Law Firms 2011 Scenario

Not surprisingly, it appears that I am not the only one thinking about the transformation that is going on within the legal market in regards to the paradigm shift of eDiscovery being brought in-house by corporations. As a follow-up to an article titled, "Does it make sense for Corporations to Bring Litigation Services and Technology in-house?" that I posted on Tuesday February 10, 2009, there was another article titled, "Law Firms' 2011 Scenario and the End of Leverage" with a very similar theme that was posted on the Law.com site by Paul Lippe from the The LegalOnRamp on Wednesday February 11, 2009. Mr. Lippe predicts that based upon the current worldwide economic conditions, law firm revenues are going to drop by 20% and therefore (based upon their 100% gross margins) are going to have to reduce their overhead by 40% to maintain profit margins resulting in the following four (4) outcomes:

1. Clients will just flat-out spend less, drive harder bargains and get more for their money.
2. Some work will go to outsourcers, whether onshore or off.
3. More work will go to contract lawyers or proto-associates not on any kind of partnership track.
4. Some associate time will get replaced by technology.

This is a great article and provides an interesting perspective of the harsh realities that are facing law firms over the next 24 months. And, although it doesn't specifically address the issue about corporations moving services and technology in-house, the take away from all of this is:

1. The legal market is definitely in the middle of a paradigm shift or transformation.
2. Law firms will be generating less revenue and reducing costs.
3. Litigation service providers and litigation technology providers may need to develop new channels and support organizations to work directly with the corporations instead of the law firms.
4. Outsourcing both on-shore and off-shore will flourish.
5. Legal Staffing organizations will flourish.
6. There is now technology to replace some of the previously expensive hourly legal work.

The full text of Mr. Lippe's article is as follows:

I just got back from London, where I met with my friend "Dave" from the legal department of "GlobalBank," which operates in Europe, North America and Asia. In 2007, GlobalBank spent around $700 million on legal costs, making it likely one of the 10 biggest clients in the world. In 2009, no one really knows, but spending will be more like $250 million to $300 million, notwithstanding a bump in restructuring, layoffs and investigations. According to Dave, "we have been through four rounds of layoffs so far. In addition to half of my team and several of my peers, my boss, my boss's boss and boss's boss's boss all have been let go. We expect the recession to last through all of 2009 and most of 2010, but then hopefully things will start to get better."

A mere 11 months ago -- a lifetime in meltdown years -- a group of industry experts published the Legal Transformation Study. The study outlined four scenarios for the evolution of the legal industry by 2020. The folks behind this are offering a free webinar to introduce scenario thinking.

Let me offer my own 2011 scenario in the simplest possible terms.
As Dave and others are now saying, the recession will last through 2010. Law firms will use this period to substantially restructure, and beginning in 2011, things will start growing again. While there's a lot of detail and nuance around the form this restructuring will take, it can be described in simple terms. A typical law firm bill in January 2011 will generate the same dollars for partner work as it does today, but it will generate half the revenue for associate work. Consider a bill in July 2008 for $1,000,000, representing $450,000 of partner contribution, $500,000 of associate contribution and $50,000 of "other"; in January 2011, the bill for an essentially identical project will be $800,000, reflecting $450,000 of partner contribution, $250,000 of associate contribution and $100,000 of "other."

Whether this is accounted for as hourly billing or "value billing" is not particularly strategic, except that to measure differently will, of course, incentivise firms to be more thoughtful about how to structure work.

Where will those dollars go? Four places.

1. Clients will just flat-out spend less, drive harder bargains and get more for their money.
2. Some work will go to outsourcers, whether onshore or off.
3. More work will go to contract lawyers or proto-associates not on any kind of partnership track.
4. Some associate time will get replaced by technology.

Why am I so confident that this will happen?

First, associate time is a pricing mechanism, not an indicator of value. Like so much in the modern law firm model, the explosion in associate hours, rates and leverage began with the Cravath IBM antitrust defense in the 1970s and 1980s, when the firm discovered that in the quintessential "bet the company" case, IBM would willingly pay full freight for associate time on massive and pretty routine document review, and that in turn would drive up Cravath's profits dramatically. Since this wasn't particularly compelling work for the associates, the firm had to raise salaries to hold onto folks, triggering the great associate salary escalation.

Second, clients have always recognized that associate time is overpriced. Every client I know views associate time as the price for getting access to partner time and to the firm "brand." In truth, there are two billable hours: the partner's, which should reflect deep expertise and judgment about the client, the law and best practices, and the associate's, which is generally spent on some form of information processing, which clients recognize as relatively poorly managed compared to other arenas of information processing. As Susan Hackett, general counsel of the Association of Corporate Counsel, recently put it, "I don't have a problem with the $1,000-an-hour lawyer, but the $350-an-hour junior associate isn't worth it." Third, as individual partners follow the example of Fred Bartlit and others and spin out of big firms with an "anti-leverage" model, they will be able to charge substantially less than traditional firms. While some sliver of work will still require the very large firm, enough won't, so that firms will have to largely match the boutiques for efficiency gains, or they'll have to shrink radically if they want to do just "high end" work.

For you math majors out there, you will have noticed that the 2011 scenario locks in a 20 percent drop in firm revenues. That's right. So firms will have to find ways to cut at least 40 percent of overhead to maintain profits (more on that in a subsequent column).
In another London meeting, a very able head of knowledge management for a Magic Circle firm quoted the Nobel Prize-winning physicist Sir Ernest Rutherford. "Gentlemen, we have run out of money. It is time to start thinking."

Pretty good advice.

Labels: eDiscovery, Law Firm Profits, Legal Transformation Study, Paradigm Shifts, The LegalOnRamp

posted by Charles Skamser @ 9:19 AM 0 Comments

Which Channel is Winning the eDiscovery Wars?

Having spent the better part of the last twenty (24) months meeting with the General Council of many of the Fortune 2000, Partners from many of the largest law firms in the country, regionally based litigation service providers, many of the well know litigation consulting organizations and most of the leading litigation technology vendors, I have a very in-depth understanding of the litigation market requirements and what solutions are going to work and which ones are not. However, I am still trying to figure which channel is ultimately going to win the eDiscovery Wars.

First of all, let me point out that there is a war going on in this market because according to the 2008 Socha-Gelbmann Electronic Discovery Survey, the eDiscovery market is going to be a $4.67 billion market by 2010. But, the question is who is the ultimate end user and who do they want to buy there eDiscovery solutions from?

The Ultimate End Users and who makes the Buying Decisions
The ultimate end users in this market are the parties to the law suite with defendants leading the way with their deep pocketed insurance partners. However, historically and for a variety of reasons that are quickly changing, end users have conceded the management of litigation to outside council and therefore the control over the buying decisions and the "channel" to the end users was through the law firms.

As such, there are thousands of regionally based litigation service providers that service their local law firms and most of the litigation technology vendors and consulting organizations have a law firm channel. Further, over the past ten (10) years, most of the largest law firms in the country and many of the smaller law firms have also setup their own litigation service organizations.

So, it would seem that the law firms are winning the eDiscovery channel wars. Or are they?

Law firm Partners Questioning What they Do Best - Practice Law
Over the past twenty (24) months, I can even count how many law firm partners have told me that they went to law school to either change the word or make a lot of money or both and are not sure how they woke up one morning to find out that they were actually running litigation technology and service companies. Well, this is a bit of an exaggeration on their part. But, I have gotten the message or question loud and clear; why have law firms morphed into technology and document service providers? The answer is obvious; money and control. We forget sometimes (probably not that often) that law firms are a business and therefore are not different than any other business in their pursuit of higher revenues, greater profit margins and all of the other lofty goals of capitalism.

However, with the accelerating volume of Electronically Stored Information (ESI) and the changes to the Federal Rules of Civil Procedure (FRCP), I believe that we have reached a cross roads or what I would call a paradigm shift in the market. As a result, it is my observation that both the end users and the law firms are starting to realize that providing litigation technology and services in this new eDiscovery environment is no longer a game for amateurs. Or, put a different way, it may be best left to the technology and consulting professionals to figure out.

Therefore, I predict that law firms will be displaced as the defacto channel into the eDiscovery market. Obviously, they will always be the best source for references and leads and will also always have to be a partner in almost any matters. However, with ten (10) years I don't see many of them being in the litigation services and technology business. It's not what they do best.

Service Providers
The next group in the channel mix are the regionally based litigation service providers that have been providing local law firms with copying, scanning, blowbacks and other printing services. Over the years these organizations have formed a very strong bond with their law firm clients and have filled a very important market niche. However, with the accelerating volume of Electronically Stored Information (ESI) and the changes to the Federal Rules of Civil Procedure (FRCP), I believe that we have also reached a cross roads or what I would call a paradigm shift in regards to the regional service providers. As a result, it is my observation that both the law firms and the regional service providers are starting to realize that providing litigation technology and services in this new eDiscovery environment is a much different business model and takes a much more technologically complex staff to offer than the standard bread and butter litigation services that they have been offering in the past.

Therefore, I predict that over the next five (5) years regional service providers will either have to dramatically change their product offerings with a more technology and/or technology services bent or they will fade from the landscape like the dinosaurs.

The eDiscovery Consultants
The eDiscovery consulting game is a relatively new endeavor that has proven to be extremely profitable. As already indicated, with the accelerating volume of Electronically Stored Information (ESI) and the changes to the Federal Rules of Civil Procedure (FRCP), the end users, the law firms and in some cases the regional service providers have all been turning to the eDiscovery Consultants for help. And, at a very hefty per hour price tag I might add.

However, I am not convinced that this actually represents a litigation services channel. In most circumstances consultants want to increase their billable hours and stay as agnostic as possible in regards to partnering with and/or recommending required litigation technology.

The End Users
As with all paradigm shifts, these are interesting times for determining channel alignment. The end users are beginning to figure out that eDiscovery is a very technology oriented endeavor with the requirement for their internal Information Technology (IT) organizations to be heavily involved. Therefore, the solutions and third party relationships that they require to be successful are are more similar to the types of relationships that the IT department has then the legal department has historically had. As such, and with the IT players in tow, they are becoming less inclined to turn to their law firms or their regional service providers for answers or solutions. Alternatively, and with prompting from their IT organizations, they are turning to the new eDiscovery consultants and the eDiscovery technology vendors directly for assistance.

So, based upon my myopic twenty four (24) month US wide observation of this market, the winner of the eDiscovery Channel wars is going to the the litigation technology vendors with assistance from the eDiscovery consultants.

Postmortem on Law Firms and Service Providers
Without seeming to hedge my prediction, I have to say that the imminent demise of both the law firm and the regional service provider in the brave new world of eDiscovery is probably an exaggeration. However, for all the reasons that I have pointed out, it is going to become more and more difficult for these two groups to compete without making a commitment to make some dramatic changes and some "investments" in their organization to keep pace with the demands of the marketplace.

Labels: eDiscovery, eDiscovery Channel, eDiscovery Consultants, Law Firms, Paradigm Shifts, Regional Litigation Service Providers

posted by Charles Skamser @ 2:44 PM 1 Comments

Are Changes to the FRCP Increasing the Cost of Litigation?

Over the past year, in pursuit of everyone trying to figure out the best way to address all of the issues created by the changes to the Federal Rules of Civil Procedure and all of the resulting changes to state and local rules, I have worked with litigators from over 75 different law firm, litigation services professionals from 50 different service providers, technologies from 50 different litigation technology vendors and the General Counsels, Associate General Counsels and related IT professionals for over 25 Fortune 1000 companies. In addition to an incredible education of the current state of the litigation market and all of the associated technologies and new service practices, what I have taken away from this journey is a sense that we are still in the middle of a paradigm shift that is rocking the industry to its very core.

As such, I believe that the answer to the question about whether or not the changes to the Federal Rules of Civil Procedure and all of the resulting changes to state and local rules, is going to be different depending upon who you are asking.

Following are the results of the answers that I have gotten from the various groups that I meet with:

Litigators
Litigators are reporting that the changes to the FRCP and all of the resulting changes to state and local rules have required them to "go back to school" and learn a more about the technology and science of litigation and Electronically Stored Information (ESI) then many of them ever cared to know. I can tell you that the CLE classes on the effects of the changes to the FRCP that I teach have been full with a lot of very attentive attorneys.

In addition, litigators are now learning that litigation has gotten much more complicated and much more expensive. And, they are realizing that they are now required to solicit the assistance of technology and process experts are the very beginning of case to participate in pre meet and confer strategy sessions.

Further, whether they have been caught off guard or not, many litigators are finding that it is making more financial sense to settle their cases out of court due to the extreme cost of just getting prepared for trial.

Finally, although I am not a liberty to discuss the details of any of the cases that I have been involved in, I believe that there are an alarming number of new suits being filed against corporations by savvy litigators in which the "end game" is to force a settlement out of court due to the high cost of preparation and initial response.

Litigation Service Providers
As with Litigators, Ligitation Service Providers are reporting that the changes to the FRCP and all of the resulting changes to state and local rules have required them to "go back to school" and learn a more about the technology and science of litigation and Electronically Stored Information (ESI) then many of them ever cared to know. Having started in the legal services business providing copying services, the current surviving providers had to successfully make the transition to the world of imaging, coding, translatoin and hosting over the past several years. They are now faced with the even more daunting task of making the next leap to the world of Electronic Data Discovery and Computer Forensics. For a variety of reason, many of them will not be successful unless they embrace the eDiscovery Paradigm Shift, form new partnerships with technology vendors and consultants that can help them with the new paradigm and change their clients perceptions of what they can bring to the new ESI table. It is my opinion that based upon this classic paradgim shift, there is a tremendous opportunity for the Litigation Service Providers that successfully make the transition and a blunt reality of failure waiting for those that do not.

Litigation Technology Providers
As alluded to in my overview of how the changes to the FRCP have effected the Litigation Services Providers, we are in the midst of a classic market paradigm shift which casuse fear, uncertainty and doubt on the buyer side. As such, and is the case in any market where this occurs, it is an open season for technology providers to step in and fill the requirements gaps with new solutions. Since many of the posts on my Blog deal with my my opinions of all of the wonderful new technologies, I am not going to go into any detail in this post. However, I would like to mention that I believe that the biggest technology winner that will emerge from this opportunity will be the Software-as-as-Service (SaaS) deliver model. Its lesss expensive to develop and deliver, less expensive to use and enables very rapid and incremental updates.

The Fortune 1000
The changes to the FRCP and all of the resulting changes to state and local rules have had the most profound effect on the way in which the Fortune 1000 now have to manage with all things related to litigation. Frist and foremost, they can no longer ignore the whole area of what I am going to refer to as ESI Management including the development and implementaiton of a proper rentention policy and the asssociated infrastructure without taking on the liability of severe financial consequences for no compliance.

In addition, ESI no longer includes just information on servers, desktops and lapstops. It now includes information stored on corporate issued thumb drives and other external storage devices, Blackberries and other PDA, cell phones and even information stored with third party email providers and a list of information that may be stored with applications delivered via a Software-as-as-Service (SaaS) model. And, since collection is no longer an option, IT departments may no longer have the expertise or experience to keep up.

Further, courts are becomming less and less tolerant of ignorance and/or inaction and therefore management of preservation notices and actual preservation have also become an area riddeled with the rick of sanction and servere financial consequences.

In summary, with the changes to the FRCP and all of the resulting changes to state and local rules, the Fortune 1000 can longer afford its IT departments to like its fathers corporate IT departments. The externally mandated compliance and litigation preparedness requirements are much greater and the consequences of non-compliance are server.

So, my conclusion is that the changes to the FRCP and all of the resulting changes to state and local rules probably seems like it has had a net result of making litigation more complex and much more expensive for everyone involved. And, with our country heading into a ression or a least a downturn, conducting successful litigation under the new requirements being impossed by the changes to the FRCP may seem like it has become out of reach financially for many. And, it may be for some time.

However, in the long these changes will enable our legal system as a whole and the individual participants more accurate and equal access to justice. Only time will tell.

Labels: Compliance, Discovery, Document Rentention Policy, eDiscovery, ESI, FRCP, Litigation, Litigation Service Providers, Paradigm Shifts, Preservation, Records Rentention, Saas, Software-as-a-Service

posted by Charles Skamser @ 10:17 AM 0 Comments

The Vitural Law Office (VLO) Leverages Software-as-a-Service (SaaS)

Is it possible that we are seeing the demise of the big brick law office with a classic"bricks to clicks" paradigm shift?

Given my passion for paradigm shifts in the litigation market, I am absolutely fascinated with a Blog post that I found this weekend by Stephanie Kimbro called The Virtual Law Office(VLO) - It's Not Your Mother's Law Office that shows how the legal market is leveraging the power of Software-as-a-Service (SaaS).

Kimbro states, "As for the practical, a virtual law office that runs on a web-based application means minimal overhead and minimized startup costs. To open the doors to my solo, so to speak, I did not have to invest in computers, hardware or software and could use the equipment and internet connection I already had."

I hope that she takes her VLO concept to the next level by leveraging SaaS litigation technologies such as Online Review Tools (ORT) and on-Demand Electronic Data Discovery (EDD).

And, as SaaS support for the VLO matures, attorny's will soon be able to have access to better litigation techology than their big brick competitors, with little or no investment in technology infrastructure and therefore a much better Total Cost of Ownership (TCO) and Technology Delivery model.

As such, I beleive that we are wittnessing a classic "bricks to clicks" paradigm shift in the legal market. And, maybe it is a bit too early to predict the demise of the big brick legal offices. However, as some point, with the help of SaaS, as the VLO cost structure begins to put downward pressure on fees, are client's going to wonder why they are paying such high fees for the privlidge of sitting in a "brick office"?

Labels: Paradigm Shifts, Saas, Software-as-a-Service, Virtual Law Office (VLO), VLO

posted by Charles Skamser @ 8:09 AM 0 Comments

ELM Appliances are First Sign of Falling Costs for eDiscovery

As the namesake of this Blog suggests, the litigation market is in the throws of a major paradigm shift. Most markets that go through these shifts find that consulting fees charged by the early experts seem excessive. But, they are willing to pay these fees for as long as they can produce the required results. A good example or point of reference are the consulting fees that website development firms were able to charge when we were going through the "bricks to clicks" paradigm shift and everyone wanted to get their business on the Web.

Following tradition, when the changes in the FRCP in December of 2006 set the federally sanctioned groundrules for handling ESI, eDiscovery consulting firms filled the need and siezed the opportunity to charge "premium fees". Don't get me wrong, I am not some anti-capitalist passing judgement on economic results of the open market and calling for government intervention and price controls. I am merely pointing out that there is a well defined and historcially proven cycle that technology markets go through during major paradigm shifts. And, part of this cycle enables both premium consulting fees and in some cases premium costs associated with new and required technology.

This all being said, just as technologist came to the rescue of the website development market by automating standard and mundame tasks thereby reducing the overall cost of development and deployment, I beleive that Evidence Lifecycle Management (ELM) appliances and related technologies from such vendors as WorkProducts (http://www.workproducts.com/) are being initially introduced and sold with a Total Cost of Ownership (TCO) and Return on Investment (ROI) model that includes automating the standard mundame tasks that were previsouly being done by $400 per hour eDiscovery consultants.

These mundame tasks include such things as managing the location of employee data sources and therefore easily and automatically enabling the collection of data from multiple data sources such as PSTs from multiple servers in mutliple locations for specific custodians for specific dates and or other routine search tems. This is certainly something that an eDiscovery Consultant could do for $400 per hour. And, if an organization only has 1 or 2 potential matters per year to consider, it may be more financially feasible to hire the consultant.

However, if an organizaiton has the expectation of many potential matters per year, the appliance financial model can't be beat and once in place will probably even enable the organization to address very small matters that they just plain settled in the past because it cost less to settle than to hire the consultants to figure out the merits of the case.

So, am I predicting the collapse and early demise of the very lucrative eDiscovery consulting market? Not at all.

With the rapidly increasing introduction of technology to manage the mundame and standard tasks, eDiscovery consultants can continue to own the more difficult to automate and demanding tasks such as finding deleted data, searching for data needles in enterprise haystacks and positioning themselves for the next paradigm shift and related opportunities.

It's a great system with room for everyone. Consultants support the innovators and early market adaptors by investing the time and resources to figure out what has to be done and how to do it. Hardware and software Technologists then step in and automate these processes and reudce the costs for the mainstream market buyers. And together, they move from paradigm shift to paradigm shift fueling our economies ability to continue to grow through the introduction of new technology.

Labels: Consulting Fees, eDiscovery, eDiscovery Consultants, ELM, ESI, Evidence Lifecycle Management, FRCP, Litigation, Paradigm Shifts, Return on Investment, ROI, TCO, Total Cost of Ownership

posted by Charles Skamser @ 9:45 PM 0 Comments