging preferred firms for service, improved billing guidelines for invoice audit
accuracy and complete transparency and visibility into all legal spend. A good sourcing
strategy that includes developing, implementing, monitoring, and continuous improving
can produce sustainable savings averaging of 7 to 10 percent, and in some cases,
significantly more. Standard practices of corporations today include billing guidelines,
case management guidelines, matter evaluation process, and invoice review process. The
majority of organizations also generate key performance indicator (KPI) reports. Law
firms need to understand which KPI procurement measures and deliver on these
More and more, these changes are led by data-driven legal operations
professionals. Typically equipped with a strong financial background, legal operations
managers scrutinize legal spending: Their analyses go from the 10,000 feet-view down to
the granular level of the Uniform Task Based Management System (UTBMS) task code,
while invoices are looked at—sometimes literally—line by line.
Legal operations professionals use data to conduct analyses in four performance
areas regarding rates, outcomes, resource use, and other law firm metrics. The quality of
the analytics here is mainly driven by:




The quantity of the data – how detailed is it, how much of the legal spend is covered, how
many years of data comparisons are available.
The extent to which the data can be segmented: To generate insightful analyses, for
example, segmentation by descriptive information (e.g. practice area, timekeeper level,
severity) would be useful, or segmentation by time (including trending information).
The extent to which miscellaneous performance indicators are collected.
The extent to which benchmark data can be incorporated into the analyses.
To evaluate efficiency, they measure the extent to which higher and lower cost
timekeepers and timekeeper levels are used on matters. For example, to what extent are
partners used compared to associates and paralegals? How does it change over time?
Analyses account for matter type as well as for severity/complexity. Evaluation of
efficiency can be applied at the matter level as well as at the phase, task or group of tasks
level by incorporating UTBMS data. Other performance metrics used include the quality
of line item entries, compliance with expense guidelines, on-going/unusual weekend
hours billed or the frequency of high daily hours for individuals, performance to budget,
closed matter performance evaluations, and number of billers per matter.
So what conclusions can we draw from this rapidly evolving situation? The basis
of valuable insight is clean, reliable data that can be sliced and diced for analysis.
16
Without the necessary systems or processes to capture and analyze spend data the legal
department continues to operate only partially sighted. Until now, the legal department
was typically the last part of the organization to avoid this level of data scrutiny.
However, time is running out for insisting that legal is ‘different.’ The ‘legal exception’
has a limited shelf life; show good corporate citizenship now before you are forced to.
Adapting to that change in order to stay competitive, to thrive in the “new normal,” is
essential. As discussed more fully in the case study below, LegalZoom, the online
provider of self-help legal documents, for example, has for several years battled with the
North Carolina Bar Association about the bar’s attempt to prevent LegalZoom from what
it considers the unauthorized practice of law in the state. This reflects an economy-wide
change.
From travel agents to print journalists, “middleman” professions are increasingly
irrelevant due to computer and Internet technology advances. Business and individual
clients likewise assume that electronic tools make lawyers increasingly irrelevant to help
with commodity services like drafting a will, filing a patent application, or registering a
deed. While some jobs are being replaced with technology, however, new roles are
developing. Much as the information overload in travel led to the role of curator and
cultivated a need for high-end, personalized, human expertise in planning for travel
experiences, law is witnessing the emergence of roles such as the lawyer as a trusted
curator and a return to the lawyer as trusted advisor for specialized, nuanced service.
Technology will continue to affect the cost and quality of the legal service delivered to
the clients. Improving the delivery of legal service through knowledge management and
client relationship management software will make legal costs competitive. Getting the
work, doing the work with the help of technology, and getting paid for the work will all
be transformed. Business schools call this marketing, production, and finance. Law firms
must consider them the survival tactics of the future. 80 The next two case studies make
these observations compellingly clear.
B. Case Study #2: LegalZoom as First-Mover in the Online, Do-It-Yourself Legal
Services Market
LegalZoom was founded with a vision of combining the power of online technology
with deep legal experience to create a scalable online legal platform that would
fundamentally transform the way legal services are delivered to small businesses and
consumers. In the twelve years since its launch, LegalZoom has become the leading
online provider of services that meet the legal needs of small businesses and consumers
in the United States. The company served approximately two million customers in the
first 10 years of business. In 2011 LegalZoom customers placed approximately 490,000
orders and more than 20 percent of new California limited liability companies were
formed using LegalZoom’s online legal platform. Second quarter revenues in 2012
reached nearly $50 million81.
80
http://wislawjournal.com/2013/02/22/lawbiz-coaches-corner-understanding-law-firms-new-normal/
All financial data is publicly available in LegalZoom.com, Inc’s S1 on file with the Securities and Exchange Commission, avai lable at
http://www.sec.gov/Archives/edgar/data/1286139/000104746912007609/a2209713zs-1a.htm (last visited Mar. 20, 2013).
81
17
Quarterly Revenues
(in millions)
50
40
30
20
10
0
The company remains focused on transforming the small business and consumer
legal services market by leveraging the power of technology and people. Today,
LegalZoom’s services include a portfolio of interactive legal documents that are
personalized by customers through dynamic online processes, as well as subscription
legal plans and registered agent services. For small businesses and consumers who want
legal advice, LegalZoom’s subscription legal plans connect customers with experienced
attorneys who participate in a legal plan network. In order to continue this type of
expansion over the last 12 years, LegalZoom has focused a great deal of effort on two
areas: exceptional customer experience and building a leading brand.
A. Exceptional customer experience.
Nearly every LegalZoom customer is asked one question following his or her
purchase: “How likely are you to recommend LegalZoom.com to a friend or colleague?”
This question is intended to measure customer loyalty by facilitating the tracking of net
promoters – the percentage of customers who are promoters of a brand or company minus
the percentage who are detractors82. The number is important as loyalty drives revenues
both from repeat customers and from new customers who were referred to a company.
The net promoter score has been shown to serve as a very good indicator of customer
loyalty and predictor of growth. For a striking example of this, see the chart below which
shows 3-year growth of several airlines on the Y-axis against net promoter score of those
same companies on the X-axis.
82
For a thorough discussion of Net Promoter Score and loyalty, see Reichheld, Frederick, The One Number You Need to Grow, Harvard
Business Review, 2003. To calculate net promoter score, calculate the percentage of customers who respond with nine or ten (promoters) and the
percentage that respond with zero through six (detractors). Subtract the percentage of detractors from the percentage of promoters to arrive at
your net promoter score.
18
83
While net promoter score is not a perfect indicator and is not appropriate for all
industries, it does provide a simple and fairly accurate measure of customer loyalty when
applied appropriately.
Because LegalZoom recognizes the importance of this type of loyalty in the
online legal service business, customer satisfaction has been a primary focus of the
company for years and the company has provided an exceptional customer experience
through a variety of strategies. For example, customer care is central to LegalZoom’s
culture and employees are highly focused on providing exceptional customer
experiences. Even in the early days as a legal document provider, LegalZoom provided
live customer care representatives who focused on resolving customer issues. LegalZoom
has put its money where its mouth is regarding customer experience by maintaining a
satisfaction guarantee for its offerings. If a customer is not completely satisfied with
services received for any reason, LegalZoom will attempt to correct the situation, or
provide a refund or credit. Approaches such as these have not gone unnoticed by
LegalZoom’s customers. While LegalZoom does not publicize its net promoter score, in
2011, nine out of ten of the approximately 34,000 customers who responded to a
LegalZoom survey said they would recommend the company to their friends and family.
B. Leading Brand.
LegalZoom recognized early on that building a trusted brand would be critical for
a company providing legal documents online. The credibility of the documents is
extremely important for any company in the space. That is why LegalZoom co-founders
Brian Lee and Brian Liu approached Robert Shapiro with an offer to join as a co-founder
in the very early days of the company. Since that time, LegalZoom has continued to focus
on building a trusted brand through use of talk radio, pod casts, television commercial
using real LegalZoom customers and innovative social media initiatives such as Free Joe
Friday (a free legal Q&A session on Facebook with Joe Escalante; an attorney and host
of the syndicated entertainment legal advice radio call-in program “Barely Legal
Radio.”). As a result of these efforts, LegalZoom has become the leading, nationally
recognized legal brand for small businesses and consumers in the United States; with
60% aided brand awareness based on a survey conducted using United Sample, Inc. in
January 201284.
83
84
Reichheld, Frederick, The One Number You Need to Grow, Harvard Business Review, 200
LegalZoom.com, Inc. S1
19
C. Early Stages – Document Assembly
LegalZoom first deviated from the traditional law firm model more than a decade ago
when it entered the market as a Legal Document Assistant and introduced its online legal
document services. Legal Document Assistants are non-lawyers that provide basic legal
documents directly to consumers, generally using online intake questionnaires and
automated document assembly. These entities focus primarily on the unmet legal needs
of consumers in moderate income households - needs have existed for some time 85 .
While the levels of service vary somewhat, most of these entities provide consumers with
some sort of legal document, but no tailored legal advice. These entities are regulated
directly in a few states 86 and indirectly through the state bars and committees on
unauthorized practice of law in most others.
As a result of LegalZoom’s early success in providing online legal document
services, the company has become seen as a substitute to lawyers and is viewed as cutting
into the low-end, routine, less custom work. Richard Susskind provides an excellent view
of the spectrum of legal services product. At one end of the spectrum, are bespoke legal
services. These are “traditionally handcrafted, one-to-one consultative professional
services.” 87 Legal “commodities” are on the opposite end of the spectrum, with
gradations in between88. LegalZoom has been providing services at the Commodity and
Packaged end of the spectrum in the traditional markets for small firms (estate planning
documents, small business documents, etc.) for around a decade and many other
providers have followed suit.
Traditionally, the threat of substitutes for law firms has been very low. The
profession is regulated and lawyers themselves can dictate who can be licensed to
practice law. As of 2007, approximately 94% of all services provided under the legal
services category were provided by law firms 89. That said, in recent years substitutes have
been the focus of a great deal of energy from the legal services industry. The growth of
this industry has been viewed as a threat by small firms in particular because the
provision of simple legal documents such as Last Wills and Powers of Attorney has
traditionally been their market. The impact of this threat is that certain legal services are
becoming commoditized90 . In addition, these simple services are often the entry point for
small firms into the lives of clients from whom they expect to receive significant business
in the future. As such, small firms and sole practitioners have reacted with lawsuits
claiming Unauthorized Practice of Law, among other things, with limited success 91.
85
The unmet legal needs of consumers are well documented and dramatic. In 1994, the American Bar Association published Findings of the
Comprehensive Legal Needs Study. The study surveyed low and moderate income households to assess their legal needs and related solutions for
1992, the year prior to the data collection. Nearly half (46 percent) of moderate income households reported having at least one legal need in the
prior year. Less than half of those consumers (43 percent of those with a legal need and 22 percent of those overall) consulted a lawyer about
their problem. William Hornsby, “Improving the Delivery of Affordable Legal Services Through the Internet: A Blueprint to Shi ft to a Digital
Paradigm, ABA Standing Committee on the Delivery of Legal Services.
86
See California Business & Professions Code § 6400 et seq. and Arizona Code of Judicial Administration §7-208
87
RICHARD SUSSKIND, THE END OF LAWYERS? RETHINKING THE NATURE OF LEGAL SERVICES __ (2008)
88
Id.
89
Mintel, Legal Services Snapshots – US – December, 2008
90
Susskind defines a commoditized legal service as “an IT-based offering that is undifferentiated in the marketplace (undifferentiated in the
minds of the recipients and not the providers of the service).”
91
In fact, some attorneys point out that this approach only further commoditizes such services by basically saying such companies are providing
the equivalent services of an attorney. Thus far, courts have generally recognized the difference between online “scriveners” and unauthorized
practice of law.
20
Today, LegalZoom offers a broad portfolio of interactive legal documents that
customers can tailor to their specific needs through using dynamic online processes and
scalable technology. LegalZoom’s interactive legal documents are designed for use, as
appropriate, at the federal level, as well as in all 50 states, the District of Columbia and
approximately 2,900 U.S. counties. LegalZoom’s interactive legal document services for
small businesses include limited liability company formations, incorporations and
trademark applications and for consumers include wills, living trusts and powers of
attorney. Customer demand for these transactional offerings has remained very strong
with recent quarterly order volume remaining at over 100,000 transactions with high
points of over 150,00092.
Orders Placed
(Thousands)
200
150
100
50
0
This order volume not only provides revenues, but also provides LegalZoom with
unique insight into the legal needs of small businesses and consumers. LegalZoom
leverages that legal knowledge and team of experienced, in-house attorneys, often in
consultation with outside attorneys from across the United States, to design, review and
maintain their services. The high volume of transactions handled and the feedback
received from customers and government agencies give LegalZoom a scale advantage
that enables development of additional services to address their customers' needs and
refine their business processes.
Subscription Legal Plans
LegalZoom’s understanding of their customer’s needs eventually led to
significant changes to the business. Where once there was a great deal of room to work
with true DIY customers, LegalZoom began to see more customers in need of legal
advice. Due to Unauthorized Practice of Law and Corporate Practice of Law statutes,
LegalZoom employees could not provide such assistance. Further, due to Model Rule 5.4
and its various incarnations across the US, LegalZoom could not, even if desired, develop
or invest in a law firm to assist customers in these matters 93 . While lead generation
between non-lawyer websites and lawyer was becoming increasingly accepted,
92
LegalZoom.com, Inc. S1
While customer or client demand for such arrangements appears to be high, the US legal industry has been resistant to allowing practitioners
and firms to partner with or be owned by non-lawyers. A common fear is that doing so would give non-lawyers direct or indirect control over
lawyers’ professional judgment. However, many in the industry are calling for reforms which would allow partnerships with out side non-lawyer
professionals, the granting of partner status or ownership to such professionals within law firms, and even stock ownership of firms by the public.
According to proponents, such reforms would increase clients’ access to firms, allow firms to raise much-needed capital, and help firms attract
and retain talent, among other benefits. These calls are growing stronger given recent developments in England and an increa sing focus on access
to justice, but agreement on the matter is rather far off on the horizon. Indeed, the last time the matter came before the ABA the delegates, against
the recommendations of the counsel set up to study the issue, voted resoundingly against non-lawyer ownership.
93
21
LegalZoom knew that a network of unaffiliated lawyers simply using the LegalZoom
brand to bring in leads was unlikely to be a beneficial arrangement for their customers.
Ultimately, this led the company to establish basic legal service plans to meet the
needs of their customers. Legal service plans appealed for two primary reasons. First, the
format was generally accepted by regulators. As the ABA has noted “The ABA has long
supported prepaid legal services plans as a way to increase access to the justice system
for low‐ and middle‐income Americans. These plans allow individuals and families to
address legal issues before they become significant problems, reducing demands on
already overburdened court systems and instilling confidence in our justice system.” This
same report touched on the second reason that legal plans appeared to be such a good fit
for LegalZoom’s customer base. As the report noted, “for the consumer, legal services
are among the most difficult services to buy. The prospect of doing so is rife with
uncertainty and potential risk,” and further concluded, “the challenge (and opportunity)
for the legal profession is to make lawyers more accessible and less threatening to
consumers who might need them.”94 This opportunity of making lawyers more accessible
and less threatening to consumers was a perfect fit for LegalZoom’s mission.
Legal service plans (legal plans), have been offered in Europe for more than one
hundred years and, in some countries, have market penetration in excess of 60 percent.
Legal plans were not developed in the United States until the late 1960s. Since that time,
there has been substantial growth in the market. Legal service plans are offered through
various organizations and marketing methods and contain a wide variety of benefits. A
large number of plans are offered free to members of associations (such as labor unions
and the American Association of Retired Persons). Another large source of legal plans is
employee welfare benefit plans, which are paid for by employers and treated as a fringe
benefit. Finally, there are plans that are sold directly to consumers. Historically, these
direct to consumer plans “have more comprehensive benefits, higher utilization, involve
higher costs to participants, and are offered on an individual enrollment or voluntary
basis.” 95 LegalZoom’s offerings are aligned more with this last category of direct to
consumer plans.
For small businesses and consumers who want legal advice, LegalZoom offer
legal plans that connect subscribers with experienced attorneys licensed in their
jurisdiction to address their specific legal needs. In order to be considered for
participation in the legal plan network, independent attorneys must satisfy certain quality
standards established by LegalZoom and be highly focused on customer care. In fact, all
attorneys participating in LegalZoom’s network are surveyed by legal plan members after
consultations. LegalZoom’s small business and consumer subscription legal plans are
currently available in 41 states and the District of Columbia. LegalZoom’s subscription
legal plans include free attorney consultations on new legal matters, review of legal
documents up to ten pages in length, and discounts on LegalZoom services and additional
services provided by legal plan network attorneys.
The success of LegalZoom’s legal plans is evidence that improving technology
can yield more affordable attorney services. As consultations with attorneys become
more efficient (the idea is that LegalZoom’s system will eliminate much of the research
attorney’s must now conduct for each new case) the price of legal help will come down
94
95
Public Perceptions of Lawyers Consumer Research Findings, 2002, ABA
Pre-Paid Legal Services Inc. annual report, 2009
22
and access becomes more universal. The concept has, to date, appeared to work as
participating fims have assisted in developing innovative way of completing
consultations and membership in LegalZoom subscriptions has increased several fold
over the last few years and the percentage of total revenues from subscrition enrollement
increased from five percent in 2009 to over 20% in the first half of 201296.
Total Active
Subscriptions
(Thousands)
400
300
200
100
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
0
Increase in Percentage of Revenues from Subscriptions
5%
2009
2010
Documents
Documents
Subscriptions
Subscriptions
9%
95%
91%
2011
Q1-Q2 2012
Documents
Documents
Subscriptions
Subscriptions
18%
22%
78%
82%
Another benefit of efficiencies of scale is that provider frims have started offering special
discounted flat fee services to members of those legal plans as an additional benefit to
the member and additional source of revenue to the firm.
96
LegalZoom.com, Inc. S1
23
The growth of LegalZoom’s legal plans may be the catalyst for moving
LegalZoom from status as a pure substitute for legal services to a hybrid with
complementary components for many firms as well. As LegalZoom’s legal plan
membership grows, the company is looking to expand its network of attorneys to provide
services outside of plan benefits to members who need local representation or advice on
complex or highly specialized matters.The attorneys who participate must meet similar
requirements to to the primary firms and provide an initial free consultation and 25
percent discount off their customary rates (and, of course, maintain high levels of
customer service for legal plan members). While this service is still in its very early
stages, it’s clear that LegalZoom intends to focus on connecting their customers with the
right attorneys in the future. As LegalZoom CEO John Suh has stated, "Forget the fearbased notion of technology replacing lawyers, because that’s completely down the wrong
path. Think of it as lawyers embracing technology to create greater access to the law and
extend legal services to the over 100 million Americans to whom it is currently out of
reach.”97
While innovation in consumer legal services is somewhat limited in the US due
to Unauthorized Practice of Law statutes and rules against non-lawyer ownership of law
firms, the legal services market in England and Wales is currently undergoing large scale
transformation due to the liberalization of legal services regulations. These changes have
not only brought in new non-lawyer entrants to the market, but have also spurred
innovation among a limited group of law firms. Among the most striking of those
examples is Riverview Law.
C. Case Study #3: Riverview Law’s New Model for Business Representation in
the Wake of the UK Legal Services Act
This case study of the recently launched Riverview Law is best understood
within the context of regulatory changes in England and Wales over the past decade. A
brief history is necessary before moving on to explore Riverview’s work. In a 2003
report entitled Competition and regulation in the legal services market, the UK
Government’s Department for Constitutional Affairs (DCA) highlighted a number of
inherent weaknesses in the regulatory framework for legal services in England and
Wales. In July of that same year, it commissioned a full review of the existing framework
by Sir David Clementi, an accomplished businessman and the former Deputy Governor
of the Bank of England. The terms of reference for the review were twofold:
97

To consider what regulatory framework would best promote competition, innovation
and the public and consumer interest in an efficient, effective and independent legal
sector, and

To recommend a framework which will be independent in representing the public
and consumer interest, comprehensive, accountable, consistent, flexible, transparent,
and no more restrictive or burdensome than is clearly justified.
Harrison, John, LegalZoom Takes New Twist to Old Profession, Portfolio.com
24
Clementi submitted his report in December 2004 and in its Foreword he states
that nothing that he learned during the 18 month period of his review had caused him to
doubt the broad validity of the DCA’s earlier conclusion that the current regulatory
framework was outdated, inflexible, over-complex and insufficiently accountable or
transparent. “The current system is flawed,” stated Clementi, 98 and what followed in his
now infamous report called for sweeping changes that struck at the very heart of the longstanding traditions of the legal system.
The Government’s response followed some three years later in the form of The
Legal Services Act 2007 (LSA) which sought to address most of Clementi’s concerns and
to implement the majority of his recommendations over a period of approximately five
years. The Act heralded a number of significant changes, but is perhaps best known for
opening up the sector to non-lawyers. Under the new regime, companies who did not
offer legal services as their primary business were now permitted to undertake legal
practice, and new licensing rules concerning Incorporation and Alternative Business
Structures (ABS) meant that for the first time, anyone could own a law firm.
1.
Enter Riverview Law
As intended, the LSA served as a significant catalyst for change in the
marketplace, and what followed was a succession of market moves that linked private
money with the practice of law. Most activity was focused on individual consumers and
in anticipation of a move to enter the market by the UK’s largest retailer, Tesco, the term
“Tesco Law” was coined to refer to this segment. At the time of writing, the retail giant
has yet to enter the legal services market, but many of its competitors have done so,
including The Co-operative Group, a retail co-operative run and owned by over 6 million
members and with approximately 5,000 stores across the UK.
While the market’s attention was predominantly fixed on the opportunities for
individual consumers, one group of executives in a business operating in the north-west
of England believed a significant opportunity also existed in the commercial law arena.
They had set-up and at the time were running professional services company
AdviserPlus, which provides advisory outsourcing services to a client base ranging from
small businesses to large FTSE 100 international corporations. Many of AdviserPlus’
clients use the company to provide services typically undertaken by an in-house Human
Resources team. Some of those who outsourced advisory support to AdviserPlus also
asked the company to undertake their transactional work as well.
Operating in the HR, employment and Health & Safety advisory space, the
leadership team was aware of the LSA and its potential impact on the marketplace. So
when clients started asking them to consider extending the scope of their services into the
legal services arena, they took it very seriously. Around the same time, the team began to
be approached by regional commercial law firms who, seeing change on the horizon,
were seeking partnership with (or even acquisition by) a successful forward-looking
company in an adjacent section of the value chain.
Presented with several alternatives for entering the market, the decision was
taken to start with a blank slate and to build a new organization from the ground up.
Unencumbered by legacy technology systems, cultural baggage, or the constraints of
98
Review of the Regulatory Framework for Legal Services in England and Wales: Final Report, Dec 2004, p.1
25
existing operational structures, the founding team had the luxury of approaching the
market with an open mind and asking questions such as What do customers actually
want?; How do we best configure ourselves to deliver it?; What kind of people and
behaviors do we need?; and last but by no means least, What technology is required to
support it?
Nearly two years in the making, Riverview Law launched as a “new model”
fixed-fee commercial firm in February 2012, shortly after the last of the measures from
the LSA was implemented. As the first new entrant into the commercial market, the firm
attracted a lot of media attention and quickly gained traction in the market. The Lawyer
described its arrival as “the boldest-ever post-Legal Services Act move involving the bar”
and in the same article suggested that it “poses a direct threat to [UK] law firms.”99 In
June 2012 Riverview opened its first international office in New York, providing an
alternative route into the English legal system for US clients requiring advice or
representation there. The following table illustrates the forces behind Riverview’s
entrance, including significant change factors coupled with a market structure that is
vulnerable to well executed new models by new entrants with little or no baggage.
2.
Technology and the “Penny Gap”
Run by experienced business leaders who also happen to have a background in
law, the firm’s mission is to change the way businesses use, measure and buy legal
services. To achieve this, Riverview’s organizational structure and team demographic are
markedly different to that of a typical law firm and bear testimony more to the principles
taught in business schools and the real world of running companies, than those taught in
law schools. A diverse team of professionals has been configured to perfectly match
99
[http://www.thelawyer.com/invested-interest/1011462.article]
26
experience, skills and competencies with the requisite resource for any piece of work.
Unsurprisingly, technology is a significant enabler, though the leadership team is often
keen to stress that it is just an enabler. Eleven years’ experience running AdviserPlus
proved that however good the technology is, in services businesses it is people that make
the difference.
A powerful technology system was required to maximize the efficiencies
achieved by this approach, and once again the link to AdviserPlus (a shareholder in the
new company) proved invaluable. Specializing in outsourced HR and employmentrelated advice, over a period of twelve years AdviserPlus had created and refined a
proprietary software platform and portal to manage case workflows, interface with clients
and produce powerful management information for both internal and external audiences.
Riverview’s founders already understood the benefit of investing in high quality
technology at the outset.
Leveraging this existing proprietary knowledge and expertise made perfect sense
and gave Riverview an easy answer to one of the biggest questions faced by any new
business aiming to build an efficient, scalable and future-proof model: Which of the
many available technology platforms should we invest in? Ongoing access to the very
developers who had created the system, known internally as the Intelligent Integrated
Architecture™ (IIA), was also a significant advantage. It was then only a matter of
working with a partner to adapt the IIA approach to fit Riverview’s precise requirements
in the legal sector specifically.
In addition to providing paying clients with the benefits of the portal’s features,
the team also recognized the value it could bring to a broader audience. The internet
revolution fundamentally changed the way business sourced legal advice and guidance,
especially start-ups and smaller businesses who often chose to shun the uncertainty of
their local law firm’s billable hour in favor of resources on the World Wide Web. Search
long and hard enough and it’s possible to get a free answer to almost any routine legal
question, or pay a nominal subscription to a more comprehensive service to access the
information more readily.
Riverview understood, though, that there is a huge difference between cheap and
free – a reality that venture capitalist Josh Kopelman has referred to as the “penny gap.”
He observed that the emergence of technology and the web has rewritten the old rules of
what became known as “price elasticity” (the expectation of a linear relationship in which
volume goes up as price goes down, to a point of diminishing returns). 100
100
[http://redeye.firstround.com/2007/03/the_first_penny.html]
27
The truth, he suggests, is that zero is one market and any other price is another,
and in many cases this “penny gap” can be the difference between a great market and
none at all.101
According to Chris Anderson, former editor-in-chief of Wired magazine and
author of Free: How Today's Smartest Businesses Profit by Giving Something for
Nothing, “The huge psychological gap between ‘almost zero’ and ‘zero’ is why
micropayments failed. It's why Google doesn't show up on your credit card. It's why
modern Web companies don't charge their users anything. And it's why Yahoo gives
101
Id.
28
away disk drive space. The question of infinite storage was not if but when. The winners
made their stuff free first.”102
3.
Riverview’s Philosophy of Free for Small Businesses
Armed with this understanding of the new freeconomy, Riverview decided to
take an unprecedented step and offer free unlimited access to a comprehensive, regularly
updated online library containing over 650 plain English advice pages and 450
documents, forms, records and templates. The intention is that the portal (called
MyView) will provide information on just about every conceivable issue and area of law
that a small-to-medium sized business might require, all in one place, written in a
consistent and accessible style. It makes the Google search redundant, and undermines
the business model of those law firms and businesses who believe that users should pay
for this type of information.
MyView saw many thousands of businesses register in its first year and includes
additional freemium components such as a free call to one of Riverview’s qualified
lawyers. The idea is that if a member has an issue that extends beyond the generic advice
and guidance to be found in MyView, they can pick up the phone and get immediate
expert advice on any legal business matter. The adviceline has been designed to be as
user-friendly as the portal, and offers immediate access to lawyers on demand without the
need to navigate a frustrating Interactive Voice Response (IVR) system.
A number of the UK’s regional High Street (Main Street) firms now offer the
first half-hour of advice for free. But to Kopelman’s “penny gap” point, this isn’t as
attractive an idea as those peddling it might believe. To the educated client, a free halfhour of advice is little more than a faintly disguised entrance into the world of the billable
hour, which is precisely the system in which many of those who take advantage of this
offer will find themselves when their issue is not neatly resolved in the limited 30-minute
window. Riverview’s free call, however, is just that – an unlimited conversation which
will either resolve the issue, or get the caller to the point where they understand their
options and next steps.
As a further benefit within a short period of time the member receives a discreet
email informing them that a follow-up case note has been generated and sent to their
secure case management area on MyView. On logging in, the member has access to a
plain English bullet-point summary of the call, with clearly marked actions and next steps
where appropriate. Positive feedback from recipients shows that they appreciate the
ability to review the advice in their own time and make sure they properly understood the
advice and guidance provided over the telephone.
4.
Client (and User) Experience is the “Holy Grail”
The ability to integrate the benefits of powerful online technologies with human
intervention as and when required was a model tried, tested and refined at AdviserPlus.
Thus, the Riverview team entered this new market with the advantage of a welldeveloped understanding and a blueprint for implementation. The freemium model has
been successfully employed by the new online giants of the travel industry and has
102
[http://www.wired.com/techbiz/it/magazine/16-03/ff_free?currentPage=all]
29
proven itself an effective strategy for initially attracting users who then convert to
become clients. It translates well to legal services, but only works, of course , to the
extent that users are so impressed by their free experience that they become paying
customers when the next need arises. For many of Riverview’s small-to-medium sized
business users, the path from free to paid-for often takes the form of a commitment to the
firm’s annual “eat as much as you like” service for a monthly fee that starts from the
equivalent price of just one billable hour of a junior lawyer’s time at a small local firm.
Providing a great experience for users and clients is therefore critical to
Riverview’s model, and an investment was made from the outset in a senior role assigned
to oversee it – a Director of Customer Experience. The “Riverview experience” is
designed to stand out in an industry which is often accused of being rather introspective
and geared towards engaging with customers on the law firm’s terms, rather on the user’s
or client’s terms. Befitting of a model that claims to be genuinely customer-centric, each
point of interaction and stage of the process has been carefully designed to enhance the
experience, and Riverview’s bespoke internal training program teaches team members—
staff and lawyers—how to put themselves in their customers’ shoes.
5. Legal Advisory Outsourcing
As with AdviserPlus, this same customer focus is applied to larger clients too, for
whom Riverview’s streamlined structure, fixed-fee model and advanced technology
makes for an appealing alternative to traditional “Big Law.” For one-off matters, the
portal’s case management features provide much the same benefits as for smaller clients.
But the technology really comes into its own for institutional clients and those using
Riverview’s Legal Advisory Outsourcing (LAO) services, for whom the advanced datahandling capabilities and comprehensive reporting suite provide a level of management
information that most law firms and in-house departments have hitherto found impossible
to deliver.
LAO is not to be confused with LPO (Legal Process Outsourcing). LPO is
typically understood to address the “bottom” 10% of the legal requirements of large
businesses, whereas LAO is focused on the 60-70% of day-to-day, week-to-week
requirements. The Riverview LAO model provides General Counsel with an alternative
to using traditional law firms and outdated panel arrangements, or to building large inhouse teams. The following graphic illustrates the model:
30
Riverview’s high-end services are as popular as its proposition for small-tomedium sized businesses, and it sees this as a continuing trend. While technology is an
enabler to innovate in certain areas, there remains strong demand for the high-touch
expertise provided by domain experts, and this is unlikely to change in the immediate
future. As with the travel industry, the increased access to information is creating demand
for experts to navigate it. While law is in many ways a well-established marketplace,
Riverview believes there are opportunities for those firms who can find ways of bringing
the people and technology together to create something much more compelling. Having
won its first FTSE 100 client after only six weeks, the marketplace would seem to agree.
6.
Riverview’s Digital Marketing Strategy
Technology and the internet also feature strongly when it comes to Riverview’s
approach to marketing its services. The firm’s leaders understood the importance of
leveraging popular social media platforms and using them alongside more traditional
approaches such as soft and hard-copy printed media and radio advertising. In a bold prelaunch statement of intent, Riverview appointed a dedicated Social Media Manager to
direct a coordinated approach to its activities across the major platforms.
Riverview has been particularly active on Twitter, where its efforts were soon
recognized with an award from a creative PR and design agency who provided a useful
independent validation of their approach: “Riverview Law engages with a great many of
the legal community on Twitter with ‘@mentions’, ‘@replies’ and retweets. Their
Twitter interactions focus on law and its change but they do it in an open and friendly,
unintimidating manner. They are just as likely to have a chat or a bit of fun with
followers. Overall they’re an example of one of the most interactive professional
personalities on Twitter.”103
103
http://www.elephantcreative.co.uk/2012/11/16/tweeter-of-the-week-award/
31
The review goes on to highlight another of Riverview’s social media objectives:
“Riverview Law is one of the most informative Tweeters you could come across. They
Tweet fantastically informative content, share news and often Tweet from leading
conferences.”104 This observation hints at another important aspect of how Riverview
sees their role in this space: not only as a trusted advisor, but also as a trusted curator,
paralleling travel’s similar shift from advice-giving to content-curating. 105 In keeping
with their client-focused philosophy and desire to make things easy, Riverview quickly
understood the benefit to customers (whether paying or not) of consolidating valuable
information from a range of sources and passing it on via Twitter and other appropriate
social media platforms.
This strategy has also informed Riverview’s approach to targeted newsletters.
While many firms trot out regular lengthy newsletters (typically weekly or monthly) to
clients and followers, Riverview’s market research indicated that many recipients are
finding increasingly little value in the typical “scatter gun” approach which fails to
acknowledge that they are already inundated with information and often don’t have the
time or the inclination to search through the metaphorical sieve of stones looking for a
possible nugget of gold. Sending relevant information little and often recognizes that
clients aren’t all cut with the same cloth and delivers something of genuine value that’s
not so likely to meet an untimely end with a judicious use of the Delete key!
The ability to act as both trusted advisor and trusted curator is an important
hallmark of the new generation of legal service providers who have thrown out the old
rulebook and are rewriting the rules of engagement on the clients’ terms rather than their
own. Riverview maintains that as the market wakes up to the implications of this
paradigm shift, there will be an increasing number of providers who use the language of
innovation and customer-centered change, but a much smaller percentage of those who
are actually doing it. The old adage that actions speak louder than words is as true as
ever, and may help clients sort the wheat from the chaff.
Riverview has also invested heavily in creating professional marketing videos
which it hosts on its own YouTube channel and which again serve as a useful
differentiator in the marketplace. As Mitch Kowalski, lawyer and author of Avoiding
Extinction: Reimagining Legal Services for the 21st Century observes: “The vast majority
of video produced by North American law firms is worse than horrible. Thinly financed
and laced with not even a smidgen of creativity, these videos are quickly forgotten by
both firms and viewers. Into this legal media vacuum steps U.K. firm, Riverview Law,
with its take on fixed-fee pricing for legal services. Watch and learn Canadian/American
law firms: watch and learn. Cometh the Hour is three and a half minutes of your life that
is not wasted.”106
Cometh the Hour in particular has attracted a lot of attention for its honest and
humorous treatment of the way traditional firms struggle to think beyond the billable
hour.107 It has been viewed thousands of times on YouTube and shown at numerous legal
conferences around the world at which Riverview was not even present. This is viral
marketing at its best, and testimony to the way in which new entrants with a fresh
approach are unashamedly shaking the foundations of a profession that has long been in
104
Id.
See discussion supra note __ (citing Knake, The Lawyer as Trusted Curator).
106
http://business.financialpost.com/2012/08/27/mitch-kowalski-cometh-the-hour-for-video/
107
http://www.youtube.com/watch?v=BfXhn3tf_vE
105
32
need of an overhaul. These “new kids on the block” know how to leverage the power of
digital media and, in contrast to their more traditional competitors, they’re not afraid to
inject a little humor along the way too.
7.
The Importance of Brand
These messages are no coincidence, of course, but instead are part of Riverview’s
carefully constructed approach to brand management. For a variety of reasons, the legal
industry has by and large grown up without strong brands, especially in the small and
mid-cap markets which represent the largest volume of business clients. Hence, there are
significant opportunities for those early movers able to step into this void with a
recognizable brand that gains traction across this sizeable market segment.
Riverview’s research into the way large traditional firms are using social media
makes for an excellent illustration of just how difficult it is proving for many of them to
navigate the brave new world of digital brand management. A number of AmLaw 200
firms who spend a fortune trying to maintain their brand in more traditional contexts,
appear to lack any sense of purpose or even control over the use of their brand online. It
found numerous examples of multiple corporate profiles on the same platform, apparently
owned by different representatives of the firm who clearly aren’t communicating with
each other, and presenting varying levels of quality or in some cases merely an empty
branded shell with no content whatsoever.
Riverview is comfortable in this space, though, and works hard to ensure that it
presents a consistent and powerful brand, both to existing and prospective clients.
Visitors to Twitter, YouTube, Facebook, LinkedIn or Google+ (all of which Riverview is
active on) will find the same brand values and key messages designed to leave the
audience in no doubt about what it stands for. Riverview’s interactive style means it often
gets into public exchanges online in which those who have encountered the firm will give
tangible examples of these values in practice – an independent validation that they are
who they say they are.
This authenticity is an important value to Riverview and other new entrants who
are seeking to bring about a cultural shift in an industry which ironically has not typically
been associated with living out its values (many lawyers would seek to disagree, of
course, but independent surveys showing the perceived lack of trust in the profession
suggest otherwise). Present-day business consumers of legal services are often cynical
buyers, used to being bombarded with positive spin from all directions and quick to spot
inauthenticity when they are unfortunate enough to encounter it. Mitch Kowalski
captured the essence of this achievement when he recounted on his blog the experience of
visiting Riverview’s UK service delivery center: “The highlight of my trip was visiting
Riverview’s operations in The Wirral – it was if I had walked into the offices of my
fictionalized law firm, BFC – minus the rooftop deck. I was astounded by the fact that
from the top down, a customer-centered culture permeated the team. It was palpable,
refreshing and genuine – something I’ve not seen before in any law firm.” 108
8.
108
“The Long Tail” of Riverview Law
http://kowalski.ca/kowalski_blog/maple-leaf-reflections
33
The concept of “the long tail,” popularized by Chris Anderson in a 2004 Wired
magazine article and then later in his book The Long Tail: Why the Future of Business is
Selling Less of More (2006), is a useful lens through which to observe the Riverview
model. The intelligent integration of technology, people and process combines with a
structured approach to external marketing and brand management, to create a compelling
proposition from the proverbial head to the tail of the commercial legal advisory services
market – a feat that has arguably not been achieved by any other law firm.
On the one hand, the model appeals to large corporates who are increasingly
looking for value and price certainty on major instructions and outsourcing arrangements.
On the other, its democratized service for start-ups and small businesses has lengthened
the tail and created a new market for those who have previously been excluded on
grounds of price. The following graph illustrates this point:
What Riverview is doing in the commercial space, others are doing in the
consumer space in the UK by providing access to justice for millions of individuals
whose legal needs currently go unmet because of the high and often unpredictable cost of
legal services. The early signs are that the stimulus provided by the Legal Services Act
and the UK Government’s progressive approach to liberalizing the market is indeed
having the desired effect and promoting healthy competition, innovation and the public
and consumer interest.
Conclusion
While retail travel agents and brick-and-mortar (or marble-and-dark-wood) law
firms may have reached their apex in the mid-1990’s, new opportunities remain in both
industries. Both of these professional service industries have been upended by
technology, especially through sophisticated online access and high-level data
aggregation. Perhaps because it was hardest hit, travel responded more quickly than law,
offering lessons for lawyers at all levels of service, from solo practitioners to large,
traditional firms—these lessons largely emphasize the focus going forward on how to
best serve a highly informed yet information inundated user/client.
34
These are exciting times for those willing and able to embrace change and take
advantage of the efficiencies to be found in a new liberalized and technology-enabled
paradigm. Similar transformations have long since occurred in other industries and the
travel industry certainly makes for an interesting parallel. Indeed, the very same digital
revolution that redrew the landscape for travel professionals in the 1990’s, has finally
caught up with the legal industry and is dragging it kicking and screaming into the
twenty-first century.
Long-protected by myth and regulation, the legal services industry has until very
recently managed to hold back the tsunami of change that long ago swept across less
shielded professions and industries. For centuries, lawyers have had to compete only with
other lawyers, creating a remarkably successful and rewarding ecosystem for those on the
inside. The cynic might be forgiven for suggesting that beneficiaries of this system have
done their utmost to defend it, fiercely resisting the competitive market pressures that are
the norm for just about every other profitable enterprise on the planet.
Yet despite their best efforts, significant change factors, coupled with a market
structure that is vulnerable to well-executed alternative models by new entrants, have
come together to challenge the very foundations upon which this great industry has been
built. The last five years in legal services have arguably seen more innovation and
disruption than the preceding five hundred. Those who once opted to entrench themselves
structurally and financially in the prevailing system now appear somewhat trapped within
their own walls, vulnerable to an onslaught of more flexible and “fleet of foot” new
entrants who are hungry to reinvent legal services.
35
The dilemma of technology use and relationships:
How the introduction of a knowledge management system
affects workplace relationships and value creation in a corporate law firm
Forrest Briscoe
Associate Professor
Smeal College of Business
Penn State University
[email protected]
Wenpin Tsai
John and Kara Arnold
Professor of Business
Administration
[email protected]
Marion Brivot
Assistant Professor of
Accountancy
Universite Laval
[email protected]
Draft April 1, 2013
Prepared for the Georgetown Center for the Study of the Legal Profession, 2013 Symposium
Abstract: How does the introduction of new information technology in an organization affect
workplace relationships and create value? A widely subscribed materialist perspective emphases
the way technology facilitates discovery of distant information, reducing the reliance on
interpersonal relationships in knowledge search and use. In contrast, a social perspective
highlights the enduring importance of people and their social interactions in shaping technology
use. Analyzing the client billings and personnel records from before and after the implementation
of a knowledge management system (KMS) in a large law firm, we examine the effect of KMS
use on the formation of new workplace ties and the creation of value. We compare the effect of
KMS document downloads from directly-tied, indirectly-tied, and non-tied colleagues. We find
that downloads from indirect ties will lead to new relationship formation more often than
downloads from non-tied colleagues. We also find that wider downloading increases subsequent
value creation. But contrary to our expectations, more value is created by downloads of direct
ties compared with indirect ties (or non-ties). We consider the implications of our findings for
research on technology use and social networks in organizations, as well as for practitioners in
law firm.
1 The introduction of a new technology into an organization can change the way
individuals work and how they learn from each other. Technologies such as information systems
and knowledge databases open up access to knowledge that was previously unavailable to
organizational members (Lucas 1975; Zuboff 1988), and can thus disrupt an established social
structure (Leonardi 2007). When knowledge is systematically stored and disseminated using
technology, organizational transparency can increase as people use technology to find where a
specific bit of knowledge resides. Technology, therefore, may reduce the need to rely on
personal relationships or social capital for knowledge search in the workplace. Further,
knowledge that is discovered or located through technology might also more easily be used
directly by others without forming any relationship to the creator of that knowledge.
Although in general technology can clearly reduce human labor and increase efficiency,
several scholars have suggested that technology has important limitations in its application to
knowledge management (e.g., Alavi and Leidner 2001). In particular, technology may not
effectively replace individuals’ social capital when performing knowledge work. Because
knowledge is locally embedded in people and their relationships, social capital (i.e. relationships)
is critical to accessing and transferring knowledge (Tsai, 2001). Complex knowledge is
especially difficult to codify for systematic reuse and dissemination, and people may still have to
rely on their prior social relationships to access and comprehend such complex knowledge
(Hansen 1999).
Prior research on knowledge sharing inside organizations has tended to focus on either
technology use, or on workplace social relationships (e.g. Reagans & McEvily, 2003), essentially
viewing them as separate phenomena. Few studies have examined technology use and
relationship dynamics simultaneously, or distinguished their relative influence (Haas and Hansen,
2007). In this paper, we investigate the tension between technology use and relationships, and we
also show how they may complement each other to create value. Specifically, we ask: How does
technology use compare with prior social capital as the basis for forming new workplace
relationships and creating value?
To address this question, we analyze both qualitative and quantitative data collected from
a large European law firm concerning its implementation of a new technology: a knowledge
management system (KMS) designed to capture, store, and disseminate knowledge in lawyers’
work. We use interview data and meeting records to describe our research context and the KMS
implementation processes and to inform our theory development. In our quantitative analysis, we
use records of KMS document downloads, client billings, and personnel information to examine
the dynamic interplay between technology use and social capital. We examine how the interplay
of those two factors shapes the formation of new workplace relationships among organizational
members and the creation of value through billable-hours revenue generation.
The use of KMS’s for managing professional knowledge work has increased rapidly. A
recent report shows that AmLaw 200 firms invest on average $5-7 million per year in KMS
technology (Cohen 2011). Typically, investments in KMS technologies in professional service
firms are aimed at leveraging the intellectual capital of organizational members and facilitating
transfer of knowledge among them. Yet although the KMS technology is expected to help
management of knowledge work by identifying best practices and keeping track of employees’
knowledge, whether such technology actually creates value for employees has not been proven in
the existing literature. In addition, prior research has not systematically examined the
consequences of using such technology for workplace relationships. In this research, we observe
2 workplace relationships with respect to joint client work between managers and partners. In the
law firm setting as well in many other professional service firms, such workplace relationships
are critical for employees’ apprenticeship learning and career development. By simultaneously
considering technological and social influences on workplace relationships, we discuss the
implications of KMS use by highlighting a potential trade-off between different learning modes.
RESEARCH CONTEXT
Our data consist of the quantitative internal records of a large, century old European law
firm during the years 1999 to 2010, combined with qualitative interviews and archival materials
form that same firm. The firm is organized as a partnership. Lawyers enter the firm as junior
associates, and progress through a manager level to eventually be considered for partnership.
Work in the research site, as in other corporate law firms, is organized around client projects.
Each project is supervised by a lead partner who owns the client relationship. Projects are carried
out by the members of an engagement team comprised of the partner(s), a manager, associates
and other junior staff. Clients are invoiced on the basis of the billable hours spent by each team
member on the project.
For this study, we focus on the ties formed between mid-level lawyers referred to as
managers and the firm’s partners. Managers work for a range of different partners and clients
When managers are eventually considered for partnership the ties they were able to form with
partners are an essential component of their assessment: not only is it strategic for them to have
different partners advocating in favor of their promotion, but ties with partners are also a
prerequisite for demonstrating high value creation (measured in terms of hours billed) because it
is partners who decide which client project are assigned to them.
The case firm’s knowledge management system
The case firm has an established and well-utilized knowledge management system (KMS)
that was created to store best practice opinion letters and other types of documents in a central
database accessible to everyone in the firm, for easy, quick and cheap reuse. In 2000, a pilot
knowledge management system was implemented during an experimentation period. Initial
reaction was mixed, as highlighted by a survey conducted shortly before the roll out of the KMS.
There was little participation, reflected in very low uploading and downloading of documents.
At the end of 2004, a new and extensively retooled KMS was rolled out after reflecting
on lessons from the pilot period. The case firm’s managing partner enthusiastically endorsed the
new system, and its promise, with comments such as: “let’s stop reinventing the wheel”; “if only
we knew what we know”; and an aim to create “a knowledge environment that leverages the
intellectual capital of everyone” for “quality enhancement.”
The managing partner announced that inputting of documents and use of the KMS would
be mandatory for everyone. There were no formal sanctions or rewards for KMS participation,
but document uploads were frequent and widespread (450 per month during the first quarter of
2005). After 2005, as KMS usage increased, the firm’s total billings also increased. More
interestingly, the project networks inside the firm also changed, as lawyers made fewer new ties
with peers every year, and at the same time those new ties became more stable. Hence our
analysis focuses on how KMS use affected relationship formation dynamics at the micro level—
and how KMS use shaped value creation in the form of billable hours generated over time.
3 Before turning to our main quantitative analysis, we provide some qualitative background
on the reactions and experiences of lawyers during KMS implementation, based on interviews
conducted from 2005 to 2010.
Lawyers’ reactions to the knowledge management system
When asked about their perceptions of the KMS and its use, some commented that it had
positively influenced their working relationships, for example by helping people to discover
more about the current projects of others who they were interested in for one reason or another.
On the other hand, some people focused on the KMS as a source of information to be directly
applied to projects. Some lawyers in this latter group focused on what they viewed as risks of
KMS use, including the loss of intellectual independence, and the loss of human contact.
Examples of these contrasted opinions are provided in the top panel of Table 1.
On the specific issue of how KMS use could influence collaborative relationships,
opinions were mixed. Consistent with the materialist view, some interviewees revealed the belief
that using the KMS could effectively reduce the need for collaboration or interaction with peers,
essentially substituting for workplace relations. Other interviewees made comments more
consistent with the social view of technology, believing that they needed to draw on their
existing relationships in order to use the KMS correctly. Still others agreed with the first group
that KMS use reduced social interaction, but rather than viewing this positively they worried
about how such changes would impact social relations or work quality. Examples of these
diverse views are provided in the bottom panel of Table 1.
THEORY AND HYPOTHESES
The qualitative data above show contrasting reactions toward the KMS that loosely
resemble the two widely subscribed perspectives on technology use we outlined above. In the
materialist perspective, technology can substitute for interpersonal relationships in the execution
of knowledge work and the creation of value; see for instance Braverman’s (1973) argument that
technology deskills workers. In contrast, the social perspective argues that technology has
limited independent effects (if any), unless one takes into account the social context of human
agents and their interactions shaping the use of technology (Barley 1986; Orlikowski 2000; see
Orlikowski and Barley 2001 for a review of these two views on technology).
Although some theorization attempts have been made to bridge the gap between the old
materialist perspective and the more recent social perspective of technology’s impacts, few
studies have demonstrated how the two perspectives can be reconciled with empirical evidence.
Haas and Hansen (2007) examine two types of knowledge sharing in line with the two
perspectives: knowledge sharing in the form of electronic documents (technology use) versus in
the form of personal advice (relying on relationships). They find that different types of
knowledge sharing do not substitute for each other. Extending Haas and Hansen (2007), we
further examine how the two types of knowledge sharing, independently as well as conjointly,
shape new tie formation and value creation in an organization.
Technology use and relationship formation
Focusing on the efficiency of technology in locating information and accessing
knowledge, the materialist perspective emphasizes the benefits of KMS in making knowledge
transparent and codified. Employees can gain new knowledge through KMS without having a
4 connection with the knowledge provider. Therefore, KMS reduces the need for forming new ties
to gain new knowledge. From this perspective, one would expect that a manager’s technology
use to access a partner’s knowledge (by downloading the partner ’s documents in the KMS) will
decrease the likelihood of new tie formation between the manager and the partner.
Yet our qualitative interviews suggest that technology use without relationships could be
dangerous. People who perceive the risks of misusing distant knowledge might like to connect
with distant partners in order to clarify the appropriate use of that knowledge, but they have no
immediate access to forming those relationships. One possible solution would be to rely on
indirect contacts in order to form relationships with distant knowledge providers. This use of preexisting social capital in order to form a new relationship with a knowledge provider is
consistent with the social perspective that highlights the importance of interpersonal
relationships in shaping technology use.
Integrating the materialist and social perspectives suggests that the benefits of knowledge
acquired from technology use can be perceived and acted on when surrounded by a context of
complementary social capital. This social capital context should make it more feasible to
conceive of the potential fruitfulness of collaborating. For example, one of our interviewers
(documented above) commented that after downloading a partner’s documents, he was more
likely to connect with that partner if already somewhat acquainted, but not if he lacked any
connection. Therefore, we expect that technology use combined with indirect ties from a
manager to a partner will increase the likelihood of new tie formation, while technology use
lacking pre-existing social capital will not.
H1: Managers downloading documents of partners with whom they have prior indirect
ties (social capital) will increase the likelihood of new tie formation, relative to
downloading documents of partners without prior ties (no social capital).
Technology use and value creation
Research on innovation and value creation suggests that the discovery and combination
of knowledge from different domains helps to foster new knowledge creation (Leonard-Barton
1995; Burt 2004). Hence our baseline expectation about the influence of technology use on value
creation in the law firm is positive. The vision for KMS use, largely rooted in a materialist
perspective, holds that these systems should facilitate effective search and use of existing
knowledge to surface new solutions for clients. Those new solutions might include the
development of new types of services, or the adaptation of existing services to match the needs
of new clients.
For example, a lawyer whose client is considering opening a manufacturing plant in
another country may want to consider a range of issues including tax, intellectual property, and
labour law. If that lawyer turns to her firm’s KMS to search for relevant documents, she may
find examples that are similar but not spot-on. Hence the knowledge content of prior documents
cannot simply be replicated, but hopefully by combining those prior documents, she can produce
higher quality advice for her client. Without the ability to access and integrate prior knowledge
through the KMS, the partner would never have been able to provide that increased level of
service. Further, in subsequent years, that partner may be able to integrate insights gained from
those diverse document inputs for other value creating opportunities, such as analyzing the legal
merits and risks of plant relocations for other clients—leading to additional increases in client
work and revenues.
5 H2: Wider document download patterns (involving a larger number of unique partners)
will increase a manager’s subsequent value creation.
Although more document downloading may increase value creation in general, our
arguments above about the social view of technology suggest that the results may depend on preexisting social ties between the users and producers of knowledge accessed through the KMS.
For complex knowledge, such as that found in legal services, it may be difficult to effectively
understand another person’s prior experiences reflected in their downloaded documents. Prior
social relations with the knowledge provider can help to clarify the meaning of the document and
how that knowledge can be applied in other cases. As mentioned earlier in our case study, reuse
of documents with which one is not familiar can easily lead to mistakes and be confusing for
clients, leading to conflict and client dissatisfaction. Similarly, without prior social relations an
individual’s attempt to use different people’s documents may be fraught, and not lead to any
clear improvement in client services. In this case the search and efforts around it become wasted
time that negatively impact on ability to generate client revenue. Hence without any social ties,
technology based search appears more likely to lead to a “dead end” or to knowledge misuse,
reducing the value created.
H3: Downloading documents from directly-tied partners will increase a manager’s
subsequent value creation more so than downloading documents from non-tied providers.
Going deeper into knowledge use when social ties exist, we can consider two types of
connections between user and provider of knowledge: they could share either indirect ties, if they
work with common colleagues (but not each other), or they could share direct ties, if they
actually already work together on projects. Research in social networks suggests that indirect ties,
which are often called “weak ties,” have greater benefits for individuals because they are more
likely to provide new and non-redundant useful information to the focal person. In contrast,
direct or “strong” ties are more likely to provide information to the focal person that he or she
already knows and which is therefore of less value (Granovetter 1973). Hence we argue that
indirect tie-based document use should provide the optimal context for value creation because
knowledge originating in this social context is most likely to be novel and actionable.
H4: Downloading documents from indirectly-tied partners will increase a manager’s
subsequent value creation more so than downloading documents from directly-tied
partners.
METHODS
Qualitative data
Data collection for this project took place between 2005 and 2010. For our quantitative
analysis, we obtained access to the log file of the KMS for the period 2005-2010. In addition, we
were granted access to billable and non-billable hours information, for each member of the firm,
from 1999 to 2010, and to reports prepared in the context of individual yearly performance
evaluations, which showed who had worked with whom (and for what volume of hours) from
1999 to 2010, with the exception of 20071. We immediately anonymized all files received.
1
The files showing who had worked with whom, in 2007, were corrupted and unusable. 6 These data covered all the partner lawyers and manager lawyers at the firm who were
working in the largest of the firm’s departments, from the period 2005 to 2010. Our analysis
focuses on the connections between managers and partners, and the value being created by
managers. In the case firm, managers lead client projects, with the assistance of teams of junior
lawyers, while partners oversee client relationships but are not necessarily as directly involved in
the client projects on a daily basis. Our tie formation analysis focuses on managers as producers
of value, and manager (“M”) – partner (“P”) dyads as key relationships that can contribute
important knowledge to the value production process. Our interviews suggested that focusing at
the manager level would be valuable because managers are the essential decision makers
regarding the way knowledge will be applied to each client project. M-P dyad ties are important
for managers in terms of their learning and development, as well as for building support among
partners for their own eventual advancement (via partner vote) into the partnership.2
We also collected and analyzed a large amount of qualitative data from the case firm.
Between 2005 and 2008, we tracked the use of KMS in practice by repeated interviews with
lawyers working on 12 different client projects. The projects were selected for tracking because
they were considered representative of the firm’s scope of services (including: preparing a due
diligence report for a company in the process of a takeover; helping a new shareholder to
restructure an acquired company; choosing the optimum fiscal location for an industrial group’s
new banking entity and set up its contractual structure; advising a company subject to a tax
inspection in connection with litigation, etc.). In total, 16 partners, 10 managers, and 6 junior
associates were interviewed who were working on these client project teams. Interviews lasted
from thirty minutes to four hours, with an average of about an hour and a half and were recorded
(one person refused to be taped and two persons made corrections to the transcription of their
interview).
In addition to the project tracking interviews, key archival materials were obtained from
the case firm, including internal documentation of the design, development and roll-out of the
system. One of the authors also attended five two-hour departmental meetings held in different
lines of business from 2005 to 2008.
Dependent variables
New tie formation. Our first dependent variable, new tie formation, is based on the
observation of new workplace ties between managers and partners. To construct this variable, we
defined a new tie if an M starts billing a P’s clients at least 50 hours in a given year, and there
has not been any client billing based connection between that M and P during the prior 3 years.
The 50 hour threshold was used by the firm to define a formal supervisory relationship between
managers and partners. This approach is similar to that used by Briscoe and Tsai (2011). For
each MP dyad year, we then coded the new tie formation dependent variable 1 if a new tie was
formed in that year; otherwise the variable was coded 0.
Value creation. Our second dependent variable, value creation, is based on revenue
generation through billable hours. Specifically, we used the total billable hours of each
individual M as the dependent variable for models predicting value creation, while controlling
for last year’s billable hours by that same M.
2
Note that our data do not permit us to observe M-M or P-P ties directly, since our relationship data come from lists
of formal supervisory relationships that show which M’s have worked for each P’s clients in a given year. 7 Independent variables
Technology use (document download): In models predicting new tie formation, we coded
technology use at the dyad level, based on whether a given M had downloaded a given P’s
document. For this variable, downloading was coded 1, and otherwise the variable was coded 0.
In order to use include technology use in our models predicting value creation, we aggregated
document download activity at the dyad level to create a variable which is the count of P’s from
whom each M had downloaded documents. This count variable ranged across individual M’s and
years from 0 to 49.
Indirect ties: Indirect ties exist between an M and a P if there is a “two step” connection
between them, but no direct tie. We are able to observe indirect two-step ties in our cross-nested
data because individual managers work on client projects for multiple partners. Hence M1 has an
indirect tie to P2 if there is a proximal M2 who works on projects for the same P1 as he does,
who also works on projects for P2. In this case, although M1 is not directly working for P2,
information could flow between them through proximal colleague M2. We considered direct and
indirect ties to be mutually exclusive; hence if there was a direct tie between an M and a P (i.e.
M did not bill any of P’s clients), we did not consider that as an indirect tie.
Direct ties. We operationalize direct ties based on a prior connection between M and P.
Analytic approach
New tie formation: To analyze new tie formation, we conducted a dyad-level analysis,
using a risk of all possible dyads between the managers and partners across all possible years of
data. Thus the unit of analysis was the dyad-year. We employed multilevel logistic regression
models, using STATA’s xtmelogit command, to predict the formation of a new tie in a given
year. These models include two-way crossed random effects to account for unmeasured variance
associated with both individual managers and individual partners. The two way crossed effects
design (also sometimes referred to as cross-nesting) is appropriate given that managers are often
nested within more than one partner’s projects, meaning that although the data are multilevel,
traditional approaches that assume full nesting of lower level units within higher level units
would be in appropriate. A common analogy for this type of data structure is raters and subjects,
where each rater evaluates multiple subjects, and each subject is also evaluated by multiple raters.
The final models included 8326 dyad-years.
Value creation. For our value creation analysis, we shifted to the individual level. We
used person-year data to predict yearly value creation outcomes for M’s. We employed OLS
regression models with individual fixed effects, using STATA’s xtreg command. The final
models included 253 person-years. In all value creation and new tie formation models, the
independent variables are lagged one year. Year dummies are also included in all models to
control for unobserved variation associated with changes taking place over time in the case firm.
Because of our fixed and random effects model designs, we did not include other controls for
individual differences in our analyses.
RESULTS
Descriptive statistics are presented in Table 2. The left-hand column of Table 2 provides
information related to the dyad-year sample, and the right-hand column provides information
related to the person-year sample. Table 3 presents the results for models predicting new tie
formation, and Table 4 presents the result for models predicting value creation.
8 Hypothesis 1 predicted that document downloads of indirect ties would lead to more
relationship formation than document downloads of distant partners. The results in Model 3 of
Table 3 indicates that document downloads with indirect ties have a significant positive effect on
tie formation, while document downloads without any ties actually have a negative effect on tie
formation, and a test supports a significant difference between these two coefficients (p<.01).
Hence Hypothesis 1 is supported. The results indicate that the chances of new tie formation
increase by a factor of 2.43 if they are connected with an indirect tie and document download
occurs. In contrast, document download without any connection nearly halves the chances of
new tie formation (factor of 0.54).
Hypothesis 2 predicted that managers who download documents from more unique
partners will have more subsequent revenue generation (billable hours). The results in Model 1
of Table 4 indicate that document use significantly increases revenue generation, supporting
Hypothesis 2. Controlling for last year’s revenue generation, each additional partner from whom
the focal manager downloads documents adds 7.3 billable hours to her revenue generation
outcome (p<.001).
Hypothesis 3 predicted that downloading documents from indirect ties would lead to
greater revenue generation (billable hours) compared with downloading from non-ties. This
hypothesis is confirmed based on a coefficient contrast test using Model 2 of Table 4. Document
downloads from direct ties has a positive effect on value creation, while document downloads
from non-ties has a negative effect.
Finally, Hypothesis 4 predicted that downloading documents from indirect ties would
lead to greater revenue generation than would downloading documents from direct ties. The
results in Model 2 of Table 4 indicate that document downloads from direct ties has a
significantly positive effect on value creation, while document downloads from indirect ties has a
negative (but insignificant) effect. Note that these results are opposite to our expectations, and
hence Hypothesis 4 is not supported. In fact, a coefficient contrast test indicates that direct tie
downloads are associated with significantly more billable hours than are indirect tie downloads
(p<.05).
Although we did not hypothesize about this finding, the coefficient for document
downloads from non-ties (unconnected others) is negative significant in Model 2 of Table 4. This
indicates that use of distant knowledge is actually counter-productive. This finding is opposite of
the materialist view of technology use.
Additional analysis
We find similar results using dyad level fixed effects for new tie formation rather than
cross-nested random effects.
DISCUSSION
The effect of technology on workplace relationships remains inconclusive in the existing
literature. Although technology is expected to increase search efficiency and reduce the reliance
on personal relationships at work, several studies find that technology creates new advice
seeking or knowledge sharing relationships within the organization even though the formal
reporting chart remains the same (Aydin and Rice 1992, Barley 1990a, Burkhardt and Brass
1990, Rice et al. 1999).
9 Our research reconciles these two different perspectives. We find that KMS use only
leads to new relationship formation when there exists social capital to support it, in the form of
indirect ties; otherwise, KMS use decreases relationship formation. We also find that KMS use
increases value creation among those with existing direct ties--and actually decreases revenue
generation where ties are lacking. Finally, we find that the positive effects of KMS use depend
on pre-existing social capital (indirect ties), in terms of both relationship formation and value
creation outcomes.
There are some important limitations in our analysis. Although we control for differences
across individuals by using random- and fixed-effects regression models, our analysis is still
limited by the fact that the data come from a single case firm. We cannot generalize to other
settings where the rules, incentives or norms regarding workplace collaboration could be
different than those in our setting. In addition, differences in the KMS technologies implemented
and in the country jurisdictions where firms operate could also influence the ways that this
technology impacts relationships and value creation. Nonetheless, our study provides one of the
first systematic investigations of how technology-based knowledge sharing affects the fabric of
relationships and the production of economic value.
Contributions
Our findings suggest that for complex knowledge organizations such as law firms, KMS
is best used as an entry point into collaborations that can be productive—and works best when
applied to knowledge that is “local” in the sense of complemented with existing workplace
relationships. The idea that the KMS can facilitate knowledge reuse directly is not supported, this
can even hurt value creation efforts.
Most thinking about the benefits of implementing searchable knowledge databases in
organizations has focused on individuals’ ability to discover and access distant knowledge that
they would not otherwise have been exposed to. Yet we find little evidence that distant search
pays off: downloading documents from unconnected others does not lead to new working
relationships, and actually harms subsequent revenue generation.
Our study contributes to theory on technology and relationships. We help unpack how the
introduction of a new technology influences relationship formation and social capital among
organizational members. In doing so, we help to reconcile a materialist view and a social view of
technology use by showing that the positive effects of technology use require pre-existing social
capital to be realized.
Further, taking our findings on relationship formation and value creation together
suggests an inversion of common thinking about the way technology complements social
relationships: instead of the former being useful where the latter is lacking, it appears that—at
least in the case of complex knowledge production—search technology is most useful in the
context of close social relations.
Our findings also contribute to networks research. In contrast to what we might expect
based on weak tie theory, we find that more value is created from downloading direct contacts
than downloading indirect weak tie contacts. This is true, even though people are likely to have
more overlapping knowledge with their strong ties. This finding suggests that some of the most
productive discovery and learning from use of knowledge databases occurs among close
colleagues with prior working relationships.
10 Implications for practice
This research also holds implications for practice. Our findings suggest that law firms and
other professional service firms can benefit from tracking the factors that influence workplace
collaboration, and monitor changes in collaboration networks and value creation arising after
KMS implementation. Professional service firms continue to spend large sums of money on
KMS systems. Our research can help to guide the effective use of these systems. Our research
also reveals a few specific dangers related to KMS implementation. In aggregate, we find that
KMS use may diminish the rate of new tie formation, reducing cohesion in the organization. In
addition, there may be special risks for junior members of the organization who lack pre-existing
social capital. Finally, we found that the most short-term value from KMS use can arise from the
reuse of knowledge among existing groups of collaborators rather than from unconnected people.
In short, the idea that KMS can help firms to realize new value by bringing together distant
knowledge within the firm may be over-stated.
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13 Table 1: Representative Excerpts from Interviews
Theme
Positive general
view of KMS
Negative general
view of KMS
KMS increases
amount of
workplace
collaboration
KMS reduces
amount of
workplace
collaboration,
with positive
consequences
Uncertain impact
on amount of
workplace
collaboration
KMS reduces
amount of
workplace
collaboration,
Excerpt
Informant: You know, people are curious to see, for such and such partner
or manager, what types of engagements they have worked on. We see lots
of searches by client’s name, or searches by lawyer’s name. …it helps
people find out what everyone is working on and find out who they want to
work with.
Interviewer: So before [the KMS], if I understand you, people knew what
their colleagues were working on?
Informant: Exactly. Everybody knew who was doing what. People
communicated a lot. Because we had to…. So when you gave someone a
job to do, you told him: “Go and see Dupont, I think he’s already worked
on that issue.” Or you said: “I already did something similar last year; look
at client file X.” And it worked very well like that. Because people talked
to one another…. I think that the overall quality of our knowledge sharing
could have been improved through investing in people rather than in
machines.
Interviewer: Do you use it to save time on well-known recurring issues or
do you also use it when you are stuck on new questions, I mean, technical
questions that you have never addressed before?
Informant: It depends. When I am stuck on a technical question, I try to
search the database to see if someone already took a stand on comparable
issues…. If I find someone, I usually call him and ask what he thinks.
Informant: I also use the knowledge base as a consumer, including anything
that is securities law…. I just sold two client projects by the existence of
these [KMS] documents that I would never have sold otherwise.
Interviewer: Did you involve the authors of these documents, in both
projects you sold?
Informant: It was not necessary. At least not at this stage, but it’s all very
recent and I have not finalized my team.
Informant: If I have an idea of the person who worked on it, yeah, I think
I’ll go see the person after watching what she has in the knowledge base.
After hearing about “So and so had to do this or that” well I’ll go see the
person.
Interviewer: Even when you do not know her well?
Informant: Well, no, he must already know that I (pausing), I will have an
easier time knowing what they did and then go to the people if I know
them. If this is someone I have absolutely no idea, there it is more difficult.
Informant (Discussing the outputs from a specific client project): I think
that everything we did is in the knowledge base. And I know it’s already
been used.… When I browse the knowledge base, I realize that some of our
things have been reused.
14 with negative
social
consequences
KMS reduces
amount of
workplace
collaboration,
with negative
work-quality
consequences
Interviewer: How can you tell?
Informant: The juniors with whom I work told me ‘everyone reuses this and
that.’
Interviewer: And how do you feel about being such a popular author? Does
it bring you satisfaction or displeasure?
Informant: Sadness.
Interviewer: Really? Sadness? Why?
Informant: Because the least they could do is come and see me instead of
plainly reusing my stuff.
Informant: When you read a textbook on a specialized subject of law, if
things are not explained well, you don’t fully understand what’s going on.
So imagine how difficult it is for a Philistine who wants to reuse my
opinion letters without prior knowledge of laws and regulations on financial
activities! My consultations aren’t textbooks. They are elliptical. They deal
with specific and practical client problems. I go straight to the point and
don’t mention things that are known by both my client and me. People who
download my memos and try to reuse them without understanding the
subject and the context of the engagement… I mean that’s pathetic. Reuse
by people who are not specialists, that’s very very dangerous. And I see
people doing that all the time.
15 Table 2: Descriptive Statistics
Variable
Dyad level
New tie formation
0.03 (0/1 variable)
Value creation (billable hours)
Technology use (document
download)
Indirect ties
Individual level
800.87 (S.D. 357.47, Max 1656)
0.13 (0/1 variable)
14.25 (S.D. 13.37, Max 49)
0.41 (0/1 variable)
Doc. use from direct ties
1.79 (S.D. 1.61, Max 5)
Doc. use from indirect ties
6.10 (S.D. 6.78, Max 30)
Doc. use from non-ties
6.36 (S.D. 7.46, Max 37)
16 Table 3: Results of Cross-Nested Random Effects Models Predicting New Tie Formation
(Dyad Level Analysis)
Variable
Model 1
Model 2
Coeff
(s.e.)
0.07
(0.17)
Coeff
(s.e.)
0.002
(0.17)
Model 3
Coeff
(s.e.)
Odds
ratio
-0.58*
(0.28)
0.54
Indirect tie only
(no doc. use)
0.61***
(0.13)
1.84
Doc. use and indirect tie
0.89***
(0.20)
2.43
Document use
(linking M to P)
Indirect tie
(linking M to P)
Document use only
(no indirect ties)
0.78***
(0.13)
Year dummies included?
Yes
Yes
Yes
***p<.001, **p<.01, *p<.05, +p<.10 significance level
17 Table 4: Results of Individual Fixed-Effects Models Predicting Revenue Generation
(Billable Hours)
Billable hours in previous year
Document use
Model 1
Model 2
Coeff.
(s.e.)
-0.00002
(0.0001)
Coeff.
(s.e.)
-0.05
(0.08)
7.27***
(1.93)
Doc. use from direct ties
38.20*
(19.06)
Doc. use from indirect ties
-7.83
(5.37)
Doc. use from non-ties
-7.72*
(3.71)
Individual fixed effects and year dummies?
Y
***p<.001, **p<.01, *p<.05, +p<.10 significance level
Y
18 IV
The Shrinking Pyramid: Implications for Law
Practice and the Legal Profession
Lunch Panel: Legal
Services in Emerging
Countries: Brazil,
India, and China
Friday April 12th, 12:30-1:45 pm
Moderator: James Jones, Georgetown Law
Panelists: David Trubek, University of Wisconsin Law School; Sida Liu, University
of Wisconsin Department of Sociology and Law School; Jay Krishnan, Indiana
University Maurer School of Law
There are no materials
for this session.
V
The Shrinking Pyramid: Implications for Law
Practice and the Legal Profession
Corporate Clients and
Outside Law Firms:
Procurement or
Partnership?
Friday April 12th, 2:00-3:30 pm
Moderator: Ellen Rosenthal, Chief Counsel, Pfizer Legal Alliance and VicePresident and Assistant General Counsel, Pfizer
Panelists: Leslie Turner, General Counsel, The Hershey Company; Matthew Biben,
General Counsel, Chase Consumer Businesses and Senior Legal Adviser, JPMorgan
Chase
(1) Deconstructing Big Law: The Future Market for Corporate Legal Services –
Preliminary Results
Molly Selvin, Stanford Center on the Legal Profession, Stanford Law School
and Southwestern Law School; Patrick M. Hanlon, Stanford Center on the
Legal Profession, Stanford Law School
(2) Lawyers Between Market and Hierarchy: Evidence from Fortune 500
Companies
Mari Sako, Saïd Business School, University of Oxford
1 DECONSTRUCTING BIG LAW The Future Market for Corporate Legal Services Preliminary Results by 1
Molly Selvin and Patrick M. Hanlon2 The Shrinking Pyramid: Implications for Law Practice and the Legal Profession Symposium Georgetown University Law Center April 12, 2013 Abstract The legal industry is in transition. A generation of explosive growth in the market for corporate legal services has ended, and while many big law firms remain highly profitable to their owners, revenues are stagnant, jobs are increasingly insecure, and the demand for new lawyers is at low ebb. Stories announcing the demise big‐firm law practice have made the New York Times front page and draw almost obsessional coverage in legal trade publications. Though the law firm “pyramid” is under tremendous stress, preliminary results from a multi‐year Stanford Law School project on the future of the legal profession also reveal a more diverse—and somewhat less dire—picture of the legal services industry. The Stanford legal profession project aims to understand the changes occurring in the market for corporate legal services and their implications for legal education and legal careers. Our research encompasses both purchasers and suppliers of legal services. The people we have interviewed to date were candid and thoughtful, and our interviews comprise a rich source of qualitative data. First of all, these data suggest that that the industry’s financial pressures are neither felt uniformly across the legal industry nor are they always as acute as often portrayed. While corporate clients have for years tried to avoid excessive costs, this often does not result in the relentless cost‐cutting and churning of firms postulated in the literature. Corporate counsel often hire what they regard as the best lawyers (or sometimes firms) for the job with only limited consideration of cost. This is often due to the impossibility of replicating outside counsel’s knowledge of the client and its business. By the same token, despite growing corporate interest in alternative to big law – LPOs, contract lawyers, e‐discovery and other technology vendors, and even firms that provide highly sophisticated lawyers on a temporary basis – these alternatives so far enjoy only modest market participation. They have a long way to go to realize their full potential. Second, cost pressures have allowed some lawyers to capitalize on the 1
Research Fellow, Stanford Center on the Legal Profession, Stanford Law School; Associate Dean for Interdisciplinary Programs and Adjunct Professor of Law, Southwestern Law School. 2
Research Fellow, Stanford Center on the Legal Profession, Stanford Law School and former lecturer at Berkeley Law and partner at Goodwin Procter LLP. 2 current economic turmoil. During the recession, partners with high‐value corporate clients left their big firm “homes,” slashed their fees, and flourished. Similarly, small elite firms increasingly market themselves as alternatives to excessively leveraged big firms. They can do this even in big cases by contracting with LPOs to do the heavy lifting. Finally, a new breed of entrepreneurs is working to develop new technologies and sophisticated operational methods. If successful, these methods may vastly increase the productivity of legal services providers—and perhaps further erode the market for traditional lawyering. Whether innovation is coopted by the incumbent elite firms or disrupts them, the potential impact on what most lawyers do in their careers may be profound. The Stanford Law School Research Project on Future of the Legal Profession
The goal of the Stanford Law School research project on future of the legal profession is to
understand better the changes that are taking place in the high-value sector of the market for
corporate legal services and the implications of these changes for legal education and legal
careers. Our research encompasses both purchasers and suppliers of high-value corporate
legal services, including multi-national and other very large corporations, the law firms that have
traditionally provided high-value corporate legal services, and the alternative providers of
corporate legal services that have emerged over the last decade. The research focuses on the
US market but includes an analysis of global trends and changes in the corporate legal services
market in selected foreign economies.
Media coverage of changes in the corporate legal services market typically draws on a mix of
data of uncertain quality and scope, anecdotes and hyperbole. By systematically assembling,
assessing and analyzing the best available quantitative data on the high-value sector of the
corporate legal services market and interviewing a broadly representative sample of corporate
legal officers, law firm partners, principals of other firms that provide legal services to this sector,
technology experts and management analysts, we hope to develop a more nuanced perspective
on what changes have actually taken place and are likely to take place in the high-value market
sector over the next decade, the relative importance of the factors that are driving change and
the consequences for legal careers.
The research program includes:
1) An in-depth interview survey of general counsel of Fortune 100 companies focusing on
corporate legal service managers’ perceptions of past, present and future legal needs
and changing strategies for satisfying these needs;
2) An historical analysis of the changing role of general counsels;
3) A detailed description of the range of providers that have emerged to compete with “big
law” firms for corporate legal business, including case studies of the more innovative
models;
4) An analysis of current, near and mid-term disruptive legal technologies;
5) Case studies of the evolution of the corporate legal services market in selected
developing economies;
6) An in-depth investigation of the causes of “big law” firm collapses over the past two
decades aimed at disentangling idiosyncratic firm-specific factors from underlying market
factors;
7) A systematic survey of “big law” firm strategic managers focusing on understanding how
these firms are responding to changes in the demand for high-value corporate legal
services on the one hand, and increased competition from new types of providers on the
other;
8) Reflections on the consequences of changes in the market on legal education and legal
careers.
The product of the project will be a book that synthesizes the academic and practitioner
literature on the high-value sector of the market, presents our analyses of quantitative and
interview data and suggests what the future holds. As the project unfolds we expect to hold a
number of symposia to present our interim findings for critical review and discussion.
The project team, headed by Stanford Law Professor and Associate Dean for Graduate Studies
Deborah Hensler, includes Patrick Hanlon, retired partner at Goodwin Procter LLP and former
Senior Lecturer at U.C. Berkeley Law School; Molly Selvin, Associate Dean for Inter-disciplinary
Programs at Southwestern Law School, Associate Editor of the Journal of Legal Education and
former member of the Los Angeles Times editorial board; Ron Dolin, a computer scientist and
Distinguished Visiting Scholar at Stanford Law School; Marc Galanter, emeritus Profesor of
Law at the University of Wisconsin; Manuel Gomez, Associate Professor at Florida International
University Law School; Amanda Packel, Executive Director of the Stanford Center for the Legal
Profession; Sergio Puig, Teaching Fellow in the Stanford Program in International Legal Studies
and Stanford Law Professor Norman Spaulding. Hanlon, Gomez and Selvin are Research
Fellows at the Stanford Center for the Legal Profession and Hensler and Spaulding are
members of the Center’s Steering Committee.
The project is funded by a generous gift to Stanford Law School from Sidley Austin, LLP.
Hensler March 2013
2011 General Counsel with Power? Mari Sako with Afterword by Richard Susskind General Counsel with Power? 2011 Table of Contents Executive Summary of Key Findings.............................................................................................. 2 Chapter 1: Introduction ..................................................................................................................... 3 Chapter 2: Size and Shape of the Legal Department................................................................. 4 Size of Legal Departments ........................................................................................................................... 4 Shape of Legal Departments........................................................................................................................ 5 Legal Budget Control ................................................................................................................................... 6 Externalizers and Internalizers..................................................................................................................... 6 Summary...................................................................................................................................................... 8 Chapter 3: Convergence, Panels, and Legal Networks ............................................................. 9 Panels........................................................................................................................................................... 9 Convergence .............................................................................................................................................. 10 Online Bidding............................................................................................................................................ 11 Legal Networks .......................................................................................................................................... 12 Summary.................................................................................................................................................... 13 Chapter 4: A Production-­line Approach to Legal Work.........................................................14 A ‘Production-­‐line Approach’..................................................................................................................... 14 Objections to the Production-­‐line Approach ............................................................................................. 15 Litigation Tasks .......................................................................................................................................... 16 Intellectual Property Tasks: a Case Study .................................................................................................. 18 Summary.................................................................................................................................................... 18 Chapter 5: What Lawyers Do in a World of Multi-­sourcing .................................................19 Sourcing Criteria: Labour Arbitrage vs Process Efficiency.......................................................................... 20 De-­‐lawyering in Legal Product Lifecycle .................................................................................................... 20 Who Manages the Reassembly?................................................................................................................ 21 What Do General Counsel Do? .................................................................................................................. 22 Summary.................................................................................................................................................... 23 Conclusions ..........................................................................................................................................24 Afterword: The Future for General Counsel .............................................................................26 References ............................................................................................................................................29 About the Authors..............................................................................................................................30 Appendix: Research Methodology................................................................................................31 Said Business School | University of Oxford 1 General Counsel with Power? 2011 Executive Summary of Key Findings Size and shape of legal departments •
•
•
In-­‐house legal departments reflect the structure of businesses. Some in-­‐house legal functions are centralized at the corporate headquarter, whilst others are decentralized to a varying degree to business and geographic units. In-­‐house legal departments’ reliance on external legal resources varies enormously. This study identified a range from 12% to 93% in the proportion of external to total legal spending. There are four types of general counsel with respect to their make-­‐or-­‐buy decisions, namely Externalizer Type I, Externalizer Type II, Mid-­‐ranger, and Internalizer. Externalizer Type II (proactively managing legal networks) and Internalizer (in-­‐sourcing actively) are the ones with an appetite for change in legal services. Convergence, panels, and legal networks •
•
•
•
Panels mean different things to different general counsel due to differential emphasis placed on competition and collaboration in managing a panel. On convergence, GCs who believed in competitive selection for a panel followed by close collaboration reduced the number of law firms more rigorously than those who wished to retain competition within a panel. Online bidding for legal work was used selectively both within the panel and to identify new providers. The most collaborative form of a panel took the shape of ‘legal networks’, in which the general counsel facilitated lateral collaboration amongst the law firms to deliver services as an extension of the in-­‐house legal function. A Production-­line approach to legal work •
•
•
A production-­‐line approach to delivering legal work consists of three steps: disaggregation and standardization, process flow management, and project management. Many general counsel found a variety of reasons to reject or delay the wholesale adoption of this production-­‐line approach. In practice, the general counsel adopted either a craft approach, an automation approach, or a process flow approach. Internalizers tended to lead in implementing a combination of automation and process flow approaches. What do lawyers do in a multi-­sourcing world? •
•
Multi-­‐sourcing – the use of multiple sources of legal service delivery – is likely to change the contour of global value chains in legal services. Value migration away from the traditional corporate client – law firm transactions is more likely due to three factors: (a) the more the motive for offshoring and near-­‐shoring goes beyond mere labour cost arbitrage to the implementation of a production-­‐line approach, (b) the more lead is taken by the in-­‐house legal function in project management, and (c) the higher up the priority list the general counsel places the issue of efficient legal service delivery. Said Business School | University of Oxford 2 General Counsel with Power? 2011 Chapter 1: Introduction Globalization, digital technology, and multi-­‐disciplinary professional knowledge -­‐-­‐ these pervasive forces present opportunities and challenges for all major law firms, potentially transforming legal practice via two agents of change. One is the in-­‐house legal function in corporations and financial institutions. In a buyer’s market, the general counsel is exerting greater power in relation to the external lawyer. The other agent of change comes in the form of new entrants into the global legal services market. These non-­‐traditional suppliers, including so-­‐called legal process outsourcing (LPO) providers, deliver legal support services from low cost locations, onshore and offshore. How are lawyers responding to these gentle winds of creative destruction? This report presents key findings from a study of legal services outsourcing and its impact on the legal profession. In order to analyze the ecosystem of key actors in the sector, we have focused first on the ultimate demander of corporate legal services, namely in-­‐house lawyers. The aim of this report is to go beyond anecdotes about novel practices, to present a systematic analysis of what is happening in the in-­‐
house legal departments of major corporations and financial institutions. This study is based on interviews with 52 general counsel in the UK and the United States during May 2010 – January 2011. Interviews explored four key areas: (a) the changing size and shape of the in-­‐
house legal department, (b) the changing nature of relationships with law firms, (c) the extent to which legal work has become disaggregated or decomposed in specific areas of work, and (d) how multi-­‐
sourcing (including outsourcing and offshoring) decisions are made. We targeted general counsel in major private and public organizations (see Appendix for details). The report is structured as follows. Chapter 2 analyzes the size and shape of legal departments in the past five years. Chapter 3 examines the changing nature of relationship between in-­‐house and external lawyers. Chapter 4 discusses the perspectives of general counsel on the disaggregation of legal work as a pre-­‐requisite for implementing outsourcing and offshoring. Chapter 5 addresses what lawyers do in a multi-­‐sourcing world. We conclude by discussing key issues for further consideration. 3 Said Business School | University of Oxford General Counsel with Power? 2011 Chapter 2: Size and Shape of the Legal Department In-­‐house lawyers in major businesses are demanding cost effectiveness in the delivery of legal services. The 2008 financial crisis intensified the general drive to reduce costs including legal costs. In what ways have in-­‐house lawyers reacted to these pressures to do ‘more for less’? This chapter answers this question by analyzing competing logics in three related areas, namely (a) the way the legal function reflects corporate structures, (b) the nature of legal budget control, and (c) the optimization of legal resources internally and externally. Size of Legal Departments In our sample, the absolute size of the legal department varies enormously, ranging from a small department with only a couple of lawyers to a globally distributed legal function with over 1000 lawyers at some banks (see Table 1). In the last five years, the majority of organizations have increased the number of in-­‐house lawyers, generally reflecting business growth, either organically or through acquisitions. Sectoral differences are evident in the numbers. In financial services, the legal department grew enormously, reaching a peak in 2007 before the financial crisis led to a contraction in lawyer headcount. There was no such clear-­‐cut impact of the financial crisis on lawyer headcount in other sectors. Table 1: Size and shape of in-­‐house legal departments in 2010 Sector Construction Manufacturing Energy Financial services ICT Professional services Public sector Retailing and wholesale distribution Utilities Other sectors TOTAL Number in sample 4 2 7 11 9 2 3 5 2 7 52 Number of in-­‐house lawyers (range) 25 -­‐ 61 150 – 314 10 – 650 80 -­‐ 1068 2 -­‐ 400 11 -­‐ 12 n.a. 8 – 35 n.a. 7 -­‐ 72 2 -­‐ 1068 External to total legal spending (range) 20% -­‐ 83% 30% 12% -­‐ 57% 50% -­‐ 77% 27% -­‐ 93% 60% n.a. 60%-­‐ 90% 20% 40% -­‐ 60% 12% -­‐ 93% Source: Author’s interviews; n.a. = not available. In a small number of cases, the general counsel managed to reduce the size of the legal department despite significant business growth. At an energy company, the number of lawyers was reduced from Said Business School | University of Oxford 4 General Counsel with Power? 2011 750 to 650 in the past two years, as part of a corporate-­‐wide drive to reduce all costs. Another energy company implemented its policy to create a lean legal function, reducing in-­‐house lawyers from 30 to 12. Similarly, at a construction company, the total legal department headcount went down from 25 to 7 in five years with the creation of a global headquarter legal function. Shape of Legal Departments The internal legal department mirrors the corporate structure in some form. At its simplest, a single product firm operating in one country has a functional structure. The structure inevitably becomes more complex with multiple business lines and/or cross-­‐national geographic coverage. With complexity comes a certain degree of freedom in choosing among alternative structures for the in-­‐house legal function. There is clearly a trade-­‐off in this choice. The advantage of a centralized legal function is that the general counsel is in full control of overseeing all in-­‐house lawyers. However, in-­‐house lawyers may not give the best advice if they are remote from the business context. By contrast, by embedding themselves in business units or country operations, in-­‐house lawyers acquire an intimate knowledge of the corporation for which they work. However, this devolved reporting structure hinders the sharing of best practice and the optimal allocation of legal resources across business units. Some general counsel have devised structural and process mechanisms that minimize this trade-­‐off. At one end of the spectrum, companies with a focused product or service have a centralized legal department structure, with all in-­‐house lawyers reporting to the general counsel. If a corporation is focused in its product/service line but has an international presence, then it may have a legal department in each country-­‐based or regional operation. In such a structure, only the headquarter-­‐
based lawyers have a solid reporting line to the group general counsel, whilst country-­‐based lawyers have a solid reporting line to the country general manager and only a dotted line to the group general counsel. At the other end of the spectrum, large energy companies and financial institutions are typically both global and diversified in product/service lines. Then, the legal department structure tends to mirror the three-­‐dimensional matrix applied to the firm, with geography, product, and function as dimensions. The matrix is a complex structure that rarely works well with a sole reliance on formal reporting lines. It is therefore not just a matter of whether in-­‐house lawyers have solid or dotted line reporting to the general counsel or business unit head. Typically, the matrix also requires much informal coordination and communication. With such processes in place, a global headquarter legal function can be a ‘centre of excellence’ providing specialist support (e.g. in litigation, corporate transactions, etc.) to legal departments in diversified business units. However, when a headquarter practice group (e.g. in litigation) lacks connectivity with business unit lawyers, this may lead to uncoordinated actions, or a situation of ‘too many hammers in the same machinery’, as one general counsel put it. Said Business School | University of Oxford 5 General Counsel with Power? 2011 Legal Budget Control The shape of the legal function gives some, but not full, insight into how the general counsel controls the legal budget. There is much variation, first in how much budgetary information the headquarter legal function holds, second with respect to the system of accounting for legal fees, and third in what levers are used to keep legal expenses under control. First, in terms of information, some multi-­‐divisional firms hold information about legal spending of all divisions centrally, whilst others admit to not having a fully functioning central record keeping to date of the total corporate legal spending, including spending by autonomous business units. Many respondents mentioned that they have recently implemented, or are in the process of implementing, an e-­‐billing system which, amongst other things, would enhance the transparency and accuracy of legal spending. Second, in terms of accounting for legal fees, one approach at one extreme is a tightly controlled central legal budget, with a specific lawyer as a clear budget holder for each line of legal activity. At the other extreme, another approach is to have no central legal budget at all, by embedding all legal fees in business project costs. Many firms fall in-­‐between, with a central legal budget which lawyers control directly (e.g. for major litigation or corporate transaction), and project-­‐based budgets in civil engineering, for example, in which legal fees for contract drafting and negotiation are included. Third, many respondents have an explicit policy to use in-­‐house resources first before going out-­‐of-­‐
house, as it is generally considered cheaper to do so. However, only a small number of general counsel interviewed rely on explicit mechanisms for cost control. In one case, the general counsel of a divisionalized company stated that ‘our legal department is a planned economy’, pointing to a performance ‘dashboard’ that the legal department at each operating business unit was required to submit on a monthly basis. At another company, the general counsel introduced a central approval system for legal fees above a certain sum. This led in-­‐house lawyers to think twice about the necessity of putting work out to external lawyers. Externalizers and Internalizers Despite entertaining a common aim to contain legal costs, the interviews reveal an enormous variation in how corporate legal departments are attempting to fulfil this objective. One comparative indicator is the percentage of total legal spending on external lawyers, which ranged from 12% to 93% in our sample (see Table 1). Sectoral patterns are evident, with some retailers and high-­‐tech firms relying heavily on external lawyers and financial services firms positioned in mid-­‐range, but variations within sectors point to company-­‐specific legacy and policy on this matter. Four generic types exist in the sample: Externalizers Type 1 and Type 2, Mid-­‐rangers, and Internalizers. Externalizers (Type 1 and Type 2) The externalizers – companies that depend on external lawyers for 90%+ of their legal resource needs – fall into two types, and their logic is somewhat different. Externalizers Type 1 do not have an active in-­‐
house legal department, relying on external lawyers to act as though they were in-­‐house general counsel. For example, one US retailer did not have an in-­‐house lawyer at all until recently. Another Said Business School | University of Oxford 6 General Counsel with Power? 2011 retailer in the UK has had a small in-­‐house legal department which was often bypassed by the CEO and business managers who went direct to external lawyers for advice. According to the general counsel, ‘our legal function was a little bit like an outside law firm dropped in here, and we sort of sat and waited for people round the business to come and talk to us, and then we’d give them some advice and then they’d go away. That was one part of the model. The other part was, we had outside lawyers that were more like in-­‐house counsel.’ Externalizers Type 2 also rely heavily on external legal resources, but the in-­‐house legal department has a proactive stance with respect to managing law firms. Typically, the general counsel hosts an annual conference of major law firms, and encourages lateral communication amongst these law firms in what they call a ‘legal community’, a ‘legal network’, or a virtual law firm. These general counsel are adept at balancing collaboration and competition, in order to induce law firms to work effectively and efficiently for the corporate client (see Chapter 3 for details). Mid-­rangers Financial services firms, including investment banks and commercial banks, are the biggest spenders on big law firms in absolute terms. However, proportionately their reliance on external lawyers relative to internal lawyers is balanced. This might conflate clear patterns in different lines of work, for example, heavier reliance on external lawyers in corporate finance than in sales and trading due to large amounts of complex documentation and the use of syndicates in the former. At the same time, some interviewees indicated that apart from ‘big ticket’ items such as large litigation cases, internal and external legal work was somewhat fungible. As a general counsel at an investment bank asked rhetorically: ‘What has to be done in-­‐house? Nothing! A few years ago, I said to my bosses when we were having a debate about the structure of the legal department. I said we can hire another 200 lawyers and bring more of the work in-­‐house, or we can fire all in-­‐house lawyers and you two can manage all the outside counsel. Those are the two ends of the spectrum. The question to me is where do you want to be in the middle.’ However, apart from some consideration for managing the existing capacity and internal lawyers’ careers, the general counsel admitted to not being able to ‘articulate where on the spectrum we should be’. Internalizers The internalizers – with 20% or less reliance on external resources – use a different logic. They have developed a strong in-­‐house legal function that conducts most of the legal work for the corporation. The key advantage lies in in-­‐house lawyers’ intimate knowledge of the business. Amongst the internalizers interviewed, a general counsel at an energy company considered heavy reliance on external legal resources as not cost-­‐effective overall. Transacting with many outside counsel, ‘constantly keeping them up to speed on what the business was doing’, was very expensive. The general counsel devised and implemented a law department strategy that placed importance on ‘fit-­‐for-­‐purpose’ lawyering, which involved staying very close to internal clients in business operations, and keeping tight control over external legal resources. Pursuing this strategy resulted in only 12% of total legal spending going to external lawyers by 2010, down from 19% in 2005 and 23% in 2000. Said Business School | University of Oxford 7 General Counsel with Power? 2011 Whilst some firms reduced reliance on external lawyers by increasing the size of the internal legal department, a small but significant number of firms have done so by cutting back on the size of the internal legal department. On first reading, this is counter-­‐intuitive. Surely, a reduction in internal legal resources would result in shifting more work out to external lawyers. However, in a small number of cases, the general counsel in charge achieved heavier reliance on in-­‐house legal resources at the same time as reducing in-­‐house lawyer headcount (see Table 2 for some extreme examples). Table 2: Relationship between in-­‐house lawyers and % of legal work done in-­‐house in the last 5 years Case I Case II Case III Source: Author’s interviews. Number of in-­‐house lawyers 30  15 750  650 30  15 % legal work done in-­‐house 21%  80% 48%  55% 77%  88% This evidence is consistent with the claim that ‘supply creates demand’ for external legal work. In-­‐house lawyers may go outside to get confirmation from external lawyers of what they are doing. A general counsel at a financial institution noted: ‘a result of having more in-­‐house lawyers is that you are creating more external spend. So, the more activity you’re creating through that operating model, the more there is a sort of on-­‐cost of doing external business’. Conversely, a reduction in in-­‐house lawyers can trigger a reduction in the outside legal cost. Through rigorous in-­‐house processes for avoiding or resolving disputes before they became litigation, an energy company reduced its external spending on litigation. Similarly, the same firm reduced its legal cost on patenting by being more disciplined about what went into its intellectual property portfolio. These are instances, not of in-­‐sourcing, but of the elimination of the need for outside counsel. Summary With a diverse range of sectors and corporate structures in our sample, apples-­‐to-­‐apples comparisons are not easy and come with many caveats. Moreover, the diversity of practices captured by this study challenges existing studies and surveys that claim to have identified dominant definitive trends or fashions in the legal sector. This study has identified clear patterns in completing principles driving general counsel’s attempts to change the size and shape of legal departments. First, there are four generic types of general counsel: Externalizer Type 1, Externalizer Type 2, Mid-­‐ranger, and Internalizer. Second, of these four, Externalizer Type 2 (proactively managing legal networks) and Internalizer (proactively in-­‐sourcing legal resources) are the ones with the biggest appetite for change. As noted above, Internalizers have taken seriously the following dictum by the management guru Peter Drucker: ‘there is nothing more wasteful than doing more efficiently that which need not be done.’ First and foremost, internalizers have eliminated wasteful supply-­‐induced demand for legal services. We turn, in the next chapter, to how the nature of relationships between the corporate legal department and external law firms has been changing. Said Business School | University of Oxford 8 General Counsel with Power? 2011 Chapter 3: Convergence, Panels, and Legal Networks The practice of law is in part based on building and maintaining relationships. Personal rapport remains highly significant particularly for high-­‐end bespoke work in litigation or corporate transactions. Some in-­‐
house lawyers therefore stated that instructing a specific lawyer was more important than, or just as important as, retaining specific law firms. Nevertheless, most general counsel in this study said that these relationships are largely institutional, and that working with a smaller number of law firms would be of mutual benefit. Such generic belief, however, disguises subtle differences amongst in-­‐house lawyers in how they think they can balance the use of competitive forces and collaborative commitment to engage law firms. Panels To the question ‘does your firm have a panel?’ some said yes, others said they had informal ones, and yet others said no, revealing a strong dislike for the notion of panels. Why is there such disagreement amongst the general counsel? Disagreement stems from the fact that the notion of a panel incorporates several characteristics, and the general counsel interviewed have in mind a different mix of these characteristics. Panels may involve some or all of the following:-­‐ (a) A rigorous process of selection onto the panel with specific criteria such as expertise, market reputation, values and branding (b) A periodic review of panel members, leading to some turnover in the membership (c) A stable group of preferred suppliers who commit to a long-­‐term relationship (d) An element of competition among panel law firms (e) Lateral communication amongst suppliers, with the use of knowledge management tools to facilitate this. Some general counsel put great importance on building long-­‐term relationships (i.e. an emphasis on (c) above). Without such relationship building, law firms are unlikely to develop good knowledge of the client firm. According to one general counsel: ‘I’ve always believed in a panel pledge, on the basis that if you spread your job too thinly, one, people don’t have much knowledge of your business, and two, you might save a bob on one deal but I bet you it will come back and haunt you.’ Some other general counsel focused on having a very small number of law firms without calling them panel firms. For example, one general counsel retained five ‘chosen partner’ law firms, each with a 20 – 30 year-­‐long relationship. He said: ‘I don’t believe in a panel because our work does not generate the Said Business School | University of Oxford 9 General Counsel with Power? 2011 sort of panel mentality, although occasionally, we might put a few of them in competition’ (revealing a distaste for (d) in the panel characteristics above). Thus, the five ‘chosen partners’ are typically not asked to tender, but are allocated legal work in non-­‐compete areas. One respondent defined a panel succinctly as ‘a group of interchangeable suppliers with whom you have preferential supply terms.’ Evident in this definition is the inherent tension between competition and collaboration. There are three mechanisms in use – convergence, online bidding, and legal networks – to navigate this tension. A different mix of these mechanisms gives rise to differential incentives for law firms, as elaborated below. Convergence An overwhelming majority of general counsel in this study noted a recent trend towards reducing the number of law firms the company instructs. In the last five to ten years, drastic ‘culling’ occurred at some firms (see Table 3). (At the other extreme, one global manufacturing company continued to have as many as 170 law firms on its practice-­‐based panels put together). Table 3: Number of Law Firms on the Panel Case I Case II Case III Case IV Case V Source: Author’s interviews. Five years ago Now (2010) 55 60 38 49 70 14 6 26 9 20 The general counsel saw obvious advantages in giving larger chunks of legal work to a smaller number of law firms. For example, a financial institution has 15 law firms on a global panel, which includes three magic circle firms. Its general counsel echoed many others interviewed in noting three key benefits of having a panel, namely (a) deeper relationship with panel firms arising from focus, (b) discounted fees for volume work, and (c) ‘freebies’ such as secondees, free advice, seminars and training, and the allocation of good partners and associates for the bank’s legal work. Hence, the panel is a good mechanism for enhancing corporations’ bargaining power vis-­‐à-­‐vis law firms. Despite these obvious benefits, a minority of general counsel are not convergence fans. There are three problems, in their views. First, there is the problem of diminished local autonomy: convergence requires centralized legal department control, and some GCs felt it politically impossible to take power away from in-­‐house lawyers in divisions and regions. Second, there is the problem of inefficiency: ‘firms that have converged have focused that work on a number of large law firms, and we have found the larger law firms to be what we consider the more inefficient of the bunch’, according to a US energy firm GC. Mid-­‐tier law firms are less costly and often have better connections with local counsel. Third, there Said Business School | University of Oxford 10 General Counsel with Power? 2011 is the problem of false aggregation: ‘when firms focus on a very small number of firms, those firms, in turn go out and hire local counsel anyway. So it looks like it is aggregated, but it truly always is not.’ Online Bidding Law firms, once they are selected onto a panel, are asked to bid for specific pieces of legal work. Panel structures vary from firm to firm and put restriction on who can bid for what kind of work. Some firms distinguish between a global panel and regional/country panels, whilst others have specialist practice panels. Yet others have a tiered panel, with high-­‐risk high-­‐value work going to a Tier 1 panel of global or national firms and lower-­‐risk lower-­‐value work going to a Tier 2 panel of regional law firms. In the last several years, some firms (notably financial institutions) have intensified competition among law firms by using online auction for commoditized types of work or discrete pieces of work. At one bank, legal work in small claims and conveyancing is subjected to ‘slice and price’, i.e. disaggregating work into well-­‐defined tasks before each task is put out for bidding. Only firms on the panel are able to participate in the auction. A time window such as a couple of hours is given for an auction. One valuable outcome of online bidding is significantly lower prices. Whilst this creates short-­‐term gains in price reduction via margin compression, it has not necessarily given incentives for law firms to invest in cost reduction. A general counsel at a financial institution reflected on the pros and cons of online bidding: ‘that’s great today, but I don’t think it particularly gives you an incentive to be creative in the way that you do the work, and the reason for that is it’s a one-­‐off transaction. So I think what the firms do today, particularly in an environment where they are in, they will get to the right price mostly through margin compression. Now, I’m not against margin compression, but there is a limit to margin compression because the law firm says, you know what, I’ll do this at a loss, but they won’t at some point when they get too busy, and the prices will go up.’ Thus, in-­‐house lawyers have not made sufficient progress in devising incentives for law firms to change the way they do their work in the long run. A US manufacturing company also made some use of reverse auctions1 for legal matters, but restricted the use to occasions when the firm did not have an incumbent law firm or was dissatisfied with the incumbent firm for whatever reason. Even with this different use of bidding to reach out beyond panel firms, the general counsel noted a disadvantage: ‘we don’t believe in doing them (auctions) for every matter because we think they’re value-­‐destructive, or they are relationship-­‐destructive, and we do value our relationships.’ Because of the downside to online bidding, a few companies with a panel minimize elements of competition among panel firms. One civil engineering firm has only three firms on the panel. According to the general counsel, ‘I don’t let our panel law firms compete against each other. What I mean by that 1
In an ordinary auction, buyers compete to obtain goods or services, and prices typically increase during the auction. In a reverse auction, sellers compete to obtain business, and prices decrease over time. Said Business School | University of Oxford 11 General Counsel with Power? 2011 is, if I have a piece of work, I don’t say to all three of them, “Give me a price.” We tend to spread the work around, and we work with each of them individually. We’ve got good relationships with each of them, and it’s a non-­‐confrontational approach.’ This general counsel, therefore, relies on competition during a comprehensive panel selection process, but avoids the ‘them and us’ mentality by treating panel firms as an extension to the in-­‐house legal department. Legal Networks At a handful of companies in this study, the general counsel went further to promote collaboration, not just bilaterally with each law firm, but also among the chosen law firms. Lateral collaboration amongst preferred law firms is tricky to craft because they are in potential or real competition to bid each other out. Nevertheless, it is encouraged at a civil engineering company at which 13 law firms, chosen via a rigorous selection process, are brought together as a Legal Network (Page et al., 2007). According to its general counsel, ‘we do require them to work together, so we disaggregate some work and put certain parts to certain law firms. For instance, we have three or four firms who do Private Finance for us, and we will require them to sit together and work out what is a market position on particular documents. So rather than having one network firm act for this client company and another for the bank, each having a different view on what is a standard parent company guarantee, or what is an appropriate finance model, we have caused them to sit in a room and say, “Here is a document which is acceptable from both perspectives.” So when we go into a transaction, we don’t have to go through all of the preliminary maneuvering around all those things. We can simply say, okay, all of that is done, and that saves time and saves effort and saves money.’ Similarly, a retailer developed a ‘Legal Community’ of ten law firms, in order to implement cross-­‐firm communication and collaboration in the interest of the corporate client. These preferred law firms are invited to an annual conference at which the retailer explains the nature of its business and its future strategic direction. The external lawyers at the conference, according to the general counsel, are the virtual law firm he needed. ‘If it were one firm, one virtual law firm, what would they be doing? One thing they would be doing is to help each other do better work for us.’ This requires overcoming inter-­‐
firm rivalry, and it is not a natural instinct for law firms to collaborate in this way. The general counsel said they have to work hard to make firms work together. This idea of a lateral legal network or community, therefore, is a step change from the more traditional bilateral relationship model. Our last example comes from a US company which has effected lateral collaboration by inviting six panel law firms (which survived a rigorous selection process) to form a case-­‐by-­‐case ‘joint venture’. When a new litigation case comes up, one of them is assigned a coordinator role, and it is that firm’s job to work closely with the in-­‐house lawyer in charge to involve other law firms in the matter. The general counsel is clear in his aim: ‘the critical element in doing it this way is that all of the vendors have to share your philosophy. If they don’t share your philosophy and if they’re not focused on efficiency, it won’t work.’ Said Business School | University of Oxford 12 General Counsel with Power? 2011 Figure 1: Balancing Competition and Collaboration among Law Firms Collabora^on • Legal network or community • Annual conference • Collaboraqon among law firms Compe^^on • Online bidding • Low prices • Via margin compression Summary Regardless of the existence of a formal panel, the general counsel in our study already have, or are shifting towards working with, a small number of law firms. But this trend is shadowed by the need to balance competition and collaboration with law firms (see Figure 1). Some GCs rely predominantly on intensifying competition, even after a panel is selected by using online bidding, whilst others take a two step approach, relying on competitive forces to establish a panel, but then enhancing collaboration by developing ‘legal networks’. None relies on both online bidding and legal networks for the same category of legal work, as this mix would create contradictory signals and incentives for law firms. Law firm incentives matter for the long-­‐term sustainability of specific practices. But in-­‐house lawyers have found it challenging to provide carrots and sticks for law firms to find new ways of doing their work differently and more cost effectively. This study did not go into details of various alternatives to hourly billing as incentive mechanisms for law firms. The next chapter addresses how corporate legal departments are considering ways of making legal work more efficient and effective, involving disaggregation and standardization. 13 Said Business School | University of Oxford General Counsel with Power? 2011 Chapter 4: A Production-­line Approach to Legal Work ‘Commoditization’ is a dirty word in legal practice. All lawyers recognize that some parts of what they do are repetitive, routine, and boring. Nevertheless, lawyers consider those legal tasks to be a necessary part of legal work particularly for trainees and junior lawyers, resulting in deeper knowledge and experience for making better professional judgement. However, when corporate clients ask for better value for money, most lawyers begin to see that some of the work could be simplified, standardized, and shifted to less qualified workers in low-­‐cost locations. A nagging worry persists, nevertheless: how can one maintain the quality of work done, the overall custody, and client confidentiality? But not so fast. This chapter summarizes the findings of this study in an area that is in a state of flux. There is little agreement on terminology – disaggregation, decomposition, unbundling, etc. all uttered interchangeably. Several techniques originating from manufacturing – process mapping, Lean Six Sigma, Just-­‐in-­‐Time, etc. -­‐-­‐ fall off the tongue of some enthusiasts intent on transforming the way legal services are delivered, but without a system-­‐wide perspective on what is holding back key actors from jumping on the bandwagon. Despite the existence of a well-­‐articulated five-­‐stage model from bespoke to commoditized legal service delivery (Susskind, 2008), the clock speed for adopting this model appears slow. This study attempts to describe and analyze the state of play – what the interviewed general counsel said and observed – without a teleological vision of the future. In this sense, this study does not judge whether legal services should become more like manufacturing; nor does the study take an optimistic or pessimistic stance on the possibility of change. It attempts, however, to accurately reflect and understand who is implementing what types of change for what reason. A ‘Production-­line Approach’ Ted Levitt was one of the earliest advocates of the ‘production-­‐line approach’ to service in the early 1970s. He argued that services would benefit from drastic improvements in quality and efficiency at the same time if they adopted a manufacturing approach to its activities that substituted technology and systems for people and serendipity (Levitt, 1972). What he had in mind was the key principles of scientific management that Fredrick Taylor articulated in the 1910s, namely the separation of planning from execution, the standardization of products and processes, and the training of workers to carry out tasks. History tells us that mass production based on these principles supplanted craft production due to discontinuous efficiency gains. The work of lawyers today may be on the cusp of a similar transformation due to digital technology, globalization, and new entrants. Whilst bespoke work continues to exist, legal work may be subjected to treatment similar in nature to that which has been applied to automobile assembly for over a century. Said Business School | University of Oxford 14 General Counsel with Power? 2011 For example, the standardization and templating of legal documents is the legal equivalent of inter-­‐
changeable and standard components in manufacturing. And why not a just-­‐in-­‐time approach to legal service delivery? In legal services, as in other sectors, the production-­‐line approach requires the following three steps. 1. Disaggregation and standardization: to break down legal work into constituent tasks which are then standardized or modularized 2. Process management: to ensure the smooth flow of process steps and to eliminate waste 3. Project management: to separate planning from execution, to define who does what, and to ensure that milestones and deadlines are met on time Objections to the Production-­line Approach The general counsel interviewed for this study tended to fall into three groups. First, a small group of enthusiasts demonstrated an enormous appetite to embrace this approach. Second, some sceptics stated that there was nothing new in this approach (that for quite some time, lawyers have been parcelling out work to junior associates and paralegals). Third, the wait-­‐and-­‐see group were happy for others to take a lead, particularly as this approach did not apply to their own area of work. The adverse consequences of standardized mass production are well known. One does not need to evoke the image of Charlie Chaplin spinning around repetitively tightening nuts and bolts in Modern Times to feel how disheartening routine tasks could be. However, unlike in manufacturing which encountered vocal Luddite opposition in its history, the opposing segments of the legal profession are gentle sceptics and passive resisters. In the legal world, some objections to the production-­‐line approach are common to manufacturing, whilst others are peculiar to legal work. Below is a list of objections gleaned from the interviews. (a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Our volume is too low, so we cannot exploit economies of scale (mentioned most frequently) Quality would go down with disaggregation Legal work has to be holistic to meet clients’ need Collaboration, iteration, and interaction are inherent in doing legal work Over-­‐disaggregating carries the risk of de-­‐motivating lawyers who do not see the whole picture Standardization gives lawyers a ‘license not to think’ Lawyers are not trained to think in this way Routine tasks, if outsourced or offshored, will undermine training opportunities for junior lawyers Upfront costs in technology investment and/or visiting unfamiliar locations (e.g. India) are too high Lawyer culture does not fit with disaggregated task delivery Law of privilege gets in the way of disaggregation Disaggregation, resulting in the use of unqualified non-­‐lawyers, is bad because they do not have the same ethical standard as lawyers Said Business School | University of Oxford 15 General Counsel with Power? 2011 So, what types of legal work are most easily subjected to disaggregation? Who decides how much disaggregation is too much or too little? Is there one best way to break up a piece of legal work into constituent tasks? In order to answer these questions, this study asked general counsel to choose a specific practice area to discuss their achievements and aspirations. Litigation Tasks Litigation is often the largest component of external legal expenditure, a component that also fluctuates widely from year to year. For this reason, the general counsel are keen to consider ways of reducing and controlling litigation costs. However, those interviewed varied in their philosophy on how best to tackle this. During the interview, a general counsel was shown a list of litigation tasks (see Figure 2) (see Susskind 2008) which became a basis of discussion. An initial discussion was whether or not the list made sense, and what might be an optimal degree of disaggregation. It is evident that some general counsel had never considered the way they deal with each litigation matter in this laundry list sort of way. However, once they recognized that the list made generic sense, some started making comments on the possibility of finer disaggregation. Legal research is a good case in point. Generally, many general counsel made a distinction between information gathering (e.g. a fifty state survey in the US) which can be disaggregated easily and may be carried out by junior lawyers or paralegals, and researching legal precedents which require a high level of judgement in context by experienced lawyers. Another example is document review, which may be disaggregated into first-­‐level reviews and further reviews that require professional judgement on what is relevant or privileged. Figure 2: Litigation tasks Legal research Document review Negoqaqon Advocacy Strategy Tacqcs Liqgaqon support E-­‐disclosure or e-­‐discovery Project management A further point of discussion was who was best placed to do each task. The starting point for this discussion revealed which one of the three approaches a general counsel adopted. First, in what may be called a craft approach, the in-­‐house counsel homed in on the importance of Strategy and Tactics, which should be led by the in-­‐house lawyer with close counsel from the lead law firm. Beyond this, however, Said Business School | University of Oxford 16 General Counsel with Power? 2011 the in-­‐house lawyer delegated the whole matter to the law firm, and expected many of the tasks – be they negotiation or legal research – to be carried out iteratively and collaboratively. Negotiation, for example, was a matter of collaboration between in-­‐house and external lawyers, with a tactical aspect of matching the other side. Second, in an automation approach, the general counsel regarded automating one chunk in the task list – namely litigation support and e-­‐discovery (or e-­‐disclosure) – as the primary focus of efficiency improvement. Starting with computerizing the collection and hosting of data, the general counsel focused his attention on replacing humans with machines to undertake rule-­‐based data processing (e.g. de-­‐duplicating, coding, etc.), moving eventually onto pattern recognition in first-­‐level document review. Third, in a process flow approach, the general counsel had established processes and procedures, in some cases using process mapping, to ensure the smooth flow of legal tasks from the start to the end of a case. This approach forces in-­‐house lawyers to clearly scope out each task, and to define who is going to do what at the planning stage. An automation approach may be combined with a process flow approach, but some corporations adopted an automation approach without a process flow approach. One of the intriguing issues in this study is how these approaches relate to the general counsel’s internalization vs externalization tendencies (see Chapter 2). Internalizers amongst the interviewed tended to be most systematic about adopting the process flow approach, eliminating waste in the whole matter by taking a lead in disaggregating and in-­‐sourcing litigation support and/or document review (see Figure 3). Externalizers Type 2 exercised their voice to induce law firms to take a lead; one general counsel told law firms “you’d better unbundle, or else we’ll unbundle for you.” Figure 3: Schematic association between general counsel type and production approach 17 Said Business School | University of Oxford General Counsel with Power? 2011 Intellectual Property Tasks: a Case Study Patent filing and prosecution was another area mentioned frequently by interviewees. All three approaches were detected as in the case of litigation. In a craft approach, the general counsel continues to use law firms to manage the whole matter, starting from prior art search to patent prosecution (see Figure 4). Corporations in the ICT sector were at the forefront in adopting an automation approach, investing in patenting software so as to enable self-­‐service by inventors to use electronic filing. As before, Internalizers have gone furthest in implementing a process flow approach. This has led not only to the disaggregation of patenting tasks, but also to the use of multi-­‐sourcing, that is, the use of multiple types of suppliers via in-­‐sourcing, offshoring, de-­‐lawyering, etc. (Susskind 2008, p.47). As shown in Figure 3 (last line), the Internalizers tended to in-­‐source most or all stages of patenting by hiring more patent agents who carry out tasks that used to be done by patent attorneys in law firms. Alternatively, Externalizers Type 2 disaggregated some tasks – prior art search, patent drafting – which they sourced from legal process outsourcing (LPO) providers directly or indirectly via law firms. Figure 4: Patenting tasks Prior art search Patent drauing Patent filing Patent prosecuqon Law firm Law firm Law firm Law firm LPO LPO Law firm Law firm LPO
LPO
LPO
LPO
In-­‐source In-­‐source
In-­‐source
In-­‐source
Summary The corporate cost pressure to do ‘more for less’ has led many general counsel in this study to consider (and in some cases implement) a production-­‐line approach to legal service delivery. In totality, this approach requires three steps: not just disaggregation and standardization, but also process management and project management. The approach therefore requires a system-­‐wide end-­‐to-­‐end perspective. However, the majority of general counsel found a variety of reasons – lack of scale, lawyers’ mentality, lack of time, expensive upfront cost, etc. – to reject or delay wholesale adoption. Nevertheless, some general counsel found tactical advantage in making significant efficiency gains by relying primarily on the automation and digitization of specific tasks. Moreover, a handful of general counsel, led by Internalizers, have appointed Directors of Legal Operations to take a lead in implementing the production-­‐line approach. The next chapter turns to the issue of multi-­‐sourcing, the criteria used to make a decision on who does what tasks once legal work is disaggregated, and the resulting patterns in what lawyers do in relation to non-­‐lawyers. Said Business School | University of Oxford 18 General Counsel with Power? 2011 Chapter 5: What Lawyers Do in a World of Multi-­sourcing Once legal work is disaggregated into constituent tasks, the in-­‐house legal department must consider the most efficient and effective way of sourcing each task. In the last several years, the portfolio of possible sources of legal service has expanded – hence the notion of multi-­‐sourcing – as new providers and new locations have become available. Up until recently, the only thick pipeline of legal advisory work that mattered was the one connecting the corporation to the law firm. Whilst this will continue to be important, the corporation now has a diverse set of sourcing options, ranging from (i) offshoring a captive in-­‐house legal department (as GE had done); (ii) relying on law firms to set up a captive low-­‐cost centre (as Clifford Chance or Baker & McKenzie have done); (iii) sourcing from contract lawyers on a project-­‐by-­‐project basis; to (iv) going direct to new legal services providers that have a global presence (as Rio Tinto did with CPA Global) (see Figure 5). Despite these emergent models for sourcing legal services, the offshore legal process outsourcing (LPO) sector remains a mere drop in the ocean, around $500 million in revenue, or 0.1% of the worldwide legal market worth around $500 billion in 2010 (Datamonitor, 2010). Figure 5: Global value chain in legal services 19 Said Business School | University of Oxford General Counsel with Power? 2011 How significant will the phenomenon of multi-­‐sourcing be in the future? In particular, how much value might migrate from transactions between corporate clients and law firms to other parts of the global value chain? The answer depends on who is making multi-­‐sourcing decisions using what criteria. This chapter discusses (a) labour arbitrage vs process efficiency as sourcing criteria; (b) de-­‐lawyering; and (c) who does project management. The chapter concludes by drawing implications for what lawyers do in a multi-­‐sourcing world. Sourcing Criteria: Labour Arbitrage vs Process Efficiency In our study, only a small minority of general counsel actively set out to source from remote offshore locations, most notably India. The key reasons mirrored the list of objections to the production-­‐line approach noted in the previous chapter. By contrast, those who enthusiastically endorsed new low-­‐
cost locations, be they nearshore (e.g. Belfast for London-­‐based financial institutions and law firms) or offshore (e.g. India, South Africa, the Philippines, etc.), divided into two camps. The first camp is primarily after labour cost arbitrage and nothing much else. The general counsel may look to contract lawyers on demand or foreign lawyers familiar with English or US law to conduct legal work in a manner that is no different from if it were carried out by lawyers onshore. The other camp expects to obtain much more than merely lower labour rates. In these cases, the general counsel is intent on attacking both the denominator (i.e. productivity) and the numerator (wage rate) in the unit labour cost equation. At Greenfield sites, some financial institutions sought greater efficiency in processing derivatives documentation, for example, not only by templating and standardizing documents, but also by investing in software technology, improving the process flow of work, and exploiting economies of scale. The choice between captive and outsourced offshoring, then, depends in part on the general counsel’s views on who has the best package of capabilities in process management and project management. Thus, a ‘new location’ is often a code for accelerating the implementation of new modes of working, not a mere attempt at seeking temporary labour cost arbitrage. De-­lawyering in Legal Product Lifecycle A key aspect of taking cost out of legal work – combining process improvements and billable hour reduction – derives from ‘de-­‐lawyering’ i.e. the use of non-­‐lawyers to do work that had been done by fully qualified lawyers. As noted in Chapter 4, in-­‐house lawyers disaggregated patenting tasks in order to use patent agents to do work previously done by patent attorneys; similarly, and paralegals were employed to do simple legal research previously done by junior lawyers. Perhaps the most significant use of non-­‐lawyers has occurred in contract documentation in a variety of sectors. In civil engineering, for example, in-­‐house lawyers push routine contract documentation work to engineers who lead projects. According to one general counsel, ‘we look at the contract if it’s non-­‐
standard and comment on that. But most of the issues are not legal issues; they are around fees and scope. Those are the issues engineers can deal with. So what we want to do is to give engineers Said Business School | University of Oxford 20 General Counsel with Power? 2011 confidence, and train them up to look for issues that matter.’ Thus, engineers are encouraged to negotiate contracts and deal with clients directly without a lawyer involvement. In financial services, also, documentation work is pushed down to non-­‐lawyers working in the relevant business departments. According to one general counsel, ‘I’d like to get into the business of templating things and give them to the business function. … Let’s be honest. Lawyers are not good at providing either systems or process or handling volume.’ Derivatives documentation is a good case in point, as the sheer volume of work often creates bottlenecks in workflow. It is now common practice for non-­‐lawyers -­‐-­‐ called document analysts or documentation specialists – to handle derivatives documentation, often at captive (i.e. in-­‐house) offshore or nearshore centres. Investment banks are in the business of creating new financial products that are initially complex, low volume and high margin. But they commoditize them and turn them into high volume, lower margin work. Law firms may be involved in early stages, but when the work becomes a repeat exercise, banks have an incentive to internalize them eventually. De-­‐lawyering, therefore, appears to be a cyclical trend, most evident during the mature stage of legal product lifecycles. Who Manages the Reassembly? Multi-­‐sourcing – including outsourcing and offshoring – requires someone to take a lead in supervising and managing a variety of providers. Just as making an aeroplane requires systems integration by the aircraft manufacturer to manage the final assembly of engines, wings, and fuselage made by different suppliers, we would expect an ‘architect’ to manage the integration – final assembly – of disaggregated legal tasks so the final ‘product’ works and is delivered seamlessly to the client. But which entity should assume this architecting role? Should it be the law firm or the in-­‐house legal department? The answer to that question is almost the Holy Grail to gauging the future shape of legal services markets. The picture that emerges from this study is far from clear cut. When asked if their law firms use outsourcing or offshoring, some general counsel responded that they did not know, and that it was up to the law firms to decide. A general counsel at a bank stated: ‘our preference is to deal directly with law firms and for them to outsource to the alternative providers if they choose in order to drive their costs down to us. We want those firms to be responsible for managing that. I am not keen to deal with people in other jurisdictions who may not have the same requirement as us in confidentiality and security of information. We’d like to place the onus on the major law firms we deal with to ascertain that for us.’ An alternative approach, adopted by a small number of general counsel, was to instruct law firms to disaggregate and to use a specific LPO provider for work chunked out, such as data room management, e-­‐discovery (e-­‐disclosure) work, and contract review. The in-­‐house department would have a direct contractual relationship with such a provider. Delegating decisions on what to outsource/offshore to law firms would not work because ‘you effectively run the risk of delegating the control of what needs to be done, which inevitably ends up being more expensive’, according to a general counsel. Said Business School | University of Oxford 21 General Counsel with Power? 2011 Several general counsel expressed the view that had law firms been willing and able to take an initiative in managing legal projects, they would rather not have to step in. However, even with such a competency gap in project management skills amongst law firms, these in-­‐house lawyers felt ambivalent about investing in in-­‐house capability. At least two future scenarios are possible here. In one scenario, law firms will retain a thick pipeline of legal work if they are able to take a lead in filling the competency gap in project management. In an alternative scenario, law firms might be bypassed – disintermediated – as the general counsel invests in project management capability and engages aggressively in multi-­‐
sourcing, including trading directly with new types of legal services providers. These new entrants bring new financial capital and professional talent into the sector. Thus, the future shape of legal services value chain depends heavily on the role the general counsel wishes to play in project management. What Do General Counsel Do? The general counsel continues to navigate a fine line between being a lawyer first and foremost with its professional ethics on the one hand, and being a business person offering legal advice in context without selling one’s soul to commercial enterprises on the other. Over time, the power base of in-­‐
house lawyers appears to have enhanced, due not only to the short-­‐term impact of the financial crisis, but also to longer-­‐term trends. Perhaps the most significant of these trends is the increasing importance placed by corporate executives in legally astute firms on the general counsel as joint risk managers (Bagley, 2008). Not only can the general counsel front-­‐load legal inputs to pre-­‐empt disputes, thus reducing litigation costs significantly. They can also alert CEOs to potential risks arising from likely government investigations in a tougher regulatory enforcement environment. The general counsel’s intimate knowledge of the business is indispensable, and they consider this an advantage in offering better legal advice. In the words of one general counsel, ‘I’m a business person who happens to be a lawyer, a business partner who brings legal background to business problems.’ Nearly all the general counsel interviewed regularly rub shoulders with the CEO by dint of having a seat on the corporate executive committee. In this context, how important is the efficient delivery and multi-­‐sourcing of legal services in the general counsel’s priority list? Opinions were split on this score. At one extreme, commoditization – disaggregation and standardization – is regarded as the stuff for legal operations directors with support from legal technologists. The general counsel’s primary job is to contribute to corporate strategy and to manage legal risk. As such, the downside risk of messing up a litigation case by cutting corners is too huge compared to the marginal benefit arising from cost savings. Thus, however powerful the general counsel might be, he is highly risk averse, and cost becomes a secondary concern to obtaining appropriate advice and support. ‘No body ever got fired for hiring IBM’, quipped one respondent. In this view, unless there is a supply side revolution, rearranging the legal services market would remain ‘a game of inches’, a tactical game rather than a strategic game. At the other extreme, the general counsel considers his own role to be the guardian of the legal process architecture in his organization. Such a GC spends little time being a lawyer, exercising legal judgements Said Business School | University of Oxford 22 General Counsel with Power? 2011 only in extreme cases, whilst delegating much of the day-­‐to-­‐day legal advisory work to other in-­‐house lawyers in his department. What is more ‘strategic’ is the formulation of a legal strategy, involving the management of performance in the legal department, the proactive and pre-­‐emptive legal inputs into the business, and the management of outside relationships, etc. all with a view to enhancing the value added of the legal department to the business. In this view, the efficient multi-­‐sourcing of legal services is part and parcel of an effective legal process architecture. Summary Multi-­‐sourcing – the use of multiple sources of legal service delivery – is likely to change the contour of global value chains in legal services. However, how much value might migrate from transactions between corporate clients and law firms to other parts of the value chain depends on a number of factors. This chapter demonstrated that we are likely to see greater value migration away from the traditional corporate client – law firm transactions, (a) the more the motive for offshoring and near-­‐
shoring goes beyond mere labour cost arbitrage to the implementation of a production-­‐line approach, (b) the more lead is taken by the in-­‐house legal function in project management and in establishing direct contractual relationships with LPO providers, and (c) the higher up the priority list the general counsel places the issue of efficient legal service delivery. The general counsel is a business partner in corporate top management teams. This study found that beyond this rhetoric, some GCs believe that cost-­‐cutting efficiency should not be a direct concern and should be delegated to managers of legal operations and legal technology. By contrast, a small number of GCs believe in the central importance of being a chief ‘legal architect’ whose task is to add value to the core business of the corporation or financial institution, by embedding process and project management in the implementation of a legal strategy. 23 Said Business School | University of Oxford General Counsel with Power? 2011 Conclusions This report discussed what general counsel do in relation to the corporation they work for (Chapter 5), in implementing efficiency drives (Chapter 4), balancing competition and collaboration with law firms (Chapter 3), and managing the make-­‐or-­‐buy decisions (Chapter 2). In Chapter 2, we identified four types of general counsel with respect to their make-­‐or-­‐buy decisions, namely Externalizer Type I, Externalizer Type II, Mid-­‐ranger, and Internalizer. Chapter 3 considered three tools – convergence, online bidding, and legal networks – put to use by general counsel to improve relations with law firms. Chapter 4, in elaborating the production-­‐line approach to legal services delivery, identified three approaches in practice – namely, craft, automation, and process flow approaches. Figure 6: Clustering of practices •  Externalizer I •  Externalizer II •  Mid-­‐rangers •  Internalizers •  Legal advice only •  Extensive advisor and legal strategist •  Convergence •  Online bidding •  Legal networks Make-­‐or-­‐buy decisions Relaqons with law firms What GCs do Producqon approaches •  Crau approach •  Automaqon approach •  Process flow approach Whilst much of the practices gleaned from the interviews are in a state of flux and yet to be implemented, the study highlights some practices that tend to cluster more strongly than others. There are at least two clusters of practices that GCs are using to drive change, although these may not be the only clusters that work well. The first cluster (see green legends in Figure 6) concerns Externalizers Type II, who have committed to rely heavily on law firms. Consequently, the main locus of action is to improve the multilateral links amongst the chosen law firms as much as the bilateral relationship with each law firm. Externalizers Type II also expect law firms to take a lead in implementing multi-­‐sourcing and components of the production-­‐line approach to legal service delivery including project management. Said Business School | University of Oxford 24 General Counsel with Power? 2011 The second cluster (see red legends in Figure 6) concerns Internalizers. They rely heavily on internal legal resources, are most systematic in implementing the production-­‐line approach, and view themselves as legal strategists in charge of managing legal projects and process flows. This study attempted to provide a systematic analysis of current trends and possible future directions in legal services. We conclude by summarizing a set of key factors that will influence who drives power in legal service global value chains in the future. It is often argued that corporate clients are becoming a force for change in legal services. However, the general counsel’s power to drive change in a sustainable manner depends on the sources of power. The most temporary of GC power lies in the buyer’s market during the post-­‐financial crisis recession. Much of the bargaining power resulting from the economic climate is likely to erode when the economy picks up. By contrast, the general counsel will remain a more sustainable force for change if they proactively invest in new capabilities such as project management, as Internalizer GCs are doing. So, law firms, beware of Internalizers amongst the general counsel. However, GCs with a power base in corporate managerial hierarchy may not necessarily regard efficient legal service delivery on a strategic par with legal risk management. If such GCs dominate the in-­‐house legal function, power does not equate to an appetite for change. It is, therefore, equally possible that we are heading for a supply side revolution with new entrants – legal services providers – driving discrete and disruptive changes in the way legal services are delivered. 25 Said Business School | University of Oxford General Counsel with Power? 2011 Afterword: The Future for General Counsel Richard Susskind It was fascinating to be in regular dialogue with Professor Sako during the project discussed in this report. Rarely have I had the chance to hold in-­‐depth discussions about the legal market with someone who is not a lawyer. And here is one of the main contributions that Professor Sako makes – she does not have the limited perspective of a practising or academic lawyer, she has no legal axe to grind, no legal business to sustain or disrupt, nor any legal overlord to appease. Rather, she brings the expertise and experience of an economist and management theorist, someone who understands economic forces, business strategy, industry upheaval, and organizational change. And she applies this knowledge to the law, as part of her growing interest in the professions more generally. The legal world should warmly welcome the objective insights of an expert outsider who is looking afresh at its marketplace. Methodologically, this report is different from much that is held out as research into the legal industry. I had anticipated a document that was brimming with data, diagrams, tables, and percentages; and maybe even a formula or two. But I now see this would be pseudo-­‐science. This research shows us that General Counsel are a grouping of lawyers that are too diverse in the nature of their work, in the size of their teams and broader organizations, in their industries and markets, and in their geographical presence, for it to be sound to claim that x% of GCs believe this or Y% prefer that. These statistical claims are the stuff of the transient PR-­‐based research that surfaces every few weeks whose aim is to secure a headline in the trade press. I see more clearly now that these superficially plausible pie charts and bar graphs do not in fact improve our understanding. Trends What the Oxford research instead provides is a snapshot of the central trends in the buyer’s side of the legal market. Its scope is limited, though, because the focus is on the in-­‐house functions of very large organizations. As the list in the Appendix shows, most of the businesses involved in the study are major household names (it is unusual in itself, incidentally, in the world of research into the legal market to be able to see who has actually been consulted). Said Business School | University of Oxford 26 General Counsel with Power? 2011 Within this sector of the market, some of the trends are quite clear: GCs want to secure ‘more for less’, more legal service at less cost; and most are wrestling, but doing so tentatively, with various new ways of sourcing legal services. Two divides also emerge. First, there is a stark contrast between the conservatives who see the future as a mildly finessed version of the past; and the radicals, who anticipate and are implementing major change in the way that legal services are delivered. Second, there is the split between those GCs who argue that external law firms are best motivated by urging them to compete with one another and those who believe that law firms will be individually and collectively more productive and efficient if encouraged to collaborate. Issues My own interest has always been in change. I am not a dispassionate observer. I believe lawyers must modernize -­‐ to survive in law firms and to meet the needs of clients. One issue that currently interests me is who these agents of change might be. From the transcripts of Professor’s Sako’s interviews, it is clear that some GCs think they themselves should drive innovation; but a larger proportion think that law firms should be leading the way. Many law firms seem hesitant about this. Yet, in the history of industry and commerce, customers or clients have rarely redefined the services they receive or the markets of which they are part. That is the job of the provider. Law firms, generally, have always been reluctant to change. As I like to point out, or did at least until 2007, it is hard to convince a room-­‐full of millionaires that their business model is broken. And it is tougher still to compel managing partners to innovate radically when they have only two years or so left in post; their understandable inclination, rather, is to squeeze more out of the existing model and keep the figures looking rosy. In the long run, this thinking will be to the detriment of law firms. But, of course, the providers in the legal market are no longer just the law firms. As this report shows, there are new players in the legal game, not least the legal process outsourcers. I believe we will also see the resurgence into the legal sector of the large accounting firms, as well alternative business structures fuelled by private equity. These new providers tend to have much greater appetite for rethinking legal services than conventional law firms. The competition is stiffening. In the end, then, the agents of change may not be lawyers. Another issue that flows from this report concerns the discipline that I call ‘legal process analysis’. This is the job of analyzing legal requirements (of an individual matter or of an entire business) and specifying the most efficient way of sourcing the legal work, consistent with the level of quality needed. Following the terminology of one of the interviewees, the question here is -­‐ who should the architects (the process analysts) be? I worry about those GCs who immediately see this as a role for law firms. Surely, shareholders and directors of business can reasonably expect that their own in-­‐house lawyers are the people ideally placed to assess legal problems and identify the best way to sort them out. Said Business School | University of Oxford 27 General Counsel with Power? 2011 The evolution of the legal market From this report and my own research, I now see that the mainstream legal market is likely to evolve in three phases. The first, extending from 2007 to 2013 or so, is the period during which most law firms and GCs will seek to maintain the status quo. GCs will resist fundamental change of their own departments and try to meet the ‘more for less’ challenge by inviting law firms to charge much less. In turn, law firms will be similarly reluctant to change radically and so will propose alternative fee arrangements. But these deals will not give GCs the savings they need and so there will be a shift to a second phase, from about 2013 to 2016, when GCs will dramatically re-­‐engineer their legal functions; and law firms will move from pricing differently to working differently. Both will embrace legal process outsourcing, off-­‐shoring, de-­‐lawyering, and agency lawyers. The endgame, though, will not be about labour arbitrage. I predict that the third phase, from 2016 onwards, will involve great uptake of information technology across the profession, such as automated production of documents and intelligent e-­‐discovery systems – these are applications that will be staggeringly less costly than even the lowest paid lawyers. Strategy for GCs In practical terms, how should GCs prepare for this future? I am often asked this question by in-­‐house lawyers in the following terms – what should our strategy be? I cannot answer that query in generic terms. But I can suggest that there are four broad types of strategy for GCs. They differ in their scope and ambition. The first strategic approach is to concentrate largely on external law firms and drive their prices down. This will be the preferred method of Professor Sako’s ‘externalizers’. The second approach, better suited to the ‘internalizers’, is to focus instead on reshaping the in-­‐house department. Third, is simultaneously to review internal and external capabilities and to seek to streamline both. The fourth approach is the most ambitious – it is to start with a blank sheet of paper, to forget about current resources (in-­‐house and outside) and instead to undertake a comprehensive legal needs analysis for the business. Once these requirements have been identified, the task then is, dispassionately, to identify how best to resource the full set of needs; drawing not just on conventional lawyers but on the new legal providers too. This final strategy, in my view, is the one that will deliver the most cost-­‐effective and responsive legal services for large businesses in the future. Said Business School | University of Oxford 28 General Counsel with Power? 2011 References Bagley CE. 2008. Winning legally: the value of legal astuteness. Academy of Management Review 33(2): 378-­‐390 Datamonitor. 2010. Global Legal services. Datamonitor: New York Levitt T. 1972. Production-­‐line approach to service. Harvard Business Review September -­‐ October: 41-­‐
52 Page A, Tapp R. 2007. Managing External Legal Resources. ICSA Publishing: London Susskind R. 2008. The End of Lawyers? Rethinking the Nature of Legal Services. Oxford University Press: Oxford 29 Said Business School | University of Oxford General Counsel with Power? 2011 About the Authors Mari Sako is Professor of Management Studies at Said Business School and Professorial Fellow at New College, University of Oxford. After reading Philosophy, Politics, and Economics at Oxford, she completed an MSc in Economics at London School of Economics (LSE), an MA in Economics at the Johns Hopkins University, USA, and a PhD in Economics at London University. Before taking up her current position, she taught at LSE’s Industrial Relations Department for ten years. She was also a visiting scholar at Kyoto University Department of Economics, Tokyo University Institute of Social Research, RIETI (Research Institute of the Ministry of Economics, Trade and Industry in Tokyo), Ecole Polytechnique, Paris, and MIT Sloan School of Management. Her research focuses on the connections between global strategy, comparative business systems, and labour markets. Publications include How the Japanese Learn to Work (with Ronald Dore) (1989), Prices, Quality and Trust (1992), Japanese Labour and Management in Transition (with Hiroki Sako) (1997), Are Skills the Answer? (with Colin Crouch and David Finegold) (1999), and Shifting Boundaries of the Firm (2006). She was a principal researcher for the MIT International Motor Vehicle Program (IMVP) during 1993-­‐2006, working on modularisation, outsourcing, and supplier parks in the global automotive industry. She is also a Senior Fellow of the ESRC-­‐EPSRC Advanced Institute of Management in Britain. More recently, as a member of the Novak Druce Centre for Professional Services at Said Business School, she has been researching about the globalization of law firms, the outsourcing and offshoring of professional services and their impact on the professions. Richard Susskind OBE is Visiting Professor in Internet Studies at the Oxford Internet Institute at Oxford University and Emeritus Law Professor at Gresham College, London. He is IT Adviser to the Lord Chief Justice of England and Wales, President of the Society of Computers and Law, and the author of numerous books, including The End of Lawyers? (Oxford University Press, 2008). 30 Said Business School | University of Oxford General Counsel with Power? 2011 Appendix: Research Methodology Fifty-­‐two GCs were interviewed, 36 in the UK and 16 in the US. Interviews typically lasted one hour. Where permission was sought and granted, interviews were recorded. In many cases, interviewees also provided further data by email, and internal policy documents (and an authored book on one occasion) at the interview. Table A1: List of Interviewed Organizations Alliance Boots AMEC Archon Group ARUP BAE Systems Barclays Barclays Capital BAT Boston Consulting Group Bechtel BP BT BUPA Carillion Centerpoint Energy Christies Cisco Systems CITI Conoco Phillips Datacert Deutsche Bank Dollar Tree Financial Services Authority FMC Technologies Goldman Sachs Hanson Ltd HP HSBC Infineum ISS ITV M&S Medtronic Ministry of Justice, UK Qwest Royal Bank of Canada Royal Bank of Scotland Royal Dutch Shell Sainsburys Sigma Aldrich Solicitor General Counsel, UK Sony Ericsson Southwest Airlines State Street Bank Team AOL Tesco Thomas Miller UK Experian United Utilities Vodafone Williams Corporation Yahoo 31 Said Business School | University of Oxford Resource Co-Specialization and Supplier Concentration in Plural Sourcing: Evidence
from Legal Services Sourcing at Fortune 500 Companies
Comments Welcome
This Draft: 21 February 2013
Mari Sako
Professor of Management Studies
Saïd Business School
University of Oxford
Park End Street
Oxford, OX1 1HP, UK
Tel +44 (0)1865 288925
Email [email protected]
George Chondrakis
Post-doctoral Research Fellow
Saïd Business School
University of Oxford
Park End Street
Oxford, OX1 1HP, UK
Tel +44 (0)1865 288925
Email [email protected]
&
Paul M. Vaaler
Associate Professor
Department of Strategic Management & Organization
Carlson School of Management
University of Minnesota
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Minneapolis, MN 55455
USA
Tel +1(612) 625-4951
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1
Resource Co-Specialization and Supplier Concentration in Plural Sourcing: Evidence
from Legal Services Sourcing at Fortune 500 Companies
ABSTRACT
Although the preconditions for the simultaneous use of multiple sourcing modes have been
explored, the question of what determines how much to make and how much to buy in plural
sourcing has been understudied. This study fills this gap. Using longitudinal data of in-house
lawyers at, and law firms used by, Fortune 500 firms, we find empirical evidence that plural
sourcing strategies are tilted in favor of ‘make’ whenever firms have opportunities for
resource co-specialization (notably between legal resources and R&D, marketing, and top
management teams) and a broad portfolio of suppliers that raises the cost of contracting. Our
study suggests that plural sourcing research benefits from examining a group of transactions
within a corporate function, to complement the predominant focus on transaction-level
outcomes.
Keywords: plural sourcing; make-and-buy decisions; resource co-specialization; supplier
concentration; legal services.
INTRODUCTION
How do firms organize economic transactions? Since the seminal work on firm
boundaries by Coase (1937, 1988), scholars have addressed this question by identifying
multiple modes (i.e. make, buy, ally, etc.). Prior work in transaction cost economics (TCE)
analyzed the transactional characteristics that lead to choosing one of these modes (Poppo et
al., 1998; Walker et al., 1984; Williamson, 1985) while the resource-based view of the firm
(RBV) suggests that firm boundaries reflect differences in capabilities and knowledge
(Argyres, 1996; Jacobides et al., 2005; Kogut et al., 1996).
Both TCE and RBV employ a comparative analysis of sourcing modes, leading to the
choice of the most efficient institutional arrangement (i.e. market, hierarchy or hybrid) for
each transaction. However, prior research has documented the simultaneous use of multiple
sourcing modes by firms, calling this concurrent sourcing (Parmigiani, 2007; Parmigiani et
2
al., 2009), plural sourcing (Bradach, 1997; Gulati et al., 2006; Heide, 2003; Jacobides et al.,
2006), or taper integration (Harrigan, 1986; Rothaermel et al., 2006). In contrast to a TCE or
RBV logic, firms are often found to both make and buy the same input.
There is robust theory and evidence on the conditions under which plural sourcing is
likely to occur. For example, Parmigiani (2007) demonstrates that greater overlap between
the firm’s and the supplier’s expertise increases the likelihood of plural sourcing while
Parmigiani et al. (2009) explain that firms may make and buy sets of complementary
components. Performance uncertainty and information asymmetry between buyers and
suppliers (Dutta et al., 1995; Heide, 2003), technological volatility (Krzeminska et al.,
forthcoming), and complementarities in incentives or knowledge (Puranam et al.,
forthcoming) can also lead to plural sourcing.
While important in identifying the prevalence of plural sourcing, this research has
provided limited guidance on a logical follow-on question, that is, how to explain the mix of
internal and external sourcing (Parmigiani, 2007:306; Puranam et al., forthcoming).
Assuming that a firm does indeed both make and buy, why would it choose 80% make vs.
20% buy as opposed to 40% make vs. 60% buy? Thus, given the presence of preconditions
for plural sourcing, how do firms decide how much to make and how much to buy?
In addition, the literature does not explore the selection of suppliers and their impact
on the design of plural sourcing strategies. For example, if a firm decides to buy 40% for a
given product or service, this 40% could be outsourced to a single firm or multiple firms.
Existing theory assumes the decisions on the make-buy balance and supplier selection to be
independent of each other. This is despite the fact that behind the ‘façade of the market’ lies
another firm, with its own capabilities and contractual relationship with the focal firm
(Jacobides et al., 2005). To the extent that supplier selection influences the cost of
contracting, it would have an impact on the make-and-buy decision.
3
In this paper we build on recent progress in the area of plural sourcing and address
these two limitations. In doing so we identify two mechanisms that help better understand the
design and variability in plural sourcing strategies. First, resource co-specialization enhances
the benefits of internalization. By resource co-specialization we refer to the synergistic gains
that arise from the interaction of different resources within firm boundaries (Lippman et al.,
2003; Teece, 1986). When firms outsource part of production they essentially position certain
resources, e.g. personnel, equipment etc. outside of their boundaries. By doing so, they
forego opportunities to harvest synergies resulting from resource combinations that increase
their marginal productivity through on-going interaction, shared expertise, and knowledge
spillovers (Dierickx et al., 1989; Kogut et al., 1992; Milgrom et al., 1995). Consequently, in
cases of plural sourcing the extent of integration, or make, will increase when there are
opportunities for resource co-specialization with other firm resources.
Second, we highlight the impact of supplier concentration (Moeen et al., 2013) on the
relative importance of internal versus external suppliers in plural sourcing. Here we suggest
that the number of suppliers chosen to outsource to is not independent of the proportion that
is bought. A large number of suppliers leads, ceteris paribus, to high mundane transaction
costs and reduces the benefits from relational contracting (Baker et al., 2002; Langlois,
2006), resulting in the firm relying more heavily on make in plural sourcing. By contrast,
when firms use a small number of suppliers, they will benefit from relational contracting and
lower transaction costs and consequently buy more from their suppliers (Dyer, 1997; Moeen
et al., 2013).
We develop our arguments in the context of corporate legal services, a setting where
the use of both internal and external suppliers for the same input, known as multi-sourcing, is
common (Sako, 2011; Susskind, 2008). We demonstrate that resource co-specialization
drives the design of plural sourcing strategies as the balance tilts in favor of make when firms
4
rely more on R&D resources, advertising resources, international presence, and legal
expertise in their top management team. We also find that the extent of insourcing increases
when the firm sources from a large number of law firms. Although this result might sound
counterintuitive, it is explained by the endogenous impact of supplier concentration on the
costs of contracting.
This paper contributes to our understanding of plural sourcing by moving beyond the
recognition of the phenomenon to the identification of specific strategies that firms employ
and their antecedents. Moreover, this study is important in extending the inquiry on firm
boundaries to the domain of corporate functions. The vast majority of an admittedly
voluminous literature on vertical integration (or disintegration) has focused on primary
activities (Gibbons, 2005; Williamson, 1985), to the neglect of corporate functions providing
important support activities in the value chain (Porter, 1985). This paper highlights the
importance of investigating firm boundary-setting and the mix of make and buy activities
with a focus on value-adding professional and business services in corporate functions (Sako,
2013). Finally, our study contributes to debates outside the strategy field. Legal scholars
(Regan et al., 2010; Schwarcz, 2008) and commentators (Smith, 2001; Susskind, 2008) have
been debating recent make-and-buy trends in legal services without the benefit of any broadsample statistical evidence. We provide that evidence and demonstrate how strategy research
can inform and, perhaps, promote evidence-based consensus on key issues in legal practice.
In the next section we review the relevant literature and explain why corporate legal
services provide an ideal setting to test our predictions. Then, we present in sequence our
hypotheses, data and methodology, and results. The final part offers a concluding discussion.
PLURAL SOURCING: THEORY & EVIDENCE
TCE and RBV are the two dominant theories employed to understand firm boundary
decisions. On the one hand, TCE explains the make-or-buy decision as a response to close
5
comparison of costs associated with each alternative (Williamson, 1985). Market-based buy
strategies tend to have lower costs and thus dominate comparable make strategies
emphasizing firm ownership of and hierarchical control over suppliers. But cost advantages
of buy over make strategies reverse themselves in exceptional circumstances where hazards
with market-based contracting are substantial. In contrast, RBV contends that the reason an
activity is conducted within the firm is not market failure but rather firm success: the firm as
an institution enjoys an ‘organizational advantage’ in organizing economic activity (Madhok,
2002:536). Thus, RBV explains firm boundary-setting based on competitive interest in
exploiting value from difficult to imitate resource bundles (Barney, 1986; Peteraf, 1993).
TCE and RBV differ on many dimensions (Conner, 1991), but share assumptions
about the choice of one ‘optimal’ exclusive governance mode that runs counter to long-term
use of multiple sourcing modes. Nevertheless, the simultaneous use of multiple sourcing
channels is something we observe empirically, and numerous studies testify to its systematic
use, at different points in production of goods and services in different industry contexts
(Bradach, 1997; Heide, 2003; Jacobides et al., 2006; Parmigiani, 2007; Porter, 1980). Plural
sourcing, along with other terms such as tapered integration or concurrent sourcing, has been
used to describe such phenomena.
The benefits and rationale for undertaking plural sourcing are well understood. Some
of the earlier arguments focused on the role of demand uncertainty, whereby firms can avoid
maintaining idle capacity through the use of external suppliers (Adelman, 1949), and the
threat of backwards integration to external suppliers (Harrigan, 1986). Besides these, firms
also have a better understanding of the production process when making and buying and are
thus better at monitoring suppliers (Dutta et al., 1995; Heide, 2003). Finally, ‘knowledge
complementarities’ between the two sourcing modes have been noted (Puranam et al.,
forthcoming). For example, internal and external suppliers can benefit from mutual learning
6
and from transferring best practices across different organizational arrangements (Bradach,
1997; Cassiman et al., 2006; Parmigiani, 2007).
Of course, these findings have not gone unchallenged by TCE orthodoxy. Williamson
(1985) suggests that plural sourcing is actually an artifact of ill-identified transactional
heterogeneity. Consistent with this argument, He et al. (2006) find that although trucking
firms appear to engage in plural sourcing (through the use of both internal and external
drivers), they are in fact choosing to outsource hauls that are qualitatively different from the
ones undertaken internally. Similarly, Azoulay (2004) demonstrates that variation in project
characteristics guides pharmaceutical companies when choosing to outsource or assign their
own employees on different projects. More generally, the difficulty in identifying when firms
both make and buy ‘exactly the same input’ presents a substantial challenge to plural
sourcing research (Krzeminska et al., forthcoming).
Two further limitations of prior theorizing are notable. First, there is little guidance on
the relative balance of make and buy in cases of plural sourcing (Parmigiani, 2007; Puranam
et al., forthcoming). When the preconditions for plural sourcing exist, we still know little
about how firms choose the mix of internal and external procurement.
Second, existing theories do not analyze supplier selection and its impact on the
design of plural sourcing strategy. Although the role of suppliers’ capability and expertise has
been explored (Parmigiani, 2007; Parmigiani et al., 2009), the overall cost of contracting is
assumed to be independent of concentration in the portfolio of suppliers. However, this
premise is unlikely to hold given that the costs of contracting are affected by the nature of the
contractual relationship between any two parties. In particular, one-off arms-length
transactions between parties are characterized by increased costs of contracting because there
are higher ‘mundane’ transaction costs and lower opportunities to benefit from relational
contracting (Dyer, 1997; Langlois, 2006; Moeen et al., 2013). Hence, the degree of supplier
7
concentration, and its subsequent impact on the cost of contracting, should influence the
make-buy balance in the plural sourcing of products or services.
In order to address these limitations and contribute to our understanding of plural
sourcing we study corporate legal services. This setting is ideal as it is an unambiguous
example of plural sourcing (see below). We are thus able to dispense with the discussion
about whether inputs are actually both internally and externally procured and focus instead on
observed variability in the design of plural sourcing strategies.
In addition, by moving from the level of the individual transaction to that of a
portfolio of transactions (i.e. legal services) we are able to account for patterns of
interdependence between different transactions and firm resources (Moeen et al., 2013;
Puranam et al., forthcoming). Without such focus, it is impossible to observe ‘spillovers’
from different transactions (Mayer, 2006) and the effect of complementarity between inputs
(Parmigiani et al., 2009). Firms regularly employ suppliers for a variety of inputs – with
varying degrees of similarity (Krzeminska et al., forthcoming) – and supplier selection is
naturally affected by existing contractual relationships. For example, a corporation using a
law firm for patent filing could choose the same law firm in case some of its patents are
targeted in a patent suit, given the law firm’s expertise and experience in this area. A
portfolio-level analysis ensures that this information is not lost.
The plural sourcing of legal services
The procurement of legal services by corporations presents an ideal context for the
study of plural sourcing (Sako, 2011; Susskind, 2008). Firms typically have an in-house legal
department headed by a general counsel (GC) leading a staff of in-house lawyers, while at the
same time regularly engaging external law firms. Make-and-buy strategies are driven to some
extent by transactional characteristics: routine legal tasks, such as regulatory form filing, may
be undertaken by in-house lawyers while external lawyers may take the lead on more
8
specialized tasks such as complex acquisitions, litigation, and criminal matters. However, inhouse and external lawyers often work simultaneously, as a team or in parallel, on the same
type of legal matter. For example, combined teams of in-house and external lawyers support
and consult senior managers during acquisitions. Similarly, in-house legal departments
usually undertake patent filing and prosecution with the help of specialist law firms.
The plural sourcing of legal services is not surprising given complementarity between
the in-house lawyer’s firm-specific and the outside counsel’s practice-specific knowledge and
experience (Puranam et al., forthcoming). Important synergies and learning opportunities
arise from such interactions. There are also bargaining and oversight dimensions to consider
in the plural sourcing of legal services (Dutta et al., 1995; Harrigan, 1986). If firms have the
capacity to re-direct legal matters from outside counsel to qualified in-house lawyers, then
these firms also have more power to bargain over the costs of retaining outside counsel. They
can also exercise oversight of outside counsel actions to assure high-quality and costeffective representation in some legal matter. Conversely, the use of external law firms helps
create competitive pressure to the in-house legal department, thus ensuring a minimum level
of efficiency in its operations (Jacobides et al., 2006).
Overall, the context of legal services allows us to focus on hitherto underexplored
factors that affect the design of plural sourcing strategies. Below we develop hypotheses to
explain the relative weight placed on make versus buy when firms source legal services.
HYPOTHESES
Co-specialization of legal resources
A central tenet of RBV is that firms create and capture value by deploying different or
unique combinations of resources (Penrose, 1959; Teece et al., 1997). This suggests that the
value of a resource is not exogenously determined but rather depends on other surrounding
resources. For example, the value of a patented innovation is much higher in the presence of
9
specialized complementary assets (Arora et al., 2006; Teece, 1986). Lippman et al. (2003) go
as far as to state that no resource is firm-specific, and suggest that firm value can be traced to
the presence of co-specialized resources that exist within the legal shell of the firm. Resource
co-specialization then is associated with excess value, or synergy, that results from the
interaction of different resources within firm boundaries.
A number of explanations have been put forward in the literature to explain the
emergence of gains from resource co-specialization.1 Nelson et al. (1982) describe how
organizational resources are engaged in functioning routines that enable firms to economize
on coordination costs. Kogut et al. (1992) explain that the emergence of high-order principles
through organizational membership enhances knowledge creation and sharing. More recently,
the ability of managers to ‘dynamically manage’ their resources and ‘orchestrate’ their
deployment has been shown to contribute to firm performance (Adner et al., 2003; Sirmon et
al., 2009).
The generation of synergies resulting from resource co-specialization will affect the
design of plural sourcing strategies, as firms will be less reluctant to outsource production.
Market contracting entails the externalization of resources, which reduces the opportunities
of resources to become co-specialized. Hence, in the case of plural sourcing, there will be
more emphasis on make when resource co-specialization is likely to generate synergies. It is
important to clarify here that our notion of resource co-specialization is distinct from
complementarity between procurement modes as described by Puranam et al. (forthcoming).
Whereas they focus on the excess value resulting from the simultaneous use of both market
contracting and hierarchical governance, we emphasize the excess value resulting from the
interaction of internalized resources with other firm resources. Resource co-specialization is
1
We prefer to use the concept of resource co-specialization as opposed to resource complementarity (Milgrom
et al. 1995) because resource co-specialization emphasizes the dynamic nature of the process of generating
synergy. This synergy is not a characteristic of the resource but develops through ongoing interactions within
firm boundaries. Complementarity results in a more instant generation of surplus value due to the attributes of
assets or resources that may lie within or across the firm boundary.
10
also distinct from economies of scope, the cost savings that arise from the sharing of
corporate resources in diversified multi-divisional firms (Chandler, 1990).
In the case of corporate legal services, the in-house legal department handles different
types of legal work, demand for which is generated by the corporation. Some are routine, for
example reviewing and renewing contracts, whilst others come in lumpy work packages, for
example in the form of bet-the-house litigation cases. However, legal resources can be
combined with other firm resources, giving rise to opportunities for exploiting resource cospecialization. Thus, instead of regarding lawyering as necessary fixed overhead costs for the
corporation, in-house legal resources may be seen as a source of competitive advantage
(Bagley, 2008; Orozco, 2010). But exactly what firm resources give rise to co-specialization
opportunities, which in turn increase reliance on the internal legal department?
International firms
Internationalization as a process compounds the complexity of all managerial tasks
(Carpenter, 2002; Prahalad, 1990; Sanders et al., 1998). As multinationals enter foreign
markets which are more distant in geographic, cultural, and administrative dimensions
(Ghemawat, 2001), they suffer from greater ‘liability of foreignness’ (Zaheer, 1995). In
relation to legal tasks, complexity multiplies with the number of foreign jurisdictions in
which the company has presence, as it has to deal with diverse institutional environments.
Thus, the multinational corporation must cope with greater complexity arising from multijurisdictional and extra-territorial work necessitated by its international presence.
This additional complexity creates opportunities for generating value through
regulatory arbitrage. This term is used to describe cases when parties take advantage of a gap
between the economics of a deal and its regulatory treatment, restructuring the deal to reduce
or avoid regulatory costs (Fleischer, 2010:227). Examples include transfer pricing, effective
cross-jurisdictional tax planning, investment decisions based on tax, or other regulatory
11
incentives. Yet, a strong legal expertise within the firm is required in order to identify such
opportunities and fully capture their benefits (Bagley, 2008). As Marchant et al. (1999)
explain, legal expertise largely relies on tacit knowledge of the context and past experience
with the specifics of the situation. Hence, frequent interaction between the corporate legal
department and, say, the corporate accounting department (for international tax planning) or
the strategic planning department (for foreign direct investment or M&A) is likely to create
important benefits for international firms through the identification and realization of
unexplored opportunities. Hence, the potential to exploit opportunities from the cospecialization of legal with other resources, arising from multi-jurisdictional international
presence, is likely to favor more ‘make’ in the plural sourcing of legal services. Thus:
H1: The more internationalized a firm is, the greater its reliance on the internal
sourcing of legal services.
R&D intensive firms
Besides international firms, we also expect R&D intensive firms to rely more on their
internal legal departments. Firms investing in new technology must choose an appropriate
strategy to appropriate gains by protecting their intellectual property, for example by
choosing between secrecy and patenting. Exactly what to patent and how to patent is a knowhow that arises from the co-specialization of legal and technical knowledge. Internal patent
lawyers tend to be highly knowledgeable about the company’s unique technologies (Somaya
et al., 2007). They can interact with the firm’s R&D department to discuss patentable ideas
from an early stage and thus help to increase the share of the value appropriated from
innovation. For example, Reitzig et al. (2009) have found that intermediate levels of crossfunctional involvement between the legal and R&D department increase the speed of patent
grants. In addition, in-house legal expertise has been found to increase patenting output as
firms are able to identify patentable inventions more effectively (Somaya et al., 2007).
12
In case studies of innovating firms there is also increased evidence on the role and
importance of internal legal experts in the management of intellectual property – for example
through various committee memberships (Fox, 1998; Grindley et al., 1997). Hence, the value
of in-house lawyers will be higher for R&D intensive firms due to the co-specialization of
legal and technical resources. We therefore hypothesize that:
H2: The higher the R&D intensity of a firm is, the greater its reliance on the internal
sourcing of legal services.
Advertising intensive firms
Similarly to R&D intensive firms, firms that rely on advertising to compete will
benefit from the co-specialization of legal resources. Advertising relies on the use of
intangible assets, such as brand names and trademarks, which require protection from
competition. Increased interaction between the legal and marketing departments will
therefore help firms devise a trademark strategy that is informed by and exploits the legal
opportunities and limitations in the use of trademarks (Cohen, 1986, 1991). This will enable
firms to reduce brand dilution and create stronger brand names. Increased communication
between lawyers and marketers is important in this process as lawyers can identify threats to
the intellectual capital of the firm that are not immediately obvious to marketing stuff
(Peterson et al., 1999; Taylor et al., 2002). In view of these gains, firms with high advertising
intensity will rely more on their internal legal department. Thus:
H3: The higher the advertising intensity of a firm is, the greater its reliance on the
internal sourcing of legal services.
Legal expertise in TMTs
Legal resources may be used directly by top management teams (TMT) to hone their
capability for making strategic choice. Defined as ‘the ability of a TMT to communicate
effectively with the counsel and to work together to solve complex problems’, ‘legal
13
astuteness’ is a valuable dynamic capability (Bagley, 2008:378). By incorporating legal
know-how in business decisions, ‘legally astute’ TMTs can protect and enhance the
realizable value of resources (e.g. intellectual property), use legal tools to create options (e.g.
in litigation), and convert regulatory constraints into opportunities (e.g. by proactively going
beyond the letter of the law in environmental compliance to improve financial performance).
Legal astuteness impacts on the orientation of both TMTs and company lawyers. As
for TMTs, the upper echelons perspective points out that organizational outcomes reflect the
values and cognitive bases of powerful actors in the organization (Hambrick et al., 1984).
Consequently, examining prior experiences and background of TMT members help us
identify the ways they shape and direct the resources at their disposal. In the legal context,
TMTs with legal expertise may create more structures and processes to improve the
effectiveness of the in-house legal function. Thus, the presence of a functional TMT member
influences organization design, and equally, the TMT composition is affected by changes in
organization structure (Menz, 2012).
Legal astuteness also affects the orientation of in-house corporate lawyers. They
would be expected to be proactive in identifying complementarities between business
opportunities and legal know-how. They are, in effect, counsels (combining legal and
business advice) or entrepreneurs (giving priority to business objectives rather than legal
analysis), rather than cops (limiting their advice to legal mandates) (Nelson et al., 2000). In
short, these ‘decision consultants’ (Rosen, 1984) give legal advice in the context of the
business. Thus, legally astute TMTs rely much on the GC’s capacity to create value from the
co-specialization of legal resources and business-context knowledge within the firm. In doing
so, the key source of the GC’s capability lies in his access to the TMT’s strategic thinking.
Thus, the more legally astute the TMT, the more likely the GC is a member of the TMT and
the more likely in-house lawyers rely on co-specialization of legal and firm-specific business
14
knowledge. This translates into a relatively large in-house legal department. We therefore
predict the following:
H4: The general counsel’s membership in the top management team will result in
greater reliance on the internal sourcing of legal services.
Supplier concentration
Besides resource co-specialization, the degree of concentration of suppliers affects the
design of plural sourcing strategy. As explained before, heterogeneity in supplier selection
has not been explored in the context of plural sourcing. In essence, the analytical calculus that
prompts a firm to choose plural sourcing is assumed to be independent of the composition of
supplier portfolio. Here, however, we suggest that different degrees of supplier concentration
impose different costs of contracting to the outsourcing firm. These costs depend on the
nature of the contractual relationship. Low scale, arms-length transactions are characterized
by high costs of contracting as the parties do not have much incentive to invest in firmspecific transacting platforms and systems (Baldwin et al., 2003; Langlois, 1992, 2006). In
addition, infrequent interactions with suppliers do not generate inter-organizational trust and
the associated benefits of relational contracting and increased commitment (Baker et al.,
2002; Dyer, 1997; Sako et al., 1998). Hence, in the presence of high costs of contracting, we
expect lower reliance on external providers.
In the case of the plural sourcing of legal services, firms choose to outsource to law
firms with different portfolios of specialisms and varying degrees of horizontal scope
(Chatain, 2011; Chatain et al., 2007). In-house legal departments may choose to procure legal
services from a large number of law firms in pursuit of increased expertise in some area (e.g.
regulatory compliance in a specific industry) or lower cost. This model is closer to armslength-style market governance, as firms scan the environment for the best possible provider
for their specific legal needs. Alternatively, legal departments could outsource to a
15
concentrated panel of law firms involved in relational governance. This mode involves less
flexibility in terms of supplier selection but the firm benefits from reduced costs of
contracting. For example, having an on-going and committed relationship with a law firm
facilitates communication (as there is no need to identify points of contact or firm
background), and ensures that the client firm will get the top partners for their case.
We therefore expect a company’s willingness to invest in relational governance with a
selected few law firms to result in a high degree of outsourcing and a smaller in-house legal
department (Moeen et al., 2013). By contrast, companies collaborating with a large number
of law firms will increase their reliance on internal legal resources. Thus, we predict the
following:
H5: The larger the number of external law firms employed by a firm, the greater its
reliance on the internal sourcing of legal services.
EMPIRICAL METHODS
Data and sampling
To evaluate our theoretical framework and test our hypotheses, we first collect
information on the size and composition of internal legal departments and their relationships
with external law firms. This information is not publicly available, so we use proprietary
survey and secondary data collected by ALM Legal Intelligence, a research unit within the
American Lawyer Media Group. ALM is a leading provider of news and information on legal
markets, and offers detailed business information and competitive intelligence about the legal
industry and their clients. In particular, we used ALM’s annual survey of in-house legal
departments as well as ALM’s reports on corporate activity, including litigation, M&A
transactions, and corporate bankruptcies. These data are available from 2004 until 2011 for
Fortune 500 companies2.
2
For 2004 and 2005 the data are only available for Fortune 250 companies.
16
To be included in our sample, we require firms to have ALM annual survey data as
well as data on firm operations in Compustat corporate and industry segment files. Our final
dataset is an unbalanced panel consisting of 1230 observations from 285 firms (i) observed
over up to eight years (t). Our reported number of observations drops to 945 as several
statistical analyses below require the inclusion of one-year lagged variables.
Dependent variable
Consistent with other empirical work on plural sourcing (Parmigiani, 2007;
Parmigiani et al., 2009), we seek comparable information on internal and external suppliers
of legal services. Ideally we would have information on hours worked on specific matters by
in-house lawyers at corporations as well as hours worked on the same matters by lawyers at
outside law firms on behalf of these client corporations. Such data are not publicly available
as lawyers at both types of organizations treat such information as sensitive and strictly
confidential.
We do, however, have ALM survey data on the number of in-house lawyers and the
number of external law firms providing outside legal work for these firms. Thus, we
construct our dependent variable based on the count of in-house lawyers (as reported in the
ALM annual survey of general counsel (GC)) and include the count of external law firms as a
right-hand side term. Our dependent variable is the natural log of the annual count of inhouse lawyers per $100 billion in firm sales. Changes in the dependent variable then reflect
changes in the in-house lawyer count attributed to factors unrelated to organic growth.
An increase (decrease) in the dependent variable can be attributed to two possibilities:
a) increased (decreased) reliance on internally made legal services by in-house lawyers rather
than externally bought legal services by outside law firms; or b) an increase (decrease) in the
overall amount of legal work that needs to be undertaken on behalf of the firm by both
internal and external providers. In order to account for the second possibility and isolate
17
changes in the make-and-buy mix, we include controls for the overall amount of legal work
undertaken and employ multiple regression analyses that incorporate dynamic processes and
account for possible reverse causality.
Independent variables
Internationalization. We measure the degree of internationalization as a count of the
number of countries where each firm operates via subsidiaries in a given year. These data
were obtained from Standard and Poor’s Capital IQ database which includes information on
corporate divisions, subsidiaries and affiliates. A substantial literature in management and
international business notes different measures of firm internationalization (Ramaswamy et
al., 1996; Sullivan, 1994, 1996). We use the number of countries as it more accurately
captures the complexity associated with operating in multiple jurisdictions. Even modest
sales or presence in a country requires basic knowledge of and compliance with substantive
laws and legal processes.
R&D intensity. We calculate R&D intensity as R&D expenses divided by sales.
Advertising intensity. We calculate advertising intensity as advertising expenses
divided by sales.
General counsel in TMT. In order to examine the GC’s participation in the firm’s
TMT, we construct a dummy variable taking the value of one when the GC has the title
‘Senior Vice President’ or ‘Executive Vice President’ and otherwise taking the value of zero.
Data on the GC’s role were obtained from S&P’s Capital IQ database which includes
biographical and other information on key professionals, executives and directors. Our
approach is consistent with other studies focusing on upper echelons in defining top
management teams as individuals with the title ‘Vice President’ or higher (Keck, 1997; Lee
et al., 2008; Lee et al., 2007; Michel et al., 1992).
18
Law firms. In order to measure the degree of concentration in the provision of external legal
services we use a count of external law firms working for a given client corporation
surveyed. This variable is included in ALM’s annual survey and asks GCs to identify the law
firms that undertook legal work on their behalf in a given year. All other things equal, the
higher the number of law firms, the lower the degree of concentration in the provision of
external legal services across the group. All variables used in statistical analyses are listed in
Table 1.
- Insert Table 1 about here Control variables
The panel structure of our dataset allows us to account for unobserved heterogeneity
among firms in our sample. However, this methodology only controls for time-invariant firmspecific factors affecting the legal sourcing decision. We therefore include a number of timevarying firm controls including firm debt exposure, calculated as total debt divided by total
assets, firm profitability, calculated as EBITDA divided by sales, and the natural log of the
count of firm employees. We also control for the effect of product diversification using the
entropy measure of diversification (Palepu, 1985), where industry segments are defined by 4digit SIC codes. This measure captures the effect of scope economies that are present in
diversified corporations and are likely to influence the sourcing of corporate functions like
legal services (Chandler, 1962; Parmigiani, 2007). In addition, we include a count of new
acquisitions started in a given firm as well as a count of new litigation cases started in a given
year where the firm was involved either as defendant or plaintiff.3 Both acquisitions and
lawsuits are important controls as they may prompt a significant increase in the amount of
3
ALM only collects data for ‘important’ acquisitions and lawsuits as reported in trade publications. Although
this probably results in loosing some information, this is unlikely to bias our results as reporting criteria are
similar for all firms in our sample. In addition, the biggest acquisitions and lawsuits are likely to have the most
important effect on legal service sourcing dynamics.
19
legal work to be done in-house or externally. To account for the possibility that the additional
work may come with some delay, we also include one-year lagged value of these two counts.
To better control for the overall amount of legal work undertaken by the firm in each
year, we also use annual selling, general and administrative expenses (SG&A) as a proxy for
legal expenses. This variable is reported by Compustat and includes all commercial expenses
of operation not directly related to production, including GC office expenses and legal fees
paid to law firms. We are thus able to observe changes in the legal service make and buy
propensity as opposed to changes in the overall amount of legal work undertaken. Finally, we
include a dummy variable which is equal to one when the firm is in bankruptcy proceedings
in a given year. Table 2 reports summary statistics and correlations for the variables.
- Insert Table 2 about here Econometric specifications
Standard fixed- or random-effects specifications allow us to control for unobserved
firm characteristics that influence the legal services make-and-buy decision. However, our
data have two additional characteristics that need to be accounted for. First, the in-house
lawyer count is likely to be influenced by past observations. Including a lagged value of the
dependent variable as a regressor allows us to account for autocorrelation but the presence of
both a lagged dependent variable and fixed-effects can render estimates inconsistent. For
example, it can lead to significant downward bias on the coefficient for the lagged dependent
variable (Cameron et al., 2005; Nickell, 1981). Second, several of our regressors may be
endogenously determined or predetermined, that is, correlated with current or past
disturbances. To address these concerns we employ a dynamic panel data estimator with
GMM-type instruments (Arellano et al., 1991). This estimator is ideal for ‘small T, large N’
panels like ours. In addition, GMM estimators are robust to heteroskedasticity in the crosssection and unknown patterns of serial correlation (Arellano, 1987; Vogelsang, 2012).
20
More specifically, we estimate a statistical model of the form:
!!" = !! !!
!!!
+ ! ! !!" + !! + !! + !!"
where !!" is the natural log of the count of lawyers divided by sales in firm i of year t, !!" is a
vector of explanatory variables, !! is a year effect, !! is a time-invariant firm-specific effect
and !!" is the error term.
The GMM estimator originally proposed by Arellano et al. (1991) uses first
differencing to remove unobservable firm-specific effects and then instruments the
endogenous variables using lagged levels of the series. However, this approach is
problematic in our setting as the first-differenced GMM estimator is found to have large
finite sample bias and poor precision when time series are short and persistent (AlonsoBorrego et al., 1999; Blundell et al., 1998). Instead, we employ the system GMM estimator
suggested by Arellano et al. (1995) and Blundell et al. (1998). This approach uses lagged
differences as instruments for equations in levels, in addition to lagged levels as instruments
for equations in first differences. The system estimator introduces an additional assumption
that changes in instrumenting variables are uncorrelated with the fixed effects. All models
were calculated using the xtabond2 Stata module (Roodman, 2006).
To address concerns about simultaneity bias we treat the number of law firms and
general counsel in TMT variables as endogenous while the remaining explanatory variables
as predetermined. From the control variables, selling, general and administrative expenses are
endogenous as they proxy overall legal expenses. Litigation cases are also treated as
endogenous given that larger legal departments are more likely to take cases to court. The
remaining control variables are treated as exogenous. Following standard treatment, we
specify lagged differences one for endogenous variables and lagged differences zero for
predetermined variables (in orthogonal deviations) for the levels equation. We use the
forward orthogonal deviation transformation instead of first differencing given that our panel
21
is unbalanced. This minimizes data loss while preserving the orthogonality among the errors
(Arellano et al., 1995; Roodman, 2006). Finally, we use standard errors that are robust to
heteroskedasticity and arbitrary patterns of autocorrelation within firms.
RESULTS
Descriptive statistics and preliminary analysis
Descriptive statistics and pair-wise correlations are reported in Table 2. The sample
mean for In-house lawyers is 5.37, suggesting that firms employ on average 3.62 lawyers per
billion dollar of sales. The raw number of in-house lawyers at Fortune 500 firms sampled
exhibited substantial variation ranging from a handful to more than 1200 in certain firms such
as General Electric. The sample mean of Outside law firms is 1.83, meaning that firms
reported on average nine outside law firms as undertaking legal work on their behalf in a
given year. Those numbers ranged from one to more than 50 outside law firms. Other key
variables comport with intuition in large, established firms. Pair-wise correlations are largely
intuitive. Variables corresponding to the five hypotheses for testing all exhibit the predicted
positive sign when correlated with the dependent variable. Overall, these descriptive statistics
indicate substantial variation in both the dependent variable and key independent variables
with initial correlations consistent with our theoretical framework and related hypotheses.
Figures 1A-E present results from Lowess analyses4 of In-house lawyers and make
and buy determinants related to Hypotheses 1-3 and 5 (Internationalization, R&D intensity,
Advertising intensity, and Outside law firms), and from comparative bar-chart analyses of Inhouse lawyers related to Hypothesis 4 (General counsel on TMT). The pattern of results in
all figures indicates preliminary support for Hypotheses 1-5. Lowess analyses indicate that
In-house lawyers increases with our independent variables. Comparative bar-chart analyses
4
Lowess analyses compute linear regressions around each observation of given determinant (e.g.,
Internationalization) with neighborhood observations chosen within some sampling bandwidth and weighted by
a tri-cubic function. Based on the estimated regression parameters, In-house lawyers values are computed.
Combinations of determinants and In-house lawyers are then connected, yielding a Lowess curve.
22
of sample means indicate more in-house lawyers when GCs are on the TMT. This difference
is significant at the 5% level.
- Insert Figures 1A-E about here Regression analysis
Table 3 presents the results of our regression analysis. Models 1-2 present fixedeffects specifications while Models 3-5 present results from the system GMM estimator.
Simpler fixed-effects models suggest that the lagged dependent variable, In-house lawyersit-1,
explains roughly 30% of variation in the dependent variable. We noted previously, however,
that the lagged dependent variable coefficient estimates in fixed-effects regressions are
typically biased downwards (Nickell, 1981). When the number of time-periods, t, are few as
here, the downward bias can be substantial as corrected system GMM regression results
demonstrate. Coefficients on In-house lawyersit-1 jump from 0.310 and 0.305 in Models 1-2
to 0.973, 0.882 and 0.883 in Models 3-5. All estimates are significant at the 1% level.
Model 3 reports one-step system GMM results with the lagged dependent variable
and controls only. Models 4-5 are fully-specified and report one- and two-step system GMM
results (the two-step estimator is corrected for downward bias in the computed standard
errors (Windmeijer, 2005)). Diagnostics at the bottom of each column suggest that key
estimation assumptions hold. The Arellano-Bond z test for second- and higher-order autocorrelation is not statistically significant. This is not weakened by the number of instruments
as instrument count is lower than the number of firms (Roodman, 2006). Hansen’s J test, a
variant of the Sargan test of overidentifying restrictions, fails to reject the null hypothesis that
the instruments generated are exogenous. Taken together, these results confirm the
appropriateness of our system GMM strategy as a response to possible bias in estimation
related to the endogenous and/or predetermined nature of certain regressors.
- Insert Table 3 about here -
23
We look primarily to results in Models 4-5 for evidence to evaluate support for our
hypotheses. Results support our predictions and the importance of resource co-specialization
in designing plural sourcing strategies. Consistent with Hypothesis 1, we observe positive
coefficients for Internationalization significant at the 1% level. Firms operating in more
countries increase their dependence on in-house lawyers. Consistent with Hypotheses 2 and
3, we see positive coefficients on R&D intensity significant at the 10% level and positive
coefficients on Advertising intensity significant at the 5% level. Firms more reliant on
technology and intangibles such as brands also increase in-house lawyer counts consistent
with making more legal services that can be co-specialized with other firm resources.
Consistent with Hypothesis 4, we observe positive coefficients on General counsel on TMT
significant at the 10% level, suggesting that elevating senior legal personnel to top
management ranks also increases in-house lawyer counts.
Recall that Hypothesis 5 explains that the design of the portfolio of external legal
service providers is not independent of the proportion of legal work that is externally
procured. Our analysis confirms the hypothesized positive relation between the number of
law firms supplying to a company and the propensity to internalize legal work. The
coefficient for the number of external law firms is positive and significant at the 10% level,
suggesting that the proportion of legal work undertaken within the firm boundaries increases
with the number of external service providers. Although this result might sound counterintuitive, it is consistent with a relational contracting logic. Firms employing a large number
of suppliers do not develop the mechanisms that reduce contractual uncertainty and, as a
result, face higher contracting costs.
From the control variables we find that firm profitability is negatively correlated with
the extent of internal procurement of legal services. Though only a conjecture, this finding
may reflect less concern with controlling fees through the threat of internalizing legal
24
services. The coefficient for selling, general and administrative expenses, a proxy for the
overall amount of legal work undertaken by the firm, is also negative and significant. This
might reflect the ‘natural’ tendency to outsource legal work due to low asset specificity and
increased expertise in the marketplace. Interestingly, product diversification doesn’t affect
the make-and-buy balance of legal services. Although one could suggest that multi-product
firms are motivated to internalize legal work as they can apply their legal resources across a
wider portfolio of business lines, we do not find support for this view. Finally, the coefficient
for the number of acquisitions undertaken is negative and significant. Given that corporate
acquisitions require specialist legal knowledge during negotiations, due diligence, contract
design etc, it is reasonable to expect that more outsourcing of legal work will take place.
Robustness checks
These results prove robust to several changes in model specification and sampling.
For example, we excluded firms from our sample that were involved either in antitrust suits
or in bankruptcy proceedings – see Model 6. We also obtain consistent results when remeasuring the dependent variable, In-house lawyers, as a simple count and then analyzed in
Poisson panel count models – see Models 7-8. Results remain essentially unchanged when
employing different variable definitions (e.g. we varied Internationalization to account for
the number of foreign jurisdictions with differing (from US) legal system and rule-of-law
traditions) and when excluding possible outliers (e.g. R&D intensity values above 30%).
Another issue we explored further is the measurement of supplier portfolio
concentration. On average, we expect that a high number of law firms undertaking work for
the focal firm is associated with low concentration in the supply of legal services. However,
this relationship is less clear when there are changes in the type of representation. For
example, assume firm A employs 4 different law firms in four different practice areas
(M&As, patent litigation etc) while firm B similarly employs 4 law firms but in one practice
25
area. As it stands, our measure suggests that both corporations have the same level of supplier
concentration. However, firm B clearly has a less concentrated portfolio of suppliers given
that it has 4 different suppliers for the same practice area. To account for this, we counted the
number of law firms undertaking work for the focal firm in each practice area (this
information is available from ALM) and then averaged these. A high number of this measure
suggests that the focal firm has multiple suppliers in the same practice area, which is
indicative of low concentration in the provision of legal services. Consistent with our results,
the coefficient for this variable remains positive and significant at the 6% level.
DISCUSSION AND CONCLUSION
A substantial body of research has examined the conditions under which plural
sourcing is likely to occur. Moving beyond the question of when it occurs, the issue of how
firms choose the balance between making and buying in plural sourcing has remained underexplored. This study fills that gap. In doing so we identify two mechanisms that dictate the
make-buy balance in plural sourcing, namely resource co-specialization and supplier
concentration. Our framework enables us to predict the make-and-buy mix in the context of
legal services provision.
The empirical findings support the view that when making and buying, firms exploit
resource co-specialization and supplier selection to tip the balance in favor of in-house
production and delivery. Dynamic panel regression analysis uncovered broad-sample
statistical support for five of the six hypotheses derived from our plural sourcing framework.
We noted statistically significant and practically substantial increases in the reliance on inhouse lawyers with increases in the number of countries where the firm had operations, with
increasing R&D and advertising expenses as a percentage of sales, when the GC is part of the
firm’s TMT, and as the number of law firms providing work for the firm increases. These
trends proved robust to alternative estimation strategies that took full advantage of the panel
26
study design and accounted explicitly for omitted variable issues and for the possibly
endogenous determination of key independent variables. Overall, these findings provide
broad-based support for our make-and-buy framework that explains how firms decide to
balance internal and external activities.
To help interpret the regression results and add additional insight in the legal services
context, we draw on evidence from semi-structured interviews with just over fifty in-house
lawyers at corporations and banks in the US and UK.5 A key finding of this study is that
opportunities for co-specialization of legal and other firm-level resources enhances the extent
of insourcing in plural sourcing. Internal legal resources may be utilized for co-specialization
in various arenas, including when firms internationalize, and when they wish to harvest the
results of R&D and advertising. According to one GC:
[I]f we’re developing a new market, then we will make it our job to ensure that we
understand the legal and regulatory environment in that market and that we train
managers how best to exploit opportunities in that market, whilst complying with the
company’s policies and processes.
Arguably, external counsel would be just as knowledgeable about such regulatory
issues in general. However, managers can be better assisted in exploiting market
opportunities by the in-house counsel who has an intimate knowledge of the business. For
example, another GC noted:
It hasn’t really altered my fundamental belief that the work should be done internally,
and can be done internally, more cost effectively and more efficiently, by a very
commercially attuned and commercially embedded legal function.
Such intimacy extends to the interaction between the R&D function and the in-house
intellectual property (IP) lawyers:
5
Interviews were undertaken by the first author during May 2010 and December 2010. The interviewees also
confirmed the appropriateness of the setting to study the design of plural sourcing strategies.
27
[W]e have a large research centre on this site, where we do R&D and test-tubes and all
that kind of stuff, and we have patent attorneys sit here, supporting them. … We have a
process by which all the guys on the test-tubes over in the lab, when they invent
something, they will write up their lab notebooks. …we have a patent attorney, an
inventor and a business manager all sitting in the same room, because then the
strategic relevance of the patent is tested rather than just that it is chemically a great
idea.
In the interviews, we also found notable instances of the GC in the company’s TMTs
who prefer the use of internal over external legal resources. The following quote is
illustrative:
Because of the particular sector (financial services) that we’re in, the risks and the way
you manage risks has a higher profile and requires higher intensity from us than it has
ever done before. There’s a move towards more of the lawyers focused around legal
risk issues. It’s not really work that can be done by external lawyers in the same way.
A second key finding of this study is that the number of suppliers chosen to outsource
to is not independent of the proportion that is bought. Prior research has tended to treat the
extent of outsourcing and the concentration of external resources as separate considerations.
In the legal context, a portfolio of law firms that in-house legal departments retain is known
as the panel. We find evidence from our field interviews that some legal departments see the
benefits of having a concentrated panel with fewer law firms. Two GCs noted:
[O]n the basis that if you spread your job too thinly, people don’t have much
knowledge of your business, and you might save a bob on one deal but I bet you it will
come back and haunt you.
You cannot manage 60 law firms in any coherent or effective manner, and persuade
them to act better, do things for us, help us run our business better.
28
These in-house legal departments carried out a ‘panel review’, and reduced the
number of preferred law firms as part of an exercise to reduce the overall legal spending. A
tighter control over external spending resulted in internalizing the plural sourcing balance.
Developing relational contracts with a smaller number of law firms has facilitated this. The
following quotes are illustrative:
Only three firms were chosen for the panel. I don’t let our panel law firms compete
against each other. What I mean by that is, if I have a piece of work, I don’t say to all
three of them, “Give me a price.” We tend to spread the work around, and we work
with each of them individually. We’ve got good relationships with each of them, and
it’s a non-confrontational approach.
Implications for theory and research
Our study has important implications for strategy theory. First, our study extends the
plural sourcing research by going beyond important but still basic questions of whether and
when firms engage in this practice to theorize about firm-level mechanisms, including
resource co-specialization and supplier selection, that determine the mix of sourcing modes.
Second, these co-specialization opportunities exist for resources lying in different
corporate functions. Thus, whilst our empirical context is the legal department as a focal
corporate function, other corporate functions also engage in plural sourcing by balancing
internal and external resources within the firm. In particular, in-house accountants work
alongside outside accounting and audit firms, in-house engineers with outside engineering
consultant firms, in-house marketing departments with marketing and PR agencies, and
internal strategy consultants with outside consulting firms. In these and other contexts, we
think our theoretical framework can provide researchers with relevant guides for making
inferences about make and buy strategies.
29
A third research implication relates to methods. We suspect that the dearth of research
on sourcing decisions in legal services is due to the absence of good data and the difficulty in
making causal inference. Despite their still relatively short time-series (i.e. seven years) and
limited cross-sectional coverage (i.e. Fortune 500 firms), our panel data provide us with
advantages relative to single firm case narratives (e.g. Smith, 2001) or one-time crosssectional surveys (e.g. Schwarcz, 2008). Most importantly, the panel nature of our ALM data
permit us to use state-of-the-art dynamic panel estimators. In this way, we give future
researchers guidance on how to address challenges of mutual causation in other plural
sourcing contexts where panel data is increasingly available and dynamic panel estimators
increasingly expected.
Implications for practice
The findings of this study draw practitioners’ attention to a few, yet important, aspects
of the sourcing decisions in legal services. Some of them may appear paradoxical. First, in
legal circles, the last two decades have seen vigorous debate on the proper size and scope of
work for in-house lawyers. One view championed by the US giant, General Electric
(Heineman, 2010; Smith, 2001), argues for substantially increasing the number of in-house
lawyers and giving them primary if not exclusive responsibility for legal transactions and
litigation cases. In-house lawyers are expected to increasingly play a dual role of being a
lawyer and a business partner (Green, 2012). The chief legal officer (CLO) is said to be ‘one
of the mightiest figures in the C-suite’6. This is because the 2002 Sarbanes-Oxley Act, the
2010 Dodd-Frank Act and the 2008 financial crisis have heightened the need for compliance
and risk management, making companies turn to lawyers to prevent corporate bosses from
going to jail and to fend against endless threats of lawsuits. Our study indicates that whilst the
power and status of GC may be on the rise, the resulting trend towards insourcing leads to
6
‘A guardian and a guide’, Schumpeter column, The Economist April 7, 2012
30
business benefits only if resource co-specialization benefits are exploited. In other words, our
broad sample statistical study demonstrates that insourcing is less desirable when there are no
co-specialization opportunities.
Second, plural sourcing strategies are not a transition towards the dominance of one
or the other mode. Instead, it is a self-reinforcing, sustainable alternative system of service
production, closely supported by the nature of relational contracts with external suppliers.
The multi-sourcing of legal services, including the use of law firms and other service
providers such as legal process outsourcing (LPO) providers, is now well recognized in legal
practice and scholarship (Regan et al., 2010; Sako, 2009; Susskind, 2008). But to date, the
TCE-focused analysis in legal scholarship has not been able to explain the co-existence of
multiple sourcing modes. Our plural sourcing framework provides a clear rationale for multisourcing. It also gives a limited, yet significant, range of factors that affect the mix of
multiple sourcing modes. In particular, our findings suggest that ‘panel reviews’ leading to
the selection of fewer law firms can co-exist with heavy reliance on outsourcing.
Limitations and further research
A number of limitations of this study are worth noting. The first limitation in the
analytical framework is self-imposed to simplify the analysis. Plural sourcing in legal
services in full manifestation involves multiple sourcing modes (make, buy, ally) from
multiple types of providers other than law firms, including LPO providers, legal technology
providers, and contract lawyers. By limiting our analysis to the co-existence of ‘make’ and
‘buy’ only from law firms, we did not take into account the impact of the growth of providers
other than law firms on the number of law firms and the consequent make-buy balance.
The second limitation lies in available data. Our study links the number of in-house
lawyers to the number of outside law firms, not the number of external counsel or hours spent
by these lawyers. In an ideal world, we would have better data on internal to external legal
31
personnel or hours worked. We deal with this limitation by including a number of control
variables and employing a dynamic panel data estimator. Future research may see more
information available on the identities of such outside law firms permitting a closer matching
of internal and external personnel and hours.
A third limitation relates to sampling and generalizability. We think our framework
and evidence can be generalized to other large, established firms in the US, the UK and to
other such firms domiciled elsewhere but with substantial business and or secondary share
listings in the US or UK. But this leaves many other firm types where we are reluctant to
generalize and advise additional study on make and buy strategies. The discount consumer
services purchasing giant, Groupon, was founded in 2008, but did not have a full-time inhouse counsel until 2011 when it already operated in 48 countries generating $1.6 billion in
annual revenue7. Groupon’s history suggests that explanation of plural sourcing strategies for
legal services in entrepreneurial firms may require quite different framework assumptions
and empirical methods to account for confounding effects related to organizational newness
and management professionalization.
Conclusion
We began this study by asking how firms develop plural sourcing strategies important
to their survival and success. We end it with a call for strategy researchers to continue
developing plural sourcing frameworks and evidence relevant to different organizational
forms and different product and service producing activities. We chose legal services and
demonstrated how such frameworks and evidence could help us understand the relative size
of in-house legal departments, an exercise quite different from what Shakespeare’s character,
7
ABA Journal. 2011. The new normal: Make or buy in the age of the free-agent lawyer. ABA Journal.com.
October 26. Available electronically at: http://www.abajournal.com/legalrebels/article/inhouse_lawyers_make_or_buy/ 32
Dick the Butcher, wishes for lawyers in Henry VI, Part II, Act IV, Scene 2.8 Even so, we
think the counting exercise important for understanding make and buy strategies for
professionals including not only lawyers but also accountants, financial analysts, consultants,
engineers, and marketing specialists, who have a choice between working in corporate
functions or at professional service firms. Hitherto, strategy scholars have undervalued the
analysis of what Porter (1980) and others refer to as “support activities” to the firm. Our
study suggests that they can be essential to the firm’s strategy for gaining and maintaining
competitive advantage. In this context, we should count all the inside and outside
professionals as part of the search for an optimal make and buy mix in corporate functions.
Research on firm boundaries will be enriched by placing plural sourcing decisions in
corporate functions on a par with vertical (dis)integration decisions for the primary activities
of the firm.
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37
Table 1. Variable names, descriptions, sources and expected impact in panel regressions
Expected impact on
dependent variable
Variable name
Variable description
Source
In-house lawyers
Natural log of the number of lawyers working in the legal
department of firm I in year t divided by sales in US$100
billions.
Natural log of the number of countries where firm i has
subsidiaries in year t.
R&D expense divided by sales for firm i in year t.
Advertising expense divided by sales for firm i in year t.
0-1 dummy taking the value of one when the firm i’s general
counsel is senior or executive vice president in year t
Natural log of the number of outside law firms providing
significant legal services to firm i in year t.
ALM Legal
Intelligence
Dependent variable
S&P Capital IQ
Positive (H1)
Compustat
Compustat
S&P Capital IQ
Positive (H2)
Positive (H3)
Positive (H4)
ALM Legal
Intelligence
Compustat
Positive (H5)
Compustat
Control variable
Compustat
Control variable
Compustat
Compustat
Control variable
Control variable
ALM Legal
Intelligence
ALM Legal
Intelligence
ALM Legal
Intelligence
Control variable
Internationalization
R&D intensity
Advertising intensity
General counsel on TMT
Outside law firms
Product diversification
Entropy measure calculated as Div = ! P! ×ln 1 P! where
Pj is the share of sales attributed to industry segment j for fim
i in year t.
Total debt divided by total assets in US$ millions for firm i in
year t.
Operating income (EBITDA) divided by sales in US$
millions for firm I in year t.
Number of employees in 1,000s for firm i in year t.
Natural log of Selling, General & Administrative Expenses:
Indirect commercial expenses of operation incurred in the
regular course of business, including legal expenses in US$
millions for firm i in year t.
Number of litigation cases where firm i in year t was either a
defendant or plaintiff.
Number of acquisitions undertaken by the firm i in year t.
Debt
Profitability
Employees
SG&A
Litigation
Acquisitions
Bankruptcy
0-1 dummy taking the value of one when firm i in year t is in
bankruptcy proceedings.
Control variable
Control variable
Control variable
Table 2. Descriptive statistics and pairwise correlations
Descriptive statistics
Pair-wise correlations
Variable
Mean St.Dv. Min Max (1)
1) In-house lawyers
5.37
1.10
1.44 8.44 1.00
2) Internationalization
2.24
1.48
0.00 4.55 0.36* 1.00
3) R&D intensity
0.02
0.05
0.00 0.53 0.30* 0.41* 1.00
4) Advertising intensity
0.01
0.03
0.00 0.21 0.17* 0.14* 0.07* 1.00
5) General counsel on TMT
0.79
0.41
0.00 1.00 0.19* 0.02 0.05
6) Outside law firms
1.83
0.93
0.00 3.95 0.14* 0.21* 0.12* 0.02 0.09* 1.00
7) Diversification
0.90
0.36
0.00 2.05 0.01
0.17* -0.11* 0.09* 0.00
8) Debt
0.04
0.07
0.00 0.46 -0.02
0.04 0.00
9) Profitability
0.16
0.13 -0.31 0.77 0.40* 0.24* 0.20* 0.10* 0.11* 0.14* 0.00 0.10* 1.00
10) Employees
3.67
1.11
0.00 6.32 -0.08* 0.24* 0.06
11) SG&A
6.64
2.93
0.00 10.79 -0.20* 0.24* 0.28* 0.28* 0.07* 0.10* 0.08* -0.07* -0.12* 0.36* 1.00
12) Litigation
0.13
0.44
0.00 3.00 0.21* 0.18* 0.29* 0.12* 0.02
0.18* -0.04 0.04
13) Acquisitions
0.09
0.33
0.00 3.00 0.08* 0.09* 0.08* -0.01 -0.01
0.05 0.01 0.20* 0.22* 0.12* -0.04
14) Bankruptcy
0.00 0.06 0.00 1.00 0.04
N=945, * statistically significant at the 5% level
(2)
(3)
-0.01 -0.03
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11) (12) (13)
(14)
0.06 1.00
0.03 1.00
0.02 -0.10* 0.06 0.00 1.00
0.10* 0.08* 0.29* 0.15* 0.01
-0.02 -0.02
38
0.08* 0.01 0.03
-0.03
1.00
0.23* 0.12* 0.06
1.00
0.15* 1.00
-0.07* 0.04 -0.13* 0.07* 0.10* 1.00
Table 3. Panel data regression models of corporate legal services make and buy balance
Dep. Variable
In-house lawyers
Lagged dep. variable
No of lawyers
(count)
(7)
(8)
Fixed Random
effects
effects
Poisson Poisson
(1)
(2)
(3)
(4)
(5)
(6)
Fixed
effects
Fixed
effects
System
GMM
System
GMM
System
GMM
System
GMM
0.310**
(0.000)
0.305**
(0.000)
0.973**
(0.000)
0.882**
(0.000)
0.883**
(0.000)
0.882**
(0.000)
0.041**
(0.005)
0.770†
(0.072)
2.442*
(0.012)
0.090†
(0.094)
0.041†
(0.069)
0.040**
(0.008)
0.764†
(0.078)
2.389*
(0.012)
0.090†
(0.079)
0.041†
(0.072)
0.039**
(0.008)
0.912†
(0.051)
2.469*
(0.017)
0.0938†
(0.082)
0.0389†
(0.076)
0.043
(0.661)
0.518†
(0.068)
1.636*
(0.013)
0.180**
(0.000)
0.019**
(0.000)
0.006
0.021
0.022
0.000
(0.937)
(0.653) (0.641) (0.990)
-0.213
-0.179
-0.229
-0.218
-0.234
(0.562) (0.132) (0.165) (0.200) (0.144)
-1.026** -0.444* -0.346* -0.343* -0.290†
(0.000) (0.037) (0.029) (0.045) (0.075)
-0.344** 0.003
-0.009
-0.010
-0.012
(0.000) (0.825) (0.593) (0.553) (0.502)
-0.117** -0.018 -0.040** -0.040** -0.035*
(0.005) (0.204) (0.008) (0.007) (0.032)
-0.040*
0.065
0.046
0.047
0.053
(0.013) (0.169) (0.141) (0.132) (0.106)
-0.009
-0.014
-0.012
-0.012
-0.059†
(0.765) (0.746) (0.722) (0.730) (0.084)
-0.012
-0.030
-0.055† -0.055† -0.079*
(0.722) (0.369) (0.088) (0.089) (0.020)
-0.035
-0.014
-0.029
-0.028 -0.0301
(0.266) (0.683) (0.380) (0.391) (0.440)
-0.467* -0.480
-0.389
-0.382
(0.045) (0.411) (0.344) (0.356)
0.0301
(0.236)
-0.405*
(0.010)
-0.057
(0.486)
-0.000
(0.995)
0.093**
(0.000)
0.000
(0.923)
-0.010
(0.174)
-0.004
(0.682)
-0.018*
(0.036)
0.0210
(0.625)
0.141**
(0.000)
Explanatory variables
No of countries (log)
R&D intensity
Advertising intensity
General counsel in TMT
No of law firms (log)
0.055
(0.818)
2.878*
(0.028)
0.350
(0.778)
0.090*
(0.034)
0.023
(0.112)
0.270**
(0.000)
2.407**
(0.000)
1.240*
(0.049)
0.161**
(0.000)
0.014*
(0.017)
Control variables
Product diversification
Debt ratio
Profitability
No of employees (log)
Selling, general & admin
expenses (log)
No of litigation cases
No of litigation casest-1
No of acquisitions
No of acquisitions-1
Bankruptcy
Sales (log)
Constant
Year dummies
N (number of firms)
Wald x2 (R2)
Arellano-Bond test AR(1)
Arellano-Bond test AR(2)
No of instruments
Hansen test
0.103**
(0.000)
-0.139
-0.605**
(0.686)
(0.000)
-1.092**
-0.227**
(0.000)
(0.006)
-0.344**
-0.024
(0.000)
(0.356)
-0.118**
-0.049**
(0.005)
(0.000)
+
-0.028
-0.010
(0.096)
(0.175)
-0.021
-0.000
(0.529)
(0.922)
-0.003
-0.019+
(0.911)
(0.057)
-0.034
-0.027**
(0.270)
(0.002)
-0.463*
-0.0228
(0.049)
(0.601)
0.331**
(0.000)
5.952** 5.658**
0.325
0.674*
0.676*
0.680*
0.264
(0.000)
(0.000) (0.257) (0.012) (0.013) (0.012)
(0.339)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
945(285) 945(285) 945(285) 945(285) 945(285) 921(280) 945(285) 945(285)
(0.344)
(0.361) 3119.9
4885.9
5060.1 5006.39 218.64
347.7
-3.80** -4.15** -3.97** -4.10**
0.31
0.23
0.23
-0.42
126
249
249
248
106.2
224.74
224.74
214.95
†
p-values in parentheses, p ≤ 10%, * p ≤ 5%, ** p ≤1%
39
Figures 1A-E. Locally-weighted scatter-plot smoothed and comparative bar-chart analyses of in-house
lawyer counts
Figure 4. Lowess results – R&D
intensity
Lowess
smoother
2
2
In-house lawyers
loglawyers_per_sales
4
6
In-house lawyers
loglawyers_per_sales
4
6
8
8
Figure 3. Lowess results - Internationalization
Lowess smoother
1A
0
20
40
60
No_countries
80
100
.1
.2
No of countries
bandwidth = .8
.3
rndintensity
.4
.5
R&D intensity
bandwidth = .8
Figure 5. Lowess results – Advertising
Lowessintensity
smoother
2
In-house lawyers
loglawyers_per_sales
4
6
In-house lawyers
loglawyers_per_sales
4
6
8
8
Figure 7. Lowess results – No Lowess
of law firms
smoother
.1
advert_intensity
.15
.2
1D
0
Advertising intensity
10
20
30
no_of_lawfirms
No of law firms
bandwidth = .8
In-house lawyers
loglawyers_per_sales
4
6
8
10
Figure 6. Box plot – General counsel in TMT
1E
2
bandwidth = .8
.05
2
1C
0
!
1B
0
0
1
No
Yes
CG in TMT
40
40
50
VI
The Shrinking Pyramid: Implications for Law
Practice and the Legal Profession
Sustainable Law Firm
Models: Beyond the
Pyramid?
Friday April 12th, 3:45-5:30 pm
Moderator: Aric Press, American Lawyer Media
Panelists: Paul Smith, Partner, Eversheds and Eversheds Consulting; Blane
Prescott, Chief Executive Officer, Brownstein Hyatt Farber Schreck, LLP; Steven J.
Harper, publisher, The Belly of the Beast; author, The Lawyer Bubble: A Profession
in Crisis
(1) The Economic Crisis: What Happened to Associates and What Does the
Future Hold for Them?
Lisa Rohrer, Georgetown Law; Peter Sherer, Haskayne School of Business,
University of Calgary
(2) Limiting the Damage of Lateral Partner Movement: Exit Quantity,
Geographic Focus, and Multiple Movers
Rhett Brymer, Farmer School of Business at Miami University; Len Bierman,
Mays School of Business, Texas A&M University
Variation in Large Law Firm
Career Paths: Implications
for Associates and Law
Students
Lisa Rohrer and Peter Sherer
This paper is available from the authors upon
request. Please email [email protected]
should you like access to this paper.
Limiting the Damage of Lateral Partner Movement:
Exit Quantity, Geographic Focus, and Multiple Movers
Rhett Brymer
Miami University, Farmer School of Business
Len Bierman
Texas A&M University, Mays School of Business
Partner movement between law firms has become commonplace in the legal labor
market. While historically the movement of partners was a relatively rare phenomenon compared
to the movement of professional managers within other industries, law firms now must cope with
the realities of an active lateral market. The human capital loss when partners exit presents
several organizational issues – partner disruption of social structures and their associated
routines, diminished firm expertise, and the erosion of firm-client relationships. Greater amounts
of turnover are associated generally with negative firm performance outcomes, such as decreased
returns on sales. What is not understood well, though, is what types of partner loss are more or
less detrimental. Further, organizations may be structured in particular ways that can help
mitigate possible negative effects. Thus, it is of strategic importance that law firms understand
the implications of who leaves and how to structure the firm to best brace human capital loss.
As such, this study seeks to answer the following research questions: What variables
determine the impact of the loss of partners from law firms? Specifically, what characteristics of
the remaining firm, the exiting partners, and their destinations erode the focal organization’s
value generating capability? Finally, what strategies can law firms employ to ameliorate the
damage from exiting partners?
Using over 19,000 lateral partner events within the American Lawyer 200 law firms over
an eight year period (2000-2007), this study examines the effect of exiting partners on the
financial performance of the firm. Consistent with turnover research in other industries, greater
amounts of partners leaving is associated with decreasing return on sales (ROS) performance.
For example, five partners leaving is associated with a 8.2% decrease in ROS the following year.
Fifteen exiting partners is associated with a 13.2% decrease. Interestingly, these performance
impacts are independent of several measures of lawyer quality, such as lawyer rating, tenure,
level of education, and law school quality. The characteristic of exiting partners that does make a
notable impact is whether or not the partner is a “multiple mover”, i.e., a partner who has
switched firms in a previous year and thus has moved laterally at least twice in her/his career.
Losing more multiple movers ameliorates the negative performance effect. If the concentration
of these multiple movers is high enough in the exiting partner group for any given year, the
subsequent effect on the performance of the firm can actually turn positive.
Additionally, firm structural variables are tested to determine which organizational forms
are more robust to high levels of partner exit. The leverage of the firm, i.e. the number of
associates per partner, has a direct negative effect on ROS, but has no effect when coupled with
the number of partners exiting in a particular year. However, more geographically diverse firms
are subject to worse firm performance when many partners leave as compared to geographically
focused firms. The redundancy of partners in particular branches when firms are geographically
focused may allow remaining partners to extract more knowledge from the exiting partners, and
thus, the negative performance effects are not as high.
The implications of this study point to three primary prescriptions for large, US-based
firms. First, engendering firm loyalty and reducing the amount of partner turnover will, on
average, produce better financial performance for firms. Second, by staying more geographically
focused on particular markets, firms can mitigate many of the negative effects when partners do
leave. Finally, losing partners who did not start their career at a particular firm is not as harmful
as losing partners that did. The evidence even points to a potential benefit to losing partners that
have switched firms before. Firms, therefore, concern themselves much more with preventing the
loss of internally promoted partners as opposed to multiple move partners, i.e., those that have
been hired externally.