Date: April 12, 2013 Topic: The Shrinking ... - Georgetown Law
Date: April 12, 2013 Topic: The Shrinking ... - Georgetown Law
Date: April 12, 2013 Topic: The Shrinking ... - Georgetown Law
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<strong>Date</strong>: <strong>April</strong> <strong>12</strong>, <strong>2013</strong><br />
<strong>Topic</strong>: <strong>The</strong> <strong>Shrinking</strong> Pyramid: Implications for <strong>Law</strong> Practice and the Legal Profession<br />
Location: <strong>Georgetown</strong> University <strong>Law</strong> Center, 600 New Jersey Avenue NW Washington DC 20001<br />
Sponsor: <strong>Georgetown</strong> Center for the Study of the Legal Profession<br />
<br />
Symposium Description:<br />
A consensus seems to be emerging that lower demand for law school graduates will become a permanent<br />
feature of the legal market. This is most notably the case in large law firms whose business model has been<br />
based on a large number of associates at the bottom of a pyramid with a small number of equity partners at<br />
the top. Firms of all size, however, are affected by this trend.<br />
Lower demand reflects the impact of forces such as intensified client insistence on cost-effective legal<br />
services, the growth of more widespread expertise in mapping and disaggregating legal work, the use of<br />
increasingly sophisticated technology and communication systems, the development of new forms of<br />
collaboration between clients and outside lawyers, the provision of a larger portion of legal work by in-house<br />
counsel in some corporations, and the emergence of networks and supply chains as basic units in the<br />
provision of legal services.<br />
This symposium will explore the potential implications of this major shift in how legal work is organized and<br />
provided, and how careers in the law are unfolding.
Table of Contents<br />
I. General Information ........................................................................................................................................... 3<br />
Program Agenda and Room Locations<br />
Things to do in Washington, D.C.<br />
Restaurant Guide<br />
II. Collaboration and Innovation in the New Normal ..................................................................................... 8<br />
Moderator: Reena Sengupta<br />
Panelists: Kim Koopersmith, Stephen Denyer<br />
III. Re-Engineering Legal Services Collaboration and Innovation in the New Normal ......................... 11<br />
Moderator: Tanina Rostain<br />
Panelists: Lisa Damon, Mitch Kowalski, Paul Lippe<br />
Even in a Digital, Data Driven World, We Still Need Travel Agents… and <strong>Law</strong>yers<br />
<strong>The</strong> Dilemma of Technology Use and Relationships<br />
IV. Lunch Panel: Legal Services in Emerging Countries: Brazil, India, and China ............................... 66<br />
Moderator: James Jones<br />
Panelists: David Trubek, Sida Liu, Jay Krishnan<br />
V.Corporate Clients and Outside <strong>Law</strong> Firms: Procurement or Partnership? ......................................... 69<br />
Moderator: Ellen Rosenthal<br />
Panelists: Leslie Turner, Matthew Biben<br />
Deconstructing Big <strong>Law</strong> Abstract<br />
<strong>The</strong> Stanford <strong>Law</strong> School Research Project on the Future of the Legal Profession<br />
General Counsel with Power?<br />
Resource Co-Specialization and Supplier Concentration in Plural Sourcing<br />
VI.Sustainable <strong>Law</strong> Firm Models: Beyond the Pyramid? ............................................................................ 147<br />
Moderator:Aric Press,<br />
Panelist: Paul Smith, Blane Prescott, StevenJ. Harper<br />
Variation in Large <strong>Law</strong> Firm Career Paths<br />
Limiting the Damage of Lateral Partner Movement
PROGRAM AGENDA & ROOM LOCATIONS<br />
<strong>The</strong> <strong>Shrinking</strong> Pyramid: Implications for <strong>Law</strong> Practice and the Legal Profession<br />
<strong>April</strong> 11-<strong>12</strong>, <strong>2013</strong><br />
<strong>Georgetown</strong> University <strong>Law</strong> Center | Washington, DC<br />
Thursday, <strong>April</strong> 11<br />
6:00-7:30 pm Opening Cocktail Reception – Hotung 2001<br />
Friday, <strong>April</strong> <strong>12</strong><br />
8:15-8:45 am Registration & Continental Breakfast – Gewirz <strong>12</strong> th Floor<br />
8:45-9:00 am Welcoming Remarks – Gewirz <strong>12</strong> th Floor<br />
9:00-10:30 am Collaboration and Innovation in the New Normal – Gewirz <strong>12</strong> th Floor<br />
Moderator: Reena Sengupta, RSG Consulting<br />
Panelists:Kim Koopersmith, Chair, Akin Gump Strauss Hauer & Feld LLP; Stephen<br />
Denyer, Global Markets Partner, Allen & Overy LLP<br />
(1) Collaboration: A Challenging but Strategic Imperative for Today’s <strong>Law</strong> Firm<br />
Heidi Gardner, Harvard Business School<br />
(2) Changing Career Models and Capacity for Innovation in Professional Services<br />
Michael Smets, Aston Business School; Timothy Morris, Saïd Business School, University of Oxford;<br />
Namrata Malhotra, Imperial College Business School<br />
10:30-10:45 am Break – Gewirz <strong>12</strong> th Floor<br />
10:45 am-<strong>12</strong>:15 pm Re-Engineering Legal Services – Gewirz <strong>12</strong> th Floor<br />
Moderator: Tanina Rostain, <strong>Georgetown</strong> <strong>Law</strong><br />
Panelists: Lisa Damon, National Chair, Labor & Employment <strong>Law</strong> Practice, Seyfarth<br />
Shaw LLP; Mitch Kowalski, author, Avoiding Extinction: Reimagining Legal Services for<br />
the 21st Century; Paul Lippe, Legal OnRamp<br />
(1) Even in a Digital, Data-Driven World We Still Need Travel Agents – and <strong>Law</strong>yers<br />
Renee Newman Knake, Michigan State University College of <strong>Law</strong> and ReInvent <strong>Law</strong> Laboratory; Silvia<br />
Hodges, Fordham University School of <strong>Law</strong> and TyMetrix Legal Analytics; Andy Daws, Riverview <strong>Law</strong>;<br />
James Peters, LegalZoom<br />
(2) How Does New Technology Affect Workplace Relationships? Evidence from Knowledge Management<br />
Systems Implementation in a Corporate <strong>Law</strong> Firm<br />
Forrest Briscoe, Penn State Smeal College of Business; Marion Brivot, Université Laval; Wenpin Tsai,<br />
Penn State Smeal College of Business<br />
<strong>Georgetown</strong> <strong>Law</strong> Wireless Information<br />
Network: gulaw events<br />
Passcode: gohoyas!
<strong>12</strong>:15-<strong>12</strong>:30 pm Lunch Distribution - Gewirz <strong>12</strong> th Floor<br />
<strong>12</strong>:30-1:45 pm Lunch Panel: Legal Services in Emerging Countries: Brazil, India, and China –<br />
Gewirz <strong>12</strong> th Floor<br />
Moderator: James Jones, <strong>Georgetown</strong> <strong>Law</strong><br />
Panelists: David Trubek, University of Wisconsin <strong>Law</strong> School; Sida Liu, University of<br />
Wisconsin Department of Sociology and <strong>Law</strong> School; Jay Krishnan, Indiana University<br />
Maurer School of <strong>Law</strong><br />
1:45-2:00 pm Break – Gewirz <strong>12</strong> th Floor<br />
2:00-3:30 pm Corporate Clients and Outside <strong>Law</strong> Firms: Procurement or Partnership? – Gewirz<br />
<strong>12</strong> th Floor<br />
Moderator: Ellen Rosenthal, Chief Counsel, Pfizer Legal Alliance and Vice-President<br />
and Assistant General Counsel, Pfizer<br />
Panelists: Leslie Turner, General Counsel, <strong>The</strong> Hershey Company; Matthew Biben,<br />
General Counsel, Chase Consumer Businesses and Senior Legal Adviser, JPMorgan<br />
Chase<br />
(1) Deconstructing Big <strong>Law</strong>: <strong>The</strong> Future Market for Corporate Legal Services – Preliminary Results<br />
Molly Selvin, Stanford Center on the Legal Profession, Stanford <strong>Law</strong> School and Southwestern <strong>Law</strong><br />
School; Patrick M. Hanlon, Stanford Center on the Legal Profession, Stanford <strong>Law</strong> School<br />
(2) <strong>Law</strong>yers Between Market and Hierarchy: Evidence from Fortune 500 Companies<br />
Mari Sako, Saïd Business School, University of Oxford<br />
3:30-3:45 pm Break – Gewirz <strong>12</strong> th Floor<br />
3:45-5:30 pm Sustainable <strong>Law</strong> Firm Models: Beyond the Pyramid? – Gewirz <strong>12</strong> th Floor<br />
Moderator: Aric Press, American <strong>Law</strong>yer Media<br />
Panelists: Paul Smith, Partner, Eversheds and Eversheds Consulting; Blane Prescott,<br />
Chief Executive Officer, Brownstein Hyatt Farber Schreck, LLP; Steven J. Harper,<br />
publisher, <strong>The</strong> Belly of the Beast; author, <strong>The</strong> <strong>Law</strong>yer Bubble: A Profession in Crisis<br />
(1) <strong>The</strong> Economic Crisis: What Happened to Associates and What Does the Future Hold for <strong>The</strong>m?<br />
Lisa Rohrer, <strong>Georgetown</strong> <strong>Law</strong>; Peter Sherer, Haskayne School of Business, University of Calgary<br />
(2) Limiting the Damage of Lateral Partner Movement: Exit Quantity, Geographic Focus, and Multiple<br />
Movers<br />
Rhett Brymer, Farmer School of Business at Miami University; Len Bierman, Mays School of Business,<br />
Texas A&M University<br />
5:30-6:30 pm Cocktail Reception – Gewirz <strong>12</strong> th Floor<br />
<strong>Georgetown</strong> <strong>Law</strong> Wireless Information<br />
Network: gulaw events<br />
Passcode: gohoyas!
Things to do in Washington, D.C.<br />
Washington Monument: Constitution Ave. & 15 th St. NW. Reserve tickets to ride the elevator to the top (free at<br />
kiosk on grounds, or reserve in advance for $1.50) for a great view of the city.<br />
Smithsonian Museums: Pick up a map at the “Castle,” the Smithsonian Institution Building. Museums open<br />
daily from 9am-5:30pm. Great for kids: Natural History Museum and National Air and Space Museum.<br />
Jefferson Memorial & Tidal Basin: 15 th St. SW. Great for a walk, especially during cherry blossom season.<br />
Open 8am-midnight.<br />
Lincoln Memorial: 23 rd Street NW (Between Constitution and Independence Ave). Open 8am-midnight.<br />
<strong>The</strong> White House: 1600 Pennsylvania Ave NW. Tours are only available though contacting one’s member of<br />
Congress in advance. However, at the White House Visitor Center at the corner of 15 th & E St. NW, learn about<br />
the history, visit the gift shop, and watch a video on the President’s home.<br />
U.S. Capitol Building: Constitution and 1 st St. NE. Guided tours conducted 9am-4:30pm, Monday-Saturday.<br />
Get free tickets from the Capitol Guide Service Kiosk at 1 st St. NE & Independence Ave.<br />
U.S. Holocaust Memorial Museum: 100 Raoul Wallenberg Place, SW. Permanent exhibit NOT<br />
RECOMMENDED FOR CHILDREN UNDER 11. Open 10am-5:30pm daily; extended hours to 7:50pm on<br />
Tuesdays and Thursdays, <strong>April</strong> to mid-June.<br />
Arlington National Cemetery: At the west end of the Memorial Bridge in Arlington, VA. Guided tours for $6,<br />
or tour the grounds on your own. See burial sites of Presidents William Howard Taft and John F. Kennedy, and<br />
many others. Open 8am-7pm daily, <strong>April</strong> to September; 8am-5pm daily October to March.<br />
<strong>The</strong> National Building Museum: Free access to the Great Hall, historic building tours, Museum Shop, & café.<br />
Monday - Saturday: 10 am - 5 pm; Sunday: 11 am - 5 pm. 401 F Street NW.<br />
<strong>The</strong> Newseum: An interactive news museum; great for children and adults alike. 9 am- 5 pm, daily.<br />
Purchase advanced tickets online to receive a discount. 555 Pennsylvania Ave.<br />
United States Botanical Garden: 100 Maryland Avenue, SW.<br />
Martin Luther King Jr. Memorial:<br />
1964 Independence Avenue, SW.<br />
<strong>The</strong> Phillips Collection: Encounter superb works of modern art in an intimate setting at <strong>The</strong> Phillips Collection,<br />
an internationally recognized museum in Washington's vibrant Dupont Circle neighborhood. 1600 21st St., NW.<br />
Taxis: Diamond Cab (202) 387-2600<br />
Yellow Cab (202) 544-<strong>12</strong><strong>12</strong><br />
Silver Cab (202) 484-8<strong>12</strong>5<br />
Transportation<br />
Metro: <strong>The</strong> closest stations to <strong>Georgetown</strong> <strong>Law</strong> are Judiciary Square (E & 4th St NW) and Union Station<br />
(1st St. & Massachusetts Ave. NE). Both are on the Red Line; pick up a map of the Metro at the station.<br />
Circulator Bus: Catch a $1 ride across town on these big, red buses. <strong>The</strong> stop at 2 nd & Massachusetts Ave.<br />
NW will take you west to the <strong>Georgetown</strong> neighborhood. Other routes service the National Mall, Nationals<br />
Stadium, and the Convention Center. Pick up a map on board.
Restaurants<br />
Walking Distance from <strong>Law</strong> Center<br />
Article I: Located in the Hyatt Regency Hotel, this restaurant offers upscale classic American cuisine and libations. Moderate. 400<br />
New Jersey Avenue. 202-737-<strong>12</strong>34. *Ask for the D.C. Neighborhood Business Discount*<br />
Art & Soul: Art Smith’s renowned fresh and modern regional cuisine with a Southern accent. Inside <strong>The</strong> Liaison Hotel. Moderate-<br />
Expensive. Located in <strong>The</strong> Liaison at 415 New Jersey Ave. 202-638-1616<br />
Billy Goat Tavern: Burgers and sandwiches. Do you recall the Saturday Night Live sketch in which a short order cook would yell out<br />
to incoming patrons: "Cheezborger! Cheezborger! No fries, cheeps! No Pepsi, Coke!"? Inexpensive. 500 New Jersey Avenue.<br />
202-783-2<strong>12</strong>3.<br />
Bistro Bis: Fabulous French food, lots of seafood and great desserts. Blonde wood, big booths and a neat view of chefs at work<br />
through the glass wall that covers the kitchen. Expensive. Located in <strong>The</strong> Hotel George at 15 E Street. 202-661-2700.<br />
Charlie Palmer Steakhouse: Sleek and sophisticated restaurant offering steaks and seafood. Views of Capitol Hill and the Mall from<br />
its rooftop terrace. Expensive. 101 Constitution Avenue. 202-547-8100.<br />
<strong>The</strong> Dubliner: Traditional Irish pub and restaurant. Has outdoor dining in good weather. Inexpensive. 520 North Capitol Street.<br />
202- 737-3773.<br />
Kelly’s Irish Times: Irish pub. Looks rather run down, but always packed for lunch. <strong>The</strong>y have great specials. Inexpensive. 14 F<br />
St., NW. 202- 543-5433.<br />
Subway: Patrons can choose from a variety of signature subs. Subway also serves salads, soups, and dessert items. Very inexpensive.<br />
Located on the 2 nd floor of the <strong>Georgetown</strong> <strong>Law</strong> Sport and Fitness Center.<br />
Sunspot: A very casual sandwich shop and salad bar. Outdoor seating area. Very inexpensive. 601 New Jersey Avenue. 202-<br />
783-8331.<br />
Union Station: <strong>The</strong> lower level of Union Station offers many casual dining options. It resembles a very large mall food court.<br />
Upstairs, there are also sit-down restaurants including:<br />
B.Smith’s: Southern style cooking with a great dessert menu, located in the former Presidential train station waiting room.<br />
Expensive. 202-289-6188.<br />
Pizzeria Uno: This busy pizza chain serves up Chicago deep-dish style pizza, pastas and good appetizers. Inexpensive.<br />
202-842-0438.<br />
Chipotle: Endless options of overstuffed burritos. Made to order with only the freshest ingredients. Very inexpensive. 202-<br />
706-5935.<br />
Potbelly Sandwich Works: Toasty warm sandwiches, hand-dipped malts and milkshakes - and warm homemade cookies -<br />
have made this sandwich shop a local favorite. Very Inexpensive. 202-408-9583.<br />
Chop’t Salad: Fresh ingredients and homemade dressings help you create your own crisp meal. Very inexpensive. 202-668-<br />
0330<br />
West Wing Cafe: Serves a variety of bagels, sandwiches, wraps, hot panini, focaccia, and salads.<br />
1111 Pennsylvania Ave. 202-628-2233.<br />
Cab Ride from <strong>Law</strong> Center<br />
Old Ebbitt Grill: Steps from <strong>The</strong> White House, this restaurant features upscale American saloon food. Popular with political<br />
insiders. Moderate. 675 15th St NW. 202-347-4800.<br />
Tosca: Award-winning northern Italian fare, in a sophisticated downtown venue. Expensive. 11<strong>12</strong> F St. NW. 202-367-<strong>12</strong>990.<br />
Ten Penh: Asian fusion at its best. Best known for their lobster. Moderate/Expensive. 1001 Pennsylvania Ave. NW. 202-393-<br />
4500.
<strong>The</strong> <strong>Shrinking</strong> Pyramid: Implications for <strong>Law</strong><br />
Practice and the Legal Profession<br />
Collaboration and<br />
Innovation in the New<br />
Normal<br />
Friday <strong>April</strong> <strong>12</strong> th , 9:00-10:30 am<br />
Moderator: Reena Sengupta, RSG Consulting<br />
Panelists: Kim Koopersmith, Chair, Akin Gump Strauss Hauer & Feld LLP; Stephen<br />
Denyer, Global Markets Partner, Allen & Overy LLP<br />
(1)Collaboration: A Challenging but Strategic Imperative for Today’s <strong>Law</strong> Firm<br />
Heidi Gardner, Harvard Business School<br />
(2)Changing Career Models and Capacity for Innovation in Professional Services<br />
Michael Smets, Aston Business School; Timothy Morris, Saïd Business School,<br />
University of Oxford; Namrata Malhotra, Imperial College Business School
<strong>The</strong>re are no materials<br />
for this session.
III
<strong>The</strong> <strong>Shrinking</strong> Pyramid: Implications for <strong>Law</strong><br />
Practice and the Legal Profession<br />
Re-Engineering Legal<br />
Services<br />
Friday <strong>April</strong> <strong>12</strong> th , 10:45 am-<strong>12</strong>:15 pm<br />
Moderator: Tanina Rostain, <strong>Georgetown</strong> <strong>Law</strong><br />
Panelists: Lisa Damon, National Chair, Labor & Employment <strong>Law</strong> Practice,<br />
Seyfarth Shaw LLP; Mitch Kowalski, author, Avoiding Extinction: Reimagining<br />
Legal Services for the 21st Century; Paul Lippe, Legal OnRamp<br />
(1)Even in a Digital, Data-Driven World We Still Need Travel Agents – and<br />
<strong>Law</strong>yers<br />
Renee Newman Knake, Michigan State University College of <strong>Law</strong> and<br />
ReInvent <strong>Law</strong> Laboratory; Silvia Hodges, Fordham University School of <strong>Law</strong><br />
and TyMetrix Legal Analytics; Andy Daws, Riverview <strong>Law</strong>; James Peters,<br />
LegalZoom<br />
(2)How Does New Technology Affect Workplace Relationships? Evidence from<br />
Knowledge Management Systems Implementation in a Corporate <strong>Law</strong> Firm<br />
Forrest Briscoe, Penn State Smeal College of Business; Marion Brivot,<br />
Université Laval; Wenpin Tsai, Penn State Smeal College of Business
DRAFT IN PROGRESS—PLEASE DO NOT CITE WITHOUT AUTHOR PERMISSION<br />
EVEN IN A DIGITAL, DATA-DRIVEN WORLD,<br />
WE STILL NEED TRAVEL AGENTS…AND LAWYERS<br />
Andy Daws, Riverview <strong>Law</strong><br />
Silvia Hodges, Fordham <strong>Law</strong> School, TyMetrix Legal Analytics<br />
Renee Newman Knake, Michigan State University College of <strong>Law</strong>, ReInvent <strong>Law</strong><br />
James Peters, LegalZoom<br />
Introduction<br />
<strong>The</strong> mid-1990’s witnessed the peak for retail travel agents and brick-and-mortar<br />
law firms the likes of which are unlikely to be experienced again. Over 20,000 travel<br />
retail locations closed in the past two decades, and the legal profession shed thousands of<br />
jobs. Both of these professional service industries were disrupted by technological<br />
innovation, in particular sophisticated online access and high-level data aggregation.<br />
<strong>The</strong>re are lessons to be learned from travel agents for lawyers at all levels of service,<br />
from solo practitioners to large, traditional firms. <strong>The</strong> reality is that travel agents are no<br />
longer necessary to secure the lowest airfare or most desirable seat on the plane. Instead,<br />
the store-front travel agent has been largely replaced by intuitive, user-friendly search<br />
engines and strategically curated websites targeting travelers of every budget for any<br />
destination. Online search has made travel planning available to the masses, tapping<br />
latent markets and creating new standards through customer-based travel review sites.<br />
User adoption has been overwhelming—Orbitz.com alone facilitates 1.5 million flight<br />
searches and 1 million hotel searches daily. Even in the Oribitz.com, Expedia.com,<br />
Jetsetter.com and Kayak.com world, however, a cadre of travel professionals has carved<br />
out niche specialties where individual, human interaction is desirable and sought.<br />
<strong>The</strong> travel industry channeled disruption into new models for personal service<br />
that law is only now beginning to attempt. We have yet to see a parallel explosion in<br />
online services and data-driven analysis in the legal profession, though a number of new<br />
organizations are emerging in response to the changing landscape created by the so-called<br />
shrinking pyramid and the associated economic pressures. For example, the market share<br />
of the three leading legal process outsourcing companies (LPOs) has grown significantly<br />
at a time when most law firms felt the pain of recession and had to adjust their<br />
expectations of growth and profitability. <strong>The</strong> market size of the LPO business is hard to<br />
estimate, but industry sources believe it to be worth between $500 million and $900<br />
million in revenue. Bullish forecasts guesstimate that the industry will surpass $2 billion<br />
in 20<strong>12</strong> and reach $4 billion in 2015. What’s noteworthy is that the client list of these<br />
LPOs significantly overlaps with those of traditional leading law firms.<br />
Consider also online retailers. LegalZoom, founded in 2001, competes with<br />
smaller law firms. An article in Forbes warned that as Craigslist decimated the<br />
newspaper industry by taking away its low-end but profitable classified-ad business,<br />
LegalZoom targets the high-volume, low-cost business of providing basic consumer and<br />
business documents, 1 and is moving higher up the value chain with its new addition of<br />
legal plans, discussed more fully below. A more recently launched online legal service,<br />
1 Daniel Fisher, Entrepreneurs versus lawyers, Forbes, 10.05.11 (October 24, 2011), http://www.forbes.com/forbes/2011/1024/entrepreneurslawyers-suh-legalzoom-automate-daniel-fisher.html<br />
1
Rocket <strong>Law</strong>yer, received $18.5 million investment from Google Ventures. Rocket<br />
<strong>Law</strong>yer charges $9.99 to $39.95 a month to review documents and give legal advice. In<br />
the UK, private equity firms have started buying equity stakes in law firms. For example,<br />
Palamon Capital Partners now owns majority stakes in Quality Solicitors, a network of<br />
so-called “High Street” law firms, i.e. primarily consumer law firms. <strong>The</strong> investment is<br />
thought to be upwards of GBP 70m or $111m 2 It was the first outside investment after<br />
the Legal Services Act liberalization in October 2011. 3 <strong>The</strong> Legal Services Act 2007<br />
allows UK law firms to finance externally and even to float. With the help of Palamon’s<br />
investment, Quality Solicitors wants to become a household name and improve its<br />
operations. A partner at the private equity firm said that Quality Solicitors represents an<br />
unparalleled opportunity to gain market share in the legal industry and create a successful<br />
legal franchise chain. 4 <strong>The</strong> private equity firm has done this before with Integrated<br />
Dental Holdings, the UK’s largest dental chain, and with Towry, the UK’s biggest<br />
independent group of financial services advisors. 5 <strong>The</strong>ir choice of chairman for Quality<br />
Solicitors, the former chief executive of the flower delivery network Interflora, speaks<br />
volumes. In September 20<strong>12</strong>, Quality Solicitors announced an exclusive partnership with<br />
LegalZoom to provide legal advice to customers of LegalZoom’s new UK site, set to<br />
launch in <strong>2013</strong>. According to Quality Solicitors’ founder Craig Holt, the partnership<br />
“brings the best of both worlds, combining the speed, convenience and value<br />
LegalZoom’s technology brings, with the comfort and confidence provided by knowing a<br />
local QualitySolicitors expert lawyer is on hand to help at any point.” 6 Similarly,<br />
Riverview <strong>Law</strong>, which is part-owned by DLA Piper, offers fixed-price packages for<br />
businesses of all sizes, ranging from one-off matters including litigation, through to<br />
annual and multi-year contracts for what it calls Legal Advisory Outsourcing. Riverview<br />
is cultivating a significant on-line presence for the small-to-medium sized commercial<br />
market, and offers free legal document templates, free access to its online legal advice<br />
library and a free phone consultation with the legal team.<br />
What contributes to the changes in the legal profession is two-fold: (1) open<br />
access to vast amounts of information free-of-charge or at a low-cost; and (2) the<br />
involvement of procurement in the purchasing of professional services. More and more<br />
individuals are able to create their own legal documents online or seek out a range of<br />
lawyers through online review sites and retail portals. More and more companies take a<br />
structured and rigorous approach to selecting firms with the goal to ensure that the<br />
relationship continues to deliver expected outcomes. Individuals and companies are<br />
beginning to engage in intelligent purchase. For companies, this shift is particularly seen<br />
at the initial instruction phase, when they bring in procurement professionals to help<br />
evaluate providers and negotiate fee structures. In-house lawyers who once had free rein<br />
to engage, select and pay outside counsel now must report to executives, who are not<br />
lawyers, and who now insist on predictability as to legal expenses.<br />
This article explores ways that the legal profession can learn from the travel<br />
industry’s path of innovation in an era where significant components of law practice have<br />
been (or soon will be) displaced by technology and do-it-yourself services. We identify<br />
and assess two of the early entrepreneurs in online retail and in-house procurement of<br />
2 Jane Croft, Palamon Capital invests in Quality Solictors, Financial Times, (October 21, 2011), http://www.ft.com/intl/cms/s/0/0ec0c6f4-fbce-<br />
11e0-9283-00144feab49a.html#axzz2OSbscVNY<br />
3 Id.<br />
4 Id.<br />
5 Catherine Baksi, Private equity buys into QualitySolicitors, <strong>The</strong> <strong>Law</strong> Society Gazette, (October 20, 2011),<br />
http://www.lawgazette.co.uk/news/private-equity-takes-stake-qs<br />
6 http://www.thelawyer.com/legalzoom-to-tie-up-with-qualitysolicitors-for-british-launch/1014411.article<br />
2
legal services based upon data aggregation, concluding with several recommendations for<br />
the profession drawn from the travel industry’s experience. Part I of the paper provides<br />
an overview of the travel industry’s response to the Internet-boom during the 1990’s,<br />
comparing the legal profession’s reaction at that time and suggesting six lessons that law<br />
can learn from travel. Part II then examines emerging models and markets for legal<br />
services, offering three case studies: (1) the emergence of legal process outsourcing and<br />
data-driven procurement in American big law; (2) LegalZoom as first-mover in the<br />
online, do-it-yourself legal services market; and (3) Riverview <strong>Law</strong>’s new model for<br />
business representation in the wake of the UK Legal Services Act. Part III concludes that<br />
in order to thrive in the wake of the shrinking pyramid, lawyers, like travel professionals,<br />
must begin engaging in more deliberate innovation to preserve opportunities for the<br />
application of complex judgment, while simultaneously leveraging the advantages of<br />
online technology and complex data analysis. Our article offers a unique perspective on<br />
these issues, drawing from the authors’ varied backgrounds—collectively we represent<br />
two law schools and three industry innovators in the new legal marketplace.<br />
Part I: Six Lessons for <strong>Law</strong> from Travel<br />
<strong>The</strong> technology advancements of the 1990s led to significant disruption for<br />
professional service and information industries. Consumers gained access to information<br />
that previously had been the exclusive province of the industry expert. At the same time,<br />
one of “the most notable transformations in the U.S. labor market since World War II”<br />
was occurring in the form of “the rising share of employment in the services industry and<br />
the declining share in manufacturing.” 7<br />
One of the earliest and hardest hit service industries was travel. During the first<br />
half of the 1990s the travel industry lost a collective $15-20 billion in profits. 8 Yet, by<br />
the end of the decade “[t]he net profits of all scheduled airlines worldwide rose from $4.5<br />
billion in 1995 … to $8.5 billion two years later.” 9 Not only did technology innovation<br />
impact travel agents and service providers, but airline deregulation compounded the<br />
stress on the industry. “Prior to airline deregulation, the US airline industry operated<br />
similarly to a public utility company with each carrier’s routes and prices set by a<br />
governing body, the Civil Aeronautics Board.” 10 Under the Carter administration,<br />
“Congress [passed] the Airline Deregulation Act in 1978, making the airlines one of the<br />
first consumer industries to be deregulated. <strong>The</strong> resulting reforms applied free market<br />
principles to the U.S. airline business, which spurred a dramatically larger, more<br />
accessible and, some say, a more affordable travel industry.” 11 By contrast, others<br />
“argue[d] that whereas inflation-adjusted airfares have dropped 37 percent in the 22 years<br />
since deregulation, they were also falling just as much and just as fast in the 22-year<br />
period before deregulation.” <strong>12</strong> Similarly, the lower prices, while reflecting significant<br />
discounts, were seen by some as lower quality, “saddled with restrictions” and<br />
constituting “a different product quality.” 13 <strong>The</strong> role of the travel agent was especially<br />
7 Joseph R. Meisenheimer, <strong>The</strong> Services Industry in the Good versus Bad Debate, Monthly Labor Review, pgs. 22 – 47 (Feb. 1998).<br />
8 See <strong>The</strong> sky’s the limit, <strong>The</strong> Economist (Mar. 10, 2001), http://www.economist.com/node/525723/print, (“first few years of the 1990s” the travel<br />
industry lost $15 billion); <strong>The</strong> Airline Industry, http://adg.stanford.edu/aa241/intro/airlineindustry.html (<strong>The</strong> International Air Transport<br />
Association’s “member airlines suffered cumulative net losses of $20.45bn in the years from 1990-1994”).<br />
9 Id.<br />
10 Harrel Associates, <strong>The</strong> Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,<br />
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 8.<br />
11 Id.<br />
<strong>12</strong> Id.<br />
13 Id.<br />
3
hard hit, particularly since an agent’s “revenue was derived almost exclusively from<br />
commissions.” 14 <strong>The</strong> airlines that previously had “outsourced the labor-intensive<br />
process of research and booking travel to travel agencies in the late-1970’s” turned to the<br />
Internet and travelers themselves for outsourcing, “let[ting] the travelers do the work<br />
without the help of any airline employees or intermediaries, thus significantly lowering<br />
the airlines’ costs once again.” 15 “By the mid-1990s, three important factors and gained<br />
momentum to drive the aggressive migration to and adoption of Internet-based travel:<br />
high distribution costs – and the obvious value-for-dollar question that was raised based<br />
on system bias; new technology that offered a cheaper alternative to … direct access to<br />
customers; and a consumer population receptive and eager to take control of their own<br />
destinies.” 16<br />
Legal services, by comparison, went relatively unscathed through the 1990s and even<br />
into the early part of the 21 st century. <strong>The</strong> massive layoffs and un(der)employment for<br />
law did not hit full force until over a decade after travel. For example, according to the<br />
“LayoffTracker” from the blog <strong>Law</strong> Shucks, from January 2008 to December 2011 “over<br />
15,435 people have been laid off by major law firms (5,872 lawyers/9,563 staff).” 17 It is<br />
worth noting, however, that this data does not include layoffs that occurred in small or<br />
mid-sized firms, solo practices, or government, nor does it include layoffs before 2008 or<br />
after December 2011, although according to <strong>Law</strong> Shucks the layoffs have now slowed<br />
significantly: “2011 has been even slower, with just 439 people let go, of which merely<br />
<strong>12</strong> were lawyers.” 18 From 2010 to 20<strong>12</strong>, over 130,000 new lawyers entered the legal job<br />
market, predicted by the U.S. Bureau of Labor to offer only 73,600 new lawyer jobs over<br />
ten years, 2010-2020. 19<br />
Beyond the employment situation for lawyers is the “‘justice gap’: millions of<br />
people who need legal representation cannot afford or access a lawyer. <strong>The</strong><br />
overwhelming majority of this country goes without much-needed legal help because<br />
they simply cannot afford to pay a lawyer three-figures-per-hour for multiple hours, but<br />
they also do not qualify for the limited legal aid programs available.” 20 <strong>Law</strong>yers struggle<br />
to “develop sustainable models for delivering legal services that are affordable, accessible<br />
and, importantly, adopted by clients who utilize them on a regular basis.” 21 At the same<br />
time, we have a “surplus of lawyers,” 22 with thousands of lawyers seeking employment<br />
and law schools continuing to add new attorneys to the mix. It seems that “every state<br />
but Wisconsin and Nebraska (plus Washington, D.C.) is producing many more lawyers<br />
than it needs. … In fact, across the country, there were twice as many people who passed<br />
the bar in 2009 (53,508) as there were openings (26,239).” 23 One key to solving the<br />
delivery and matching problems is user-adoption. “<strong>The</strong> profession must offer personal<br />
legal services that are affordable, accessible, and—importantly—adopted by clients/users<br />
14 Harrel Associates, <strong>The</strong> Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,<br />
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 21.<br />
15 Id. at 24-25.<br />
16 Id. at 24<br />
17 Layoff Tracker, LAW SHUCKS: LIFE IN AND AFTER BIGLAW, http://lawshucks.com/layoff-tracker/ (last visited Mar. 20, <strong>2013</strong>).<br />
18 Id.<br />
19 Elizabeth Lesly Stevens, Will <strong>Law</strong> Students Have Jobs After <strong>The</strong>y Graduate?, WASH. POST (Oct. 31, 20<strong>12</strong>),<br />
http://articles.washingtonpost.com/20<strong>12</strong>-10-31/lifestyle/35498320_1_law-schools-law-jobs-legal-career-professionals.<br />
20 Renee Newman Knake, Why <strong>Law</strong> Students Should Be Thinking About Entrepreneurship and Innovation in Legal Services, Bloomberg <strong>Law</strong><br />
(Nov. 20<strong>12</strong>), http://about.bloomberglaw.com/practitioner-contributions/innovation/.<br />
21 Id.<br />
22 Catherine Rampell, <strong>The</strong> <strong>Law</strong>yer Surplus State by State, N.Y. Times (June 27, 2011, 11:35 AM),<br />
http://economix.blogs.nytimes.com/2011/06/27/the-lawyer-surplus-state-by-state/).<br />
23 Id.<br />
4
on a consistent, sustained basis. <strong>The</strong> unmet need for legal services must be channeled<br />
into a demand for legal services.” 24 <strong>The</strong> travel industry has become adept at cultivating<br />
adoption in this way through technology, data-driven decision making, marketing,<br />
branding, and beyond.<br />
While legal services are increasingly offered via new technologies, the legal<br />
industry has yet to experience the wide-spread adoption that has occurred in the travel<br />
industry. Moreover, where the role of travel agent was in many ways destroyed by<br />
deregulation and technology, the travel industry is experiencing a rejuvenated demand for<br />
personalized rather than computerized service. <strong>The</strong> travel industry’s evolution in a<br />
digital, data-driven world offers lessons for lawyers at all levels from legal aid to Wall<br />
Street to not only avoid displacement but also capitalize on existing and emerging<br />
technology advancements. We suggest six lessons below.<br />
A. Online Can’t Be Ignored<br />
Consider that travel agents are no longer necessary to secure the lowest airfare or<br />
most desirable seat on the plane. Instead, the store-front travel agent has been largely<br />
replaced by intuitive, user-friendly search engines and strategically designed websites<br />
targeting travelers of every budget for any destination. As Internet access became more<br />
publicly available, rather than resist the movement, “the travel industry was one of the<br />
earliest to go online.” 25 Online search has made travel planning available to the masses,<br />
tapping latent markets and creating new standards through customer-based travel review<br />
sites. User adoption has been overwhelming—Orbitz.com alone facilitates 1.5 million<br />
flight searches and 1 million hotel searches daily. <strong>The</strong> travel industry channeled<br />
disruption into new models for personal service, outsourcing much of the travel planning<br />
work previously done by agents to the customers themselves.<br />
<strong>The</strong> travel industry knew early on that online service cannot be ignored, for both<br />
sharing information with customers and collecting information about customers. “One<br />
big advantage of the Internet is that it gives consumers access to better information about<br />
what is on offer. Conversely, as more people buy their tickets online, the airlines get to<br />
know more about their customers’ needs and preferences.” 26 This data has enhanced is<br />
what is known as “customer relationship marketing,” where the airline induces customer<br />
loyalty “by offering tailor-made deals reflecting his known preferences.” 27 Where once a<br />
travel provider might have simply offered information, through online tools, most<br />
airlines, for example, “offer customers reservations, electronic tickets, seat selection, inflight<br />
merchandise, reward points and sometimes discounted fares unavailable elsewhere.<br />
In addition, they may offer lodging, transportation-package deals and cruises through<br />
their alliance partners.” 28 Online also allowed for the removal of intermediaries through<br />
direct-access software, fundamentally altering the traditional players in the travel supply<br />
chain. 29<br />
24 Renee Newman Knake, Democratizing Legal Education, forthcoming Connecticut <strong>Law</strong> Review (<strong>2013</strong>).<br />
25 Harrel Associates, <strong>The</strong> Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,<br />
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 26.<br />
26 <strong>The</strong> sky’s the limit, <strong>The</strong> Economist (Mar. 10, 2001), http://www.economist.com/node/525723/print.<br />
27 Id.<br />
28 Id.<br />
29 Harrel Associates, <strong>The</strong> Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,<br />
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 26.<br />
5
<strong>The</strong> legal industry is witnessing some of the same phenomena. For example, as<br />
seen in the LegalZoom and Riverview case studies below, new entrants into law are<br />
highly focused upon the user/client’s online experience. Providers like these are altering<br />
the traditional supply chain for services, as is the new role of the general counsel in<br />
navigating legal process outsourcing and procurement, also discussed as part of the case<br />
studies in Part II. <strong>The</strong> lesson that follows from the need to embrace the online<br />
experience, of course, is that service industries must invest in high quality technology for<br />
the long term.<br />
B. Investment In High-Quality, Long-Term Technology<br />
<strong>The</strong> travel industry also recognized that “[t]o meet the requirements of their<br />
increasingly discerning customers, [it had] to invest heavily in the quality of service …<br />
offer[ed], both on the ground and in the air. Ticketless travel, new interactive<br />
entertainment systems, and more comfortable seating are just some of the product<br />
enhancements being introduced to attract and retain customers.” 30 <strong>The</strong> legal profession,<br />
by contrast, has been slow to adopt technology both for practicing attorneys and,<br />
importantly, for the clients. One notable exception is newcomer Clearspire, which<br />
recently announced a plan to hire 50 to 100 “former Big<strong>Law</strong> lawyers each year for the<br />
next five years,” into its “nontraditional legal services model.” 31 Clearspire, formed<br />
in2009, is known for investing in a “$5 million online platform that connects lawyers and<br />
clients through virtual offices and high-end videoconferencing systems.” Both legal<br />
services providers profiled in the case studies below are other exceptions. In the case of<br />
Riverview, the core team understood the value of investing in high-quality, long-term<br />
technology at the outset and were able to leverage <strong>12</strong> years’ experience and expertise<br />
gained while building a proprietary case management platform in a previous business.<br />
Similarly, LegalZoom has gone to great lengths to make their online process easy to use<br />
and understand for their customers. In addition, when faced with the prospect of<br />
integrating attorneys into their offerings through new legal plans, LegalZoom developed<br />
membership portals through which customers could manage their consultation requests<br />
(including scheduling consultations online), peruse user reviews of plan attorneys and<br />
utilize other LegalZoom benefits in one place. On the other side of the equation,<br />
LegalZoom’s systems allow participating law firms to manage the administrative<br />
requirements of providing consultations and even refer out certain matters easily.<br />
C. Marketing and Branding Matter More than Ever<br />
<strong>The</strong> ability to differentiate one’s service through marketing and branding matter more<br />
than ever, a lesson learned early on by travel providers. Indeed, there is general<br />
recognition in (the business school) academia and practice that marketing addresses the<br />
increased need to compete for business. 32 Marketing is important since organizations<br />
need to be aware of their competition and aim to satisfy their customers in order to be<br />
successful. This is particularly true for service industries due to the direct interaction they<br />
have with their customers. While the rationale for marketing might be unquestionable,<br />
professional services firms, in particular law firms, traditionally resisted the diffusion of<br />
30 <strong>The</strong> Airline Industry, http://adg.stanford.edu/aa241/intro/airlineindustry.html.<br />
31 Rachel Zahorsky, New-model firm plans hiring spree, ABA Journal (Jan. 17, <strong>2013</strong>, <strong>12</strong>:25PM),<br />
http://www.abajournal.com/lawscribbler/article/firm_seeks_to_liberate_lawyers_50_to_100_each_year/.<br />
32 Silvia Hodges, I Didn’t Go to <strong>Law</strong> School to Become a Salesperson – <strong>The</strong> development of Marketing in <strong>Law</strong> Firms, forthcoming <strong>Georgetown</strong><br />
Journal of Legal Ethics (<strong>2013</strong>).<br />
6
the marketing concept or market(ing) orientation. 33 Little marketing used to occur in the<br />
legal profession, and lawyers began to adopt marketing “unenthusiastically” or not at<br />
all. 34<br />
It has been argued that, from a microeconomic point of view, a law firm is<br />
essentially a service business like any other: it renders services to clients from whom it<br />
receives payment. 35 Like any other business, a law firm combines resources in order to<br />
produce services and adheres to the basic principles of economics—profitability and<br />
financial liquidity, to ensure continuity. <strong>The</strong> “growth in the size of the profession, the size<br />
of firms, and the volume of the market, has led . . . [to] lawyers having to treat the<br />
practice of law as a business.” 36 Access to justice requires not only that the legal advice<br />
given be sound, but also “the presence of the business skills necessary to provide a costeffective<br />
service in a consumer-friendly way.” 37 Customers are the lifeblood of any<br />
commercial organization. Without them, a business has no revenues, no profits, and<br />
therefore no market value. In fact, the basis of a business is its ability to create and keep a<br />
customer. 38 “[T]he law is a service business, and satisfaction can only be measured by the<br />
client.” 39 As the satisfaction of customer needs is the main business goal, businesses have<br />
only two basic functions, or processes, that are performed to carry out their mission:<br />
marketing and innovation. 40 Nevertheless, lawyers historically have not embraced<br />
marketing. Marketing was almost non-existent among lawyers as it was not only<br />
“disliked,” but also considered “profoundly unprofessional and inappropriate.” 41 While<br />
these observations are now dated, the strong influence of tradition and history in the legal<br />
profession, the perception of and the attitude towards marketing were substantial barriers<br />
to the advance of marketing in this field.<br />
By comparison, the UK’s Legal Services Act has focused investors on the<br />
sizeable opportunity that exists to create powerful brands in an industry which has grown<br />
up without them. At a consumer level, new UK entrants such as Quality Solicitors and<br />
Cooperative Legal Services are plowing huge sums of money into brand creation and<br />
management in an attempt to gain early-mover advantage. Riverview <strong>Law</strong> was the first<br />
commercial firm to launch after the UK liberalization fully took effect, and is similarly<br />
seeking to capitalize on the absence of household brands in the B2B arena and hoping to<br />
establish itself as the “go-to” firm for fixed-fee value-based legal services. More details<br />
of its approach can be found in the case study below. Being a very early mover,<br />
LegalZoom executives learned early that brand was particularly important in online legal<br />
services. <strong>The</strong> company reported marketing and sales spending of over $30 million in<br />
33. See Lloyd C. Harris & Nigel F. Piercy, Barriers to Marketing Development in the Barristers’ Profession, SERV. INDUS. J., Oct. 1998, at 19, 20;<br />
see also WERNER PEPELS & BRUNHILDE STECKLER, ANWALTS-MARKETING [LAWYER MARKETING] 2 (2003); Angela Vickerstaff, Legal Sector<br />
Marketing: A Contested Case, 38 MGMT. DECISION 354, 356 (2000). "Market orientation" is a strategic worldview whereby a firm focuses on its<br />
selected client base (its "market") in all it does. Serving that market is the focal goal of all functions in the business. <strong>The</strong> market, i.e. the clients, is<br />
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<br />
direction. “Marketing orientation,” as truly distinct from market orientation, is more tactical: in a marketing oriented firm, the marketing function<br />
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<br />
function.<br />
34. See Lisa O’Malley & Lloyd C. Harris, <strong>The</strong> Dynamics of the Legal Market: An Interaction Perspective, EUR. J. MKTG. 874, 875 (1999).<br />
35. See PEPELS & STECKLER, supra note 3, at 1.<br />
36. STEPHEN MAYSON, MAKING SENSE OF LAW FIRMS 15 (1997) [hereinafter MAYSON, MAKING SENSE].<br />
37.<br />
SIR DAVID CLEMENTI, REVIEW OF THE REGULATORY FRAMEWORK FOR LEGAL SERVICES IN ENGLAND AND WALES 5 (2004) [hereinafter<br />
CLEMENTI, REVIEW] available at http://www.jambar.org/clement_report.pdf.<br />
38.<br />
See PETER F. DRUCKER, MANAGEMENT, TASKS, RESPONSIBILITIES, PRACTICES 20 (1974); see also THEODORE LEVITT, THE MARKETING<br />
MODE 10 (1969). Both sources emphasize the importance of focusing on the customer, and hence, the importance of marketing within any<br />
organization.<br />
39. John O. Cunningham, Getting the Most Out Of Outside Counsel 4 MIDWEST IN-HOUSE 1, 25 (2007).<br />
40. See DRUCKER, supra note 9, at 20.<br />
41. See Harris & Piercy, supra note 3, at 20.<br />
7
2009 and 2010 and topped $40 million in 2011. Brand recognition is historically very low<br />
in the legal services industry, yet the services provided are ones for which trust is very<br />
important. As detailed below, LegalZoom has focused intently on building a recognized<br />
and trusted brand since its very early days and continues to do so.<br />
D. High-End, Personalized Service is Still in Demand<br />
Despite the massive paradigm shift from human to machine in the travel industry,<br />
a demand for travel agents still exists, even in this digital, data-driven world. A cadre of<br />
travel professionals has carved out niche specialties where individual, human interaction<br />
is desirable and sought after. Even with the online capabilities to secure one’s own travel<br />
plans, users find that they need recommendations, direction, and an expert who can<br />
navigate the overwhelming array of choices. 42 Indeed, notwithstanding the “bloodletting<br />
the industry has experienced since the onset of D.I.Y. booking more than a decade ago” it<br />
turns out that now “[n]early one in three leisure agencies is hiring … [a]nd in 2011 travel<br />
agencies experienced a second consecutive year of growth; their bookings account for a<br />
third of the $284 billion United States travel market.” 43 To be sure, the composition of<br />
the travel industry looks much different today than it did two decades ago—during “the<br />
mid-1990s, there were about 34,000 retail locations booking trips. Today, there are<br />
14,000 to 15,000.” 44<br />
Interestingly, travel agents “still play a relevant role,” at least in part due to “the<br />
drawbacks of the Web” 45 and the overwhelming amount of information available, some<br />
of which may be unreliable or not trustworthy. This has created a demand for “a new<br />
breed of tech savvy, specialized and collaborative agent.” 46 <strong>The</strong> client, of course, has<br />
done research and is better informed, yet still needs an expert’s guidance. “Agents today<br />
also know they must set themselves apart from the Web by offering special experiences<br />
that consumers can’t easily get on their own.” 47 Indeed, “in a recent test of agents versus<br />
online search engines[, a]gents won ‘nearly every time … on both price (the objective<br />
part of the test) and service (what you might call the essay question). In other words, the<br />
agents suggested alternate routes, gave advice on visas and just generally acted, well,<br />
more human than their computer counterparts.” 48<br />
Similarly, lawyers can position themselves as “tech savvy, specialized and<br />
collaborative” advisors. Some law schools are beginning to prepare students for this<br />
role. 49 Individual attorneys and law practices should similarly develop this expertise as a<br />
supplement to increasingly online services.<br />
E. Democratized Service Can Cultivate New Markets<br />
42 Michelle Higgins, Are Travel Agents Back? NY TIMES at TR1 (Apr. 20, 20<strong>12</strong>) (“I needed recommendations and someone to steer me in the<br />
right direction,” said Ms. Griffin, who opted to work with an agent after years of making her own reservations because she needed a getaway<br />
suitable for a toddler and had little interest in scrolling through endless and conflicting user hotel reviews online. “<strong>The</strong>re are so many,” she said.<br />
And with every site displaying beautiful pictures and tantalizing offers, “it can be overwhelming.”).<br />
43 Michelle Higgins, Are Travel Agents Back? NY TIMES at TR1 (Apr. 20, 20<strong>12</strong>).<br />
44 Id.<br />
45 Id.<br />
46 Id.<br />
47 Id.<br />
48 Id.<br />
49 For example, at Michigan State University College of <strong>Law</strong>’s ReInvent <strong>Law</strong> program, courses include Quantitative Methods for <strong>Law</strong>yers,<br />
Entrepreneurial <strong>Law</strong>yering, Legal Information Engineering, and <strong>Law</strong>yer Ethics and Regulation in a Technology-Driven World. See<br />
www.ReInvent<strong>Law</strong>.com (last visited Mar. 20, <strong>2013</strong>).<br />
8
Technology and online access democratized travel, making it not only more<br />
affordable but also leading to highly individualized experience through unbundled<br />
services and amenities. This also impacted the way travel agents priced their services, for<br />
example a “fee for issuing a ticket or a nominal fee for changing it … or charging for<br />
information management, on-site pass port or back-office processing. Many travel agents<br />
invested in electronic servicing capabilities either independently or with technology<br />
partners, which had the two-fold objective of reducing their own service costs as well as<br />
providing entry into the new electronic market.” 50 <strong>The</strong>se changes also “led to a<br />
redefinition of who the customer is at each stage of the process, and aligning costs and<br />
revenues accordingly.” 51 Prior to the 1990s, “the customer paid nothing explicit for<br />
travel services. <strong>The</strong> cost of the service was bundled into the cost of the air ticket.” 52<br />
After the Internet-revolution, “the cost of services – in the form of service fees – is now<br />
apparent.” 53<br />
<strong>The</strong> concept of unbundled services for legal services is only beginning to be<br />
explored. Unbundled legal services involves “an agreement between the client and the<br />
lawyer to limit the scope of services that the lawyer renders.” 54 Unbundling can occur<br />
vertically, “break[ing] up the lawyer’s role into a number of limited legal services,<br />
empowering the client to select only those needed” or horizontally, “limit[ing] the<br />
lawyer’s involvement to a single issue or court process.” 55 A range of activities can be<br />
offered as unbundled services: advice, research, document drafting, negotiation, court<br />
appearances, or the handling of isolated matters. While legal has been much slower than<br />
travel to incorporate unbundled services, some predict that “[d]ue to customer education<br />
and demand, by 2032, law firms of all sizes will be proactively offering unbundled<br />
services in all areas of law and to clients of all demographics.” 56 Unbundling may also<br />
alter the way lawyers offer service, shifting from reactionary to “a preventative approach<br />
that will be used symptomatically and asymptomatically.” 57<br />
While unbundling holds the potential to open new markets for legal services,<br />
whether through lower-costs for traditional services or through new services such as<br />
preventative approaches, there are regulatory barriers constraining the legal profession<br />
that were not at issue for the travel industry. <strong>The</strong>se barriers include unauthorized practice<br />
restrictions on who may provide legal services and prohibitions on partnership and coownership/investment<br />
with nonlawyers. <strong>The</strong> ban on external ownership and investment<br />
by nonlawyers is particularly devastating for lawyers who want to “deliver en masse<br />
representation to the general public for routine wills, child custody, divorce, mortgage<br />
foreclosure, standard contracts, small business needs, immigration, bankruptcy, housing<br />
disputes, and other basic matters.” 58 “But the American Bar Association, the entity<br />
50 Harrel Associates, <strong>The</strong> Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,<br />
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 27.<br />
51 Id.<br />
52 Id.<br />
53 Harrel Associates, <strong>The</strong> Internet Travel Industry: What Consumers Should Expect and Need to Know, and Options for a Better Marketplace,<br />
Consumer WebWatch (Jun. 5, 2002), http://www.consumerwebwatch.org/pdfs/internet-travel-industry.pdf at 32.<br />
54 Forrest S. Mosten, Unbundled Legal Services for Today – and Predictions for the Future, Family Advocate Vol. 35, No. 2 (Fall 20<strong>12</strong>) at 14.<br />
See also Stephanie Kimbro, LIMITED SCOPE LEGAL REPRESENTATION: UNBUNDLING AND THE SELF-HELP CLIENT (20<strong>12</strong>) (“In this rapidly<br />
changing economic and legal climate, lawyers are seeking new methods for delivering their services efficiently and effectively while attracting<br />
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<br />
providing representation for a clearly defined portion of the client's legal needs, such as preparing a legal document or making limited court<br />
appearances, lawyers can market their practice to an entirely new client base and give their firm a competitive advantage.”).<br />
55 Id. at 14<br />
56 Id. at 15.<br />
57 Id.<br />
58 Renee Newman Knake, Democratizing the Delivery of Legal Services, 73 OHIO ST. L.J. 1, 5 (20<strong>12</strong>).<br />
9
esponsible for drafting the Model Rules of Professional Conduct, refuses to engage in<br />
any meaningful reform and few jurisdictions have taken steps on their own.” 59<br />
F. Beyond the Role of Trusted Advisor: <strong>The</strong> <strong>Law</strong>yer as “Trusted Curator”<br />
<strong>The</strong> travel industry was one of the first to contemplate assuming the rule of<br />
curator. “<strong>The</strong> Web democratized the ability to spot things … [making] curated<br />
consumption … a kind of business, because of the sheer quantity of decisions people<br />
have to make around buying things.” 60 <strong>The</strong> idea of curation, or acting as a curator,<br />
contemplates a method for “individuals [to] share their knowledge and passion on any<br />
subject not only be creating original content about it, but also by scouring the web and<br />
curating the best content into a single location.” 61 Some of the best known and most<br />
successful online travel curators include Orbitz and Jetsetter. Jetsetter.com presents an<br />
interesting example of curated travel, because in a very crowed space (and in an industry<br />
that was utterly decimated by the Internet-boom in the 1990’s—the travel agent) we see<br />
the rise of a totally new service provider that distinguishes itself not by offering a new<br />
kind of hotel room, but by altering the way the same hotel room is offered.<br />
A number of recent entrants to the legal services market are taking on a similar<br />
sort of role, one beyond that of the traditional trusted advisor—“the lawyer as trusted<br />
curator.” 62 In an era of information overload, this seems to be an important role for an<br />
attorney. While the Model Rules of Professional Conduct do not specifically use this<br />
terminology of 'trusted curator,' this seems to be in the spirit of the Preamble to the Model<br />
Rules, which observes that “a lawyer should cultivate knowledge of the law beyond its<br />
use for clients, employ that knowledge in reform of the law and work to strengthen legal<br />
education. In addition, a lawyer should further the public's understanding of and<br />
confidence in the rule of law and the justice system.” 63 This guidance contemplates that a<br />
lawyer can and should be acting as a curator to educate the public, beyond developing the<br />
lawyer’s client base. A number of recent entrants to the legal services market employ<br />
aspects of curation. 64 Much like the curator of an exhibit in a museum, these legal<br />
services providers combine law with art, design, technology, gamification, humor, and<br />
news from other fields to provide a rich user experience. <strong>The</strong>y also offer at least a<br />
59 See Knake, supra note __, at 41–42 (discussing the ABA’s resistance to reform that would allow practice with or investment from nonlawyers).<br />
Only two jurisdictions have experimented with liberalization of the non-lawyer ownership and practice restrictions. Washington D.C. permits<br />
limited partnerships with non-lawyers (see D.C. Rules of Professional Conduct, Rule 5.4) and Washington state permits limited law practice for<br />
non-lawyers (see Washington Supreme Court Admission to Practice Rule 28, Limited Practice Rule for Limited License Legal Technicians).<br />
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.<br />
61 Rohit Bhargava, Why <strong>The</strong> Future of Travel & Destination Marketing is All About Curation, Influential Marketing Blog (Feb. 15, 2011)<br />
http://www.rohitbhargava.com/2011/02/why-the-future-of-travel-destination-marketing-is-all-about-curation.html<br />
62 For further discussion of “the lawyer as trusted curator,” see Renee Newman Knake, <strong>The</strong> <strong>Law</strong>yer as Trusted Curator, Legal Ethics Forum Blog<br />
(Mar. 17, <strong>2013</strong>), http://www.legalethicsforum.com/blog/<strong>2013</strong>/03/the-lawyer-as-trusted-curator.html.<br />
63 ABA Model Rules of Professional Conduct, Preamble (20<strong>12</strong>).<br />
64 See, e.g., Axiom<strong>Law</strong> you will find case studies and a map of legal services to explore; Inspired <strong>Law</strong> Practice uses Tumbler to collect and share<br />
information for lawyers to discover balance and happiness in their law practices; LegalZoom was an early mover in providing on-line legal forms<br />
for personal and business use; Legal365 is a UK competitor offering similar services; Riverview <strong>Law</strong> offers a free library of legal information<br />
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<br />
lawyers curating specialized information—the website offers a wealth of information about Supreme Court cases in an user-friendly, accessible<br />
website; <strong>The</strong> State Decoded is the brainchild of a nonlawyer, Waldo Jaquith, but has inspired some beautifully designed websites for state<br />
statutes, including Virginia Decoded and Mi<strong>Law</strong>s; Velawsity is a recently launched law practice management system, but already has over 3,000<br />
followers on Twitter from its curated legal news and commentary; Westaway <strong>Law</strong> is a law firm for social entrepreneurship, and devotes a blog to<br />
all things related to that field.; LegalForce’s new retail presence – the BookFlip Store. Most of these examples are online curation, but<br />
LegalForce is banking on its online success with Trademarkia.com to open a beautifully designed store-front historic offering books, electronic<br />
tablets and, of course, a highly-curated legal services experience where customers can do-it-yourself with books and a computer kiosk or meet<br />
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<br />
WHSmith Stores.<br />
10
portion of their curated information for free, letting users establish some form of<br />
relationship before taking it to the level of becoming client.<br />
To better understand these lessons, this paper next explores the emerging role of<br />
legal process outsourcing and data-driven procurement followed by case studies of two<br />
innovators in online legal services—LegalZoom and Riverview <strong>Law</strong>.<br />
Part II. How <strong>Law</strong> Can Apply the Lessons from Travel—Three Case Studies<br />
Part II takes up three case studies to examine how some lawyers and legal service<br />
providers are already applying the lessons from the travel industry, and to suggest how<br />
other segments of the legal profession might consider doing so. While the use of case<br />
studies as a research method is not necessarily all that unusual for other disciplines, this is<br />
a less-explored realm in legal scholarship. Writing together as a group of academics and<br />
industry professionals we endeavor to respond in a meaningful way to those who critique<br />
the utility of law review articles. 65<br />
A. Case Study #1: <strong>The</strong> Emergence of LPOs and Data-Driven Procurement in<br />
American Big <strong>Law</strong><br />
<strong>The</strong> entrance of legal process outsourcing and data-driven procurement have<br />
impacted big law and fundamentally altered the role of the general counsel (GC). Top<br />
management around the world puts increasing pressure on its general counsel. <strong>The</strong>re is no<br />
doubt that the economic crisis forced most companies to scrutinize costs in ways they<br />
have never experienced before. From today’s management point of view, legal<br />
departments are cost centers and need to be managed as such. <strong>The</strong> legal department has to<br />
be a better corporate citizen, no more ‘legal is different’ explanations are accepted.<br />
Instead, legal is expected to create value for the business units and the organization it<br />
serves. Value can be demonstrated in many ways, including members of legal<br />
departments participating in committees alongside business managers and provide<br />
training to their internal clients. This connects lawyers with business people, possibly<br />
circumvents legal issues, and raises awareness of the work—and value—the legal<br />
department provides. In any case, like the rest of the organization, the legal department is<br />
expected to be efficient, do more with less, save money and reduce risk.<br />
This fundamentally changes the way a legal department has to be run. Legal now<br />
must manage its workflow, inventory, documents, and knowledge, it must budget,<br />
exercise cost control, closely monitor and analyze legal spend. In an effort to rein in cost,<br />
GCs consolidate the number of firms their company regularly works with, negotiate<br />
discounts and freeze rates, and demand fixed fees or caps or other alternative fee<br />
arrangements. <strong>The</strong>y hire legal operations people to support them with these tasks and<br />
even collaborate with procurement to ensure they get the most value from their law firms.<br />
In short, they are turning to data and analytics to understand and make many of these<br />
decisions, much like travel did in evolving from a desks of booking agents to rows of<br />
computer processors.<br />
<strong>The</strong> new champion in this environment is the GC as the leader of change: change<br />
towards professional management of the legal department itself as well as its<br />
relationships with internal clients and outside counsel. “Three years of cost-cutting has<br />
65 [cite Justice Roberts, others on this]<br />
11
created a new dynamic in the relationship between law firms and their clients,” found<br />
Financial Times research report A New Dawn: Lessons for <strong>Law</strong> Firm Management in the<br />
Post-Crisis World. 66 Rather than maintaining a cozy relationship with law firms on an<br />
ongoing basis, more and more companies are taking a rigorous approach to selecting<br />
firms and ensuring that the relationship continues to deliver expected outcomes.<br />
A central tool to actively manage the relationship with one’s law firms, electronic<br />
billing, is common practice in the U.S. today. EMEA countries are following suit. In<br />
addition, some legal departments choose non-traditional ways of collaboration with their<br />
law firms, an approach e.g. Pfizer and Deutsche Bank have taken. Companies with UK<br />
legal work now can also benefit from new model law firms such as Riverview <strong>Law</strong><br />
discussed more fully in the final case study or organizations such as BT, who offer<br />
specialized legal services. Others set up their own pool of lawyers in less expensive<br />
locations: British construction services company Carillion for example, hired paralegals<br />
in northern England. To ensure cost savings were achieved, both Carillion’s in-house<br />
lawyers as well as the company’s panel firms, including Slaughter & May, were expected<br />
to use the paralegals’ services. Two innovations for legal services in big law illustrate<br />
how travel’s lessons can assist lawyers: legal process outsourcing and procurement. Each<br />
is taken up in turn below.<br />
1. Legal Process Outsourcing<br />
More common is hiring legal process outsourcers (LPOs) for specific projects or<br />
tasks, bypassing law firms for routine work. According to Aaron Harmon, the ‘stigma’<br />
once associated with using LPOs is dissipating and more organizations are exploring—or<br />
already using—it. 67 <strong>The</strong> global LPO market currently employs almost 9,000 people and<br />
has reached $1.1bn of annual sales in 20<strong>12</strong> according to <strong>The</strong> 20<strong>12</strong> Legal Outsourcing<br />
Market Global Study. It saw an average growth of 32 percent in each of the last 3 years.<br />
Further 30+ percent growth is expected for the coming three years, which means that the<br />
market will double in size by 2015. It is projected to reach $3bn (or £2bn) by 2015. As<br />
LPOs make up only 0.25 percent of the overall the global legal services market, there is<br />
likely to be “considerable room for growth.” According to the before mentioned Study,<br />
even existing users of legal outsourcing have only outsourced about 5 percent of what<br />
they could potentially outsource. 68<br />
Legal process outsourcing is the process of contracting out legal tasks to less<br />
expensive third party vendors. <strong>The</strong>y are typically based in places far away, such as India<br />
and the Philippines. Looking to reduce inefficiencies, maximize profitability, and gain or<br />
retain competitive advantages, many businesses started outsourcing essential functions in<br />
the early 1990s. This included back office administrative work, IT, human resources,<br />
accounting etc. This process is called business process outsourcing (BPO). In the mid-<br />
1990s, legal services were outsourced for the first time. <strong>The</strong> LPO industry evolved most<br />
rapidly in India. Harmon suggests that due to “British colonization, many Indian workers<br />
speak English fluently, thereby facilitating an East-West synergy more easily than other<br />
countries.” 69 In addition, India utilizes a common law system similar to what is practiced<br />
66 http://aboutus.ft.com/2011/06/28/financial-times-study-highlights-mutual-misunderstandings-between-law-firms-and-their-clients/<br />
67 Aaron R. Harmon, <strong>The</strong> Ethics of Legal Process Outsourcing to India—Is the Practice of <strong>Law</strong> a “Noble Profession,” or is it Just Another<br />
Business 13 U. of Fl. J. Tech. L. & Pol’y 41 (June 2008).<br />
68 Edward Brooks, <strong>The</strong> 20<strong>12</strong> Legal Outsourcing Market Global Study; http://www.legalfutures.co.uk/latest-news/lpo-warning-law-firms-generalcounsel-freeze-out.<br />
69 See Id. at 2.<br />
<strong>12</strong>
in the United States and Britain, a result of British colonization.<br />
LPOs started out offering transcription and word processing, and other routine,<br />
back-office paralegal tasks. Over time, they moved to include more substantive issues<br />
such as patent applications and e-discovery. Increasingly, LPOs offer higher-level types<br />
of work traditionally handled by junior associates for a fraction of the price of U.S.<br />
lawyers. If the BPO development is any indicator for the LPO development, this is<br />
unlikely to stop: services offered have become more technical and sophisticated over<br />
time. Harmon understands that the first phase of offshoring involved company-owned<br />
(captive) units where basic and repetitive “back-office” tasks were sent by companies.<br />
During a second phase, non-captive service providers began to emerge, and as more and<br />
more companies set up back offices in India, venture capitalists began to fund start-up<br />
companies to provide similar services to third party clients. 70<br />
While LPOs offer their services to law firms, GCs increasingly buy directly from<br />
LPOs, cutting law firms out. However, while currently few law firms see LPOs as a<br />
threat to the law firm’s core offering, the legal industry would not be the first to<br />
mistakenly dismiss low-end competitors: In <strong>The</strong> Innovator's Dilemma: <strong>The</strong> Revolutionary<br />
Book That Will Change the Way You Do Business Clayton Christensen warns that like<br />
other industries before, incumbent suppliers (such as traditional law firms) run the risk to<br />
be replaced, hurt or significantly changed by low-end competitors (such as LPOs).<br />
“<strong>The</strong> new products were low-end, dumb, shoddy, and in almost every way inferior. But<br />
the new products were usually cheaper and easier to use, and so people or companies who<br />
were not rich or sophisticated enough for the old ones started buying the new ones, and<br />
there were so many more of the regular people than there were of the rich, sophisticated<br />
people that the companies making the new products prospered. Christensen called these<br />
low-end products “disruptive technologies,” because, rather than sustaining technological<br />
progress toward better performance, they disrupted it. After studying a few exceptions to<br />
the pattern of disruption, Christensen concluded that the only way a big company could<br />
avoid being disrupted was to set up a small spinoff company that would function as a<br />
start-up, make the new low-end product, and be independent enough to ignore what<br />
counted as sensible for the mother ship.” 71<br />
This scenario becomes even more palpable since buyers who switch to LPO suppliers<br />
“are unlikely to switch back to <strong>Law</strong> Firms to have that work done in the future,”<br />
according to the 20<strong>12</strong> Legal Outsourcing Market Global Study. 72 Despite the possible<br />
threat, the Study noted that law firms have taken few steps to protect themselves against<br />
their clients’ changing buying pattern. In fact, it remarks that “inaction by <strong>Law</strong> Firms is<br />
one of the biggest threats.” 73<br />
2. Procurement<br />
Collaboration with procurement is a more recent development, taking part in<br />
large corporations, particularly in Fortune 100 companies. Historically, procurement<br />
70 Id.<br />
71 Larissa MacFarquhar, Profiles, “When Giants Fail,” <strong>The</strong> New Yorker, May 14, 20<strong>12</strong>, p. 84<br />
http://www.newyorker.com/reporting/20<strong>12</strong>/05/14/<strong>12</strong>0514fa_fact_macfarquhar#ixzz2McKZaqSd; Clayton Christensen, <strong>The</strong> Innovator's Dilemma:<br />
<strong>The</strong> Revolutionary Book That Will Change the Way You Do Business.<br />
72 See Id. at 2.<br />
73 Id.<br />
13
focused on the purchasing of raw materials, production items as well as maintenance,<br />
repair and operations supplies. In the last decades procurement made inroads in<br />
professional services, including accounting, engineering, information technology, and<br />
consulting. Each of the professions protested against procurement getting involved in<br />
sourcing their services, arguing its distinction from “normal” business. In fact, until<br />
recently, the legal department was considered sacred, the last holdout allowed to source<br />
without the involvement of procurement. Procurement has been monitoring legal spend,<br />
noting its high degree of spending and lack of transparency. 74<br />
Today, procurement is involved in the purchasing of legal services to discover<br />
savings, negotiate more efficiently, measure best value, and provide more objective<br />
comparisons. When effectively using procurement, legal departments do not simply hand<br />
over all power to their procurement colleagues. Procurement is rarely the final decision<br />
maker: Selecting law firms is still the legal department’s prerogative. 75 Rather,<br />
Procurement is mainly responsible managing the sourcing process; for negotiation and<br />
contract development; pre-purchase evaluation of legal services providers (which may or<br />
may not be traditional law firms); as well as developing sourcing criteria and purchasing<br />
strategies. Procurement professionals are “buyers” in the classic sense: they are<br />
responsible for the engagement letter/retainer or framework agreement and negotiations.<br />
<strong>The</strong>y are also influencers, in the sense that they try to affect the outcome decisions with<br />
their opinion. Additionally, procurement professionals also act as gatekeepers for the<br />
legal category—they help manage and direct the flow of information between the service<br />
provider and client. 76<br />
“Effective legal [procurement] sourcing initiatives create ways to articulate and<br />
define the specific legal expertise needed, and then objectively assess which outside<br />
counsel has that expertise. Initially, these definitions of expertise and legal skill only<br />
reside in the minds of the in-house counsel. But a robust sourcing approach will ensure<br />
that the specific needs are formally articulated,” notes Jason Winmill. 77 What’s more,<br />
procurement professionals are involved not only in purchasing routine services and legal<br />
“commodities,” but also in complex and high value legal services. This means, that there<br />
is not a lot left in which procurement is not involved. Exceptions may be emergency<br />
situations, where procurement’s timeframe does not fit.<br />
As expense pressures have grown in the last few years, and procurement<br />
professionals have developed more experience sourcing professional services, some GC<br />
welcome procurement’s advice and support. Forward-thinking GCs like Dan Troy of<br />
GSK turn to procurement for help, and it pays off. “In the nearly four years since<br />
GlaxoSmithKline looked to revamp the way it hires and pays for outside legal services,<br />
the pharmaceutical giant has saved tens of millions of dollars in legal fees.” 78<br />
An opportunity for collaboration between the legal department and procurement<br />
is exploring whether legal services can be ‘unbundled’ to borrow a lesson for travel and<br />
74 Jason Winmill, Working with In-House <strong>Law</strong>yers: A Significant Sourcing Opportunity, Inside Supply Management, Legal Briefs: Supply<br />
Management’s Legal Issues, Vol. 19, No. 9, pages 36-37.<br />
75 Id.<br />
76 Silvia Hodges, Legal Procurement: Sourcing is a team Sport, Bloomberg <strong>Law</strong>, http://about.bloomberglaw.com/practitioner-contributions/legalprocurement-sourcing-is-a-team-sport/<br />
77 Id at 7.<br />
78 Gina Passarella, GlaxoSmithKline Saves Millions in Legal Fees With Value-Based Programs, <strong>The</strong> Legal Intelligencer, (July 9, 20<strong>12</strong>),<br />
http://www.law.com/jsp/cc/PubArticleCC.jsp?id=<strong>12</strong>02561658766&GlaxoSmithKline_Saves_Millions_<br />
in_Legal_Fees_With_ValueBased_Programs<br />
14
whether some activities traditionally carried out by counsel should be outsourced to nontraditional<br />
law firms or LPO providers. In-house counsel and procurement have to work<br />
together to balance the company’s cost-cutting needs with their preferences for outside<br />
counsel. GCs are advised to quantify legal services to steer procurement toward<br />
measuring results, not just costs. This can be achieved by benchmarking costs, comparing<br />
savings in the industry in general or looking at outside counsel savings affected by better<br />
practices or better technology.<br />
Governmental agencies have been using the so-called Two-Step Procurement<br />
Process for competitive contracting since the 1950s. This process combines sealed<br />
bidding and negotiation. Typically, procurement sends out a request for proposals (RFP),<br />
describing the client’s requirements. After procurement receives and evaluates the<br />
proposals, procurement asks the firms whose offers they found acceptable to submit their<br />
price proposals based on their initial terms. Only then will procurement conduct<br />
negotiations with the parties, now comparing “apples to apples,” leading to the award of a<br />
contract to the lowest responsive offer.<br />
Sourcing legal services requires a significant degree of trust between lawyer and<br />
client, something that does not come easily with procurement approaches. Legal services<br />
are, after all, expertise- and judgment-based services, not fungible commodities. It is<br />
hence important to understand the requirements, dependencies, cost structure and the<br />
environment in which the services are used. For example, procurement must understand<br />
if the firms serve a unique geography or mostly operate in a tier 1 market. This can make<br />
a big difference according to the Real Rate Report ® ’s 79 regression model. Based on<br />
actually paid data, the model says that the location of a lawyer in a tier 1 market, such as<br />
New York, Chicago, and Washington DC etc. raises the hourly rate of a lawyer by $161.<br />
However, rather than moving work away from the most expensive locations, it is<br />
important to understand why the work is being done there and what value is offered. It<br />
may be worth the additional cost. Again, it is helpful to ‘unbundle’ activities that have<br />
traditionally been treated as single matters to determining how to move some tasks to<br />
other less expensive–providers, such as LPOs creates different risks to manage.<br />
Also according to the Report, law firm rates have continued to increase<br />
regardless of the larger economic situation. Although rate increases were somewhat<br />
restrained during the recession, in the past two years, rates have resumed growing well<br />
past inflation. What’s more, rates for the highest billing lawyers have been growing<br />
nearly three times faster than those of the lowest billing lawyers: a 75 percent increase<br />
since 2009. Rates for lower priced lawyers, however, have only seen a slow increase as<br />
they have been facing greater competition from LPOs and contract attorneys. <strong>The</strong> vast<br />
majority of lawyers, 90 per cent, billed different rates to different companies for similar<br />
types of work. Data from the Real Rate Report ® showed that some practice areas—such<br />
as M&A—had the highest proportion of lawyers billing companies different rates, while<br />
other areas—e.g., Corporate and General Business—showed less variation. Although<br />
many companies thought they were receiving the lowest available rates with law firms,<br />
many were not. More transparency in the market is likely to mean that rates will be less<br />
variable in the future as firms will likely face tougher negotiators. Of course, rates should<br />
be evaluated in the context of outcomes to as great an extent as possible. Analyzing total<br />
79 <strong>The</strong> Real Rate Report ® is the legal industry's only benchmark report for law firm rates using actual legal invoice data instead of self-reported<br />
survey responses. This report — the only of its kind — has been developed by TyMetrix and the Corporate Executive Board’s Legal and<br />
Compliance practice as a guide to the pricing of services throughout the legal industry. http://tymetrix.com/products/legal-analytics/2/20<strong>12</strong>-realrate-report/<br />
15
cost per matter often—but not always—discloses that higher combined rates result in<br />
lower overall cost. For litigation matters, comparisons preferably include loss results,<br />
accounting for disposition type and venue. Again, benchmarking one’s results against<br />
industry experience will add information and insight.<br />
Developing a negotiation strategy often includes a preferred provider program,<br />
hourly rate structure per timekeeper, per type of practice, per region, volume price<br />
agreement (VPA), rebates, payment terms, and agreement internal billing guidelines. A<br />
well-designed, fact-based approach for reviewing legal spend can be very beneficial to an<br />
organization. Corporations will benefit from optimizing the number of firms used, their<br />
ability to leverage spend across the business, standardized rates, documented processes<br />
for engaging preferred firms for service, improved billing guidelines for invoice audit<br />
accuracy and complete transparency and visibility into all legal spend. A good sourcing<br />
strategy that includes developing, implementing, monitoring, and continuous improving<br />
can produce sustainable savings averaging of 7 to 10 percent, and in some cases,<br />
significantly more. Standard practices of corporations today include billing guidelines,<br />
case management guidelines, matter evaluation process, and invoice review process. <strong>The</strong><br />
majority of organizations also generate key performance indicator (KPI) reports. <strong>Law</strong><br />
firms need to understand which KPI procurement measures and deliver on these<br />
More and more, these changes are led by data-driven legal operations<br />
professionals. Typically equipped with a strong financial background, legal operations<br />
managers scrutinize legal spending: <strong>The</strong>ir analyses go from the 10,000 feet-view down to<br />
the granular level of the Uniform Task Based Management System (UTBMS) task code,<br />
while invoices are looked at—sometimes literally—line by line.<br />
Legal operations professionals use data to conduct analyses in four performance<br />
areas regarding rates, outcomes, resource use, and other law firm metrics. <strong>The</strong> quality of<br />
the analytics here is mainly driven by:<br />
<br />
<br />
<br />
<br />
<strong>The</strong> quantity of the data – how detailed is it, how much of the legal spend is covered, how<br />
many years of data comparisons are available.<br />
<strong>The</strong> extent to which the data can be segmented: To generate insightful analyses, for<br />
example, segmentation by descriptive information (e.g. practice area, timekeeper level,<br />
severity) would be useful, or segmentation by time (including trending information).<br />
<strong>The</strong> extent to which miscellaneous performance indicators are collected.<br />
<strong>The</strong> extent to which benchmark data can be incorporated into the analyses.<br />
To evaluate efficiency, they measure the extent to which higher and lower cost<br />
timekeepers and timekeeper levels are used on matters. For example, to what extent are<br />
partners used compared to associates and paralegals? How does it change over time?<br />
Analyses account for matter type as well as for severity/complexity. Evaluation of<br />
efficiency can be applied at the matter level as well as at the phase, task or group of tasks<br />
level by incorporating UTBMS data. Other performance metrics used include the quality<br />
of line item entries, compliance with expense guidelines, on-going/unusual weekend<br />
hours billed or the frequency of high daily hours for individuals, performance to budget,<br />
closed matter performance evaluations, and number of billers per matter.<br />
So what conclusions can we draw from this rapidly evolving situation? <strong>The</strong> basis<br />
of valuable insight is clean, reliable data that can be sliced and diced for analysis.<br />
16
Without the necessary systems or processes to capture and analyze spend data the legal<br />
department continues to operate only partially sighted. Until now, the legal department<br />
was typically the last part of the organization to avoid this level of data scrutiny.<br />
However, time is running out for insisting that legal is ‘different.’ <strong>The</strong> ‘legal exception’<br />
has a limited shelf life; show good corporate citizenship now before you are forced to.<br />
Adapting to that change in order to stay competitive, to thrive in the “new normal,” is<br />
essential. As discussed more fully in the case study below, LegalZoom, the online<br />
provider of self-help legal documents, for example, has for several years battled with the<br />
North Carolina Bar Association about the bar’s attempt to prevent LegalZoom from what<br />
it considers the unauthorized practice of law in the state. This reflects an economy-wide<br />
change.<br />
From travel agents to print journalists, “middleman” professions are increasingly<br />
irrelevant due to computer and Internet technology advances. Business and individual<br />
clients likewise assume that electronic tools make lawyers increasingly irrelevant to help<br />
with commodity services like drafting a will, filing a patent application, or registering a<br />
deed. While some jobs are being replaced with technology, however, new roles are<br />
developing. Much as the information overload in travel led to the role of curator and<br />
cultivated a need for high-end, personalized, human expertise in planning for travel<br />
experiences, law is witnessing the emergence of roles such as the lawyer as a trusted<br />
curator and a return to the lawyer as trusted advisor for specialized, nuanced service.<br />
Technology will continue to affect the cost and quality of the legal service delivered to<br />
the clients. Improving the delivery of legal service through knowledge management and<br />
client relationship management software will make legal costs competitive. Getting the<br />
work, doing the work with the help of technology, and getting paid for the work will all<br />
be transformed. Business schools call this marketing, production, and finance. <strong>Law</strong> firms<br />
must consider them the survival tactics of the future. 80 <strong>The</strong> next two case studies make<br />
these observations compellingly clear.<br />
B. Case Study #2: LegalZoom as First-Mover in the Online, Do-It-Yourself Legal<br />
Services Market<br />
LegalZoom was founded with a vision of combining the power of online technology<br />
with deep legal experience to create a scalable online legal platform that would<br />
fundamentally transform the way legal services are delivered to small businesses and<br />
consumers. In the twelve years since its launch, LegalZoom has become the leading<br />
online provider of services that meet the legal needs of small businesses and consumers<br />
in the United States. <strong>The</strong> company served approximately two million customers in the<br />
first 10 years of business. In 2011 LegalZoom customers placed approximately 490,000<br />
orders and more than 20 percent of new California limited liability companies were<br />
formed using LegalZoom’s online legal platform. Second quarter revenues in 20<strong>12</strong><br />
reached nearly $50 million 81 .<br />
80 http://wislawjournal.com/<strong>2013</strong>/02/22/lawbiz-coaches-corner-understanding-law-firms-new-normal/<br />
81 All financial data is publicly available in LegalZoom.com, Inc’s S1 on file with the Securities and Exchange Commission, available at<br />
http://www.sec.gov/Archives/edgar/data/<strong>12</strong>86139/0001047469<strong>12</strong>007609/a2209713zs-1a.htm (last visited Mar. 20, <strong>2013</strong>).<br />
17
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Quarterly Revenues<br />
(in millions)<br />
<strong>The</strong> company remains focused on transforming the small business and consumer<br />
legal services market by leveraging the power of technology and people. Today,<br />
LegalZoom’s services include a portfolio of interactive legal documents that are<br />
personalized by customers through dynamic online processes, as well as subscription<br />
legal plans and registered agent services. For small businesses and consumers who want<br />
legal advice, LegalZoom’s subscription legal plans connect customers with experienced<br />
attorneys who participate in a legal plan network. In order to continue this type of<br />
expansion over the last <strong>12</strong> years, LegalZoom has focused a great deal of effort on two<br />
areas: exceptional customer experience and building a leading brand.<br />
A. Exceptional customer experience.<br />
Nearly every LegalZoom customer is asked one question following his or her<br />
purchase: “How likely are you to recommend LegalZoom.com to a friend or colleague?”<br />
This question is intended to measure customer loyalty by facilitating the tracking of net<br />
promoters – the percentage of customers who are promoters of a brand or company minus<br />
the percentage who are detractors 82 . <strong>The</strong> number is important as loyalty drives revenues<br />
both from repeat customers and from new customers who were referred to a company.<br />
<strong>The</strong> net promoter score has been shown to serve as a very good indicator of customer<br />
loyalty and predictor of growth. For a striking example of this, see the chart below which<br />
shows 3-year growth of several airlines on the Y-axis against net promoter score of those<br />
same companies on the X-axis.<br />
82 For a thorough discussion of Net Promoter Score and loyalty, see Reichheld, Frederick, <strong>The</strong> One Number You Need to Grow, Harvard<br />
Business Review, 2003. To calculate net promoter score, calculate the percentage of customers who respond with nine or ten (promoters) and the<br />
percentage that respond with zero through six (detractors). Subtract the percentage of detractors from the percentage of promoters to arrive at<br />
your net promoter score.<br />
18
While net promoter score is not a perfect indicator and is not appropriate for all<br />
industries, it does provide a simple and fairly accurate measure of customer loyalty when<br />
applied appropriately.<br />
Because LegalZoom recognizes the importance of this type of loyalty in the<br />
online legal service business, customer satisfaction has been a primary focus of the<br />
company for years and the company has provided an exceptional customer experience<br />
through a variety of strategies. For example, customer care is central to LegalZoom’s<br />
culture and employees are highly focused on providing exceptional customer<br />
experiences. Even in the early days as a legal document provider, LegalZoom provided<br />
live customer care representatives who focused on resolving customer issues. LegalZoom<br />
has put its money where its mouth is regarding customer experience by maintaining a<br />
satisfaction guarantee for its offerings. If a customer is not completely satisfied with<br />
services received for any reason, LegalZoom will attempt to correct the situation, or<br />
provide a refund or credit. Approaches such as these have not gone unnoticed by<br />
LegalZoom’s customers. While LegalZoom does not publicize its net promoter score, in<br />
2011, nine out of ten of the approximately 34,000 customers who responded to a<br />
LegalZoom survey said they would recommend the company to their friends and family.<br />
B. Leading Brand.<br />
LegalZoom recognized early on that building a trusted brand would be critical for<br />
a company providing legal documents online. <strong>The</strong> credibility of the documents is<br />
extremely important for any company in the space. That is why LegalZoom co-founders<br />
Brian Lee and Brian Liu approached Robert Shapiro with an offer to join as a co-founder<br />
in the very early days of the company. Since that time, LegalZoom has continued to focus<br />
on building a trusted brand through use of talk radio, pod casts, television commercial<br />
using real LegalZoom customers and innovative social media initiatives such as Free Joe<br />
Friday (a free legal Q&A session on Facebook with Joe Escalante; an attorney and host<br />
of the syndicated entertainment legal advice radio call-in program “Barely Legal<br />
Radio.”). As a result of these efforts, LegalZoom has become the leading, nationally<br />
recognized legal brand for small businesses and consumers in the United States; with<br />
60% aided brand awareness based on a survey conducted using United Sample, Inc. in<br />
January 20<strong>12</strong> 84 .<br />
83<br />
83 Reichheld, Frederick, <strong>The</strong> One Number You Need to Grow, Harvard Business Review, 200<br />
84 LegalZoom.com, Inc. S1<br />
19
C. Early Stages – Document Assembly<br />
LegalZoom first deviated from the traditional law firm model more than a decade ago<br />
when it entered the market as a Legal Document Assistant and introduced its online legal<br />
document services. Legal Document Assistants are non-lawyers that provide basic legal<br />
documents directly to consumers, generally using online intake questionnaires and<br />
automated document assembly. <strong>The</strong>se entities focus primarily on the unmet legal needs<br />
of consumers in moderate income households - needs have existed for some time 85 .<br />
While the levels of service vary somewhat, most of these entities provide consumers with<br />
some sort of legal document, but no tailored legal advice. <strong>The</strong>se entities are regulated<br />
directly in a few states 86 and indirectly through the state bars and committees on<br />
unauthorized practice of law in most others.<br />
As a result of LegalZoom’s early success in providing online legal document<br />
services, the company has become seen as a substitute to lawyers and is viewed as cutting<br />
into the low-end, routine, less custom work. Richard Susskind provides an excellent view<br />
of the spectrum of legal services product. At one end of the spectrum, are bespoke legal<br />
services. <strong>The</strong>se are “traditionally handcrafted, one-to-one consultative professional<br />
services.” 87 Legal “commodities” are on the opposite end of the spectrum, with<br />
gradations in between 88 . LegalZoom has been providing services at the Commodity and<br />
Packaged end of the spectrum in the traditional markets for small firms (estate planning<br />
documents, small business documents, etc.) for around a decade and many other<br />
providers have followed suit.<br />
Traditionally, the threat of substitutes for law firms has been very low. <strong>The</strong><br />
profession is regulated and lawyers themselves can dictate who can be licensed to<br />
practice law. As of 2007, approximately 94% of all services provided under the legal<br />
services category were provided by law firms 89 . That said, in recent years substitutes have<br />
been the focus of a great deal of energy from the legal services industry. <strong>The</strong> growth of<br />
this industry has been viewed as a threat by small firms in particular because the<br />
provision of simple legal documents such as Last Wills and Powers of Attorney has<br />
traditionally been their market. <strong>The</strong> impact of this threat is that certain legal services are<br />
becoming commoditized 90 . In addition, these simple services are often the entry point for<br />
small firms into the lives of clients from whom they expect to receive significant business<br />
in the future. As such, small firms and sole practitioners have reacted with lawsuits<br />
claiming Unauthorized Practice of <strong>Law</strong>, among other things, with limited success 91 .<br />
85<br />
<strong>The</strong> unmet legal needs of consumers are well documented and dramatic. In 1994, the American Bar Association published Findings of the<br />
Comprehensive Legal Needs Study. <strong>The</strong> study surveyed low and moderate income households to assess their legal needs and related solutions for<br />
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<br />
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<br />
their problem. William Hornsby, “Improving the Delivery of Affordable Legal Services Through the Internet: A Blueprint to Shift to a Digital<br />
Paradigm, ABA Standing Committee on the Delivery of Legal Services.<br />
86<br />
See California Business & Professions Code § 6400 et seq. and Arizona Code of Judicial Administration §7-208<br />
87 RICHARD SUSSKIND, THE END OF LAWYERS? RETHINKING THE NATURE OF LEGAL SERVICES __ (2008)<br />
88 Id.<br />
89<br />
Mintel, Legal Services Snapshots – US – December, 2008<br />
90 Susskind defines a commoditized legal service as “an IT-based offering that is undifferentiated in the marketplace (undifferentiated in the<br />
minds of the recipients and not the providers of the service).”<br />
91<br />
In fact, some attorneys point out that this approach only further commoditizes such services by basically saying such companies are providing<br />
the equivalent services of an attorney. Thus far, courts have generally recognized the difference between online “scriveners” and unauthorized<br />
practice of law.<br />
20
Today, LegalZoom offers a broad portfolio of interactive legal documents that<br />
customers can tailor to their specific needs through using dynamic online processes and<br />
scalable technology. LegalZoom’s interactive legal documents are designed for use, as<br />
appropriate, at the federal level, as well as in all 50 states, the District of Columbia and<br />
approximately 2,900 U.S. counties. LegalZoom’s interactive legal document services for<br />
small businesses include limited liability company formations, incorporations and<br />
trademark applications and for consumers include wills, living trusts and powers of<br />
attorney. Customer demand for these transactional offerings has remained very strong<br />
with recent quarterly order volume remaining at over 100,000 transactions with high<br />
points of over 150,000 92 .<br />
200<br />
150<br />
100<br />
50<br />
0<br />
Orders Placed<br />
(Thousands)<br />
This order volume not only provides revenues, but also provides LegalZoom with<br />
unique insight into the legal needs of small businesses and consumers. LegalZoom<br />
leverages that legal knowledge and team of experienced, in-house attorneys, often in<br />
consultation with outside attorneys from across the United States, to design, review and<br />
maintain their services. <strong>The</strong> high volume of transactions handled and the feedback<br />
received from customers and government agencies give LegalZoom a scale advantage<br />
that enables development of additional services to address their customers' needs and<br />
refine their business processes.<br />
Subscription Legal Plans<br />
LegalZoom’s understanding of their customer’s needs eventually led to<br />
significant changes to the business. Where once there was a great deal of room to work<br />
with true DIY customers, LegalZoom began to see more customers in need of legal<br />
advice. Due to Unauthorized Practice of <strong>Law</strong> and Corporate Practice of <strong>Law</strong> statutes,<br />
LegalZoom employees could not provide such assistance. Further, due to Model Rule 5.4<br />
and its various incarnations across the US, LegalZoom could not, even if desired, develop<br />
or invest in a law firm to assist customers in these matters 93 . While lead generation<br />
between non-lawyer websites and lawyer was becoming increasingly accepted,<br />
92 LegalZoom.com, Inc. S1<br />
93 While customer or client demand for such arrangements appears to be high, the US legal industry has been resistant to allowing practitioners<br />
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<br />
lawyers’ professional judgment. However, many in the industry are calling for reforms which would allow partnerships with outside non-lawyer<br />
professionals, the granting of partner status or ownership to such professionals within law firms, and even stock ownership of firms by the public.<br />
According to proponents, such reforms would increase clients’ access to firms, allow firms to raise much-needed capital, and help firms attract<br />
and retain talent, among other benefits. <strong>The</strong>se calls are growing stronger given recent developments in England and an increa sing focus on access<br />
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<br />
the recommendations of the counsel set up to study the issue, voted resoundingly against non-lawyer ownership.<br />
21
LegalZoom knew that a network of unaffiliated lawyers simply using the LegalZoom<br />
brand to bring in leads was unlikely to be a beneficial arrangement for their customers.<br />
Ultimately, this led the company to establish basic legal service plans to meet the<br />
needs of their customers. Legal service plans appealed for two primary reasons. First, the<br />
format was generally accepted by regulators. As the ABA has noted “<strong>The</strong> ABA has long<br />
supported prepaid legal services plans as a way to increase access to the justice system<br />
for low‐ and middle‐income Americans. <strong>The</strong>se plans allow individuals and families to<br />
address legal issues before they become significant problems, reducing demands on<br />
already overburdened court systems and instilling confidence in our justice system.” This<br />
same report touched on the second reason that legal plans appeared to be such a good fit<br />
for LegalZoom’s customer base. As the report noted, “for the consumer, legal services<br />
are among the most difficult services to buy. <strong>The</strong> prospect of doing so is rife with<br />
uncertainty and potential risk,” and further concluded, “the challenge (and opportunity)<br />
for the legal profession is to make lawyers more accessible and less threatening to<br />
consumers who might need them.” 94 This opportunity of making lawyers more accessible<br />
and less threatening to consumers was a perfect fit for LegalZoom’s mission.<br />
Legal service plans (legal plans), have been offered in Europe for more than one<br />
hundred years and, in some countries, have market penetration in excess of 60 percent.<br />
Legal plans were not developed in the United States until the late 1960s. Since that time,<br />
there has been substantial growth in the market. Legal service plans are offered through<br />
various organizations and marketing methods and contain a wide variety of benefits. A<br />
large number of plans are offered free to members of associations (such as labor unions<br />
and the American Association of Retired Persons). Another large source of legal plans is<br />
employee welfare benefit plans, which are paid for by employers and treated as a fringe<br />
benefit. Finally, there are plans that are sold directly to consumers. Historically, these<br />
direct to consumer plans “have more comprehensive benefits, higher utilization, involve<br />
higher costs to participants, and are offered on an individual enrollment or voluntary<br />
basis.” 95 LegalZoom’s offerings are aligned more with this last category of direct to<br />
consumer plans.<br />
For small businesses and consumers who want legal advice, LegalZoom offer<br />
legal plans that connect subscribers with experienced attorneys licensed in their<br />
jurisdiction to address their specific legal needs. In order to be considered for<br />
participation in the legal plan network, independent attorneys must satisfy certain quality<br />
standards established by LegalZoom and be highly focused on customer care. In fact, all<br />
attorneys participating in LegalZoom’s network are surveyed by legal plan members after<br />
consultations. LegalZoom’s small business and consumer subscription legal plans are<br />
currently available in 41 states and the District of Columbia. LegalZoom’s subscription<br />
legal plans include free attorney consultations on new legal matters, review of legal<br />
documents up to ten pages in length, and discounts on LegalZoom services and additional<br />
services provided by legal plan network attorneys.<br />
<strong>The</strong> success of LegalZoom’s legal plans is evidence that improving technology<br />
can yield more affordable attorney services. As consultations with attorneys become<br />
more efficient (the idea is that LegalZoom’s system will eliminate much of the research<br />
attorney’s must now conduct for each new case) the price of legal help will come down<br />
94 Public Perceptions of <strong>Law</strong>yers Consumer Research Findings, 2002, ABA<br />
95 Pre-Paid Legal Services Inc. annual report, 2009<br />
22
4Q09<br />
1Q10<br />
2Q10<br />
3Q10<br />
4Q10<br />
1Q11<br />
2Q11<br />
3Q11<br />
4Q11<br />
1Q<strong>12</strong><br />
2Q<strong>12</strong><br />
and access becomes more universal. <strong>The</strong> concept has, to date, appeared to work as<br />
participating fims have assisted in developing innovative way of completing<br />
consultations and membership in LegalZoom subscriptions has increased several fold<br />
over the last few years and the percentage of total revenues from subscrition enrollement<br />
increased from five percent in 2009 to over 20% in the first half of 20<strong>12</strong> 96 .<br />
400<br />
300<br />
200<br />
100<br />
0<br />
Total Active<br />
Subscriptions<br />
(Thousands)<br />
Increase in Percentage of Revenues from Subscriptions<br />
5%<br />
2009<br />
Documents<br />
Subscriptions<br />
2010<br />
Documents<br />
Subscriptions<br />
9%<br />
95%<br />
2011<br />
Documents<br />
Subscriptions<br />
18%<br />
91%<br />
Q1-Q2 20<strong>12</strong><br />
Documents<br />
Subscriptions<br />
22%<br />
82%<br />
78%<br />
Another benefit of efficiencies of scale is that provider frims have started offering special<br />
discounted flat fee services to members of those legal plans as an additional benefit to<br />
the member and additional source of revenue to the firm.<br />
96 LegalZoom.com, Inc. S1<br />
23
<strong>The</strong> growth of LegalZoom’s legal plans may be the catalyst for moving<br />
LegalZoom from status as a pure substitute for legal services to a hybrid with<br />
complementary components for many firms as well. As LegalZoom’s legal plan<br />
membership grows, the company is looking to expand its network of attorneys to provide<br />
services outside of plan benefits to members who need local representation or advice on<br />
complex or highly specialized matters.<strong>The</strong> attorneys who participate must meet similar<br />
requirements to to the primary firms and provide an initial free consultation and 25<br />
percent discount off their customary rates (and, of course, maintain high levels of<br />
customer service for legal plan members). While this service is still in its very early<br />
stages, it’s clear that LegalZoom intends to focus on connecting their customers with the<br />
right attorneys in the future. As LegalZoom CEO John Suh has stated, "Forget the fearbased<br />
notion of technology replacing lawyers, because that’s completely down the wrong<br />
path. Think of it as lawyers embracing technology to create greater access to the law and<br />
extend legal services to the over 100 million Americans to whom it is currently out of<br />
reach.” 97 While innovation in consumer legal services is somewhat limited in the US due<br />
to Unauthorized Practice of <strong>Law</strong> statutes and rules against non-lawyer ownership of law<br />
firms, the legal services market in England and Wales is currently undergoing large scale<br />
transformation due to the liberalization of legal services regulations. <strong>The</strong>se changes have<br />
not only brought in new non-lawyer entrants to the market, but have also spurred<br />
innovation among a limited group of law firms. Among the most striking of those<br />
examples is Riverview <strong>Law</strong>.<br />
C. Case Study #3: Riverview <strong>Law</strong>’s New Model for Business Representation in<br />
the Wake of the UK Legal Services Act<br />
This case study of the recently launched Riverview <strong>Law</strong> is best understood<br />
within the context of regulatory changes in England and Wales over the past decade. A<br />
brief history is necessary before moving on to explore Riverview’s work. In a 2003<br />
report entitled Competition and regulation in the legal services market, the UK<br />
Government’s Department for Constitutional Affairs (DCA) highlighted a number of<br />
inherent weaknesses in the regulatory framework for legal services in England and<br />
Wales. In July of that same year, it commissioned a full review of the existing framework<br />
by Sir David Clementi, an accomplished businessman and the former Deputy Governor<br />
of the Bank of England. <strong>The</strong> terms of reference for the review were twofold:<br />
<br />
<br />
To consider what regulatory framework would best promote competition, innovation<br />
and the public and consumer interest in an efficient, effective and independent legal<br />
sector, and<br />
To recommend a framework which will be independent in representing the public<br />
and consumer interest, comprehensive, accountable, consistent, flexible, transparent,<br />
and no more restrictive or burdensome than is clearly justified.<br />
97 Harrison, John, LegalZoom Takes New Twist to Old Profession, Portfolio.com<br />
24
Clementi submitted his report in December 2004 and in its Foreword he states<br />
that nothing that he learned during the 18 month period of his review had caused him to<br />
doubt the broad validity of the DCA’s earlier conclusion that the current regulatory<br />
framework was outdated, inflexible, over-complex and insufficiently accountable or<br />
transparent. “<strong>The</strong> current system is flawed,” stated Clementi, 98 and what followed in his<br />
now infamous report called for sweeping changes that struck at the very heart of the longstanding<br />
traditions of the legal system.<br />
<strong>The</strong> Government’s response followed some three years later in the form of <strong>The</strong><br />
Legal Services Act 2007 (LSA) which sought to address most of Clementi’s concerns and<br />
to implement the majority of his recommendations over a period of approximately five<br />
years. <strong>The</strong> Act heralded a number of significant changes, but is perhaps best known for<br />
opening up the sector to non-lawyers. Under the new regime, companies who did not<br />
offer legal services as their primary business were now permitted to undertake legal<br />
practice, and new licensing rules concerning Incorporation and Alternative Business<br />
Structures (ABS) meant that for the first time, anyone could own a law firm.<br />
1. Enter Riverview <strong>Law</strong><br />
As intended, the LSA served as a significant catalyst for change in the<br />
marketplace, and what followed was a succession of market moves that linked private<br />
money with the practice of law. Most activity was focused on individual consumers and<br />
in anticipation of a move to enter the market by the UK’s largest retailer, Tesco, the term<br />
“Tesco <strong>Law</strong>” was coined to refer to this segment. At the time of writing, the retail giant<br />
has yet to enter the legal services market, but many of its competitors have done so,<br />
including <strong>The</strong> Co-operative Group, a retail co-operative run and owned by over 6 million<br />
members and with approximately 5,000 stores across the UK.<br />
While the market’s attention was predominantly fixed on the opportunities for<br />
individual consumers, one group of executives in a business operating in the north-west<br />
of England believed a significant opportunity also existed in the commercial law arena.<br />
<strong>The</strong>y had set-up and at the time were running professional services company<br />
AdviserPlus, which provides advisory outsourcing services to a client base ranging from<br />
small businesses to large FTSE 100 international corporations. Many of AdviserPlus’<br />
clients use the company to provide services typically undertaken by an in-house Human<br />
Resources team. Some of those who outsourced advisory support to AdviserPlus also<br />
asked the company to undertake their transactional work as well.<br />
Operating in the HR, employment and Health & Safety advisory space, the<br />
leadership team was aware of the LSA and its potential impact on the marketplace. So<br />
when clients started asking them to consider extending the scope of their services into the<br />
legal services arena, they took it very seriously. Around the same time, the team began to<br />
be approached by regional commercial law firms who, seeing change on the horizon,<br />
were seeking partnership with (or even acquisition by) a successful forward-looking<br />
company in an adjacent section of the value chain.<br />
Presented with several alternatives for entering the market, the decision was<br />
taken to start with a blank slate and to build a new organization from the ground up.<br />
Unencumbered by legacy technology systems, cultural baggage, or the constraints of<br />
98 Review of the Regulatory Framework for Legal Services in England and Wales: Final Report, Dec 2004, p.1<br />
25
existing operational structures, the founding team had the luxury of approaching the<br />
market with an open mind and asking questions such as What do customers actually<br />
want?; How do we best configure ourselves to deliver it?; What kind of people and<br />
behaviors do we need?; and last but by no means least, What technology is required to<br />
support it?<br />
Nearly two years in the making, Riverview <strong>Law</strong> launched as a “new model”<br />
fixed-fee commercial firm in February 20<strong>12</strong>, shortly after the last of the measures from<br />
the LSA was implemented. As the first new entrant into the commercial market, the firm<br />
attracted a lot of media attention and quickly gained traction in the market. <strong>The</strong> <strong>Law</strong>yer<br />
described its arrival as “the boldest-ever post-Legal Services Act move involving the bar”<br />
and in the same article suggested that it “poses a direct threat to [UK] law firms.” 99 In<br />
June 20<strong>12</strong> Riverview opened its first international office in New York, providing an<br />
alternative route into the English legal system for US clients requiring advice or<br />
representation there. <strong>The</strong> following table illustrates the forces behind Riverview’s<br />
entrance, including significant change factors coupled with a market structure that is<br />
vulnerable to well executed new models by new entrants with little or no baggage.<br />
2. Technology and the “Penny Gap”<br />
Run by experienced business leaders who also happen to have a background in<br />
law, the firm’s mission is to change the way businesses use, measure and buy legal<br />
services. To achieve this, Riverview’s organizational structure and team demographic are<br />
markedly different to that of a typical law firm and bear testimony more to the principles<br />
taught in business schools and the real world of running companies, than those taught in<br />
law schools. A diverse team of professionals has been configured to perfectly match<br />
99 [http://www.thelawyer.com/invested-interest/1011462.article]<br />
26
experience, skills and competencies with the requisite resource for any piece of work.<br />
Unsurprisingly, technology is a significant enabler, though the leadership team is often<br />
keen to stress that it is just an enabler. Eleven years’ experience running AdviserPlus<br />
proved that however good the technology is, in services businesses it is people that make<br />
the difference.<br />
A powerful technology system was required to maximize the efficiencies<br />
achieved by this approach, and once again the link to AdviserPlus (a shareholder in the<br />
new company) proved invaluable. Specializing in outsourced HR and employmentrelated<br />
advice, over a period of twelve years AdviserPlus had created and refined a<br />
proprietary software platform and portal to manage case workflows, interface with clients<br />
and produce powerful management information for both internal and external audiences.<br />
Riverview’s founders already understood the benefit of investing in high quality<br />
technology at the outset.<br />
Leveraging this existing proprietary knowledge and expertise made perfect sense<br />
and gave Riverview an easy answer to one of the biggest questions faced by any new<br />
business aiming to build an efficient, scalable and future-proof model: Which of the<br />
many available technology platforms should we invest in? Ongoing access to the very<br />
developers who had created the system, known internally as the Intelligent Integrated<br />
Architecture (IIA), was also a significant advantage. It was then only a matter of<br />
working with a partner to adapt the IIA approach to fit Riverview’s precise requirements<br />
in the legal sector specifically.<br />
In addition to providing paying clients with the benefits of the portal’s features,<br />
the team also recognized the value it could bring to a broader audience. <strong>The</strong> internet<br />
revolution fundamentally changed the way business sourced legal advice and guidance,<br />
especially start-ups and smaller businesses who often chose to shun the uncertainty of<br />
their local law firm’s billable hour in favor of resources on the World Wide Web. Search<br />
long and hard enough and it’s possible to get a free answer to almost any routine legal<br />
question, or pay a nominal subscription to a more comprehensive service to access the<br />
information more readily.<br />
Riverview understood, though, that there is a huge difference between cheap and<br />
free – a reality that venture capitalist Josh Kopelman has referred to as the “penny gap.”<br />
He observed that the emergence of technology and the web has rewritten the old rules of<br />
what became known as “price elasticity” (the expectation of a linear relationship in which<br />
volume goes up as price goes down, to a point of diminishing returns). 100<br />
100 [http://redeye.firstround.com/2007/03/the_first_penny.html]<br />
27
<strong>The</strong> truth, he suggests, is that zero is one market and any other price is another,<br />
and in many cases this “penny gap” can be the difference between a great market and<br />
none at all. 101<br />
According to Chris Anderson, former editor-in-chief of Wired magazine and<br />
author of Free: How Today's Smartest Businesses Profit by Giving Something for<br />
Nothing, “<strong>The</strong> huge psychological gap between ‘almost zero’ and ‘zero’ is why<br />
micropayments failed. It's why Google doesn't show up on your credit card. It's why<br />
modern Web companies don't charge their users anything. And it's why Yahoo gives<br />
101 Id.<br />
28
away disk drive space. <strong>The</strong> question of infinite storage was not if but when. <strong>The</strong> winners<br />
made their stuff free first.” 102<br />
3. Riverview’s Philosophy of Free for Small Businesses<br />
Armed with this understanding of the new freeconomy, Riverview decided to<br />
take an unprecedented step and offer free unlimited access to a comprehensive, regularly<br />
updated online library containing over 650 plain English advice pages and 450<br />
documents, forms, records and templates. <strong>The</strong> intention is that the portal (called<br />
MyView) will provide information on just about every conceivable issue and area of law<br />
that a small-to-medium sized business might require, all in one place, written in a<br />
consistent and accessible style. It makes the Google search redundant, and undermines<br />
the business model of those law firms and businesses who believe that users should pay<br />
for this type of information.<br />
MyView saw many thousands of businesses register in its first year and includes<br />
additional freemium components such as a free call to one of Riverview’s qualified<br />
lawyers. <strong>The</strong> idea is that if a member has an issue that extends beyond the generic advice<br />
and guidance to be found in MyView, they can pick up the phone and get immediate<br />
expert advice on any legal business matter. <strong>The</strong> adviceline has been designed to be as<br />
user-friendly as the portal, and offers immediate access to lawyers on demand without the<br />
need to navigate a frustrating Interactive Voice Response (IVR) system.<br />
A number of the UK’s regional High Street (Main Street) firms now offer the<br />
first half-hour of advice for free. But to Kopelman’s “penny gap” point, this isn’t as<br />
attractive an idea as those peddling it might believe. To the educated client, a free halfhour<br />
of advice is little more than a faintly disguised entrance into the world of the billable<br />
hour, which is precisely the system in which many of those who take advantage of this<br />
offer will find themselves when their issue is not neatly resolved in the limited 30-minute<br />
window. Riverview’s free call, however, is just that – an unlimited conversation which<br />
will either resolve the issue, or get the caller to the point where they understand their<br />
options and next steps.<br />
As a further benefit within a short period of time the member receives a discreet<br />
email informing them that a follow-up case note has been generated and sent to their<br />
secure case management area on MyView. On logging in, the member has access to a<br />
plain English bullet-point summary of the call, with clearly marked actions and next steps<br />
where appropriate. Positive feedback from recipients shows that they appreciate the<br />
ability to review the advice in their own time and make sure they properly understood the<br />
advice and guidance provided over the telephone.<br />
4. Client (and User) Experience is the “Holy Grail”<br />
<strong>The</strong> ability to integrate the benefits of powerful online technologies with human<br />
intervention as and when required was a model tried, tested and refined at AdviserPlus.<br />
Thus, the Riverview team entered this new market with the advantage of a welldeveloped<br />
understanding and a blueprint for implementation. <strong>The</strong> freemium model has<br />
been successfully employed by the new online giants of the travel industry and has<br />
102 [http://www.wired.com/techbiz/it/magazine/16-03/ff_free?currentPage=all]<br />
29
proven itself an effective strategy for initially attracting users who then convert to<br />
become clients. It translates well to legal services, but only works, of course , to the<br />
extent that users are so impressed by their free experience that they become paying<br />
customers when the next need arises. For many of Riverview’s small-to-medium sized<br />
business users, the path from free to paid-for often takes the form of a commitment to the<br />
firm’s annual “eat as much as you like” service for a monthly fee that starts from the<br />
equivalent price of just one billable hour of a junior lawyer’s time at a small local firm.<br />
Providing a great experience for users and clients is therefore critical to<br />
Riverview’s model, and an investment was made from the outset in a senior role assigned<br />
to oversee it – a Director of Customer Experience. <strong>The</strong> “Riverview experience” is<br />
designed to stand out in an industry which is often accused of being rather introspective<br />
and geared towards engaging with customers on the law firm’s terms, rather on the user’s<br />
or client’s terms. Befitting of a model that claims to be genuinely customer-centric, each<br />
point of interaction and stage of the process has been carefully designed to enhance the<br />
experience, and Riverview’s bespoke internal training program teaches team members—<br />
staff and lawyers—how to put themselves in their customers’ shoes.<br />
5. Legal Advisory Outsourcing<br />
As with AdviserPlus, this same customer focus is applied to larger clients too, for<br />
whom Riverview’s streamlined structure, fixed-fee model and advanced technology<br />
makes for an appealing alternative to traditional “Big <strong>Law</strong>.” For one-off matters, the<br />
portal’s case management features provide much the same benefits as for smaller clients.<br />
But the technology really comes into its own for institutional clients and those using<br />
Riverview’s Legal Advisory Outsourcing (LAO) services, for whom the advanced datahandling<br />
capabilities and comprehensive reporting suite provide a level of management<br />
information that most law firms and in-house departments have hitherto found impossible<br />
to deliver.<br />
LAO is not to be confused with LPO (Legal Process Outsourcing). LPO is<br />
typically understood to address the “bottom” 10% of the legal requirements of large<br />
businesses, whereas LAO is focused on the 60-70% of day-to-day, week-to-week<br />
requirements. <strong>The</strong> Riverview LAO model provides General Counsel with an alternative<br />
to using traditional law firms and outdated panel arrangements, or to building large inhouse<br />
teams. <strong>The</strong> following graphic illustrates the model:<br />
30
Riverview’s high-end services are as popular as its proposition for small-tomedium<br />
sized businesses, and it sees this as a continuing trend. While technology is an<br />
enabler to innovate in certain areas, there remains strong demand for the high-touch<br />
expertise provided by domain experts, and this is unlikely to change in the immediate<br />
future. As with the travel industry, the increased access to information is creating demand<br />
for experts to navigate it. While law is in many ways a well-established marketplace,<br />
Riverview believes there are opportunities for those firms who can find ways of bringing<br />
the people and technology together to create something much more compelling. Having<br />
won its first FTSE 100 client after only six weeks, the marketplace would seem to agree.<br />
6. Riverview’s Digital Marketing Strategy<br />
Technology and the internet also feature strongly when it comes to Riverview’s<br />
approach to marketing its services. <strong>The</strong> firm’s leaders understood the importance of<br />
leveraging popular social media platforms and using them alongside more traditional<br />
approaches such as soft and hard-copy printed media and radio advertising. In a bold prelaunch<br />
statement of intent, Riverview appointed a dedicated Social Media Manager to<br />
direct a coordinated approach to its activities across the major platforms.<br />
Riverview has been particularly active on Twitter, where its efforts were soon<br />
recognized with an award from a creative PR and design agency who provided a useful<br />
independent validation of their approach: “Riverview <strong>Law</strong> engages with a great many of<br />
the legal community on Twitter with ‘@mentions’, ‘@replies’ and retweets. <strong>The</strong>ir<br />
Twitter interactions focus on law and its change but they do it in an open and friendly,<br />
unintimidating manner. <strong>The</strong>y are just as likely to have a chat or a bit of fun with<br />
followers. Overall they’re an example of one of the most interactive professional<br />
personalities on Twitter.” 103<br />
103 http://www.elephantcreative.co.uk/20<strong>12</strong>/11/16/tweeter-of-the-week-award/<br />
31
<strong>The</strong> review goes on to highlight another of Riverview’s social media objectives:<br />
“Riverview <strong>Law</strong> is one of the most informative Tweeters you could come across. <strong>The</strong>y<br />
Tweet fantastically informative content, share news and often Tweet from leading<br />
conferences.” 104 This observation hints at another important aspect of how Riverview<br />
sees their role in this space: not only as a trusted advisor, but also as a trusted curator,<br />
paralleling travel’s similar shift from advice-giving to content-curating. 105 In keeping<br />
with their client-focused philosophy and desire to make things easy, Riverview quickly<br />
understood the benefit to customers (whether paying or not) of consolidating valuable<br />
information from a range of sources and passing it on via Twitter and other appropriate<br />
social media platforms.<br />
This strategy has also informed Riverview’s approach to targeted newsletters.<br />
While many firms trot out regular lengthy newsletters (typically weekly or monthly) to<br />
clients and followers, Riverview’s market research indicated that many recipients are<br />
finding increasingly little value in the typical “scatter gun” approach which fails to<br />
acknowledge that they are already inundated with information and often don’t have the<br />
time or the inclination to search through the metaphorical sieve of stones looking for a<br />
possible nugget of gold. Sending relevant information little and often recognizes that<br />
clients aren’t all cut with the same cloth and delivers something of genuine value that’s<br />
not so likely to meet an untimely end with a judicious use of the Delete key!<br />
<strong>The</strong> ability to act as both trusted advisor and trusted curator is an important<br />
hallmark of the new generation of legal service providers who have thrown out the old<br />
rulebook and are rewriting the rules of engagement on the clients’ terms rather than their<br />
own. Riverview maintains that as the market wakes up to the implications of this<br />
paradigm shift, there will be an increasing number of providers who use the language of<br />
innovation and customer-centered change, but a much smaller percentage of those who<br />
are actually doing it. <strong>The</strong> old adage that actions speak louder than words is as true as<br />
ever, and may help clients sort the wheat from the chaff.<br />
Riverview has also invested heavily in creating professional marketing videos<br />
which it hosts on its own YouTube channel and which again serve as a useful<br />
differentiator in the marketplace. As Mitch Kowalski, lawyer and author of Avoiding<br />
Extinction: Reimagining Legal Services for the 21 st Century observes: “<strong>The</strong> vast majority<br />
of video produced by North American law firms is worse than horrible. Thinly financed<br />
and laced with not even a smidgen of creativity, these videos are quickly forgotten by<br />
both firms and viewers. Into this legal media vacuum steps U.K. firm, Riverview <strong>Law</strong>,<br />
with its take on fixed-fee pricing for legal services. Watch and learn Canadian/American<br />
law firms: watch and learn. Cometh the Hour is three and a half minutes of your life that<br />
is not wasted.” 106<br />
Cometh the Hour in particular has attracted a lot of attention for its honest and<br />
humorous treatment of the way traditional firms struggle to think beyond the billable<br />
hour. 107 It has been viewed thousands of times on YouTube and shown at numerous legal<br />
conferences around the world at which Riverview was not even present. This is viral<br />
marketing at its best, and testimony to the way in which new entrants with a fresh<br />
approach are unashamedly shaking the foundations of a profession that has long been in<br />
104 Id.<br />
105 See discussion supra note __ (citing Knake, <strong>The</strong> <strong>Law</strong>yer as Trusted Curator).<br />
106 http://business.financialpost.com/20<strong>12</strong>/08/27/mitch-kowalski-cometh-the-hour-for-video/<br />
107 http://www.youtube.com/watch?v=BfXhn3tf_vE<br />
32
need of an overhaul. <strong>The</strong>se “new kids on the block” know how to leverage the power of<br />
digital media and, in contrast to their more traditional competitors, they’re not afraid to<br />
inject a little humor along the way too.<br />
7. <strong>The</strong> Importance of Brand<br />
<strong>The</strong>se messages are no coincidence, of course, but instead are part of Riverview’s<br />
carefully constructed approach to brand management. For a variety of reasons, the legal<br />
industry has by and large grown up without strong brands, especially in the small and<br />
mid-cap markets which represent the largest volume of business clients. Hence, there are<br />
significant opportunities for those early movers able to step into this void with a<br />
recognizable brand that gains traction across this sizeable market segment.<br />
Riverview’s research into the way large traditional firms are using social media<br />
makes for an excellent illustration of just how difficult it is proving for many of them to<br />
navigate the brave new world of digital brand management. A number of Am<strong>Law</strong> 200<br />
firms who spend a fortune trying to maintain their brand in more traditional contexts,<br />
appear to lack any sense of purpose or even control over the use of their brand online. It<br />
found numerous examples of multiple corporate profiles on the same platform, apparently<br />
owned by different representatives of the firm who clearly aren’t communicating with<br />
each other, and presenting varying levels of quality or in some cases merely an empty<br />
branded shell with no content whatsoever.<br />
Riverview is comfortable in this space, though, and works hard to ensure that it<br />
presents a consistent and powerful brand, both to existing and prospective clients.<br />
Visitors to Twitter, YouTube, Facebook, LinkedIn or Google+ (all of which Riverview is<br />
active on) will find the same brand values and key messages designed to leave the<br />
audience in no doubt about what it stands for. Riverview’s interactive style means it often<br />
gets into public exchanges online in which those who have encountered the firm will give<br />
tangible examples of these values in practice – an independent validation that they are<br />
who they say they are.<br />
This authenticity is an important value to Riverview and other new entrants who<br />
are seeking to bring about a cultural shift in an industry which ironically has not typically<br />
been associated with living out its values (many lawyers would seek to disagree, of<br />
course, but independent surveys showing the perceived lack of trust in the profession<br />
suggest otherwise). Present-day business consumers of legal services are often cynical<br />
buyers, used to being bombarded with positive spin from all directions and quick to spot<br />
inauthenticity when they are unfortunate enough to encounter it. Mitch Kowalski<br />
captured the essence of this achievement when he recounted on his blog the experience of<br />
visiting Riverview’s UK service delivery center: “<strong>The</strong> highlight of my trip was visiting<br />
Riverview’s operations in <strong>The</strong> Wirral – it was if I had walked into the offices of my<br />
fictionalized law firm, BFC – minus the rooftop deck. I was astounded by the fact that<br />
from the top down, a customer-centered culture permeated the team. It was palpable,<br />
refreshing and genuine – something I’ve not seen before in any law firm.” 108<br />
8. “<strong>The</strong> Long Tail” of Riverview <strong>Law</strong><br />
108 http://kowalski.ca/kowalski_blog/maple-leaf-reflections<br />
33
<strong>The</strong> concept of “the long tail,” popularized by Chris Anderson in a 2004 Wired<br />
magazine article and then later in his book <strong>The</strong> Long Tail: Why the Future of Business is<br />
Selling Less of More (2006), is a useful lens through which to observe the Riverview<br />
model. <strong>The</strong> intelligent integration of technology, people and process combines with a<br />
structured approach to external marketing and brand management, to create a compelling<br />
proposition from the proverbial head to the tail of the commercial legal advisory services<br />
market – a feat that has arguably not been achieved by any other law firm.<br />
On the one hand, the model appeals to large corporates who are increasingly<br />
looking for value and price certainty on major instructions and outsourcing arrangements.<br />
On the other, its democratized service for start-ups and small businesses has lengthened<br />
the tail and created a new market for those who have previously been excluded on<br />
grounds of price. <strong>The</strong> following graph illustrates this point:<br />
What Riverview is doing in the commercial space, others are doing in the<br />
consumer space in the UK by providing access to justice for millions of individuals<br />
whose legal needs currently go unmet because of the high and often unpredictable cost of<br />
legal services. <strong>The</strong> early signs are that the stimulus provided by the Legal Services Act<br />
and the UK Government’s progressive approach to liberalizing the market is indeed<br />
having the desired effect and promoting healthy competition, innovation and the public<br />
and consumer interest.<br />
Conclusion<br />
While retail travel agents and brick-and-mortar (or marble-and-dark-wood) law<br />
firms may have reached their apex in the mid-1990’s, new opportunities remain in both<br />
industries. Both of these professional service industries have been upended by<br />
technology, especially through sophisticated online access and high-level data<br />
aggregation. Perhaps because it was hardest hit, travel responded more quickly than law,<br />
offering lessons for lawyers at all levels of service, from solo practitioners to large,<br />
traditional firms—these lessons largely emphasize the focus going forward on how to<br />
best serve a highly informed yet information inundated user/client.<br />
34
<strong>The</strong>se are exciting times for those willing and able to embrace change and take<br />
advantage of the efficiencies to be found in a new liberalized and technology-enabled<br />
paradigm. Similar transformations have long since occurred in other industries and the<br />
travel industry certainly makes for an interesting parallel. Indeed, the very same digital<br />
revolution that redrew the landscape for travel professionals in the 1990’s, has finally<br />
caught up with the legal industry and is dragging it kicking and screaming into the<br />
twenty-first century.<br />
Long-protected by myth and regulation, the legal services industry has until very<br />
recently managed to hold back the tsunami of change that long ago swept across less<br />
shielded professions and industries. For centuries, lawyers have had to compete only with<br />
other lawyers, creating a remarkably successful and rewarding ecosystem for those on the<br />
inside. <strong>The</strong> cynic might be forgiven for suggesting that beneficiaries of this system have<br />
done their utmost to defend it, fiercely resisting the competitive market pressures that are<br />
the norm for just about every other profitable enterprise on the planet.<br />
Yet despite their best efforts, significant change factors, coupled with a market<br />
structure that is vulnerable to well-executed alternative models by new entrants, have<br />
come together to challenge the very foundations upon which this great industry has been<br />
built. <strong>The</strong> last five years in legal services have arguably seen more innovation and<br />
disruption than the preceding five hundred. Those who once opted to entrench themselves<br />
structurally and financially in the prevailing system now appear somewhat trapped within<br />
their own walls, vulnerable to an onslaught of more flexible and “fleet of foot” new<br />
entrants who are hungry to reinvent legal services.<br />
35
<strong>The</strong> dilemma of technology use and relationships:<br />
How the introduction of a knowledge management system<br />
affects workplace relationships and value creation in a corporate law firm<br />
Forrest Briscoe<br />
Associate Professor<br />
Smeal College of Business<br />
Penn State University<br />
fbriscoe@psu.edu<br />
Wenpin Tsai<br />
John and Kara Arnold<br />
Professor of Business<br />
Administration<br />
wtsai@psu.edu<br />
Marion Brivot<br />
Assistant Professor of<br />
Accountancy<br />
Universite Laval<br />
marion.brivot@fsa.laval.ca<br />
Draft <strong>April</strong> 1, <strong>2013</strong><br />
Prepared for the <strong>Georgetown</strong> Center for the Study of the Legal Profession, <strong>2013</strong> Symposium<br />
Abstract: How does the introduction of new information technology in an organization affect<br />
workplace relationships and create value? A widely subscribed materialist perspective emphases<br />
the way technology facilitates discovery of distant information, reducing the reliance on<br />
interpersonal relationships in knowledge search and use. In contrast, a social perspective<br />
highlights the enduring importance of people and their social interactions in shaping technology<br />
use. Analyzing the client billings and personnel records from before and after the implementation<br />
of a knowledge management system (KMS) in a large law firm, we examine the effect of KMS<br />
use on the formation of new workplace ties and the creation of value. We compare the effect of<br />
KMS document downloads from directly-tied, indirectly-tied, and non-tied colleagues. We find<br />
that downloads from indirect ties will lead to new relationship formation more often than<br />
downloads from non-tied colleagues. We also find that wider downloading increases subsequent<br />
value creation. But contrary to our expectations, more value is created by downloads of direct<br />
ties compared with indirect ties (or non-ties). We consider the implications of our findings for<br />
research on technology use and social networks in organizations, as well as for practitioners in<br />
law firm.<br />
<br />
1
<strong>The</strong> introduction of a new technology into an organization can change the way<br />
individuals work and how they learn from each other. Technologies such as information systems<br />
and knowledge databases open up access to knowledge that was previously unavailable to<br />
organizational members (Lucas 1975; Zuboff 1988), and can thus disrupt an established social<br />
structure (Leonardi 2007). When knowledge is systematically stored and disseminated using<br />
technology, organizational transparency can increase as people use technology to find where a<br />
specific bit of knowledge resides. Technology, therefore, may reduce the need to rely on<br />
personal relationships or social capital for knowledge search in the workplace. Further,<br />
knowledge that is discovered or located through technology might also more easily be used<br />
directly by others without forming any relationship to the creator of that knowledge.<br />
Although in general technology can clearly reduce human labor and increase efficiency,<br />
several scholars have suggested that technology has important limitations in its application to<br />
knowledge management (e.g., Alavi and Leidner 2001). In particular, technology may not<br />
effectively replace individuals’ social capital when performing knowledge work. Because<br />
knowledge is locally embedded in people and their relationships, social capital (i.e. relationships)<br />
is critical to accessing and transferring knowledge (Tsai, 2001). Complex knowledge is<br />
especially difficult to codify for systematic reuse and dissemination, and people may still have to<br />
rely on their prior social relationships to access and comprehend such complex knowledge<br />
(Hansen 1999).<br />
Prior research on knowledge sharing inside organizations has tended to focus on either<br />
technology use, or on workplace social relationships (e.g. Reagans & McEvily, 2003), essentially<br />
viewing them as separate phenomena. Few studies have examined technology use and<br />
relationship dynamics simultaneously, or distinguished their relative influence (Haas and Hansen,<br />
2007). In this paper, we investigate the tension between technology use and relationships, and we<br />
also show how they may complement each other to create value. Specifically, we ask: How does<br />
technology use compare with prior social capital as the basis for forming new workplace<br />
relationships and creating value?<br />
To address this question, we analyze both qualitative and quantitative data collected from<br />
a large European law firm concerning its implementation of a new technology: a knowledge<br />
management system (KMS) designed to capture, store, and disseminate knowledge in lawyers’<br />
work. We use interview data and meeting records to describe our research context and the KMS<br />
implementation processes and to inform our theory development. In our quantitative analysis, we<br />
use records of KMS document downloads, client billings, and personnel information to examine<br />
the dynamic interplay between technology use and social capital. We examine how the interplay<br />
of those two factors shapes the formation of new workplace relationships among organizational<br />
members and the creation of value through billable-hours revenue generation.<br />
<strong>The</strong> use of KMS’s for managing professional knowledge work has increased rapidly. A<br />
recent report shows that Am<strong>Law</strong> 200 firms invest on average $5-7 million per year in KMS<br />
technology (Cohen 2011). Typically, investments in KMS technologies in professional service<br />
firms are aimed at leveraging the intellectual capital of organizational members and facilitating<br />
transfer of knowledge among them. Yet although the KMS technology is expected to help<br />
management of knowledge work by identifying best practices and keeping track of employees’<br />
knowledge, whether such technology actually creates value for employees has not been proven in<br />
the existing literature. In addition, prior research has not systematically examined the<br />
consequences of using such technology for workplace relationships. In this research, we observe<br />
<br />
2
workplace relationships with respect to joint client work between managers and partners. In the<br />
law firm setting as well in many other professional service firms, such workplace relationships<br />
are critical for employees’ apprenticeship learning and career development. By simultaneously<br />
considering technological and social influences on workplace relationships, we discuss the<br />
implications of KMS use by highlighting a potential trade-off between different learning modes.<br />
RESEARCH CONTEXT<br />
Our data consist of the quantitative internal records of a large, century old European law<br />
firm during the years 1999 to 2010, combined with qualitative interviews and archival materials<br />
form that same firm. <strong>The</strong> firm is organized as a partnership. <strong>Law</strong>yers enter the firm as junior<br />
associates, and progress through a manager level to eventually be considered for partnership.<br />
Work in the research site, as in other corporate law firms, is organized around client projects.<br />
Each project is supervised by a lead partner who owns the client relationship. Projects are carried<br />
out by the members of an engagement team comprised of the partner(s), a manager, associates<br />
and other junior staff. Clients are invoiced on the basis of the billable hours spent by each team<br />
member on the project.<br />
For this study, we focus on the ties formed between mid-level lawyers referred to as<br />
managers and the firm’s partners. Managers work for a range of different partners and clients<br />
When managers are eventually considered for partnership the ties they were able to form with<br />
partners are an essential component of their assessment: not only is it strategic for them to have<br />
different partners advocating in favor of their promotion, but ties with partners are also a<br />
prerequisite for demonstrating high value creation (measured in terms of hours billed) because it<br />
is partners who decide which client project are assigned to them.<br />
<strong>The</strong> case firm’s knowledge management system<br />
<strong>The</strong> case firm has an established and well-utilized knowledge management system (KMS)<br />
that was created to store best practice opinion letters and other types of documents in a central<br />
database accessible to everyone in the firm, for easy, quick and cheap reuse. In 2000, a pilot<br />
knowledge management system was implemented during an experimentation period. Initial<br />
reaction was mixed, as highlighted by a survey conducted shortly before the roll out of the KMS.<br />
<strong>The</strong>re was little participation, reflected in very low uploading and downloading of documents.<br />
At the end of 2004, a new and extensively retooled KMS was rolled out after reflecting<br />
on lessons from the pilot period. <strong>The</strong> case firm’s managing partner enthusiastically endorsed the<br />
new system, and its promise, with comments such as: “let’s stop reinventing the wheel”; “if only<br />
we knew what we know”; and an aim to create “a knowledge environment that leverages the<br />
intellectual capital of everyone” for “quality enhancement.”<br />
<strong>The</strong> managing partner announced that inputting of documents and use of the KMS would<br />
be mandatory for everyone. <strong>The</strong>re were no formal sanctions or rewards for KMS participation,<br />
but document uploads were frequent and widespread (450 per month during the first quarter of<br />
2005). After 2005, as KMS usage increased, the firm’s total billings also increased. More<br />
interestingly, the project networks inside the firm also changed, as lawyers made fewer new ties<br />
with peers every year, and at the same time those new ties became more stable. Hence our<br />
analysis focuses on how KMS use affected relationship formation dynamics at the micro level—<br />
and how KMS use shaped value creation in the form of billable hours generated over time.<br />
<br />
3
Before turning to our main quantitative analysis, we provide some qualitative background<br />
on the reactions and experiences of lawyers during KMS implementation, based on interviews<br />
conducted from 2005 to 2010.<br />
<strong>Law</strong>yers’ reactions to the knowledge management system<br />
When asked about their perceptions of the KMS and its use, some commented that it had<br />
positively influenced their working relationships, for example by helping people to discover<br />
more about the current projects of others who they were interested in for one reason or another.<br />
On the other hand, some people focused on the KMS as a source of information to be directly<br />
applied to projects. Some lawyers in this latter group focused on what they viewed as risks of<br />
KMS use, including the loss of intellectual independence, and the loss of human contact.<br />
Examples of these contrasted opinions are provided in the top panel of Table 1.<br />
On the specific issue of how KMS use could influence collaborative relationships,<br />
opinions were mixed. Consistent with the materialist view, some interviewees revealed the belief<br />
that using the KMS could effectively reduce the need for collaboration or interaction with peers,<br />
essentially substituting for workplace relations. Other interviewees made comments more<br />
consistent with the social view of technology, believing that they needed to draw on their<br />
existing relationships in order to use the KMS correctly. Still others agreed with the first group<br />
that KMS use reduced social interaction, but rather than viewing this positively they worried<br />
about how such changes would impact social relations or work quality. Examples of these<br />
diverse views are provided in the bottom panel of Table 1.<br />
THEORY AND HYPOTHESES<br />
<strong>The</strong> qualitative data above show contrasting reactions toward the KMS that loosely<br />
resemble the two widely subscribed perspectives on technology use we outlined above. In the<br />
materialist perspective, technology can substitute for interpersonal relationships in the execution<br />
of knowledge work and the creation of value; see for instance Braverman’s (1973) argument that<br />
technology deskills workers. In contrast, the social perspective argues that technology has<br />
limited independent effects (if any), unless one takes into account the social context of human<br />
agents and their interactions shaping the use of technology (Barley 1986; Orlikowski 2000; see<br />
Orlikowski and Barley 2001 for a review of these two views on technology).<br />
Although some theorization attempts have been made to bridge the gap between the old<br />
materialist perspective and the more recent social perspective of technology’s impacts, few<br />
studies have demonstrated how the two perspectives can be reconciled with empirical evidence.<br />
Haas and Hansen (2007) examine two types of knowledge sharing in line with the two<br />
perspectives: knowledge sharing in the form of electronic documents (technology use) versus in<br />
the form of personal advice (relying on relationships). <strong>The</strong>y find that different types of<br />
knowledge sharing do not substitute for each other. Extending Haas and Hansen (2007), we<br />
further examine how the two types of knowledge sharing, independently as well as conjointly,<br />
shape new tie formation and value creation in an organization.<br />
Technology use and relationship formation<br />
Focusing on the efficiency of technology in locating information and accessing<br />
knowledge, the materialist perspective emphasizes the benefits of KMS in making knowledge<br />
transparent and codified. Employees can gain new knowledge through KMS without having a<br />
<br />
4
connection with the knowledge provider. <strong>The</strong>refore, KMS reduces the need for forming new ties<br />
to gain new knowledge. From this perspective, one would expect that a manager’s technology<br />
use to access a partner’s knowledge (by downloading the partner ’s documents in the KMS) will<br />
decrease the likelihood of new tie formation between the manager and the partner.<br />
Yet our qualitative interviews suggest that technology use without relationships could be<br />
dangerous. People who perceive the risks of misusing distant knowledge might like to connect<br />
with distant partners in order to clarify the appropriate use of that knowledge, but they have no<br />
immediate access to forming those relationships. One possible solution would be to rely on<br />
indirect contacts in order to form relationships with distant knowledge providers. This use of preexisting<br />
social capital in order to form a new relationship with a knowledge provider is<br />
consistent with the social perspective that highlights the importance of interpersonal<br />
relationships in shaping technology use.<br />
Integrating the materialist and social perspectives suggests that the benefits of knowledge<br />
acquired from technology use can be perceived and acted on when surrounded by a context of<br />
complementary social capital. This social capital context should make it more feasible to<br />
conceive of the potential fruitfulness of collaborating. For example, one of our interviewers<br />
(documented above) commented that after downloading a partner’s documents, he was more<br />
likely to connect with that partner if already somewhat acquainted, but not if he lacked any<br />
connection. <strong>The</strong>refore, we expect that technology use combined with indirect ties from a<br />
manager to a partner will increase the likelihood of new tie formation, while technology use<br />
lacking pre-existing social capital will not.<br />
H1: Managers downloading documents of partners with whom they have prior indirect<br />
ties (social capital) will increase the likelihood of new tie formation, relative to<br />
downloading documents of partners without prior ties (no social capital).<br />
Technology use and value creation<br />
Research on innovation and value creation suggests that the discovery and combination<br />
of knowledge from different domains helps to foster new knowledge creation (Leonard-Barton<br />
1995; Burt 2004). Hence our baseline expectation about the influence of technology use on value<br />
creation in the law firm is positive. <strong>The</strong> vision for KMS use, largely rooted in a materialist<br />
perspective, holds that these systems should facilitate effective search and use of existing<br />
knowledge to surface new solutions for clients. Those new solutions might include the<br />
development of new types of services, or the adaptation of existing services to match the needs<br />
of new clients.<br />
For example, a lawyer whose client is considering opening a manufacturing plant in<br />
another country may want to consider a range of issues including tax, intellectual property, and<br />
labour law. If that lawyer turns to her firm’s KMS to search for relevant documents, she may<br />
find examples that are similar but not spot-on. Hence the knowledge content of prior documents<br />
cannot simply be replicated, but hopefully by combining those prior documents, she can produce<br />
higher quality advice for her client. Without the ability to access and integrate prior knowledge<br />
through the KMS, the partner would never have been able to provide that increased level of<br />
service. Further, in subsequent years, that partner may be able to integrate insights gained from<br />
those diverse document inputs for other value creating opportunities, such as analyzing the legal<br />
merits and risks of plant relocations for other clients—leading to additional increases in client<br />
work and revenues.<br />
<br />
5
H2: Wider document download patterns (involving a larger number of unique partners)<br />
will increase a manager’s subsequent value creation.<br />
Although more document downloading may increase value creation in general, our<br />
arguments above about the social view of technology suggest that the results may depend on preexisting<br />
social ties between the users and producers of knowledge accessed through the KMS.<br />
For complex knowledge, such as that found in legal services, it may be difficult to effectively<br />
understand another person’s prior experiences reflected in their downloaded documents. Prior<br />
social relations with the knowledge provider can help to clarify the meaning of the document and<br />
how that knowledge can be applied in other cases. As mentioned earlier in our case study, reuse<br />
of documents with which one is not familiar can easily lead to mistakes and be confusing for<br />
clients, leading to conflict and client dissatisfaction. Similarly, without prior social relations an<br />
individual’s attempt to use different people’s documents may be fraught, and not lead to any<br />
clear improvement in client services. In this case the search and efforts around it become wasted<br />
time that negatively impact on ability to generate client revenue. Hence without any social ties,<br />
technology based search appears more likely to lead to a “dead end” or to knowledge misuse,<br />
reducing the value created.<br />
H3: Downloading documents from directly-tied partners will increase a manager’s<br />
subsequent value creation more so than downloading documents from non-tied providers.<br />
Going deeper into knowledge use when social ties exist, we can consider two types of<br />
connections between user and provider of knowledge: they could share either indirect ties, if they<br />
work with common colleagues (but not each other), or they could share direct ties, if they<br />
actually already work together on projects. Research in social networks suggests that indirect ties,<br />
which are often called “weak ties,” have greater benefits for individuals because they are more<br />
likely to provide new and non-redundant useful information to the focal person. In contrast,<br />
direct or “strong” ties are more likely to provide information to the focal person that he or she<br />
already knows and which is therefore of less value (Granovetter 1973). Hence we argue that<br />
indirect tie-based document use should provide the optimal context for value creation because<br />
knowledge originating in this social context is most likely to be novel and actionable.<br />
H4: Downloading documents from indirectly-tied partners will increase a manager’s<br />
subsequent value creation more so than downloading documents from directly-tied<br />
partners.<br />
METHODS<br />
Qualitative data<br />
Data collection for this project took place between 2005 and 2010. For our quantitative<br />
analysis, we obtained access to the log file of the KMS for the period 2005-2010. In addition, we<br />
were granted access to billable and non-billable hours information, for each member of the firm,<br />
from 1999 to 2010, and to reports prepared in the context of individual yearly performance<br />
evaluations, which showed who had worked with whom (and for what volume of hours) from<br />
1999 to 2010, with the exception of 2007 1 . We immediately anonymized all files received.<br />
1 <strong>The</strong> files showing who had worked with whom, in 2007, were corrupted and unusable. <br />
<br />
6
<strong>The</strong>se data covered all the partner lawyers and manager lawyers at the firm who were<br />
working in the largest of the firm’s departments, from the period 2005 to 2010. Our analysis<br />
focuses on the connections between managers and partners, and the value being created by<br />
managers. In the case firm, managers lead client projects, with the assistance of teams of junior<br />
lawyers, while partners oversee client relationships but are not necessarily as directly involved in<br />
the client projects on a daily basis. Our tie formation analysis focuses on managers as producers<br />
of value, and manager (“M”) – partner (“P”) dyads as key relationships that can contribute<br />
important knowledge to the value production process. Our interviews suggested that focusing at<br />
the manager level would be valuable because managers are the essential decision makers<br />
regarding the way knowledge will be applied to each client project. M-P dyad ties are important<br />
for managers in terms of their learning and development, as well as for building support among<br />
partners for their own eventual advancement (via partner vote) into the partnership. 2<br />
We also collected and analyzed a large amount of qualitative data from the case firm.<br />
Between 2005 and 2008, we tracked the use of KMS in practice by repeated interviews with<br />
lawyers working on <strong>12</strong> different client projects. <strong>The</strong> projects were selected for tracking because<br />
they were considered representative of the firm’s scope of services (including: preparing a due<br />
diligence report for a company in the process of a takeover; helping a new shareholder to<br />
restructure an acquired company; choosing the optimum fiscal location for an industrial group’s<br />
new banking entity and set up its contractual structure; advising a company subject to a tax<br />
inspection in connection with litigation, etc.). In total, 16 partners, 10 managers, and 6 junior<br />
associates were interviewed who were working on these client project teams. Interviews lasted<br />
from thirty minutes to four hours, with an average of about an hour and a half and were recorded<br />
(one person refused to be taped and two persons made corrections to the transcription of their<br />
interview).<br />
In addition to the project tracking interviews, key archival materials were obtained from<br />
the case firm, including internal documentation of the design, development and roll-out of the<br />
system. One of the authors also attended five two-hour departmental meetings held in different<br />
lines of business from 2005 to 2008.<br />
Dependent variables<br />
New tie formation. Our first dependent variable, new tie formation, is based on the<br />
observation of new workplace ties between managers and partners. To construct this variable, we<br />
defined a new tie if an M starts billing a P’s clients at least 50 hours in a given year, and there<br />
has not been any client billing based connection between that M and P during the prior 3 years.<br />
<strong>The</strong> 50 hour threshold was used by the firm to define a formal supervisory relationship between<br />
managers and partners. This approach is similar to that used by Briscoe and Tsai (2011). For<br />
each MP dyad year, we then coded the new tie formation dependent variable 1 if a new tie was<br />
formed in that year; otherwise the variable was coded 0.<br />
Value creation. Our second dependent variable, value creation, is based on revenue<br />
generation through billable hours. Specifically, we used the total billable hours of each<br />
individual M as the dependent variable for models predicting value creation, while controlling<br />
for last year’s billable hours by that same M.<br />
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<br />
of formal supervisory relationships that show which M’s have worked for each P’s clients in a given year. <br />
<br />
7
Independent variables<br />
Technology use (document download): In models predicting new tie formation, we coded<br />
technology use at the dyad level, based on whether a given M had downloaded a given P’s<br />
document. For this variable, downloading was coded 1, and otherwise the variable was coded 0.<br />
In order to use include technology use in our models predicting value creation, we aggregated<br />
document download activity at the dyad level to create a variable which is the count of P’s from<br />
whom each M had downloaded documents. This count variable ranged across individual M’s and<br />
years from 0 to 49.<br />
Indirect ties: Indirect ties exist between an M and a P if there is a “two step” connection<br />
between them, but no direct tie. We are able to observe indirect two-step ties in our cross-nested<br />
data because individual managers work on client projects for multiple partners. Hence M1 has an<br />
indirect tie to P2 if there is a proximal M2 who works on projects for the same P1 as he does,<br />
who also works on projects for P2. In this case, although M1 is not directly working for P2,<br />
information could flow between them through proximal colleague M2. We considered direct and<br />
indirect ties to be mutually exclusive; hence if there was a direct tie between an M and a P (i.e.<br />
M did not bill any of P’s clients), we did not consider that as an indirect tie.<br />
Direct ties. We operationalize direct ties based on a prior connection between M and P.<br />
Analytic approach<br />
New tie formation: To analyze new tie formation, we conducted a dyad-level analysis,<br />
using a risk of all possible dyads between the managers and partners across all possible years of<br />
data. Thus the unit of analysis was the dyad-year. We employed multilevel logistic regression<br />
models, using STATA’s xtmelogit command, to predict the formation of a new tie in a given<br />
year. <strong>The</strong>se models include two-way crossed random effects to account for unmeasured variance<br />
associated with both individual managers and individual partners. <strong>The</strong> two way crossed effects<br />
design (also sometimes referred to as cross-nesting) is appropriate given that managers are often<br />
nested within more than one partner’s projects, meaning that although the data are multilevel,<br />
traditional approaches that assume full nesting of lower level units within higher level units<br />
would be in appropriate. A common analogy for this type of data structure is raters and subjects,<br />
where each rater evaluates multiple subjects, and each subject is also evaluated by multiple raters.<br />
<strong>The</strong> final models included 8326 dyad-years.<br />
Value creation. For our value creation analysis, we shifted to the individual level. We<br />
used person-year data to predict yearly value creation outcomes for M’s. We employed OLS<br />
regression models with individual fixed effects, using STATA’s xtreg command. <strong>The</strong> final<br />
models included 253 person-years. In all value creation and new tie formation models, the<br />
independent variables are lagged one year. Year dummies are also included in all models to<br />
control for unobserved variation associated with changes taking place over time in the case firm.<br />
Because of our fixed and random effects model designs, we did not include other controls for<br />
individual differences in our analyses.<br />
RESULTS<br />
Descriptive statistics are presented in Table 2. <strong>The</strong> left-hand column of Table 2 provides<br />
information related to the dyad-year sample, and the right-hand column provides information<br />
related to the person-year sample. Table 3 presents the results for models predicting new tie<br />
formation, and Table 4 presents the result for models predicting value creation.<br />
<br />
8
Hypothesis 1 predicted that document downloads of indirect ties would lead to more<br />
relationship formation than document downloads of distant partners. <strong>The</strong> results in Model 3 of<br />
Table 3 indicates that document downloads with indirect ties have a significant positive effect on<br />
tie formation, while document downloads without any ties actually have a negative effect on tie<br />
formation, and a test supports a significant difference between these two coefficients (p
Our research reconciles these two different perspectives. We find that KMS use only<br />
leads to new relationship formation when there exists social capital to support it, in the form of<br />
indirect ties; otherwise, KMS use decreases relationship formation. We also find that KMS use<br />
increases value creation among those with existing direct ties--and actually decreases revenue<br />
generation where ties are lacking. Finally, we find that the positive effects of KMS use depend<br />
on pre-existing social capital (indirect ties), in terms of both relationship formation and value<br />
creation outcomes.<br />
<strong>The</strong>re are some important limitations in our analysis. Although we control for differences<br />
across individuals by using random- and fixed-effects regression models, our analysis is still<br />
limited by the fact that the data come from a single case firm. We cannot generalize to other<br />
settings where the rules, incentives or norms regarding workplace collaboration could be<br />
different than those in our setting. In addition, differences in the KMS technologies implemented<br />
and in the country jurisdictions where firms operate could also influence the ways that this<br />
technology impacts relationships and value creation. Nonetheless, our study provides one of the<br />
first systematic investigations of how technology-based knowledge sharing affects the fabric of<br />
relationships and the production of economic value.<br />
Contributions<br />
Our findings suggest that for complex knowledge organizations such as law firms, KMS<br />
is best used as an entry point into collaborations that can be productive—and works best when<br />
applied to knowledge that is “local” in the sense of complemented with existing workplace<br />
relationships. <strong>The</strong> idea that the KMS can facilitate knowledge reuse directly is not supported, this<br />
can even hurt value creation efforts.<br />
Most thinking about the benefits of implementing searchable knowledge databases in<br />
organizations has focused on individuals’ ability to discover and access distant knowledge that<br />
they would not otherwise have been exposed to. Yet we find little evidence that distant search<br />
pays off: downloading documents from unconnected others does not lead to new working<br />
relationships, and actually harms subsequent revenue generation.<br />
Our study contributes to theory on technology and relationships. We help unpack how the<br />
introduction of a new technology influences relationship formation and social capital among<br />
organizational members. In doing so, we help to reconcile a materialist view and a social view of<br />
technology use by showing that the positive effects of technology use require pre-existing social<br />
capital to be realized.<br />
Further, taking our findings on relationship formation and value creation together<br />
suggests an inversion of common thinking about the way technology complements social<br />
relationships: instead of the former being useful where the latter is lacking, it appears that—at<br />
least in the case of complex knowledge production—search technology is most useful in the<br />
context of close social relations.<br />
Our findings also contribute to networks research. In contrast to what we might expect<br />
based on weak tie theory, we find that more value is created from downloading direct contacts<br />
than downloading indirect weak tie contacts. This is true, even though people are likely to have<br />
more overlapping knowledge with their strong ties. This finding suggests that some of the most<br />
productive discovery and learning from use of knowledge databases occurs among close<br />
colleagues with prior working relationships.<br />
<br />
10
Implications for practice<br />
This research also holds implications for practice. Our findings suggest that law firms and<br />
other professional service firms can benefit from tracking the factors that influence workplace<br />
collaboration, and monitor changes in collaboration networks and value creation arising after<br />
KMS implementation. Professional service firms continue to spend large sums of money on<br />
KMS systems. Our research can help to guide the effective use of these systems. Our research<br />
also reveals a few specific dangers related to KMS implementation. In aggregate, we find that<br />
KMS use may diminish the rate of new tie formation, reducing cohesion in the organization. In<br />
addition, there may be special risks for junior members of the organization who lack pre-existing<br />
social capital. Finally, we found that the most short-term value from KMS use can arise from the<br />
reuse of knowledge among existing groups of collaborators rather than from unconnected people.<br />
In short, the idea that KMS can help firms to realize new value by bringing together distant<br />
knowledge within the firm may be over-stated.<br />
<br />
11
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Organizational Capabilities In A Management Consulting Company. Strategic Management<br />
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Hansen, M. T. 1999. <strong>The</strong> search-transfer problem: <strong>The</strong> role of weak ties in sharing knowledge<br />
across organizational subunits. Administrative Science Quarterly, 44: 82-111.<br />
Leonard-Barton, D. (1988). Implementation as mutual adaptation of technology and organization.<br />
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Lucas, H. 1975. Why information systems fail. New York: Columbia University Press.<br />
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<br />
13
Table 1: Representative Excerpts from Interviews<br />
<br />
<strong>The</strong>me<br />
Positive general<br />
view of KMS<br />
Negative general<br />
view of KMS<br />
KMS increases<br />
amount of<br />
workplace<br />
collaboration<br />
KMS reduces<br />
amount of<br />
workplace<br />
collaboration,<br />
with positive<br />
consequences<br />
Uncertain impact<br />
on amount of<br />
workplace<br />
collaboration<br />
KMS reduces<br />
amount of<br />
workplace<br />
collaboration,<br />
Excerpt<br />
Informant: You know, people are curious to see, for such and such partner<br />
or manager, what types of engagements they have worked on. We see lots<br />
of searches by client’s name, or searches by lawyer’s name. …it helps<br />
people find out what everyone is working on and find out who they want to<br />
work with.<br />
Interviewer: So before [the KMS], if I understand you, people knew what<br />
their colleagues were working on?<br />
Informant: Exactly. Everybody knew who was doing what. People<br />
communicated a lot. Because we had to…. So when you gave someone a<br />
job to do, you told him: “Go and see Dupont, I think he’s already worked<br />
on that issue.” Or you said: “I already did something similar last year; look<br />
at client file X.” And it worked very well like that. Because people talked<br />
to one another…. I think that the overall quality of our knowledge sharing<br />
could have been improved through investing in people rather than in<br />
machines.<br />
Interviewer: Do you use it to save time on well-known recurring issues or<br />
do you also use it when you are stuck on new questions, I mean, technical<br />
questions that you have never addressed before?<br />
Informant: It depends. When I am stuck on a technical question, I try to<br />
search the database to see if someone already took a stand on comparable<br />
issues…. If I find someone, I usually call him and ask what he thinks.<br />
Informant: I also use the knowledge base as a consumer, including anything<br />
that is securities law…. I just sold two client projects by the existence of<br />
these [KMS] documents that I would never have sold otherwise.<br />
Interviewer: Did you involve the authors of these documents, in both<br />
projects you sold?<br />
Informant: It was not necessary. At least not at this stage, but it’s all very<br />
recent and I have not finalized my team.<br />
Informant: If I have an idea of the person who worked on it, yeah, I think<br />
I’ll go see the person after watching what she has in the knowledge base.<br />
After hearing about “So and so had to do this or that” well I’ll go see the<br />
person.<br />
Interviewer: Even when you do not know her well?<br />
Informant: Well, no, he must already know that I (pausing), I will have an<br />
easier time knowing what they did and then go to the people if I know<br />
them. If this is someone I have absolutely no idea, there it is more difficult.<br />
Informant (Discussing the outputs from a specific client project): I think<br />
that everything we did is in the knowledge base. And I know it’s already<br />
been used.… When I browse the knowledge base, I realize that some of our<br />
things have been reused.<br />
14
with negative<br />
social<br />
consequences<br />
KMS reduces<br />
amount of<br />
workplace<br />
collaboration,<br />
with negative<br />
work-quality<br />
consequences<br />
Interviewer: How can you tell?<br />
Informant: <strong>The</strong> juniors with whom I work told me ‘everyone reuses this and<br />
that.’<br />
Interviewer: And how do you feel about being such a popular author? Does<br />
it bring you satisfaction or displeasure?<br />
Informant: Sadness.<br />
Interviewer: Really? Sadness? Why?<br />
Informant: Because the least they could do is come and see me instead of<br />
plainly reusing my stuff.<br />
Informant: When you read a textbook on a specialized subject of law, if<br />
things are not explained well, you don’t fully understand what’s going on.<br />
So imagine how difficult it is for a Philistine who wants to reuse my<br />
opinion letters without prior knowledge of laws and regulations on financial<br />
activities! My consultations aren’t textbooks. <strong>The</strong>y are elliptical. <strong>The</strong>y deal<br />
with specific and practical client problems. I go straight to the point and<br />
don’t mention things that are known by both my client and me. People who<br />
download my memos and try to reuse them without understanding the<br />
subject and the context of the engagement… I mean that’s pathetic. Reuse<br />
by people who are not specialists, that’s very very dangerous. And I see<br />
people doing that all the time.<br />
<br />
15
Table 2: Descriptive Statistics<br />
Variable Dyad level Individual level<br />
New tie formation<br />
0.03 (0/1 variable)<br />
Value creation (billable hours) 800.87 (S.D. 357.47, Max 1656)<br />
Technology use (document<br />
download)<br />
Indirect ties<br />
0.13 (0/1 variable) 14.25 (S.D. 13.37, Max 49)<br />
0.41 (0/1 variable)<br />
Doc. use from direct ties 1.79 (S.D. 1.61, Max 5)<br />
Doc. use from indirect ties 6.10 (S.D. 6.78, Max 30)<br />
Doc. use from non-ties 6.36 (S.D. 7.46, Max 37)<br />
<br />
16
Table 3: Results of Cross-Nested Random Effects Models Predicting New Tie Formation<br />
(Dyad Level Analysis)<br />
Variable Model 1 Model 2 Model 3<br />
Document use<br />
(linking M to P)<br />
Coeff<br />
(s.e.)<br />
0.07<br />
(0.17)<br />
Coeff<br />
(s.e.)<br />
0.002<br />
(0.17)<br />
Coeff<br />
(s.e.)<br />
Odds<br />
ratio<br />
Indirect tie<br />
(linking M to P)<br />
0.78***<br />
(0.13)<br />
Document use only<br />
(no indirect ties)<br />
-0.58*<br />
(0.28)<br />
0.54<br />
Indirect tie only<br />
(no doc. use)<br />
0.61***<br />
(0.13)<br />
1.84<br />
Doc. use and indirect tie 0.89***<br />
(0.20)<br />
2.43<br />
Year dummies included? Yes Yes Yes<br />
***p
Table 4: Results of Individual Fixed-Effects Models Predicting Revenue Generation<br />
(Billable Hours)<br />
Model 1 Model 2<br />
Coeff.<br />
(s.e.)<br />
Billable hours in previous year -0.00002<br />
(0.0001)<br />
Coeff.<br />
(s.e.)<br />
-0.05<br />
(0.08)<br />
Document use 7.27***<br />
(1.93)<br />
Doc. use from direct ties 38.20*<br />
(19.06)<br />
Doc. use from indirect ties -7.83<br />
(5.37)<br />
Doc. use from non-ties -7.72*<br />
(3.71)<br />
Individual fixed effects and year dummies? Y Y<br />
***p
<strong>The</strong> <strong>Shrinking</strong> Pyramid: Implications for <strong>Law</strong><br />
Practice and the Legal Profession<br />
Lunch Panel: Legal<br />
Services in Emerging<br />
Countries: Brazil,<br />
India, and China<br />
Friday <strong>April</strong> <strong>12</strong> th , <strong>12</strong>:30-1:45 pm<br />
Moderator: James Jones, <strong>Georgetown</strong> <strong>Law</strong><br />
Panelists: David Trubek, University of Wisconsin <strong>Law</strong> School; Sida Liu, University<br />
of Wisconsin Department of Sociology and <strong>Law</strong> School; Jay Krishnan, Indiana<br />
University Maurer School of <strong>Law</strong>
<strong>The</strong>re are no materials<br />
for this session.
<strong>The</strong> <strong>Shrinking</strong> Pyramid: Implications for <strong>Law</strong><br />
Practice and the Legal Profession<br />
Corporate Clients and<br />
Outside <strong>Law</strong> Firms:<br />
Procurement or<br />
Partnership?<br />
Friday <strong>April</strong> <strong>12</strong> th , 2:00-3:30 pm<br />
Moderator: Ellen Rosenthal, Chief Counsel, Pfizer Legal Alliance and Vice-<br />
President and Assistant General Counsel, Pfizer<br />
Panelists: Leslie Turner, General Counsel, <strong>The</strong> Hershey Company; Matthew Biben,<br />
General Counsel, Chase Consumer Businesses and Senior Legal Adviser, JPMorgan<br />
Chase<br />
(1)Deconstructing Big <strong>Law</strong>: <strong>The</strong> Future Market for Corporate Legal Services –<br />
Preliminary Results<br />
Molly Selvin, Stanford Center on the Legal Profession, Stanford <strong>Law</strong> School<br />
and Southwestern <strong>Law</strong> School; Patrick M. Hanlon, Stanford Center on the<br />
Legal Profession, Stanford <strong>Law</strong> School<br />
(2)<strong>Law</strong>yers Between Market and Hierarchy: Evidence from Fortune 500<br />
Companies<br />
Mari Sako, Saïd Business School, University of Oxford
1<br />
DECONSTRUCTING BIG LAW<br />
<strong>The</strong> Future Market for Corporate Legal Services<br />
Preliminary Results<br />
by<br />
Molly Selvin 1 and Patrick M. Hanlon 2<br />
<strong>The</strong> <strong>Shrinking</strong> Pyramid: Implications for <strong>Law</strong> Practice and the Legal Profession Symposium<br />
<strong>Georgetown</strong> University <strong>Law</strong> Center<br />
<strong>April</strong> <strong>12</strong>, <strong>2013</strong><br />
Abstract<br />
<strong>The</strong> legal industry is in transition. A generation of explosive growth in the market for corporate legal<br />
services has ended, and while many big law firms remain highly profitable to their owners, revenues are<br />
stagnant, jobs are increasingly insecure, and the demand for new lawyers is at low ebb. Stories<br />
announcing the demise big‐firm law practice have made the New York Times front page and draw<br />
almost obsessional coverage in legal trade publications.<br />
Though the law firm “pyramid” is under tremendous stress, preliminary results from a multi‐year<br />
Stanford <strong>Law</strong> School project on the future of the legal profession also reveal a more diverse—and<br />
somewhat less dire—picture of the legal services industry.<br />
<strong>The</strong> Stanford legal profession project aims to understand the changes occurring in the market for<br />
corporate legal services and their implications for legal education and legal careers. Our research<br />
encompasses both purchasers and suppliers of legal services. <strong>The</strong> people we have interviewed to date<br />
were candid and thoughtful, and our interviews comprise a rich source of qualitative data.<br />
First of all, these data suggest that that the industry’s financial pressures are neither felt uniformly<br />
across the legal industry nor are they always as acute as often portrayed. While corporate clients have<br />
for years tried to avoid excessive costs, this often does not result in the relentless cost‐cutting and<br />
churning of firms postulated in the literature. Corporate counsel often hire what they regard as the best<br />
lawyers (or sometimes firms) for the job with only limited consideration of cost. This is often due to the<br />
impossibility of replicating outside counsel’s knowledge of the client and its business. By the same<br />
token, despite growing corporate interest in alternative to big law – LPOs, contract lawyers, e‐discovery<br />
and other technology vendors, and even firms that provide highly sophisticated lawyers on a temporary<br />
basis – these alternatives so far enjoy only modest market participation. <strong>The</strong>y have a long way to go to<br />
realize their full potential. Second, cost pressures have allowed some lawyers to capitalize on the<br />
1 Research Fellow, Stanford Center on the Legal Profession, Stanford <strong>Law</strong> School; Associate Dean for<br />
Interdisciplinary Programs and Adjunct Professor of <strong>Law</strong>, Southwestern <strong>Law</strong> School.<br />
2 Research Fellow, Stanford Center on the Legal Profession, Stanford <strong>Law</strong> School and former lecturer at Berkeley<br />
<strong>Law</strong> and partner at Goodwin Procter LLP.
current economic turmoil. During the recession, partners with high‐value corporate clients left their big<br />
firm “homes,” slashed their fees, and flourished. Similarly, small elite firms increasingly market<br />
themselves as alternatives to excessively leveraged big firms. <strong>The</strong>y can do this even in big cases by<br />
contracting with LPOs to do the heavy lifting. Finally, a new breed of entrepreneurs is working to<br />
develop new technologies and sophisticated operational methods. If successful, these methods may<br />
vastly increase the productivity of legal services providers—and perhaps further erode the market for<br />
traditional lawyering. Whether innovation is coopted by the incumbent elite firms or disrupts them, the<br />
potential impact on what most lawyers do in their careers may be profound.<br />
2
<strong>The</strong> Stanford <strong>Law</strong> School Research Project on Future of the Legal Profession<br />
<strong>The</strong> goal of the Stanford <strong>Law</strong> School research project on future of the legal profession is to<br />
understand better the changes that are taking place in the high-value sector of the market for<br />
corporate legal services and the implications of these changes for legal education and legal<br />
careers. Our research encompasses both purchasers and suppliers of high-value corporate<br />
legal services, including multi-national and other very large corporations, the law firms that have<br />
traditionally provided high-value corporate legal services, and the alternative providers of<br />
corporate legal services that have emerged over the last decade. <strong>The</strong> research focuses on the<br />
US market but includes an analysis of global trends and changes in the corporate legal services<br />
market in selected foreign economies.<br />
Media coverage of changes in the corporate legal services market typically draws on a mix of<br />
data of uncertain quality and scope, anecdotes and hyperbole. By systematically assembling,<br />
assessing and analyzing the best available quantitative data on the high-value sector of the<br />
corporate legal services market and interviewing a broadly representative sample of corporate<br />
legal officers, law firm partners, principals of other firms that provide legal services to this sector,<br />
technology experts and management analysts, we hope to develop a more nuanced perspective<br />
on what changes have actually taken place and are likely to take place in the high-value market<br />
sector over the next decade, the relative importance of the factors that are driving change and<br />
the consequences for legal careers.<br />
<strong>The</strong> research program includes:<br />
1) An in-depth interview survey of general counsel of Fortune 100 companies focusing on<br />
corporate legal service managers’ perceptions of past, present and future legal needs<br />
and changing strategies for satisfying these needs;<br />
2) An historical analysis of the changing role of general counsels;<br />
3) A detailed description of the range of providers that have emerged to compete with “big<br />
law” firms for corporate legal business, including case studies of the more innovative<br />
models;<br />
4) An analysis of current, near and mid-term disruptive legal technologies;<br />
5) Case studies of the evolution of the corporate legal services market in selected<br />
developing economies;<br />
6) An in-depth investigation of the causes of “big law” firm collapses over the past two<br />
decades aimed at disentangling idiosyncratic firm-specific factors from underlying market<br />
factors;<br />
7) A systematic survey of “big law” firm strategic managers focusing on understanding how<br />
these firms are responding to changes in the demand for high-value corporate legal<br />
services on the one hand, and increased competition from new types of providers on the<br />
other;<br />
8) Reflections on the consequences of changes in the market on legal education and legal<br />
careers.
<strong>The</strong> product of the project will be a book that synthesizes the academic and practitioner<br />
literature on the high-value sector of the market, presents our analyses of quantitative and<br />
interview data and suggests what the future holds. As the project unfolds we expect to hold a<br />
number of symposia to present our interim findings for critical review and discussion.<br />
<strong>The</strong> project team, headed by Stanford <strong>Law</strong> Professor and Associate Dean for Graduate Studies<br />
Deborah Hensler, includes Patrick Hanlon, retired partner at Goodwin Procter LLP and former<br />
Senior Lecturer at U.C. Berkeley <strong>Law</strong> School; Molly Selvin, Associate Dean for Inter-disciplinary<br />
Programs at Southwestern <strong>Law</strong> School, Associate Editor of the Journal of Legal Education and<br />
former member of the Los Angeles Times editorial board; Ron Dolin, a computer scientist and<br />
Distinguished Visiting Scholar at Stanford <strong>Law</strong> School; Marc Galanter, emeritus Profesor of<br />
<strong>Law</strong> at the University of Wisconsin; Manuel Gomez, Associate Professor at Florida International<br />
University <strong>Law</strong> School; Amanda Packel, Executive Director of the Stanford Center for the Legal<br />
Profession; Sergio Puig, Teaching Fellow in the Stanford Program in International Legal Studies<br />
and Stanford <strong>Law</strong> Professor Norman Spaulding. Hanlon, Gomez and Selvin are Research<br />
Fellows at the Stanford Center for the Legal Profession and Hensler and Spaulding are<br />
members of the Center’s Steering Committee.<br />
<strong>The</strong> project is funded by a generous gift to Stanford <strong>Law</strong> School from Sidley Austin, LLP.<br />
Hensler March <strong>2013</strong>
2011 <br />
General Counsel with <br />
Power? <br />
Mari Sako with Afterword by Richard Susskind
General Counsel with Power? 2011 <br />
Table of Contents <br />
Executive Summary of Key Findings.............................................................................................. 2 <br />
Chapter 1: Introduction ..................................................................................................................... 3 <br />
Chapter 2: Size and Shape of the Legal Department................................................................. 4 <br />
Size of Legal Departments ........................................................................................................................... 4 <br />
Shape of Legal Departments........................................................................................................................ 5 <br />
Legal Budget Control ................................................................................................................................... 6 <br />
Externalizers and Internalizers..................................................................................................................... 6 <br />
Summary...................................................................................................................................................... 8 <br />
Chapter 3: Convergence, Panels, and Legal Networks............................................................. 9 <br />
Panels........................................................................................................................................................... 9 <br />
Convergence .............................................................................................................................................. 10 <br />
Online Bidding............................................................................................................................................ 11 <br />
Legal Networks .......................................................................................................................................... <strong>12</strong> <br />
Summary.................................................................................................................................................... 13 <br />
Chapter 4: A Production-line Approach to Legal Work.........................................................14 <br />
A ‘Production-‐line Approach’..................................................................................................................... 14 <br />
Objections to the Production-‐line Approach ............................................................................................. 15 <br />
Litigation Tasks .......................................................................................................................................... 16 <br />
Intellectual Property Tasks: a Case Study .................................................................................................. 18 <br />
Summary.................................................................................................................................................... 18 <br />
Chapter 5: What <strong>Law</strong>yers Do in a World of Multi-sourcing .................................................19 <br />
Sourcing Criteria: Labour Arbitrage vs Process Efficiency.......................................................................... 20 <br />
De-‐lawyering in Legal Product Lifecycle .................................................................................................... 20 <br />
Who Manages the Reassembly?................................................................................................................ 21 <br />
What Do General Counsel Do? .................................................................................................................. 22 <br />
Summary.................................................................................................................................................... 23 <br />
Conclusions ..........................................................................................................................................24 <br />
Afterword: <strong>The</strong> Future for General Counsel .............................................................................26 <br />
References ............................................................................................................................................29 <br />
About the Authors..............................................................................................................................30 <br />
Appendix: Research Methodology................................................................................................31 <br />
1 <br />
Said Business School | University of Oxford
Executive Summary of Key Findings <br />
General Counsel with Power? 2011 <br />
Size and shape of legal departments <br />
• In-‐house legal departments reflect the structure of businesses. Some in-‐house legal functions <br />
are centralized at the corporate headquarter, whilst others are decentralized to a varying degree <br />
to business and geographic units. <br />
• In-‐house legal departments’ reliance on external legal resources varies enormously. This study <br />
identified a range from <strong>12</strong>% to 93% in the proportion of external to total legal spending. <br />
• <strong>The</strong>re are four types of general counsel with respect to their make-‐or-‐buy decisions, namely <br />
Externalizer Type I, Externalizer Type II, Mid-‐ranger, and Internalizer. Externalizer Type II <br />
(proactively managing legal networks) and Internalizer (in-‐sourcing actively) are the ones with an <br />
appetite for change in legal services. <br />
Convergence, panels, and legal networks <br />
• Panels mean different things to different general counsel due to differential emphasis placed on <br />
competition and collaboration in managing a panel. <br />
• On convergence, GCs who believed in competitive selection for a panel followed by close <br />
collaboration reduced the number of law firms more rigorously than those who wished to <br />
retain competition within a panel. <br />
• Online bidding for legal work was used selectively both within the panel and to identify new <br />
providers. <br />
• <strong>The</strong> most collaborative form of a panel took the shape of ‘legal networks’, in which the general <br />
counsel facilitated lateral collaboration amongst the law firms to deliver services as an extension <br />
of the in-‐house legal function. <br />
A Production-line approach to legal work <br />
• A production-‐line approach to delivering legal work consists of three steps: disaggregation and <br />
standardization, process flow management, and project management. <br />
• Many general counsel found a variety of reasons to reject or delay the wholesale adoption of <br />
this production-‐line approach. <br />
• In practice, the general counsel adopted either a craft approach, an automation approach, or a <br />
process flow approach. Internalizers tended to lead in implementing a combination of <br />
automation and process flow approaches. <br />
What do lawyers do in a multi-sourcing world? <br />
• Multi-‐sourcing – the use of multiple sources of legal service delivery – is likely to change the <br />
contour of global value chains in legal services. <br />
• Value migration away from the traditional corporate client – law firm transactions is more <br />
likely due to three factors: (a) the more the motive for offshoring and near-‐shoring goes beyond <br />
mere labour cost arbitrage to the implementation of a production-‐line approach, (b) the more <br />
lead is taken by the in-‐house legal function in project management, and (c) the higher up the <br />
priority list the general counsel places the issue of efficient legal service delivery. <br />
2 <br />
Said Business School | University of Oxford
General Counsel with Power? 2011 <br />
Chapter 1: Introduction <br />
Globalization, digital technology, and multi-‐disciplinary professional knowledge -‐-‐ these pervasive forces <br />
present opportunities and challenges for all major law firms, potentially transforming legal practice via <br />
two agents of change. One is the in-‐house legal function in corporations and financial institutions. In a <br />
buyer’s market, the general counsel is exerting greater power in relation to the external lawyer. <strong>The</strong> <br />
other agent of change comes in the form of new entrants into the global legal services market. <strong>The</strong>se <br />
non-‐traditional suppliers, including so-‐called legal process outsourcing (LPO) providers, deliver legal <br />
support services from low cost locations, onshore and offshore. How are lawyers responding to these <br />
gentle winds of creative destruction? <br />
This report presents key findings from a study of legal services outsourcing and its impact on the legal <br />
profession. In order to analyze the ecosystem of key actors in the sector, we have focused first on the <br />
ultimate demander of corporate legal services, namely in-‐house lawyers. <strong>The</strong> aim of this report is to go <br />
beyond anecdotes about novel practices, to present a systematic analysis of what is happening in the in-house<br />
legal departments of major corporations and financial institutions. <br />
This study is based on interviews with 52 general counsel in the UK and the United States during May <br />
2010 – January 2011. Interviews explored four key areas: (a) the changing size and shape of the in-house<br />
legal department, (b) the changing nature of relationships with law firms, (c) the extent to which <br />
legal work has become disaggregated or decomposed in specific areas of work, and (d) how multi-sourcing<br />
(including outsourcing and offshoring) decisions are made. We targeted general counsel in <br />
major private and public organizations (see Appendix for details). <br />
<strong>The</strong> report is structured as follows. Chapter 2 analyzes the size and shape of legal departments in the <br />
past five years. Chapter 3 examines the changing nature of relationship between in-‐house and external <br />
lawyers. Chapter 4 discusses the perspectives of general counsel on the disaggregation of legal work as <br />
a pre-‐requisite for implementing outsourcing and offshoring. Chapter 5 addresses what lawyers do in a <br />
multi-‐sourcing world. We conclude by discussing key issues for further consideration. <br />
3 <br />
Said Business School | University of Oxford
General Counsel with Power? 2011 <br />
Chapter 2: Size and Shape of the Legal Department <br />
In-‐house lawyers in major businesses are demanding cost effectiveness in the delivery of legal services. <br />
<strong>The</strong> 2008 financial crisis intensified the general drive to reduce costs including legal costs. In what ways <br />
have in-‐house lawyers reacted to these pressures to do ‘more for less’? This chapter answers this <br />
question by analyzing competing logics in three related areas, namely (a) the way the legal function <br />
reflects corporate structures, (b) the nature of legal budget control, and (c) the optimization of legal <br />
resources internally and externally. <br />
Size of Legal Departments <br />
In our sample, the absolute size of the legal department varies enormously, ranging from a small <br />
department with only a couple of lawyers to a globally distributed legal function with over 1000 lawyers <br />
at some banks (see Table 1). In the last five years, the majority of organizations have increased the <br />
number of in-‐house lawyers, generally reflecting business growth, either organically or through <br />
acquisitions. Sectoral differences are evident in the numbers. In financial services, the legal department <br />
grew enormously, reaching a peak in 2007 before the financial crisis led to a contraction in lawyer <br />
headcount. <strong>The</strong>re was no such clear-‐cut impact of the financial crisis on lawyer headcount in other <br />
sectors. <br />
Table 1: Size and shape of in-‐house legal departments in 2010 <br />
Sector <br />
Number in <br />
sample <br />
Number of in-‐house <br />
lawyers (range) <br />
External to total legal <br />
spending (range) <br />
Construction 4 25 -‐ 61 20% -‐ 83% <br />
Manufacturing 2 150 – 314 30% <br />
Energy 7 10 – 650 <strong>12</strong>% -‐ 57% <br />
Financial services 11 80 -‐ 1068 50% -‐ 77% <br />
ICT 9 2 -‐ 400 27% -‐ 93% <br />
Professional services 2 11 -‐ <strong>12</strong> 60% <br />
Public sector 3 n.a. n.a. <br />
Retailing and wholesale distribution 5 8 – 35 60%-‐ 90% <br />
Utilities 2 n.a. 20% <br />
Other sectors 7 7 -‐ 72 40% -‐ 60% <br />
TOTAL 52 2 -‐ 1068 <strong>12</strong>% -‐ 93% <br />
Source: Author’s interviews; n.a. = not available. <br />
4 <br />
In a small number of cases, the general counsel managed to reduce the size of the legal department <br />
despite significant business growth. At an energy company, the number of lawyers was reduced from <br />
Said Business School | University of Oxford
General Counsel with Power? 2011 <br />
750 to 650 in the past two years, as part of a corporate-‐wide drive to reduce all costs. Another energy <br />
company implemented its policy to create a lean legal function, reducing in-‐house lawyers from 30 to <strong>12</strong>. <br />
Similarly, at a construction company, the total legal department headcount went down from 25 to 7 in <br />
five years with the creation of a global headquarter legal function. <br />
Shape of Legal Departments <br />
<strong>The</strong> internal legal department mirrors the corporate structure in some form. At its simplest, a single <br />
product firm operating in one country has a functional structure. <strong>The</strong> structure inevitably becomes <br />
more complex with multiple business lines and/or cross-‐national geographic coverage. With complexity <br />
comes a certain degree of freedom in choosing among alternative structures for the in-‐house legal <br />
function. <br />
<strong>The</strong>re is clearly a trade-‐off in this choice. <strong>The</strong> advantage of a centralized legal function is that the <br />
general counsel is in full control of overseeing all in-‐house lawyers. However, in-‐house lawyers may not <br />
give the best advice if they are remote from the business context. By contrast, by embedding <br />
themselves in business units or country operations, in-‐house lawyers acquire an intimate knowledge of <br />
the corporation for which they work. However, this devolved reporting structure hinders the sharing of <br />
best practice and the optimal allocation of legal resources across business units. Some general counsel <br />
have devised structural and process mechanisms that minimize this trade-‐off. <br />
At one end of the spectrum, companies with a focused product or service have a centralized legal <br />
department structure, with all in-‐house lawyers reporting to the general counsel. If a corporation is <br />
focused in its product/service line but has an international presence, then it may have a legal <br />
department in each country-‐based or regional operation. In such a structure, only the headquarter-based<br />
lawyers have a solid reporting line to the group general counsel, whilst country-‐based lawyers <br />
have a solid reporting line to the country general manager and only a dotted line to the group general <br />
counsel. At the other end of the spectrum, large energy companies and financial institutions are <br />
typically both global and diversified in product/service lines. <strong>The</strong>n, the legal department structure tends <br />
to mirror the three-‐dimensional matrix applied to the firm, with geography, product, and function as <br />
dimensions. <br />
<strong>The</strong> matrix is a complex structure that rarely works well with a sole reliance on formal reporting lines. It <br />
is therefore not just a matter of whether in-‐house lawyers have solid or dotted line reporting to the <br />
general counsel or business unit head. Typically, the matrix also requires much informal coordination <br />
and communication. With such processes in place, a global headquarter legal function can be a ‘centre <br />
of excellence’ providing specialist support (e.g. in litigation, corporate transactions, etc.) to legal <br />
departments in diversified business units. However, when a headquarter practice group (e.g. in <br />
litigation) lacks connectivity with business unit lawyers, this may lead to uncoordinated actions, or a <br />
situation of ‘too many hammers in the same machinery’, as one general counsel put it. <br />
5 <br />
Said Business School | University of Oxford
General Counsel with Power? 2011 <br />
Legal Budget Control <br />
<strong>The</strong> shape of the legal function gives some, but not full, insight into how the general counsel controls <br />
the legal budget. <strong>The</strong>re is much variation, first in how much budgetary information the headquarter <br />
legal function holds, second with respect to the system of accounting for legal fees, and third in what <br />
levers are used to keep legal expenses under control. <br />
First, in terms of information, some multi-‐divisional firms hold information about legal spending of all <br />
divisions centrally, whilst others admit to not having a fully functioning central record keeping to date of <br />
the total corporate legal spending, including spending by autonomous business units. Many <br />
respondents mentioned that they have recently implemented, or are in the process of implementing, an <br />
e-‐billing system which, amongst other things, would enhance the transparency and accuracy of legal <br />
spending. <br />
Second, in terms of accounting for legal fees, one approach at one extreme is a tightly controlled central <br />
legal budget, with a specific lawyer as a clear budget holder for each line of legal activity. At the other <br />
extreme, another approach is to have no central legal budget at all, by embedding all legal fees in <br />
business project costs. Many firms fall in-‐between, with a central legal budget which lawyers control <br />
directly (e.g. for major litigation or corporate transaction), and project-‐based budgets in civil engineering, <br />
for example, in which legal fees for contract drafting and negotiation are included. <br />
Third, many respondents have an explicit policy to use in-‐house resources first before going out-‐of-house,<br />
as it is generally considered cheaper to do so. However, only a small number of general counsel <br />
interviewed rely on explicit mechanisms for cost control. In one case, the general counsel of a <br />
divisionalized company stated that ‘our legal department is a planned economy’, pointing to a <br />
performance ‘dashboard’ that the legal department at each operating business unit was required to <br />
submit on a monthly basis. At another company, the general counsel introduced a central approval <br />
system for legal fees above a certain sum. This led in-‐house lawyers to think twice about the necessity <br />
of putting work out to external lawyers. <br />
Externalizers and Internalizers <br />
Despite entertaining a common aim to contain legal costs, the interviews reveal an enormous variation <br />
in how corporate legal departments are attempting to fulfil this objective. One comparative indicator is <br />
the percentage of total legal spending on external lawyers, which ranged from <strong>12</strong>% to 93% in our sample <br />
(see Table 1). Sectoral patterns are evident, with some retailers and high-‐tech firms relying heavily on <br />
external lawyers and financial services firms positioned in mid-‐range, but variations within sectors point <br />
to company-‐specific legacy and policy on this matter. Four generic types exist in the sample: <br />
Externalizers Type 1 and Type 2, Mid-‐rangers, and Internalizers. <br />
Externalizers (Type 1 and Type 2) <br />
<strong>The</strong> externalizers – companies that depend on external lawyers for 90%+ of their legal resource needs – <br />
fall into two types, and their logic is somewhat different. Externalizers Type 1 do not have an active in-house<br />
legal department, relying on external lawyers to act as though they were in-‐house general <br />
counsel. For example, one US retailer did not have an in-‐house lawyer at all until recently. Another <br />
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retailer in the UK has had a small in-‐house legal department which was often bypassed by the CEO and <br />
business managers who went direct to external lawyers for advice. According to the general counsel, <br />
‘our legal function was a little bit like an outside law firm dropped in here, and we sort of sat and waited <br />
for people round the business to come and talk to us, and then we’d give them some advice and then <br />
they’d go away. That was one part of the model. <strong>The</strong> other part was, we had outside lawyers that were <br />
more like in-‐house counsel.’ <br />
Externalizers Type 2 also rely heavily on external legal resources, but the in-‐house legal department has <br />
a proactive stance with respect to managing law firms. Typically, the general counsel hosts an annual <br />
conference of major law firms, and encourages lateral communication amongst these law firms in what <br />
they call a ‘legal community’, a ‘legal network’, or a virtual law firm. <strong>The</strong>se general counsel are adept at <br />
balancing collaboration and competition, in order to induce law firms to work effectively and efficiently <br />
for the corporate client (see Chapter 3 for details). <br />
Mid-rangers <br />
Financial services firms, including investment banks and commercial banks, are the biggest spenders on <br />
big law firms in absolute terms. However, proportionately their reliance on external lawyers relative to <br />
internal lawyers is balanced. This might conflate clear patterns in different lines of work, for example, <br />
heavier reliance on external lawyers in corporate finance than in sales and trading due to large amounts <br />
of complex documentation and the use of syndicates in the former. At the same time, some <br />
interviewees indicated that apart from ‘big ticket’ items such as large litigation cases, internal and <br />
external legal work was somewhat fungible. As a general counsel at an investment bank asked <br />
rhetorically: ‘What has to be done in-‐house? Nothing! A few years ago, I said to my bosses when we <br />
were having a debate about the structure of the legal department. I said we can hire another 200 <br />
lawyers and bring more of the work in-‐house, or we can fire all in-‐house lawyers and you two can <br />
manage all the outside counsel. Those are the two ends of the spectrum. <strong>The</strong> question to me is where <br />
do you want to be in the middle.’ However, apart from some consideration for managing the existing <br />
capacity and internal lawyers’ careers, the general counsel admitted to not being able to ‘articulate <br />
where on the spectrum we should be’. <br />
Internalizers <br />
<strong>The</strong> internalizers – with 20% or less reliance on external resources – use a different logic. <strong>The</strong>y have <br />
developed a strong in-‐house legal function that conducts most of the legal work for the corporation. <br />
<strong>The</strong> key advantage lies in in-‐house lawyers’ intimate knowledge of the business. Amongst the <br />
internalizers interviewed, a general counsel at an energy company considered heavy reliance on <br />
external legal resources as not cost-‐effective overall. Transacting with many outside counsel, <br />
‘constantly keeping them up to speed on what the business was doing’, was very expensive. <strong>The</strong> general <br />
counsel devised and implemented a law department strategy that placed importance on ‘fit-‐for-‐purpose’ <br />
lawyering, which involved staying very close to internal clients in business operations, and keeping tight <br />
control over external legal resources. Pursuing this strategy resulted in only <strong>12</strong>% of total legal spending <br />
going to external lawyers by 2010, down from 19% in 2005 and 23% in 2000. <br />
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Whilst some firms reduced reliance on external lawyers by increasing the size of the internal legal <br />
department, a small but significant number of firms have done so by cutting back on the size of the <br />
internal legal department. On first reading, this is counter-‐intuitive. Surely, a reduction in internal legal <br />
resources would result in shifting more work out to external lawyers. However, in a small number of <br />
cases, the general counsel in charge achieved heavier reliance on in-‐house legal resources at the same <br />
time as reducing in-‐house lawyer headcount (see Table 2 for some extreme examples). <br />
Table 2: Relationship between in-‐house lawyers and % of legal work done in-‐house in the last 5 years <br />
Number of in-‐house lawyers <br />
% legal work done in-‐house <br />
Case I 30 15 21% 80% <br />
Case II 750 650 48% 55% <br />
Case III 30 15 77% 88% <br />
Source: Author’s interviews. <br />
This evidence is consistent with the claim that ‘supply creates demand’ for external legal work. In-‐house <br />
lawyers may go outside to get confirmation from external lawyers of what they are doing. A general <br />
counsel at a financial institution noted: ‘a result of having more in-‐house lawyers is that you are creating <br />
more external spend. So, the more activity you’re creating through that operating model, the more <br />
there is a sort of on-‐cost of doing external business’. Conversely, a reduction in in-‐house lawyers can <br />
trigger a reduction in the outside legal cost. Through rigorous in-‐house processes for avoiding or <br />
resolving disputes before they became litigation, an energy company reduced its external spending on <br />
litigation. Similarly, the same firm reduced its legal cost on patenting by being more disciplined about <br />
what went into its intellectual property portfolio. <strong>The</strong>se are instances, not of in-‐sourcing, but of the <br />
elimination of the need for outside counsel. <br />
Summary <br />
With a diverse range of sectors and corporate structures in our sample, apples-‐to-‐apples comparisons <br />
are not easy and come with many caveats. Moreover, the diversity of practices captured by this study <br />
challenges existing studies and surveys that claim to have identified dominant definitive trends or <br />
fashions in the legal sector. This study has identified clear patterns in completing principles driving <br />
general counsel’s attempts to change the size and shape of legal departments. First, there are four <br />
generic types of general counsel: Externalizer Type 1, Externalizer Type 2, Mid-‐ranger, and Internalizer. <br />
Second, of these four, Externalizer Type 2 (proactively managing legal networks) and Internalizer <br />
(proactively in-‐sourcing legal resources) are the ones with the biggest appetite for change. As noted <br />
above, Internalizers have taken seriously the following dictum by the management guru Peter Drucker: <br />
‘there is nothing more wasteful than doing more efficiently that which need not be done.’ First and <br />
foremost, internalizers have eliminated wasteful supply-‐induced demand for legal services. <br />
We turn, in the next chapter, to how the nature of relationships between the corporate legal <br />
department and external law firms has been changing. <br />
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Chapter 3: Convergence, Panels, and Legal Networks <br />
<strong>The</strong> practice of law is in part based on building and maintaining relationships. Personal rapport remains <br />
highly significant particularly for high-‐end bespoke work in litigation or corporate transactions. Some in-house<br />
lawyers therefore stated that instructing a specific lawyer was more important than, or just as <br />
important as, retaining specific law firms. Nevertheless, most general counsel in this study said that <br />
these relationships are largely institutional, and that working with a smaller number of law firms would <br />
be of mutual benefit. Such generic belief, however, disguises subtle differences amongst in-‐house <br />
lawyers in how they think they can balance the use of competitive forces and collaborative commitment <br />
to engage law firms. <br />
Panels <br />
To the question ‘does your firm have a panel?’ some said yes, others said they had informal ones, and <br />
yet others said no, revealing a strong dislike for the notion of panels. Why is there such disagreement <br />
amongst the general counsel? <br />
Disagreement stems from the fact that the notion of a panel incorporates several characteristics, and <br />
the general counsel interviewed have in mind a different mix of these characteristics. Panels may <br />
involve some or all of the following:-‐ <br />
(a) A rigorous process of selection onto the panel with specific criteria such as expertise, market <br />
reputation, values and branding <br />
(b) A periodic review of panel members, leading to some turnover in the membership <br />
(c) A stable group of preferred suppliers who commit to a long-‐term relationship <br />
(d) An element of competition among panel law firms <br />
(e) Lateral communication amongst suppliers, with the use of knowledge management tools to <br />
facilitate this. <br />
Some general counsel put great importance on building long-‐term relationships (i.e. an emphasis on (c) <br />
above). Without such relationship building, law firms are unlikely to develop good knowledge of the <br />
client firm. According to one general counsel: ‘I’ve always believed in a panel pledge, on the basis that if <br />
you spread your job too thinly, one, people don’t have much knowledge of your business, and two, you <br />
might save a bob on one deal but I bet you it will come back and haunt you.’ <br />
Some other general counsel focused on having a very small number of law firms without calling them <br />
panel firms. For example, one general counsel retained five ‘chosen partner’ law firms, each with a 20 – <br />
30 year-‐long relationship. He said: ‘I don’t believe in a panel because our work does not generate the <br />
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sort of panel mentality, although occasionally, we might put a few of them in competition’ (revealing a <br />
distaste for (d) in the panel characteristics above). Thus, the five ‘chosen partners’ are typically not <br />
asked to tender, but are allocated legal work in non-‐compete areas. <br />
One respondent defined a panel succinctly as ‘a group of interchangeable suppliers with whom you have <br />
preferential supply terms.’ Evident in this definition is the inherent tension between competition and <br />
collaboration. <strong>The</strong>re are three mechanisms in use – convergence, online bidding, and legal networks – <br />
to navigate this tension. A different mix of these mechanisms gives rise to differential incentives for law <br />
firms, as elaborated below. <br />
Convergence <br />
An overwhelming majority of general counsel in this study noted a recent trend towards reducing the <br />
number of law firms the company instructs. In the last five to ten years, drastic ‘culling’ occurred at <br />
some firms (see Table 3). (At the other extreme, one global manufacturing company continued to have <br />
as many as 170 law firms on its practice-‐based panels put together). <br />
Table 3: Number of <strong>Law</strong> Firms on the Panel <br />
Five years ago <br />
Now (2010) <br />
Case I 55 14 <br />
Case II 60 6 <br />
Case III 38 26 <br />
Case IV 49 9 <br />
Case V 70 20 <br />
Source: Author’s interviews. <br />
<strong>The</strong> general counsel saw obvious advantages in giving larger chunks of legal work to a smaller number of <br />
law firms. For example, a financial institution has 15 law firms on a global panel, which includes three <br />
magic circle firms. Its general counsel echoed many others interviewed in noting three key benefits of <br />
having a panel, namely (a) deeper relationship with panel firms arising from focus, (b) discounted fees <br />
for volume work, and (c) ‘freebies’ such as secondees, free advice, seminars and training, and the <br />
allocation of good partners and associates for the bank’s legal work. Hence, the panel is a good <br />
mechanism for enhancing corporations’ bargaining power vis-‐à-‐vis law firms. <br />
Despite these obvious benefits, a minority of general counsel are not convergence fans. <strong>The</strong>re are three <br />
problems, in their views. First, there is the problem of diminished local autonomy: convergence <br />
requires centralized legal department control, and some GCs felt it politically impossible to take power <br />
away from in-‐house lawyers in divisions and regions. Second, there is the problem of inefficiency: ‘firms <br />
that have converged have focused that work on a number of large law firms, and we have found the <br />
larger law firms to be what we consider the more inefficient of the bunch’, according to a US energy firm <br />
GC. Mid-‐tier law firms are less costly and often have better connections with local counsel. Third, there <br />
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is the problem of false aggregation: ‘when firms focus on a very small number of firms, those firms, in <br />
turn go out and hire local counsel anyway. So it looks like it is aggregated, but it truly always is not.’ <br />
Online Bidding <br />
<strong>Law</strong> firms, once they are selected onto a panel, are asked to bid for specific pieces of legal work. Panel <br />
structures vary from firm to firm and put restriction on who can bid for what kind of work. Some firms <br />
distinguish between a global panel and regional/country panels, whilst others have specialist practice <br />
panels. Yet others have a tiered panel, with high-‐risk high-‐value work going to a Tier 1 panel of global or <br />
national firms and lower-‐risk lower-‐value work going to a Tier 2 panel of regional law firms. <br />
In the last several years, some firms (notably financial institutions) have intensified competition among <br />
law firms by using online auction for commoditized types of work or discrete pieces of work. At one <br />
bank, legal work in small claims and conveyancing is subjected to ‘slice and price’, i.e. disaggregating <br />
work into well-‐defined tasks before each task is put out for bidding. Only firms on the panel are able to <br />
participate in the auction. A time window such as a couple of hours is given for an auction. <br />
One valuable outcome of online bidding is significantly lower prices. Whilst this creates short-‐term gains <br />
in price reduction via margin compression, it has not necessarily given incentives for law firms to invest <br />
in cost reduction. A general counsel at a financial institution reflected on the pros and cons of online <br />
bidding: ‘that’s great today, but I don’t think it particularly gives you an incentive to be creative in the <br />
way that you do the work, and the reason for that is it’s a one-‐off transaction. So I think what the firms <br />
do today, particularly in an environment where they are in, they will get to the right price mostly <br />
through margin compression. Now, I’m not against margin compression, but there is a limit to margin <br />
compression because the law firm says, you know what, I’ll do this at a loss, but they won’t at some <br />
point when they get too busy, and the prices will go up.’ Thus, in-‐house lawyers have not made <br />
sufficient progress in devising incentives for law firms to change the way they do their work in the long <br />
run. <br />
A US manufacturing company also made some use of reverse auctions 1 for legal matters, but restricted <br />
the use to occasions when the firm did not have an incumbent law firm or was dissatisfied with the <br />
incumbent firm for whatever reason. Even with this different use of bidding to reach out beyond panel <br />
firms, the general counsel noted a disadvantage: ‘we don’t believe in doing them (auctions) for every <br />
matter because we think they’re value-‐destructive, or they are relationship-‐destructive, and we do value <br />
our relationships.’ <br />
Because of the downside to online bidding, a few companies with a panel minimize elements of <br />
competition among panel firms. One civil engineering firm has only three firms on the panel. According <br />
to the general counsel, ‘I don’t let our panel law firms compete against each other. What I mean by that <br />
11 <br />
1 In an ordinary auction, buyers compete to obtain goods or services, and prices typically increase during the <br />
auction. In a reverse auction, sellers compete to obtain business, and prices decrease over time. <br />
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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 <br />
work around, and we work with each of them individually. We’ve got good relationships with each of <br />
them, and it’s a non-‐confrontational approach.’ This general counsel, therefore, relies on competition <br />
during a comprehensive panel selection process, but avoids the ‘them and us’ mentality by treating <br />
panel firms as an extension to the in-‐house legal department. <br />
Legal Networks <br />
At a handful of companies in this study, the general counsel went further to promote collaboration, not <br />
just bilaterally with each law firm, but also among the chosen law firms. Lateral collaboration amongst <br />
preferred law firms is tricky to craft because they are in potential or real competition to bid each other <br />
out. Nevertheless, it is encouraged at a civil engineering company at which 13 law firms, chosen via a <br />
rigorous selection process, are brought together as a Legal Network (Page et al., 2007). <br />
According to its general counsel, ‘we do require them to work together, so we disaggregate some work <br />
and put certain parts to certain law firms. For instance, we have three or four firms who do Private <br />
Finance for us, and we will require them to sit together and work out what is a market position on <br />
particular documents. So rather than having one network firm act for this client company and another <br />
for the bank, each having a different view on what is a standard parent company guarantee, or what is <br />
an appropriate finance model, we have caused them to sit in a room and say, “Here is a document which <br />
is acceptable from both perspectives.” So when we go into a transaction, we don’t have to go through <br />
all of the preliminary maneuvering around all those things. We can simply say, okay, all of that is done, <br />
and that saves time and saves effort and saves money.’ <br />
Similarly, a retailer developed a ‘Legal Community’ of ten law firms, in order to implement cross-‐firm <br />
communication and collaboration in the interest of the corporate client. <strong>The</strong>se preferred law firms are <br />
invited to an annual conference at which the retailer explains the nature of its business and its future <br />
strategic direction. <strong>The</strong> external lawyers at the conference, according to the general counsel, are the <br />
virtual law firm he needed. ‘If it were one firm, one virtual law firm, what would they be doing? One <br />
thing they would be doing is to help each other do better work for us.’ This requires overcoming inter-firm<br />
rivalry, and it is not a natural instinct for law firms to collaborate in this way. <strong>The</strong> general counsel <br />
said they have to work hard to make firms work together. This idea of a lateral legal network or <br />
community, therefore, is a step change from the more traditional bilateral relationship model. <br />
Our last example comes from a US company which has effected lateral collaboration by inviting six panel <br />
law firms (which survived a rigorous selection process) to form a case-‐by-‐case ‘joint venture’. When a <br />
new litigation case comes up, one of them is assigned a coordinator role, and it is that firm’s job to work <br />
closely with the in-‐house lawyer in charge to involve other law firms in the matter. <strong>The</strong> general counsel <br />
is clear in his aim: ‘the critical element in doing it this way is that all of the vendors have to share your <br />
philosophy. If they don’t share your philosophy and if they’re not focused on efficiency, it won’t work.’ <br />
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Figure 1: Balancing Competition and Collaboration among <strong>Law</strong> Firms <br />
Collabora^on <br />
• Legal network or community <br />
• Annual conference <br />
• Collaboraqon among law firms <br />
Compe^^on <br />
• Online bidding <br />
• Low prices <br />
• Via margin compression <br />
Summary <br />
Regardless of the existence of a formal panel, the general counsel in our study already have, or are <br />
shifting towards working with, a small number of law firms. But this trend is shadowed by the need to <br />
balance competition and collaboration with law firms (see Figure 1). Some GCs rely predominantly on <br />
intensifying competition, even after a panel is selected by using online bidding, whilst others take a two <br />
step approach, relying on competitive forces to establish a panel, but then enhancing collaboration by <br />
developing ‘legal networks’. None relies on both online bidding and legal networks for the same <br />
category of legal work, as this mix would create contradictory signals and incentives for law firms. <strong>Law</strong> <br />
firm incentives matter for the long-‐term sustainability of specific practices. But in-‐house lawyers have <br />
found it challenging to provide carrots and sticks for law firms to find new ways of doing their work <br />
differently and more cost effectively. This study did not go into details of various alternatives to hourly <br />
billing as incentive mechanisms for law firms. <br />
<strong>The</strong> next chapter addresses how corporate legal departments are considering ways of making legal work <br />
more efficient and effective, involving disaggregation and standardization. <br />
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Chapter 4: A Production-line Approach to Legal Work <br />
‘Commoditization’ is a dirty word in legal practice. All lawyers recognize that some parts of what they <br />
do are repetitive, routine, and boring. Nevertheless, lawyers consider those legal tasks to be a <br />
necessary part of legal work particularly for trainees and junior lawyers, resulting in deeper knowledge <br />
and experience for making better professional judgement. However, when corporate clients ask for <br />
better value for money, most lawyers begin to see that some of the work could be simplified, <br />
standardized, and shifted to less qualified workers in low-‐cost locations. A nagging worry persists, <br />
nevertheless: how can one maintain the quality of work done, the overall custody, and client <br />
confidentiality? But not so fast. <br />
This chapter summarizes the findings of this study in an area that is in a state of flux. <strong>The</strong>re is little <br />
agreement on terminology – disaggregation, decomposition, unbundling, etc. all uttered <br />
interchangeably. Several techniques originating from manufacturing – process mapping, Lean Six Sigma, <br />
Just-‐in-‐Time, etc. -‐-‐ fall off the tongue of some enthusiasts intent on transforming the way legal services <br />
are delivered, but without a system-‐wide perspective on what is holding back key actors from jumping <br />
on the bandwagon. Despite the existence of a well-‐articulated five-‐stage model from bespoke to <br />
commoditized legal service delivery (Susskind, 2008), the clock speed for adopting this model appears <br />
slow. This study attempts to describe and analyze the state of play – what the interviewed general <br />
counsel said and observed – without a teleological vision of the future. In this sense, this study does not <br />
judge whether legal services should become more like manufacturing; nor does the study take an <br />
optimistic or pessimistic stance on the possibility of change. It attempts, however, to accurately reflect <br />
and understand who is implementing what types of change for what reason. <br />
A ‘Production-line Approach’ <br />
Ted Levitt was one of the earliest advocates of the ‘production-‐line approach’ to service in the early <br />
1970s. He argued that services would benefit from drastic improvements in quality and efficiency at the <br />
same time if they adopted a manufacturing approach to its activities that substituted technology and <br />
systems for people and serendipity (Levitt, 1972). What he had in mind was the key principles of <br />
scientific management that Fredrick Taylor articulated in the 1910s, namely the separation of planning <br />
from execution, the standardization of products and processes, and the training of workers to carry out <br />
tasks. History tells us that mass production based on these principles supplanted craft production due <br />
to discontinuous efficiency gains. <br />
14 <br />
<strong>The</strong> work of lawyers today may be on the cusp of a similar transformation due to digital technology, <br />
globalization, and new entrants. Whilst bespoke work continues to exist, legal work may be subjected <br />
to treatment similar in nature to that which has been applied to automobile assembly for over a century. <br />
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For example, the standardization and templating of legal documents is the legal equivalent of inter-changeable<br />
and standard components in manufacturing. And why not a just-‐in-‐time approach to legal <br />
service delivery? In legal services, as in other sectors, the production-‐line approach requires the <br />
following three steps. <br />
1. Disaggregation and standardization: to break down legal work into constituent tasks which are <br />
then standardized or modularized <br />
2. Process management: to ensure the smooth flow of process steps and to eliminate waste <br />
3. Project management: to separate planning from execution, to define who does what, and to <br />
ensure that milestones and deadlines are met on time <br />
Objections to the Production-line Approach <br />
<strong>The</strong> general counsel interviewed for this study tended to fall into three groups. First, a small group of <br />
enthusiasts demonstrated an enormous appetite to embrace this approach. Second, some sceptics <br />
stated that there was nothing new in this approach (that for quite some time, lawyers have been <br />
parcelling out work to junior associates and paralegals). Third, the wait-‐and-‐see group were happy for <br />
others to take a lead, particularly as this approach did not apply to their own area of work. <br />
<strong>The</strong> adverse consequences of standardized mass production are well known. One does not need to <br />
evoke the image of Charlie Chaplin spinning around repetitively tightening nuts and bolts in Modern <br />
Times to feel how disheartening routine tasks could be. However, unlike in manufacturing which <br />
encountered vocal Luddite opposition in its history, the opposing segments of the legal profession are <br />
gentle sceptics and passive resisters. <br />
In the legal world, some objections to the production-‐line approach are common to manufacturing, <br />
whilst others are peculiar to legal work. Below is a list of objections gleaned from the interviews. <br />
(a) Our volume is too low, so we cannot exploit economies of scale (mentioned most frequently) <br />
(b) Quality would go down with disaggregation <br />
(c) Legal work has to be holistic to meet clients’ need <br />
(d) Collaboration, iteration, and interaction are inherent in doing legal work <br />
(e) Over-‐disaggregating carries the risk of de-‐motivating lawyers who do not see the whole picture <br />
(f) Standardization gives lawyers a ‘license not to think’ <br />
(g) <strong>Law</strong>yers are not trained to think in this way <br />
(h) Routine tasks, if outsourced or offshored, will undermine training opportunities for junior <br />
lawyers <br />
(i) Upfront costs in technology investment and/or visiting unfamiliar locations (e.g. India) are too <br />
high <br />
(j) <strong>Law</strong>yer culture does not fit with disaggregated task delivery <br />
(k) <strong>Law</strong> of privilege gets in the way of disaggregation <br />
(l) Disaggregation, resulting in the use of unqualified non-‐lawyers, is bad because they do not have <br />
the same ethical standard as lawyers <br />
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So, what types of legal work are most easily subjected to disaggregation? Who decides how much <br />
disaggregation is too much or too little? Is there one best way to break up a piece of legal work into <br />
constituent tasks? In order to answer these questions, this study asked general counsel to choose a <br />
specific practice area to discuss their achievements and aspirations. <br />
Litigation Tasks <br />
Litigation is often the largest component of external legal expenditure, a component that also fluctuates <br />
widely from year to year. For this reason, the general counsel are keen to consider ways of reducing and <br />
controlling litigation costs. However, those interviewed varied in their philosophy on how best to tackle <br />
this. During the interview, a general counsel was shown a list of litigation tasks (see Figure 2) (see <br />
Susskind 2008) which became a basis of discussion. <br />
An initial discussion was whether or not the list made sense, and what might be an optimal degree of <br />
disaggregation. It is evident that some general counsel had never considered the way they deal with <br />
each litigation matter in this laundry list sort of way. However, once they recognized that the list made <br />
generic sense, some started making comments on the possibility of finer disaggregation. Legal research <br />
is a good case in point. Generally, many general counsel made a distinction between information <br />
gathering (e.g. a fifty state survey in the US) which can be disaggregated easily and may be carried out <br />
by junior lawyers or paralegals, and researching legal precedents which require a high level of <br />
judgement in context by experienced lawyers. Another example is document review, which may be <br />
disaggregated into first-‐level reviews and further reviews that require professional judgement on what is <br />
relevant or privileged. <br />
Figure 2: Litigation tasks <br />
Legal research <br />
Document review <br />
Negoqaqon <br />
Advocacy <br />
Strategy <br />
Tacqcs <br />
Liqgaqon support <br />
E-‐disclosure or e-‐discovery <br />
Project management <br />
A further point of discussion was who was best placed to do each task. <strong>The</strong> starting point for this <br />
discussion revealed which one of the three approaches a general counsel adopted. First, in what may be <br />
called a craft approach, the in-‐house counsel homed in on the importance of Strategy and Tactics, which <br />
should be led by the in-‐house lawyer with close counsel from the lead law firm. Beyond this, however, <br />
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the in-‐house lawyer delegated the whole matter to the law firm, and expected many of the tasks – be <br />
they negotiation or legal research – to be carried out iteratively and collaboratively. Negotiation, for <br />
example, was a matter of collaboration between in-‐house and external lawyers, with a tactical aspect of <br />
matching the other side. <br />
Second, in an automation approach, the general counsel regarded automating one chunk in the task list <br />
– namely litigation support and e-‐discovery (or e-‐disclosure) – as the primary focus of efficiency <br />
improvement. Starting with computerizing the collection and hosting of data, the general counsel <br />
focused his attention on replacing humans with machines to undertake rule-‐based data processing (e.g. <br />
de-‐duplicating, coding, etc.), moving eventually onto pattern recognition in first-‐level document review. <br />
Third, in a process flow approach, the general counsel had established processes and procedures, in <br />
some cases using process mapping, to ensure the smooth flow of legal tasks from the start to the end of <br />
a case. This approach forces in-‐house lawyers to clearly scope out each task, and to define who is going <br />
to do what at the planning stage. An automation approach may be combined with a process flow <br />
approach, but some corporations adopted an automation approach without a process flow approach. <br />
One of the intriguing issues in this study is how these approaches relate to the general counsel’s <br />
internalization vs externalization tendencies (see Chapter 2). Internalizers amongst the interviewed <br />
tended to be most systematic about adopting the process flow approach, eliminating waste in the whole <br />
matter by taking a lead in disaggregating and in-‐sourcing litigation support and/or document review (see <br />
Figure 3). Externalizers Type 2 exercised their voice to induce law firms to take a lead; one general <br />
counsel told law firms “you’d better unbundle, or else we’ll unbundle for you.” <br />
Figure 3: Schematic association between general counsel type and production approach <br />
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Intellectual Property Tasks: a Case Study <br />
Patent filing and prosecution was another area mentioned frequently by interviewees. All three <br />
approaches were detected as in the case of litigation. In a craft approach, the general counsel continues <br />
to use law firms to manage the whole matter, starting from prior art search to patent prosecution (see <br />
Figure 4). Corporations in the ICT sector were at the forefront in adopting an automation approach, <br />
investing in patenting software so as to enable self-‐service by inventors to use electronic filing. <br />
As before, Internalizers have gone furthest in implementing a process flow approach. This has led not <br />
only to the disaggregation of patenting tasks, but also to the use of multi-‐sourcing, that is, the use of <br />
multiple types of suppliers via in-‐sourcing, offshoring, de-‐lawyering, etc. (Susskind 2008, p.47). As <br />
shown in Figure 3 (last line), the Internalizers tended to in-‐source most or all stages of patenting by <br />
hiring more patent agents who carry out tasks that used to be done by patent attorneys in law firms. <br />
Alternatively, Externalizers Type 2 disaggregated some tasks – prior art search, patent drafting – which <br />
they sourced from legal process outsourcing (LPO) providers directly or indirectly via law firms. <br />
Figure 4: Patenting tasks <br />
Prior art search Patent drauing Patent filing <br />
Patent <br />
prosecuqon <br />
<strong>Law</strong> firm <strong>Law</strong> firm <strong>Law</strong> firm <strong>Law</strong> firm <br />
LPO LPO <strong>Law</strong> firm <strong>Law</strong> firm <br />
LPO LPO LPO LPO <br />
In-‐source In-‐source In-‐source In-‐source <br />
Summary <br />
<strong>The</strong> corporate cost pressure to do ‘more for less’ has led many general counsel in this study to consider <br />
(and in some cases implement) a production-‐line approach to legal service delivery. In totality, this <br />
approach requires three steps: not just disaggregation and standardization, but also process <br />
management and project management. <strong>The</strong> approach therefore requires a system-‐wide end-‐to-‐end <br />
perspective. However, the majority of general counsel found a variety of reasons – lack of scale, lawyers’ <br />
mentality, lack of time, expensive upfront cost, etc. – to reject or delay wholesale adoption. <br />
Nevertheless, some general counsel found tactical advantage in making significant efficiency gains by <br />
relying primarily on the automation and digitization of specific tasks. Moreover, a handful of general <br />
counsel, led by Internalizers, have appointed Directors of Legal Operations to take a lead in <br />
implementing the production-‐line approach. <br />
<strong>The</strong> next chapter turns to the issue of multi-‐sourcing, the criteria used to make a decision on who does <br />
what tasks once legal work is disaggregated, and the resulting patterns in what lawyers do in relation to <br />
non-‐lawyers. <br />
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Chapter 5: What <strong>Law</strong>yers Do in a World of Multi-sourcing <br />
Once legal work is disaggregated into constituent tasks, the in-‐house legal department must consider <br />
the most efficient and effective way of sourcing each task. In the last several years, the portfolio of <br />
possible sources of legal service has expanded – hence the notion of multi-‐sourcing – as new providers <br />
and new locations have become available. Up until recently, the only thick pipeline of legal advisory <br />
work that mattered was the one connecting the corporation to the law firm. Whilst this will continue to <br />
be important, the corporation now has a diverse set of sourcing options, ranging from (i) offshoring a <br />
captive in-‐house legal department (as GE had done); (ii) relying on law firms to set up a captive low-‐cost <br />
centre (as Clifford Chance or Baker & McKenzie have done); (iii) sourcing from contract lawyers on a <br />
project-‐by-‐project basis; to (iv) going direct to new legal services providers that have a global presence <br />
(as Rio Tinto did with CPA Global) (see Figure 5). Despite these emergent models for sourcing legal <br />
services, the offshore legal process outsourcing (LPO) sector remains a mere drop in the ocean, around <br />
$500 million in revenue, or 0.1% of the worldwide legal market worth around $500 billion in 2010 <br />
(Datamonitor, 2010). <br />
Figure 5: Global value chain in legal services <br />
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How significant will the phenomenon of multi-‐sourcing be in the future? In particular, how much value <br />
might migrate from transactions between corporate clients and law firms to other parts of the global <br />
value chain? <strong>The</strong> answer depends on who is making multi-‐sourcing decisions using what criteria. This <br />
chapter discusses (a) labour arbitrage vs process efficiency as sourcing criteria; (b) de-‐lawyering; and (c) <br />
who does project management. <strong>The</strong> chapter concludes by drawing implications for what lawyers do in a <br />
multi-‐sourcing world. <br />
Sourcing Criteria: Labour Arbitrage vs Process Efficiency <br />
In our study, only a small minority of general counsel actively set out to source from remote offshore <br />
locations, most notably India. <strong>The</strong> key reasons mirrored the list of objections to the production-‐line <br />
approach noted in the previous chapter. By contrast, those who enthusiastically endorsed new low-cost<br />
locations, be they nearshore (e.g. Belfast for London-‐based financial institutions and law firms) or <br />
offshore (e.g. India, South Africa, the Philippines, etc.), divided into two camps. <strong>The</strong> first camp is <br />
primarily after labour cost arbitrage and nothing much else. <strong>The</strong> general counsel may look to contract <br />
lawyers on demand or foreign lawyers familiar with English or US law to conduct legal work in a manner <br />
that is no different from if it were carried out by lawyers onshore. <br />
<strong>The</strong> other camp expects to obtain much more than merely lower labour rates. In these cases, the <br />
general counsel is intent on attacking both the denominator (i.e. productivity) and the numerator (wage <br />
rate) in the unit labour cost equation. At Greenfield sites, some financial institutions sought greater <br />
efficiency in processing derivatives documentation, for example, not only by templating and <br />
standardizing documents, but also by investing in software technology, improving the process flow of <br />
work, and exploiting economies of scale. <strong>The</strong> choice between captive and outsourced offshoring, then, <br />
depends in part on the general counsel’s views on who has the best package of capabilities in process <br />
management and project management. Thus, a ‘new location’ is often a code for accelerating the <br />
implementation of new modes of working, not a mere attempt at seeking temporary labour cost <br />
arbitrage. <br />
De-lawyering in Legal Product Lifecycle <br />
A key aspect of taking cost out of legal work – combining process improvements and billable hour <br />
reduction – derives from ‘de-‐lawyering’ i.e. the use of non-‐lawyers to do work that had been done by <br />
fully qualified lawyers. As noted in Chapter 4, in-‐house lawyers disaggregated patenting tasks in order <br />
to use patent agents to do work previously done by patent attorneys; similarly, and paralegals were <br />
employed to do simple legal research previously done by junior lawyers. Perhaps the most significant <br />
use of non-‐lawyers has occurred in contract documentation in a variety of sectors. <br />
In civil engineering, for example, in-‐house lawyers push routine contract documentation work to <br />
engineers who lead projects. According to one general counsel, ‘we look at the contract if it’s non-standard<br />
and comment on that. But most of the issues are not legal issues; they are around fees and <br />
scope. Those are the issues engineers can deal with. So what we want to do is to give engineers <br />
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confidence, and train them up to look for issues that matter.’ Thus, engineers are encouraged to <br />
negotiate contracts and deal with clients directly without a lawyer involvement. <br />
In financial services, also, documentation work is pushed down to non-‐lawyers working in the relevant <br />
business departments. According to one general counsel, ‘I’d like to get into the business of templating <br />
things and give them to the business function. … Let’s be honest. <strong>Law</strong>yers are not good at providing <br />
either systems or process or handling volume.’ Derivatives documentation is a good case in point, as the <br />
sheer volume of work often creates bottlenecks in workflow. It is now common practice for non-‐lawyers <br />
-‐-‐ called document analysts or documentation specialists – to handle derivatives documentation, often <br />
at captive (i.e. in-‐house) offshore or nearshore centres. Investment banks are in the business of creating <br />
new financial products that are initially complex, low volume and high margin. But they commoditize <br />
them and turn them into high volume, lower margin work. <strong>Law</strong> firms may be involved in early stages, <br />
but when the work becomes a repeat exercise, banks have an incentive to internalize them eventually. <br />
De-‐lawyering, therefore, appears to be a cyclical trend, most evident during the mature stage of legal <br />
product lifecycles. <br />
Who Manages the Reassembly? <br />
Multi-‐sourcing – including outsourcing and offshoring – requires someone to take a lead in supervising <br />
and managing a variety of providers. Just as making an aeroplane requires systems integration by the <br />
aircraft manufacturer to manage the final assembly of engines, wings, and fuselage made by different <br />
suppliers, we would expect an ‘architect’ to manage the integration – final assembly – of disaggregated <br />
legal tasks so the final ‘product’ works and is delivered seamlessly to the client. But which entity should <br />
assume this architecting role? Should it be the law firm or the in-‐house legal department? <strong>The</strong> answer <br />
to that question is almost the Holy Grail to gauging the future shape of legal services markets. <strong>The</strong> <br />
picture that emerges from this study is far from clear cut. <br />
When asked if their law firms use outsourcing or offshoring, some general counsel responded that they <br />
did not know, and that it was up to the law firms to decide. A general counsel at a bank stated: ‘our <br />
preference is to deal directly with law firms and for them to outsource to the alternative providers if <br />
they choose in order to drive their costs down to us. We want those firms to be responsible for <br />
managing that. I am not keen to deal with people in other jurisdictions who may not have the same <br />
requirement as us in confidentiality and security of information. We’d like to place the onus on the <br />
major law firms we deal with to ascertain that for us.’ <br />
An alternative approach, adopted by a small number of general counsel, was to instruct law firms to <br />
disaggregate and to use a specific LPO provider for work chunked out, such as data room management, <br />
e-‐discovery (e-‐disclosure) work, and contract review. <strong>The</strong> in-‐house department would have a direct <br />
contractual relationship with such a provider. Delegating decisions on what to outsource/offshore to law <br />
firms would not work because ‘you effectively run the risk of delegating the control of what needs to be <br />
done, which inevitably ends up being more expensive’, according to a general counsel. <br />
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Several general counsel expressed the view that had law firms been willing and able to take an initiative <br />
in managing legal projects, they would rather not have to step in. However, even with such a <br />
competency gap in project management skills amongst law firms, these in-‐house lawyers felt ambivalent <br />
about investing in in-‐house capability. At least two future scenarios are possible here. In one scenario, <br />
law firms will retain a thick pipeline of legal work if they are able to take a lead in filling the competency <br />
gap in project management. In an alternative scenario, law firms might be bypassed – disintermediated <br />
– as the general counsel invests in project management capability and engages aggressively in multi-sourcing,<br />
including trading directly with new types of legal services providers. <strong>The</strong>se new entrants bring <br />
new financial capital and professional talent into the sector. Thus, the future shape of legal services <br />
value chain depends heavily on the role the general counsel wishes to play in project management. <br />
What Do General Counsel Do? <br />
<strong>The</strong> general counsel continues to navigate a fine line between being a lawyer first and foremost with its <br />
professional ethics on the one hand, and being a business person offering legal advice in context <br />
without selling one’s soul to commercial enterprises on the other. Over time, the power base of in-house<br />
lawyers appears to have enhanced, due not only to the short-‐term impact of the financial crisis, <br />
but also to longer-‐term trends. Perhaps the most significant of these trends is the increasing <br />
importance placed by corporate executives in legally astute firms on the general counsel as joint risk <br />
managers (Bagley, 2008). Not only can the general counsel front-‐load legal inputs to pre-‐empt disputes, <br />
thus reducing litigation costs significantly. <strong>The</strong>y can also alert CEOs to potential risks arising from likely <br />
government investigations in a tougher regulatory enforcement environment. <strong>The</strong> general counsel’s <br />
intimate knowledge of the business is indispensable, and they consider this an advantage in offering <br />
better legal advice. In the words of one general counsel, ‘I’m a business person who happens to be a <br />
lawyer, a business partner who brings legal background to business problems.’ Nearly all the general <br />
counsel interviewed regularly rub shoulders with the CEO by dint of having a seat on the corporate <br />
executive committee. <br />
In this context, how important is the efficient delivery and multi-‐sourcing of legal services in the general <br />
counsel’s priority list? Opinions were split on this score. At one extreme, commoditization – <br />
disaggregation and standardization – is regarded as the stuff for legal operations directors with support <br />
from legal technologists. <strong>The</strong> general counsel’s primary job is to contribute to corporate strategy and to <br />
manage legal risk. As such, the downside risk of messing up a litigation case by cutting corners is too <br />
huge compared to the marginal benefit arising from cost savings. Thus, however powerful the general <br />
counsel might be, he is highly risk averse, and cost becomes a secondary concern to obtaining <br />
appropriate advice and support. ‘No body ever got fired for hiring IBM’, quipped one respondent. In <br />
this view, unless there is a supply side revolution, rearranging the legal services market would remain ‘a <br />
game of inches’, a tactical game rather than a strategic game. <br />
22 <br />
At the other extreme, the general counsel considers his own role to be the guardian of the legal process <br />
architecture in his organization. Such a GC spends little time being a lawyer, exercising legal judgements <br />
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only in extreme cases, whilst delegating much of the day-‐to-‐day legal advisory work to other in-‐house <br />
lawyers in his department. What is more ‘strategic’ is the formulation of a legal strategy, involving the <br />
management of performance in the legal department, the proactive and pre-‐emptive legal inputs into <br />
the business, and the management of outside relationships, etc. all with a view to enhancing the value <br />
added of the legal department to the business. In this view, the efficient multi-‐sourcing of legal services <br />
is part and parcel of an effective legal process architecture. <br />
Summary <br />
Multi-‐sourcing – the use of multiple sources of legal service delivery – is likely to change the contour of <br />
global value chains in legal services. However, how much value might migrate from transactions <br />
between corporate clients and law firms to other parts of the value chain depends on a number of <br />
factors. This chapter demonstrated that we are likely to see greater value migration away from the <br />
traditional corporate client – law firm transactions, (a) the more the motive for offshoring and near-shoring<br />
goes beyond mere labour cost arbitrage to the implementation of a production-‐line approach, <br />
(b) the more lead is taken by the in-‐house legal function in project management and in establishing <br />
direct contractual relationships with LPO providers, and (c) the higher up the priority list the general <br />
counsel places the issue of efficient legal service delivery. <br />
<strong>The</strong> general counsel is a business partner in corporate top management teams. This study found that <br />
beyond this rhetoric, some GCs believe that cost-‐cutting efficiency should not be a direct concern and <br />
should be delegated to managers of legal operations and legal technology. By contrast, a small number <br />
of GCs believe in the central importance of being a chief ‘legal architect’ whose task is to add value to <br />
the core business of the corporation or financial institution, by embedding process and project <br />
management in the implementation of a legal strategy. <br />
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Conclusions <br />
This report discussed what general counsel do in relation to the corporation they work for (Chapter 5), <br />
in implementing efficiency drives (Chapter 4), balancing competition and collaboration with law firms <br />
(Chapter 3), and managing the make-‐or-‐buy decisions (Chapter 2). In Chapter 2, we identified four types <br />
of general counsel with respect to their make-‐or-‐buy decisions, namely Externalizer Type I, Externalizer <br />
Type II, Mid-‐ranger, and Internalizer. Chapter 3 considered three tools – convergence, online bidding, <br />
and legal networks – put to use by general counsel to improve relations with law firms. Chapter 4, in <br />
elaborating the production-‐line approach to legal services delivery, identified three approaches in <br />
practice – namely, craft, automation, and process flow approaches. <br />
Figure 6: Clustering of practices <br />
• Externalizer I <br />
• Externalizer II <br />
• Mid-‐rangers <br />
• Internalizers <br />
• Convergence <br />
• Online bidding <br />
• Legal networks <br />
Make-‐or-‐buy <br />
decisions <br />
Relaqons <br />
with law <br />
firms <br />
What GCs <br />
do <br />
Producqon <br />
approaches <br />
• Legal advice only <br />
• Extensive advisor <br />
and legal strategist <br />
• Crau approach <br />
• Automaqon <br />
approach <br />
• Process flow <br />
approach <br />
Whilst much of the practices gleaned from the interviews are in a state of flux and yet to be <br />
implemented, the study highlights some practices that tend to cluster more strongly than others. <strong>The</strong>re <br />
are at least two clusters of practices that GCs are using to drive change, although these may not be the <br />
only clusters that work well. <br />
<strong>The</strong> first cluster (see green legends in Figure 6) concerns Externalizers Type II, who have committed to <br />
rely heavily on law firms. Consequently, the main locus of action is to improve the multilateral links <br />
amongst the chosen law firms as much as the bilateral relationship with each law firm. Externalizers <br />
Type II also expect law firms to take a lead in implementing multi-‐sourcing and components of the <br />
production-‐line approach to legal service delivery including project management. <br />
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<strong>The</strong> second cluster (see red legends in Figure 6) concerns Internalizers. <strong>The</strong>y rely heavily on internal <br />
legal resources, are most systematic in implementing the production-‐line approach, and view <br />
themselves as legal strategists in charge of managing legal projects and process flows. <br />
This study attempted to provide a systematic analysis of current trends and possible future directions in <br />
legal services. We conclude by summarizing a set of key factors that will influence who drives power in <br />
legal service global value chains in the future. <br />
It is often argued that corporate clients are becoming a force for change in legal services. However, the <br />
general counsel’s power to drive change in a sustainable manner depends on the sources of power. <strong>The</strong> <br />
most temporary of GC power lies in the buyer’s market during the post-‐financial crisis recession. Much <br />
of the bargaining power resulting from the economic climate is likely to erode when the economy picks <br />
up. By contrast, the general counsel will remain a more sustainable force for change if they proactively <br />
invest in new capabilities such as project management, as Internalizer GCs are doing. So, law firms, <br />
beware of Internalizers amongst the general counsel. However, GCs with a power base in corporate <br />
managerial hierarchy may not necessarily regard efficient legal service delivery on a strategic par with <br />
legal risk management. If such GCs dominate the in-‐house legal function, power does not equate to an <br />
appetite for change. It is, therefore, equally possible that we are heading for a supply side revolution <br />
with new entrants – legal services providers – driving discrete and disruptive changes in the way legal <br />
services are delivered. <br />
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Afterword: <strong>The</strong> Future for General Counsel <br />
Richard Susskind <br />
It was fascinating to be in regular dialogue with Professor Sako during the project discussed in this <br />
report. Rarely have I had the chance to hold in-‐depth discussions about the legal market with someone <br />
who is not a lawyer. And here is one of the main contributions that Professor Sako makes – she does not <br />
have the limited perspective of a practising or academic lawyer, she has no legal axe to grind, no legal <br />
business to sustain or disrupt, nor any legal overlord to appease. Rather, she brings the expertise and <br />
experience of an economist and management theorist, someone who understands economic forces, <br />
business strategy, industry upheaval, and organizational change. And she applies this knowledge to the <br />
law, as part of her growing interest in the professions more generally. <strong>The</strong> legal world should warmly <br />
welcome the objective insights of an expert outsider who is looking afresh at its marketplace. <br />
Methodologically, this report is different from much that is held out as research into the legal industry. I <br />
had anticipated a document that was brimming with data, diagrams, tables, and percentages; and <br />
maybe even a formula or two. But I now see this would be pseudo-‐science. This research shows us that <br />
General Counsel are a grouping of lawyers that are too diverse in the nature of their work, in the size of <br />
their teams and broader organizations, in their industries and markets, and in their geographical <br />
presence, for it to be sound to claim that x% of GCs believe this or Y% prefer that. <strong>The</strong>se statistical <br />
claims are the stuff of the transient PR-‐based research that surfaces every few weeks whose aim is to <br />
secure a headline in the trade press. I see more clearly now that these superficially plausible pie charts <br />
and bar graphs do not in fact improve our understanding. <br />
Trends <br />
What the Oxford research instead provides is a snapshot of the central trends in the buyer’s side of the <br />
legal market. Its scope is limited, though, because the focus is on the in-‐house functions of very large <br />
organizations. As the list in the Appendix shows, most of the businesses involved in the study are major <br />
household names (it is unusual in itself, incidentally, in the world of research into the legal market to be <br />
able to see who has actually been consulted). <br />
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Within this sector of the market, some of the trends are quite clear: GCs want to secure ‘more for less’, <br />
more legal service at less cost; and most are wrestling, but doing so tentatively, with various new ways <br />
of sourcing legal services. <br />
Two divides also emerge. First, there is a stark contrast between the conservatives who see the future as <br />
a mildly finessed version of the past; and the radicals, who anticipate and are implementing major <br />
change in the way that legal services are delivered. Second, there is the split between those GCs who <br />
argue that external law firms are best motivated by urging them to compete with one another and those <br />
who believe that law firms will be individually and collectively more productive and efficient if <br />
encouraged to collaborate. <br />
Issues <br />
My own interest has always been in change. I am not a dispassionate observer. I believe lawyers must <br />
modernize -‐ to survive in law firms and to meet the needs of clients. One issue that currently interests <br />
me is who these agents of change might be. From the transcripts of Professor’s Sako’s interviews, it is <br />
clear that some GCs think they themselves should drive innovation; but a larger proportion think that <br />
law firms should be leading the way. Many law firms seem hesitant about this. Yet, in the history of <br />
industry and commerce, customers or clients have rarely redefined the services they receive or the <br />
markets of which they are part. That is the job of the provider. <br />
<strong>Law</strong> firms, generally, have always been reluctant to change. As I like to point out, or did at least until <br />
2007, it is hard to convince a room-‐full of millionaires that their business model is broken. And it is <br />
tougher still to compel managing partners to innovate radically when they have only two years or so left <br />
in post; their understandable inclination, rather, is to squeeze more out of the existing model and keep <br />
the figures looking rosy. In the long run, this thinking will be to the detriment of law firms. <br />
But, of course, the providers in the legal market are no longer just the law firms. As this report shows, <br />
there are new players in the legal game, not least the legal process outsourcers. I believe we will also <br />
see the resurgence into the legal sector of the large accounting firms, as well alternative business <br />
structures fuelled by private equity. <strong>The</strong>se new providers tend to have much greater appetite for <br />
rethinking legal services than conventional law firms. <strong>The</strong> competition is stiffening. In the end, then, the <br />
agents of change may not be lawyers. <br />
Another issue that flows from this report concerns the discipline that I call ‘legal process analysis’. This is <br />
the job of analyzing legal requirements (of an individual matter or of an entire business) and specifying <br />
the most efficient way of sourcing the legal work, consistent with the level of quality needed. Following <br />
the terminology of one of the interviewees, the question here is -‐ who should the architects (the process <br />
analysts) be? I worry about those GCs who immediately see this as a role for law firms. Surely, <br />
shareholders and directors of business can reasonably expect that their own in-‐house lawyers are the <br />
people ideally placed to assess legal problems and identify the best way to sort them out. <br />
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<strong>The</strong> evolution of the legal market <br />
From this report and my own research, I now see that the mainstream legal market is likely to evolve in <br />
three phases. <strong>The</strong> first, extending from 2007 to <strong>2013</strong> or so, is the period during which most law firms <br />
and GCs will seek to maintain the status quo. GCs will resist fundamental change of their own <br />
departments and try to meet the ‘more for less’ challenge by inviting law firms to charge much less. In <br />
turn, law firms will be similarly reluctant to change radically and so will propose alternative fee <br />
arrangements. But these deals will not give GCs the savings they need and so there will be a shift to a <br />
second phase, from about <strong>2013</strong> to 2016, when GCs will dramatically re-‐engineer their legal functions; <br />
and law firms will move from pricing differently to working differently. Both will embrace legal process <br />
outsourcing, off-‐shoring, de-‐lawyering, and agency lawyers. <strong>The</strong> endgame, though, will not be about <br />
labour arbitrage. I predict that the third phase, from 2016 onwards, will involve great uptake of <br />
information technology across the profession, such as automated production of documents and <br />
intelligent e-‐discovery systems – these are applications that will be staggeringly less costly than even the <br />
lowest paid lawyers. <br />
Strategy for GCs <br />
In practical terms, how should GCs prepare for this future? I am often asked this question by in-‐house <br />
lawyers in the following terms – what should our strategy be? I cannot answer that query in generic <br />
terms. But I can suggest that there are four broad types of strategy for GCs. <strong>The</strong>y differ in their scope <br />
and ambition. <br />
<strong>The</strong> first strategic approach is to concentrate largely on external law firms and drive their prices down. <br />
This will be the preferred method of Professor Sako’s ‘externalizers’. <strong>The</strong> second approach, better suited <br />
to the ‘internalizers’, is to focus instead on reshaping the in-‐house department. Third, is simultaneously <br />
to review internal and external capabilities and to seek to streamline both. <strong>The</strong> fourth approach is the <br />
most ambitious – it is to start with a blank sheet of paper, to forget about current resources (in-‐house <br />
and outside) and instead to undertake a comprehensive legal needs analysis for the business. Once <br />
these requirements have been identified, the task then is, dispassionately, to identify how best to <br />
resource the full set of needs; drawing not just on conventional lawyers but on the new legal providers <br />
too. <br />
This final strategy, in my view, is the one that will deliver the most cost-‐effective and responsive legal <br />
services for large businesses in the future. <br />
28 <br />
Said Business School | University of Oxford
General Counsel with Power? 2011 <br />
References <br />
Bagley CE. 2008. Winning legally: the value of legal astuteness. Academy of Management Review 33(2): <br />
378-‐390 <br />
Datamonitor. 2010. Global Legal services. Datamonitor: New York <br />
Levitt T. 1972. Production-‐line approach to service. Harvard Business Review September -‐ October: 41-‐<br />
52 <br />
Page A, Tapp R. 2007. Managing External Legal Resources. ICSA Publishing: London <br />
Susskind R. 2008. <strong>The</strong> End of <strong>Law</strong>yers? Rethinking the Nature of Legal Services. Oxford University Press: <br />
Oxford <br />
29 <br />
Said Business School | University of Oxford
General Counsel with Power? 2011 <br />
About the Authors <br />
Mari Sako is Professor of Management Studies at Said Business School and Professorial Fellow at New <br />
College, University of Oxford. After reading Philosophy, Politics, and Economics at Oxford, she <br />
completed an MSc in Economics at London School of Economics (LSE), an MA in Economics at the Johns <br />
Hopkins University, USA, and a PhD in Economics at London University. Before taking up her current <br />
position, she taught at LSE’s Industrial Relations Department for ten years. She was also a visiting <br />
scholar at Kyoto University Department of Economics, Tokyo University Institute of Social Research, <br />
RIETI (Research Institute of the Ministry of Economics, Trade and Industry in Tokyo), Ecole <br />
Polytechnique, Paris, and MIT Sloan School of Management. Her research focuses on the connections <br />
between global strategy, comparative business systems, and labour markets. Publications include How <br />
the Japanese Learn to Work (with Ronald Dore) (1989), Prices, Quality and Trust (1992), Japanese Labour <br />
and Management in Transition (with Hiroki Sako) (1997), Are Skills the Answer? (with Colin Crouch and <br />
David Finegold) (1999), and Shifting Boundaries of the Firm (2006). She was a principal researcher for <br />
the MIT International Motor Vehicle Program (IMVP) during 1993-‐2006, working on modularisation, <br />
outsourcing, and supplier parks in the global automotive industry. She is also a Senior Fellow of the <br />
ESRC-‐EPSRC Advanced Institute of Management in Britain. More recently, as a member of the Novak <br />
Druce Centre for Professional Services at Said Business School, she has been researching about the <br />
globalization of law firms, the outsourcing and offshoring of professional services and their impact on <br />
the professions. <br />
Richard Susskind OBE is Visiting Professor in Internet Studies at the Oxford Internet Institute at Oxford <br />
University and Emeritus <strong>Law</strong> Professor at Gresham College, London. He is IT Adviser to the Lord Chief <br />
Justice of England and Wales, President of the Society of Computers and <strong>Law</strong>, and the author of <br />
numerous books, including <strong>The</strong> End of <strong>Law</strong>yers? (Oxford University Press, 2008). <br />
30 <br />
Said Business School | University of Oxford
General Counsel with Power? 2011 <br />
Appendix: Research Methodology <br />
Fifty-‐two GCs were interviewed, 36 in the UK and 16 in the US. Interviews typically lasted one hour. <br />
Where permission was sought and granted, interviews were recorded. In many cases, interviewees also <br />
provided further data by email, and internal policy documents (and an authored book on one occasion) <br />
at the interview. <br />
Table A1: List of Interviewed Organizations <br />
Alliance Boots <br />
AMEC <br />
Archon Group <br />
ARUP <br />
BAE Systems <br />
Barclays <br />
Barclays Capital <br />
BAT <br />
Boston Consulting Group <br />
Bechtel <br />
BP <br />
BT <br />
BUPA <br />
Carillion <br />
Centerpoint Energy <br />
Christies <br />
Cisco Systems <br />
CITI <br />
Conoco Phillips <br />
Datacert <br />
Deutsche Bank <br />
Dollar Tree <br />
Financial Services Authority <br />
FMC Technologies <br />
Goldman Sachs <br />
Hanson Ltd <br />
HP <br />
HSBC <br />
Infineum <br />
ISS <br />
ITV <br />
M&S <br />
Medtronic <br />
Ministry of Justice, UK <br />
Qwest <br />
Royal Bank of Canada <br />
Royal Bank of Scotland <br />
Royal Dutch Shell <br />
Sainsburys <br />
Sigma Aldrich <br />
Solicitor General Counsel, UK <br />
Sony Ericsson <br />
Southwest Airlines <br />
State Street Bank <br />
Team AOL <br />
Tesco <br />
Thomas Miller <br />
UK Experian <br />
United Utilities <br />
Vodafone <br />
Williams Corporation <br />
Yahoo <br />
31 <br />
Said Business School | University of Oxford
Resource Co-Specialization and Supplier Concentration in Plural Sourcing: Evidence<br />
from Legal Services Sourcing at Fortune 500 Companies<br />
Comments Welcome<br />
This Draft: 21 February <strong>2013</strong><br />
Mari Sako<br />
Professor of Management Studies<br />
Saïd Business School<br />
University of Oxford<br />
Park End Street<br />
Oxford, OX1 1HP, UK<br />
Tel +44 (0)1865 288925<br />
Email mari.sako@sbs.ox.ac.uk<br />
George Chondrakis<br />
Post-doctoral Research Fellow<br />
Saïd Business School<br />
University of Oxford<br />
Park End Street<br />
Oxford, OX1 1HP, UK<br />
Tel +44 (0)1865 288925<br />
Email george.chondrakis@sbs.ox.ac.uk<br />
&<br />
Paul M. Vaaler<br />
Associate Professor<br />
Department of Strategic Management & Organization<br />
Carlson School of Management<br />
University of Minnesota<br />
3-424 CarlSMgmt<br />
321 19 th Avenue South<br />
Minneapolis, MN 55455<br />
USA<br />
Tel +1(6<strong>12</strong>) 625-4951<br />
Fax +1(6<strong>12</strong>) 626-1316<br />
Email vaal0001@umn.edu<br />
1
Resource Co-Specialization and Supplier Concentration in Plural Sourcing: Evidence<br />
from Legal Services Sourcing at Fortune 500 Companies<br />
ABSTRACT<br />
Although the preconditions for the simultaneous use of multiple sourcing modes have been<br />
explored, the question of what determines how much to make and how much to buy in plural<br />
sourcing has been understudied. This study fills this gap. Using longitudinal data of in-house<br />
lawyers at, and law firms used by, Fortune 500 firms, we find empirical evidence that plural<br />
sourcing strategies are tilted in favor of ‘make’ whenever firms have opportunities for<br />
resource co-specialization (notably between legal resources and R&D, marketing, and top<br />
management teams) and a broad portfolio of suppliers that raises the cost of contracting. Our<br />
study suggests that plural sourcing research benefits from examining a group of transactions<br />
within a corporate function, to complement the predominant focus on transaction-level<br />
outcomes.<br />
Keywords: plural sourcing; make-and-buy decisions; resource co-specialization; supplier<br />
concentration; legal services.<br />
INTRODUCTION<br />
How do firms organize economic transactions? Since the seminal work on firm<br />
boundaries by Coase (1937, 1988), scholars have addressed this question by identifying<br />
multiple modes (i.e. make, buy, ally, etc.). Prior work in transaction cost economics (TCE)<br />
analyzed the transactional characteristics that lead to choosing one of these modes (Poppo et<br />
al., 1998; Walker et al., 1984; Williamson, 1985) while the resource-based view of the firm<br />
(RBV) suggests that firm boundaries reflect differences in capabilities and knowledge<br />
(Argyres, 1996; Jacobides et al., 2005; Kogut et al., 1996).<br />
Both TCE and RBV employ a comparative analysis of sourcing modes, leading to the<br />
choice of the most efficient institutional arrangement (i.e. market, hierarchy or hybrid) for<br />
each transaction. However, prior research has documented the simultaneous use of multiple<br />
sourcing modes by firms, calling this concurrent sourcing (Parmigiani, 2007; Parmigiani et<br />
2
al., 2009), plural sourcing (Bradach, 1997; Gulati et al., 2006; Heide, 2003; Jacobides et al.,<br />
2006), or taper integration (Harrigan, 1986; Rothaermel et al., 2006). In contrast to a TCE or<br />
RBV logic, firms are often found to both make and buy the same input.<br />
<strong>The</strong>re is robust theory and evidence on the conditions under which plural sourcing is<br />
likely to occur. For example, Parmigiani (2007) demonstrates that greater overlap between<br />
the firm’s and the supplier’s expertise increases the likelihood of plural sourcing while<br />
Parmigiani et al. (2009) explain that firms may make and buy sets of complementary<br />
components. Performance uncertainty and information asymmetry between buyers and<br />
suppliers (Dutta et al., 1995; Heide, 2003), technological volatility (Krzeminska et al.,<br />
forthcoming), and complementarities in incentives or knowledge (Puranam et al.,<br />
forthcoming) can also lead to plural sourcing.<br />
While important in identifying the prevalence of plural sourcing, this research has<br />
provided limited guidance on a logical follow-on question, that is, how to explain the mix of<br />
internal and external sourcing (Parmigiani, 2007:306; Puranam et al., forthcoming).<br />
Assuming that a firm does indeed both make and buy, why would it choose 80% make vs.<br />
20% buy as opposed to 40% make vs. 60% buy? Thus, given the presence of preconditions<br />
for plural sourcing, how do firms decide how much to make and how much to buy?<br />
In addition, the literature does not explore the selection of suppliers and their impact<br />
on the design of plural sourcing strategies. For example, if a firm decides to buy 40% for a<br />
given product or service, this 40% could be outsourced to a single firm or multiple firms.<br />
Existing theory assumes the decisions on the make-buy balance and supplier selection to be<br />
independent of each other. This is despite the fact that behind the ‘façade of the market’ lies<br />
another firm, with its own capabilities and contractual relationship with the focal firm<br />
(Jacobides et al., 2005). To the extent that supplier selection influences the cost of<br />
contracting, it would have an impact on the make-and-buy decision.<br />
3
In this paper we build on recent progress in the area of plural sourcing and address<br />
these two limitations. In doing so we identify two mechanisms that help better understand the<br />
design and variability in plural sourcing strategies. First, resource co-specialization enhances<br />
the benefits of internalization. By resource co-specialization we refer to the synergistic gains<br />
that arise from the interaction of different resources within firm boundaries (Lippman et al.,<br />
2003; Teece, 1986). When firms outsource part of production they essentially position certain<br />
resources, e.g. personnel, equipment etc. outside of their boundaries. By doing so, they<br />
forego opportunities to harvest synergies resulting from resource combinations that increase<br />
their marginal productivity through on-going interaction, shared expertise, and knowledge<br />
spillovers (Dierickx et al., 1989; Kogut et al., 1992; Milgrom et al., 1995). Consequently, in<br />
cases of plural sourcing the extent of integration, or make, will increase when there are<br />
opportunities for resource co-specialization with other firm resources.<br />
Second, we highlight the impact of supplier concentration (Moeen et al., <strong>2013</strong>) on the<br />
relative importance of internal versus external suppliers in plural sourcing. Here we suggest<br />
that the number of suppliers chosen to outsource to is not independent of the proportion that<br />
is bought. A large number of suppliers leads, ceteris paribus, to high mundane transaction<br />
costs and reduces the benefits from relational contracting (Baker et al., 2002; Langlois,<br />
2006), resulting in the firm relying more heavily on make in plural sourcing. By contrast,<br />
when firms use a small number of suppliers, they will benefit from relational contracting and<br />
lower transaction costs and consequently buy more from their suppliers (Dyer, 1997; Moeen<br />
et al., <strong>2013</strong>).<br />
We develop our arguments in the context of corporate legal services, a setting where<br />
the use of both internal and external suppliers for the same input, known as multi-sourcing, is<br />
common (Sako, 2011; Susskind, 2008). We demonstrate that resource co-specialization<br />
drives the design of plural sourcing strategies as the balance tilts in favor of make when firms<br />
4
ely more on R&D resources, advertising resources, international presence, and legal<br />
expertise in their top management team. We also find that the extent of insourcing increases<br />
when the firm sources from a large number of law firms. Although this result might sound<br />
counterintuitive, it is explained by the endogenous impact of supplier concentration on the<br />
costs of contracting.<br />
This paper contributes to our understanding of plural sourcing by moving beyond the<br />
recognition of the phenomenon to the identification of specific strategies that firms employ<br />
and their antecedents. Moreover, this study is important in extending the inquiry on firm<br />
boundaries to the domain of corporate functions. <strong>The</strong> vast majority of an admittedly<br />
voluminous literature on vertical integration (or disintegration) has focused on primary<br />
activities (Gibbons, 2005; Williamson, 1985), to the neglect of corporate functions providing<br />
important support activities in the value chain (Porter, 1985). This paper highlights the<br />
importance of investigating firm boundary-setting and the mix of make and buy activities<br />
with a focus on value-adding professional and business services in corporate functions (Sako,<br />
<strong>2013</strong>). Finally, our study contributes to debates outside the strategy field. Legal scholars<br />
(Regan et al., 2010; Schwarcz, 2008) and commentators (Smith, 2001; Susskind, 2008) have<br />
been debating recent make-and-buy trends in legal services without the benefit of any broadsample<br />
statistical evidence. We provide that evidence and demonstrate how strategy research<br />
can inform and, perhaps, promote evidence-based consensus on key issues in legal practice.<br />
In the next section we review the relevant literature and explain why corporate legal<br />
services provide an ideal setting to test our predictions. <strong>The</strong>n, we present in sequence our<br />
hypotheses, data and methodology, and results. <strong>The</strong> final part offers a concluding discussion.<br />
PLURAL SOURCING: THEORY & EVIDENCE<br />
TCE and RBV are the two dominant theories employed to understand firm boundary<br />
decisions. On the one hand, TCE explains the make-or-buy decision as a response to close<br />
5
comparison of costs associated with each alternative (Williamson, 1985). Market-based buy<br />
strategies tend to have lower costs and thus dominate comparable make strategies<br />
emphasizing firm ownership of and hierarchical control over suppliers. But cost advantages<br />
of buy over make strategies reverse themselves in exceptional circumstances where hazards<br />
with market-based contracting are substantial. In contrast, RBV contends that the reason an<br />
activity is conducted within the firm is not market failure but rather firm success: the firm as<br />
an institution enjoys an ‘organizational advantage’ in organizing economic activity (Madhok,<br />
2002:536). Thus, RBV explains firm boundary-setting based on competitive interest in<br />
exploiting value from difficult to imitate resource bundles (Barney, 1986; Peteraf, 1993).<br />
TCE and RBV differ on many dimensions (Conner, 1991), but share assumptions<br />
about the choice of one ‘optimal’ exclusive governance mode that runs counter to long-term<br />
use of multiple sourcing modes. Nevertheless, the simultaneous use of multiple sourcing<br />
channels is something we observe empirically, and numerous studies testify to its systematic<br />
use, at different points in production of goods and services in different industry contexts<br />
(Bradach, 1997; Heide, 2003; Jacobides et al., 2006; Parmigiani, 2007; Porter, 1980). Plural<br />
sourcing, along with other terms such as tapered integration or concurrent sourcing, has been<br />
used to describe such phenomena.<br />
<strong>The</strong> benefits and rationale for undertaking plural sourcing are well understood. Some<br />
of the earlier arguments focused on the role of demand uncertainty, whereby firms can avoid<br />
maintaining idle capacity through the use of external suppliers (Adelman, 1949), and the<br />
threat of backwards integration to external suppliers (Harrigan, 1986). Besides these, firms<br />
also have a better understanding of the production process when making and buying and are<br />
thus better at monitoring suppliers (Dutta et al., 1995; Heide, 2003). Finally, ‘knowledge<br />
complementarities’ between the two sourcing modes have been noted (Puranam et al.,<br />
forthcoming). For example, internal and external suppliers can benefit from mutual learning<br />
6
and from transferring best practices across different organizational arrangements (Bradach,<br />
1997; Cassiman et al., 2006; Parmigiani, 2007).<br />
Of course, these findings have not gone unchallenged by TCE orthodoxy. Williamson<br />
(1985) suggests that plural sourcing is actually an artifact of ill-identified transactional<br />
heterogeneity. Consistent with this argument, He et al. (2006) find that although trucking<br />
firms appear to engage in plural sourcing (through the use of both internal and external<br />
drivers), they are in fact choosing to outsource hauls that are qualitatively different from the<br />
ones undertaken internally. Similarly, Azoulay (2004) demonstrates that variation in project<br />
characteristics guides pharmaceutical companies when choosing to outsource or assign their<br />
own employees on different projects. More generally, the difficulty in identifying when firms<br />
both make and buy ‘exactly the same input’ presents a substantial challenge to plural<br />
sourcing research (Krzeminska et al., forthcoming).<br />
Two further limitations of prior theorizing are notable. First, there is little guidance on<br />
the relative balance of make and buy in cases of plural sourcing (Parmigiani, 2007; Puranam<br />
et al., forthcoming). When the preconditions for plural sourcing exist, we still know little<br />
about how firms choose the mix of internal and external procurement.<br />
Second, existing theories do not analyze supplier selection and its impact on the<br />
design of plural sourcing strategy. Although the role of suppliers’ capability and expertise has<br />
been explored (Parmigiani, 2007; Parmigiani et al., 2009), the overall cost of contracting is<br />
assumed to be independent of concentration in the portfolio of suppliers. However, this<br />
premise is unlikely to hold given that the costs of contracting are affected by the nature of the<br />
contractual relationship between any two parties. In particular, one-off arms-length<br />
transactions between parties are characterized by increased costs of contracting because there<br />
are higher ‘mundane’ transaction costs and lower opportunities to benefit from relational<br />
contracting (Dyer, 1997; Langlois, 2006; Moeen et al., <strong>2013</strong>). Hence, the degree of supplier<br />
7
concentration, and its subsequent impact on the cost of contracting, should influence the<br />
make-buy balance in the plural sourcing of products or services.<br />
In order to address these limitations and contribute to our understanding of plural<br />
sourcing we study corporate legal services. This setting is ideal as it is an unambiguous<br />
example of plural sourcing (see below). We are thus able to dispense with the discussion<br />
about whether inputs are actually both internally and externally procured and focus instead on<br />
observed variability in the design of plural sourcing strategies.<br />
In addition, by moving from the level of the individual transaction to that of a<br />
portfolio of transactions (i.e. legal services) we are able to account for patterns of<br />
interdependence between different transactions and firm resources (Moeen et al., <strong>2013</strong>;<br />
Puranam et al., forthcoming). Without such focus, it is impossible to observe ‘spillovers’<br />
from different transactions (Mayer, 2006) and the effect of complementarity between inputs<br />
(Parmigiani et al., 2009). Firms regularly employ suppliers for a variety of inputs – with<br />
varying degrees of similarity (Krzeminska et al., forthcoming) – and supplier selection is<br />
naturally affected by existing contractual relationships. For example, a corporation using a<br />
law firm for patent filing could choose the same law firm in case some of its patents are<br />
targeted in a patent suit, given the law firm’s expertise and experience in this area. A<br />
portfolio-level analysis ensures that this information is not lost.<br />
<strong>The</strong> plural sourcing of legal services<br />
<strong>The</strong> procurement of legal services by corporations presents an ideal context for the<br />
study of plural sourcing (Sako, 2011; Susskind, 2008). Firms typically have an in-house legal<br />
department headed by a general counsel (GC) leading a staff of in-house lawyers, while at the<br />
same time regularly engaging external law firms. Make-and-buy strategies are driven to some<br />
extent by transactional characteristics: routine legal tasks, such as regulatory form filing, may<br />
be undertaken by in-house lawyers while external lawyers may take the lead on more<br />
8
specialized tasks such as complex acquisitions, litigation, and criminal matters. However, inhouse<br />
and external lawyers often work simultaneously, as a team or in parallel, on the same<br />
type of legal matter. For example, combined teams of in-house and external lawyers support<br />
and consult senior managers during acquisitions. Similarly, in-house legal departments<br />
usually undertake patent filing and prosecution with the help of specialist law firms.<br />
<strong>The</strong> plural sourcing of legal services is not surprising given complementarity between<br />
the in-house lawyer’s firm-specific and the outside counsel’s practice-specific knowledge and<br />
experience (Puranam et al., forthcoming). Important synergies and learning opportunities<br />
arise from such interactions. <strong>The</strong>re are also bargaining and oversight dimensions to consider<br />
in the plural sourcing of legal services (Dutta et al., 1995; Harrigan, 1986). If firms have the<br />
capacity to re-direct legal matters from outside counsel to qualified in-house lawyers, then<br />
these firms also have more power to bargain over the costs of retaining outside counsel. <strong>The</strong>y<br />
can also exercise oversight of outside counsel actions to assure high-quality and costeffective<br />
representation in some legal matter. Conversely, the use of external law firms helps<br />
create competitive pressure to the in-house legal department, thus ensuring a minimum level<br />
of efficiency in its operations (Jacobides et al., 2006).<br />
Overall, the context of legal services allows us to focus on hitherto underexplored<br />
factors that affect the design of plural sourcing strategies. Below we develop hypotheses to<br />
explain the relative weight placed on make versus buy when firms source legal services.<br />
HYPOTHESES<br />
Co-specialization of legal resources<br />
A central tenet of RBV is that firms create and capture value by deploying different or<br />
unique combinations of resources (Penrose, 1959; Teece et al., 1997). This suggests that the<br />
value of a resource is not exogenously determined but rather depends on other surrounding<br />
resources. For example, the value of a patented innovation is much higher in the presence of<br />
9
specialized complementary assets (Arora et al., 2006; Teece, 1986). Lippman et al. (2003) go<br />
as far as to state that no resource is firm-specific, and suggest that firm value can be traced to<br />
the presence of co-specialized resources that exist within the legal shell of the firm. Resource<br />
co-specialization then is associated with excess value, or synergy, that results from the<br />
interaction of different resources within firm boundaries.<br />
A number of explanations have been put forward in the literature to explain the<br />
emergence of gains from resource co-specialization. 1 Nelson et al. (1982) describe how<br />
organizational resources are engaged in functioning routines that enable firms to economize<br />
on coordination costs. Kogut et al. (1992) explain that the emergence of high-order principles<br />
through organizational membership enhances knowledge creation and sharing. More recently,<br />
the ability of managers to ‘dynamically manage’ their resources and ‘orchestrate’ their<br />
deployment has been shown to contribute to firm performance (Adner et al., 2003; Sirmon et<br />
al., 2009).<br />
<strong>The</strong> generation of synergies resulting from resource co-specialization will affect the<br />
design of plural sourcing strategies, as firms will be less reluctant to outsource production.<br />
Market contracting entails the externalization of resources, which reduces the opportunities<br />
of resources to become co-specialized. Hence, in the case of plural sourcing, there will be<br />
more emphasis on make when resource co-specialization is likely to generate synergies. It is<br />
important to clarify here that our notion of resource co-specialization is distinct from<br />
complementarity between procurement modes as described by Puranam et al. (forthcoming).<br />
Whereas they focus on the excess value resulting from the simultaneous use of both market<br />
contracting and hierarchical governance, we emphasize the excess value resulting from the<br />
interaction of internalized resources with other firm resources. Resource co-specialization is<br />
1 We prefer to use the concept of resource co-specialization as opposed to resource complementarity (Milgrom<br />
et al. 1995) because resource co-specialization emphasizes the dynamic nature of the process of generating<br />
synergy. This synergy is not a characteristic of the resource but develops through ongoing interactions within<br />
firm boundaries. Complementarity results in a more instant generation of surplus value due to the attributes of<br />
assets or resources that may lie within or across the firm boundary.<br />
10
also distinct from economies of scope, the cost savings that arise from the sharing of<br />
corporate resources in diversified multi-divisional firms (Chandler, 1990).<br />
In the case of corporate legal services, the in-house legal department handles different<br />
types of legal work, demand for which is generated by the corporation. Some are routine, for<br />
example reviewing and renewing contracts, whilst others come in lumpy work packages, for<br />
example in the form of bet-the-house litigation cases. However, legal resources can be<br />
combined with other firm resources, giving rise to opportunities for exploiting resource cospecialization.<br />
Thus, instead of regarding lawyering as necessary fixed overhead costs for the<br />
corporation, in-house legal resources may be seen as a source of competitive advantage<br />
(Bagley, 2008; Orozco, 2010). But exactly what firm resources give rise to co-specialization<br />
opportunities, which in turn increase reliance on the internal legal department?<br />
International firms<br />
Internationalization as a process compounds the complexity of all managerial tasks<br />
(Carpenter, 2002; Prahalad, 1990; Sanders et al., 1998). As multinationals enter foreign<br />
markets which are more distant in geographic, cultural, and administrative dimensions<br />
(Ghemawat, 2001), they suffer from greater ‘liability of foreignness’ (Zaheer, 1995). In<br />
relation to legal tasks, complexity multiplies with the number of foreign jurisdictions in<br />
which the company has presence, as it has to deal with diverse institutional environments.<br />
Thus, the multinational corporation must cope with greater complexity arising from multijurisdictional<br />
and extra-territorial work necessitated by its international presence.<br />
This additional complexity creates opportunities for generating value through<br />
regulatory arbitrage. This term is used to describe cases when parties take advantage of a gap<br />
between the economics of a deal and its regulatory treatment, restructuring the deal to reduce<br />
or avoid regulatory costs (Fleischer, 2010:227). Examples include transfer pricing, effective<br />
cross-jurisdictional tax planning, investment decisions based on tax, or other regulatory<br />
11
incentives. Yet, a strong legal expertise within the firm is required in order to identify such<br />
opportunities and fully capture their benefits (Bagley, 2008). As Marchant et al. (1999)<br />
explain, legal expertise largely relies on tacit knowledge of the context and past experience<br />
with the specifics of the situation. Hence, frequent interaction between the corporate legal<br />
department and, say, the corporate accounting department (for international tax planning) or<br />
the strategic planning department (for foreign direct investment or M&A) is likely to create<br />
important benefits for international firms through the identification and realization of<br />
unexplored opportunities. Hence, the potential to exploit opportunities from the cospecialization<br />
of legal with other resources, arising from multi-jurisdictional international<br />
presence, is likely to favor more ‘make’ in the plural sourcing of legal services. Thus:<br />
H1: <strong>The</strong> more internationalized a firm is, the greater its reliance on the internal<br />
sourcing of legal services.<br />
R&D intensive firms<br />
Besides international firms, we also expect R&D intensive firms to rely more on their<br />
internal legal departments. Firms investing in new technology must choose an appropriate<br />
strategy to appropriate gains by protecting their intellectual property, for example by<br />
choosing between secrecy and patenting. Exactly what to patent and how to patent is a knowhow<br />
that arises from the co-specialization of legal and technical knowledge. Internal patent<br />
lawyers tend to be highly knowledgeable about the company’s unique technologies (Somaya<br />
et al., 2007). <strong>The</strong>y can interact with the firm’s R&D department to discuss patentable ideas<br />
from an early stage and thus help to increase the share of the value appropriated from<br />
innovation. For example, Reitzig et al. (2009) have found that intermediate levels of crossfunctional<br />
involvement between the legal and R&D department increase the speed of patent<br />
grants. In addition, in-house legal expertise has been found to increase patenting output as<br />
firms are able to identify patentable inventions more effectively (Somaya et al., 2007).<br />
<strong>12</strong>
In case studies of innovating firms there is also increased evidence on the role and<br />
importance of internal legal experts in the management of intellectual property – for example<br />
through various committee memberships (Fox, 1998; Grindley et al., 1997). Hence, the value<br />
of in-house lawyers will be higher for R&D intensive firms due to the co-specialization of<br />
legal and technical resources. We therefore hypothesize that:<br />
H2: <strong>The</strong> higher the R&D intensity of a firm is, the greater its reliance on the internal<br />
sourcing of legal services.<br />
Advertising intensive firms<br />
Similarly to R&D intensive firms, firms that rely on advertising to compete will<br />
benefit from the co-specialization of legal resources. Advertising relies on the use of<br />
intangible assets, such as brand names and trademarks, which require protection from<br />
competition. Increased interaction between the legal and marketing departments will<br />
therefore help firms devise a trademark strategy that is informed by and exploits the legal<br />
opportunities and limitations in the use of trademarks (Cohen, 1986, 1991). This will enable<br />
firms to reduce brand dilution and create stronger brand names. Increased communication<br />
between lawyers and marketers is important in this process as lawyers can identify threats to<br />
the intellectual capital of the firm that are not immediately obvious to marketing stuff<br />
(Peterson et al., 1999; Taylor et al., 2002). In view of these gains, firms with high advertising<br />
intensity will rely more on their internal legal department. Thus:<br />
H3: <strong>The</strong> higher the advertising intensity of a firm is, the greater its reliance on the<br />
internal sourcing of legal services.<br />
Legal expertise in TMTs<br />
Legal resources may be used directly by top management teams (TMT) to hone their<br />
capability for making strategic choice. Defined as ‘the ability of a TMT to communicate<br />
effectively with the counsel and to work together to solve complex problems’, ‘legal<br />
13
astuteness’ is a valuable dynamic capability (Bagley, 2008:378). By incorporating legal<br />
know-how in business decisions, ‘legally astute’ TMTs can protect and enhance the<br />
realizable value of resources (e.g. intellectual property), use legal tools to create options (e.g.<br />
in litigation), and convert regulatory constraints into opportunities (e.g. by proactively going<br />
beyond the letter of the law in environmental compliance to improve financial performance).<br />
Legal astuteness impacts on the orientation of both TMTs and company lawyers. As<br />
for TMTs, the upper echelons perspective points out that organizational outcomes reflect the<br />
values and cognitive bases of powerful actors in the organization (Hambrick et al., 1984).<br />
Consequently, examining prior experiences and background of TMT members help us<br />
identify the ways they shape and direct the resources at their disposal. In the legal context,<br />
TMTs with legal expertise may create more structures and processes to improve the<br />
effectiveness of the in-house legal function. Thus, the presence of a functional TMT member<br />
influences organization design, and equally, the TMT composition is affected by changes in<br />
organization structure (Menz, 20<strong>12</strong>).<br />
Legal astuteness also affects the orientation of in-house corporate lawyers. <strong>The</strong>y<br />
would be expected to be proactive in identifying complementarities between business<br />
opportunities and legal know-how. <strong>The</strong>y are, in effect, counsels (combining legal and<br />
business advice) or entrepreneurs (giving priority to business objectives rather than legal<br />
analysis), rather than cops (limiting their advice to legal mandates) (Nelson et al., 2000). In<br />
short, these ‘decision consultants’ (Rosen, 1984) give legal advice in the context of the<br />
business. Thus, legally astute TMTs rely much on the GC’s capacity to create value from the<br />
co-specialization of legal resources and business-context knowledge within the firm. In doing<br />
so, the key source of the GC’s capability lies in his access to the TMT’s strategic thinking.<br />
Thus, the more legally astute the TMT, the more likely the GC is a member of the TMT and<br />
the more likely in-house lawyers rely on co-specialization of legal and firm-specific business<br />
14
knowledge. This translates into a relatively large in-house legal department. We therefore<br />
predict the following:<br />
H4: <strong>The</strong> general counsel’s membership in the top management team will result in<br />
greater reliance on the internal sourcing of legal services.<br />
Supplier concentration<br />
Besides resource co-specialization, the degree of concentration of suppliers affects the<br />
design of plural sourcing strategy. As explained before, heterogeneity in supplier selection<br />
has not been explored in the context of plural sourcing. In essence, the analytical calculus that<br />
prompts a firm to choose plural sourcing is assumed to be independent of the composition of<br />
supplier portfolio. Here, however, we suggest that different degrees of supplier concentration<br />
impose different costs of contracting to the outsourcing firm. <strong>The</strong>se costs depend on the<br />
nature of the contractual relationship. Low scale, arms-length transactions are characterized<br />
by high costs of contracting as the parties do not have much incentive to invest in firmspecific<br />
transacting platforms and systems (Baldwin et al., 2003; Langlois, 1992, 2006). In<br />
addition, infrequent interactions with suppliers do not generate inter-organizational trust and<br />
the associated benefits of relational contracting and increased commitment (Baker et al.,<br />
2002; Dyer, 1997; Sako et al., 1998). Hence, in the presence of high costs of contracting, we<br />
expect lower reliance on external providers.<br />
In the case of the plural sourcing of legal services, firms choose to outsource to law<br />
firms with different portfolios of specialisms and varying degrees of horizontal scope<br />
(Chatain, 2011; Chatain et al., 2007). In-house legal departments may choose to procure legal<br />
services from a large number of law firms in pursuit of increased expertise in some area (e.g.<br />
regulatory compliance in a specific industry) or lower cost. This model is closer to armslength-style<br />
market governance, as firms scan the environment for the best possible provider<br />
for their specific legal needs. Alternatively, legal departments could outsource to a<br />
15
concentrated panel of law firms involved in relational governance. This mode involves less<br />
flexibility in terms of supplier selection but the firm benefits from reduced costs of<br />
contracting. For example, having an on-going and committed relationship with a law firm<br />
facilitates communication (as there is no need to identify points of contact or firm<br />
background), and ensures that the client firm will get the top partners for their case.<br />
We therefore expect a company’s willingness to invest in relational governance with a<br />
selected few law firms to result in a high degree of outsourcing and a smaller in-house legal<br />
department (Moeen et al., <strong>2013</strong>). By contrast, companies collaborating with a large number<br />
of law firms will increase their reliance on internal legal resources. Thus, we predict the<br />
following:<br />
H5: <strong>The</strong> larger the number of external law firms employed by a firm, the greater its<br />
reliance on the internal sourcing of legal services.<br />
EMPIRICAL METHODS<br />
Data and sampling<br />
To evaluate our theoretical framework and test our hypotheses, we first collect<br />
information on the size and composition of internal legal departments and their relationships<br />
with external law firms. This information is not publicly available, so we use proprietary<br />
survey and secondary data collected by ALM Legal Intelligence, a research unit within the<br />
American <strong>Law</strong>yer Media Group. ALM is a leading provider of news and information on legal<br />
markets, and offers detailed business information and competitive intelligence about the legal<br />
industry and their clients. In particular, we used ALM’s annual survey of in-house legal<br />
departments as well as ALM’s reports on corporate activity, including litigation, M&A<br />
transactions, and corporate bankruptcies. <strong>The</strong>se data are available from 2004 until 2011 for<br />
Fortune 500 companies 2 .<br />
2 For 2004 and 2005 the data are only available for Fortune 250 companies.<br />
16
To be included in our sample, we require firms to have ALM annual survey data as<br />
well as data on firm operations in Compustat corporate and industry segment files. Our final<br />
dataset is an unbalanced panel consisting of <strong>12</strong>30 observations from 285 firms (i) observed<br />
over up to eight years (t). Our reported number of observations drops to 945 as several<br />
statistical analyses below require the inclusion of one-year lagged variables.<br />
Dependent variable<br />
Consistent with other empirical work on plural sourcing (Parmigiani, 2007;<br />
Parmigiani et al., 2009), we seek comparable information on internal and external suppliers<br />
of legal services. Ideally we would have information on hours worked on specific matters by<br />
in-house lawyers at corporations as well as hours worked on the same matters by lawyers at<br />
outside law firms on behalf of these client corporations. Such data are not publicly available<br />
as lawyers at both types of organizations treat such information as sensitive and strictly<br />
confidential.<br />
We do, however, have ALM survey data on the number of in-house lawyers and the<br />
number of external law firms providing outside legal work for these firms. Thus, we<br />
construct our dependent variable based on the count of in-house lawyers (as reported in the<br />
ALM annual survey of general counsel (GC)) and include the count of external law firms as a<br />
right-hand side term. Our dependent variable is the natural log of the annual count of inhouse<br />
lawyers per $100 billion in firm sales. Changes in the dependent variable then reflect<br />
changes in the in-house lawyer count attributed to factors unrelated to organic growth.<br />
An increase (decrease) in the dependent variable can be attributed to two possibilities:<br />
a) increased (decreased) reliance on internally made legal services by in-house lawyers rather<br />
than externally bought legal services by outside law firms; or b) an increase (decrease) in the<br />
overall amount of legal work that needs to be undertaken on behalf of the firm by both<br />
internal and external providers. In order to account for the second possibility and isolate<br />
17
changes in the make-and-buy mix, we include controls for the overall amount of legal work<br />
undertaken and employ multiple regression analyses that incorporate dynamic processes and<br />
account for possible reverse causality.<br />
Independent variables<br />
Internationalization. We measure the degree of internationalization as a count of the<br />
number of countries where each firm operates via subsidiaries in a given year. <strong>The</strong>se data<br />
were obtained from Standard and Poor’s Capital IQ database which includes information on<br />
corporate divisions, subsidiaries and affiliates. A substantial literature in management and<br />
international business notes different measures of firm internationalization (Ramaswamy et<br />
al., 1996; Sullivan, 1994, 1996). We use the number of countries as it more accurately<br />
captures the complexity associated with operating in multiple jurisdictions. Even modest<br />
sales or presence in a country requires basic knowledge of and compliance with substantive<br />
laws and legal processes.<br />
R&D intensity. We calculate R&D intensity as R&D expenses divided by sales.<br />
Advertising intensity. We calculate advertising intensity as advertising expenses<br />
divided by sales.<br />
General counsel in TMT. In order to examine the GC’s participation in the firm’s<br />
TMT, we construct a dummy variable taking the value of one when the GC has the title<br />
‘Senior Vice President’ or ‘Executive Vice President’ and otherwise taking the value of zero.<br />
Data on the GC’s role were obtained from S&P’s Capital IQ database which includes<br />
biographical and other information on key professionals, executives and directors. Our<br />
approach is consistent with other studies focusing on upper echelons in defining top<br />
management teams as individuals with the title ‘Vice President’ or higher (Keck, 1997; Lee<br />
et al., 2008; Lee et al., 2007; Michel et al., 1992).<br />
18
<strong>Law</strong> firms. In order to measure the degree of concentration in the provision of external legal<br />
services we use a count of external law firms working for a given client corporation<br />
surveyed. This variable is included in ALM’s annual survey and asks GCs to identify the law<br />
firms that undertook legal work on their behalf in a given year. All other things equal, the<br />
higher the number of law firms, the lower the degree of concentration in the provision of<br />
external legal services across the group. All variables used in statistical analyses are listed in<br />
Table 1.<br />
- Insert Table 1 about here -<br />
Control variables<br />
<strong>The</strong> panel structure of our dataset allows us to account for unobserved heterogeneity<br />
among firms in our sample. However, this methodology only controls for time-invariant firmspecific<br />
factors affecting the legal sourcing decision. We therefore include a number of timevarying<br />
firm controls including firm debt exposure, calculated as total debt divided by total<br />
assets, firm profitability, calculated as EBITDA divided by sales, and the natural log of the<br />
count of firm employees. We also control for the effect of product diversification using the<br />
entropy measure of diversification (Palepu, 1985), where industry segments are defined by 4-<br />
digit SIC codes. This measure captures the effect of scope economies that are present in<br />
diversified corporations and are likely to influence the sourcing of corporate functions like<br />
legal services (Chandler, 1962; Parmigiani, 2007). In addition, we include a count of new<br />
acquisitions started in a given firm as well as a count of new litigation cases started in a given<br />
year where the firm was involved either as defendant or plaintiff. 3 Both acquisitions and<br />
lawsuits are important controls as they may prompt a significant increase in the amount of<br />
3 ALM only collects data for ‘important’ acquisitions and lawsuits as reported in trade publications. Although<br />
this probably results in loosing some information, this is unlikely to bias our results as reporting criteria are<br />
similar for all firms in our sample. In addition, the biggest acquisitions and lawsuits are likely to have the most<br />
important effect on legal service sourcing dynamics.<br />
19
legal work to be done in-house or externally. To account for the possibility that the additional<br />
work may come with some delay, we also include one-year lagged value of these two counts.<br />
To better control for the overall amount of legal work undertaken by the firm in each<br />
year, we also use annual selling, general and administrative expenses (SG&A) as a proxy for<br />
legal expenses. This variable is reported by Compustat and includes all commercial expenses<br />
of operation not directly related to production, including GC office expenses and legal fees<br />
paid to law firms. We are thus able to observe changes in the legal service make and buy<br />
propensity as opposed to changes in the overall amount of legal work undertaken. Finally, we<br />
include a dummy variable which is equal to one when the firm is in bankruptcy proceedings<br />
in a given year. Table 2 reports summary statistics and correlations for the variables.<br />
- Insert Table 2 about here -<br />
Econometric specifications<br />
Standard fixed- or random-effects specifications allow us to control for unobserved<br />
firm characteristics that influence the legal services make-and-buy decision. However, our<br />
data have two additional characteristics that need to be accounted for. First, the in-house<br />
lawyer count is likely to be influenced by past observations. Including a lagged value of the<br />
dependent variable as a regressor allows us to account for autocorrelation but the presence of<br />
both a lagged dependent variable and fixed-effects can render estimates inconsistent. For<br />
example, it can lead to significant downward bias on the coefficient for the lagged dependent<br />
variable (Cameron et al., 2005; Nickell, 1981). Second, several of our regressors may be<br />
endogenously determined or predetermined, that is, correlated with current or past<br />
disturbances. To address these concerns we employ a dynamic panel data estimator with<br />
GMM-type instruments (Arellano et al., 1991). This estimator is ideal for ‘small T, large N’<br />
panels like ours. In addition, GMM estimators are robust to heteroskedasticity in the crosssection<br />
and unknown patterns of serial correlation (Arellano, 1987; Vogelsang, 20<strong>12</strong>).<br />
20
More specifically, we estimate a statistical model of the form:<br />
! !" = ! ! ! ! !!! + ! ! ! !" + ! ! + ! ! + ! !"<br />
where ! !" is the natural log of the count of lawyers divided by sales in firm i of year t, ! !" is a<br />
vector of explanatory variables, ! ! is a year effect, ! ! is a time-invariant firm-specific effect<br />
and ! !" is the error term.<br />
<strong>The</strong> GMM estimator originally proposed by Arellano et al. (1991) uses first<br />
differencing to remove unobservable firm-specific effects and then instruments the<br />
endogenous variables using lagged levels of the series. However, this approach is<br />
problematic in our setting as the first-differenced GMM estimator is found to have large<br />
finite sample bias and poor precision when time series are short and persistent (Alonso-<br />
Borrego et al., 1999; Blundell et al., 1998). Instead, we employ the system GMM estimator<br />
suggested by Arellano et al. (1995) and Blundell et al. (1998). This approach uses lagged<br />
differences as instruments for equations in levels, in addition to lagged levels as instruments<br />
for equations in first differences. <strong>The</strong> system estimator introduces an additional assumption<br />
that changes in instrumenting variables are uncorrelated with the fixed effects. All models<br />
were calculated using the xtabond2 Stata module (Roodman, 2006).<br />
To address concerns about simultaneity bias we treat the number of law firms and<br />
general counsel in TMT variables as endogenous while the remaining explanatory variables<br />
as predetermined. From the control variables, selling, general and administrative expenses are<br />
endogenous as they proxy overall legal expenses. Litigation cases are also treated as<br />
endogenous given that larger legal departments are more likely to take cases to court. <strong>The</strong><br />
remaining control variables are treated as exogenous. Following standard treatment, we<br />
specify lagged differences one for endogenous variables and lagged differences zero for<br />
predetermined variables (in orthogonal deviations) for the levels equation. We use the<br />
forward orthogonal deviation transformation instead of first differencing given that our panel<br />
21
is unbalanced. This minimizes data loss while preserving the orthogonality among the errors<br />
(Arellano et al., 1995; Roodman, 2006). Finally, we use standard errors that are robust to<br />
heteroskedasticity and arbitrary patterns of autocorrelation within firms.<br />
RESULTS<br />
Descriptive statistics and preliminary analysis<br />
Descriptive statistics and pair-wise correlations are reported in Table 2. <strong>The</strong> sample<br />
mean for In-house lawyers is 5.37, suggesting that firms employ on average 3.62 lawyers per<br />
billion dollar of sales. <strong>The</strong> raw number of in-house lawyers at Fortune 500 firms sampled<br />
exhibited substantial variation ranging from a handful to more than <strong>12</strong>00 in certain firms such<br />
as General Electric. <strong>The</strong> sample mean of Outside law firms is 1.83, meaning that firms<br />
reported on average nine outside law firms as undertaking legal work on their behalf in a<br />
given year. Those numbers ranged from one to more than 50 outside law firms. Other key<br />
variables comport with intuition in large, established firms. Pair-wise correlations are largely<br />
intuitive. Variables corresponding to the five hypotheses for testing all exhibit the predicted<br />
positive sign when correlated with the dependent variable. Overall, these descriptive statistics<br />
indicate substantial variation in both the dependent variable and key independent variables<br />
with initial correlations consistent with our theoretical framework and related hypotheses.<br />
Figures 1A-E present results from Lowess analyses 4 of In-house lawyers and make<br />
and buy determinants related to Hypotheses 1-3 and 5 (Internationalization, R&D intensity,<br />
Advertising intensity, and Outside law firms), and from comparative bar-chart analyses of Inhouse<br />
lawyers related to Hypothesis 4 (General counsel on TMT). <strong>The</strong> pattern of results in<br />
all figures indicates preliminary support for Hypotheses 1-5. Lowess analyses indicate that<br />
In-house lawyers increases with our independent variables. Comparative bar-chart analyses<br />
4 Lowess analyses compute linear regressions around each observation of given determinant (e.g.,<br />
Internationalization) with neighborhood observations chosen within some sampling bandwidth and weighted by<br />
a tri-cubic function. Based on the estimated regression parameters, In-house lawyers values are computed.<br />
Combinations of determinants and In-house lawyers are then connected, yielding a Lowess curve.<br />
22
of sample means indicate more in-house lawyers when GCs are on the TMT. This difference<br />
is significant at the 5% level.<br />
- Insert Figures 1A-E about here -<br />
Regression analysis<br />
Table 3 presents the results of our regression analysis. Models 1-2 present fixedeffects<br />
specifications while Models 3-5 present results from the system GMM estimator.<br />
Simpler fixed-effects models suggest that the lagged dependent variable, In-house lawyers it-1 ,<br />
explains roughly 30% of variation in the dependent variable. We noted previously, however,<br />
that the lagged dependent variable coefficient estimates in fixed-effects regressions are<br />
typically biased downwards (Nickell, 1981). When the number of time-periods, t, are few as<br />
here, the downward bias can be substantial as corrected system GMM regression results<br />
demonstrate. Coefficients on In-house lawyers it-1 jump from 0.310 and 0.305 in Models 1-2<br />
to 0.973, 0.882 and 0.883 in Models 3-5. All estimates are significant at the 1% level.<br />
Model 3 reports one-step system GMM results with the lagged dependent variable<br />
and controls only. Models 4-5 are fully-specified and report one- and two-step system GMM<br />
results (the two-step estimator is corrected for downward bias in the computed standard<br />
errors (Windmeijer, 2005)). Diagnostics at the bottom of each column suggest that key<br />
estimation assumptions hold. <strong>The</strong> Arellano-Bond z test for second- and higher-order autocorrelation<br />
is not statistically significant. This is not weakened by the number of instruments<br />
as instrument count is lower than the number of firms (Roodman, 2006). Hansen’s J test, a<br />
variant of the Sargan test of overidentifying restrictions, fails to reject the null hypothesis that<br />
the instruments generated are exogenous. Taken together, these results confirm the<br />
appropriateness of our system GMM strategy as a response to possible bias in estimation<br />
related to the endogenous and/or predetermined nature of certain regressors.<br />
- Insert Table 3 about here -<br />
23
We look primarily to results in Models 4-5 for evidence to evaluate support for our<br />
hypotheses. Results support our predictions and the importance of resource co-specialization<br />
in designing plural sourcing strategies. Consistent with Hypothesis 1, we observe positive<br />
coefficients for Internationalization significant at the 1% level. Firms operating in more<br />
countries increase their dependence on in-house lawyers. Consistent with Hypotheses 2 and<br />
3, we see positive coefficients on R&D intensity significant at the 10% level and positive<br />
coefficients on Advertising intensity significant at the 5% level. Firms more reliant on<br />
technology and intangibles such as brands also increase in-house lawyer counts consistent<br />
with making more legal services that can be co-specialized with other firm resources.<br />
Consistent with Hypothesis 4, we observe positive coefficients on General counsel on TMT<br />
significant at the 10% level, suggesting that elevating senior legal personnel to top<br />
management ranks also increases in-house lawyer counts.<br />
Recall that Hypothesis 5 explains that the design of the portfolio of external legal<br />
service providers is not independent of the proportion of legal work that is externally<br />
procured. Our analysis confirms the hypothesized positive relation between the number of<br />
law firms supplying to a company and the propensity to internalize legal work. <strong>The</strong><br />
coefficient for the number of external law firms is positive and significant at the 10% level,<br />
suggesting that the proportion of legal work undertaken within the firm boundaries increases<br />
with the number of external service providers. Although this result might sound counterintuitive,<br />
it is consistent with a relational contracting logic. Firms employing a large number<br />
of suppliers do not develop the mechanisms that reduce contractual uncertainty and, as a<br />
result, face higher contracting costs.<br />
From the control variables we find that firm profitability is negatively correlated with<br />
the extent of internal procurement of legal services. Though only a conjecture, this finding<br />
may reflect less concern with controlling fees through the threat of internalizing legal<br />
24
services. <strong>The</strong> coefficient for selling, general and administrative expenses, a proxy for the<br />
overall amount of legal work undertaken by the firm, is also negative and significant. This<br />
might reflect the ‘natural’ tendency to outsource legal work due to low asset specificity and<br />
increased expertise in the marketplace. Interestingly, product diversification doesn’t affect<br />
the make-and-buy balance of legal services. Although one could suggest that multi-product<br />
firms are motivated to internalize legal work as they can apply their legal resources across a<br />
wider portfolio of business lines, we do not find support for this view. Finally, the coefficient<br />
for the number of acquisitions undertaken is negative and significant. Given that corporate<br />
acquisitions require specialist legal knowledge during negotiations, due diligence, contract<br />
design etc, it is reasonable to expect that more outsourcing of legal work will take place.<br />
Robustness checks<br />
<strong>The</strong>se results prove robust to several changes in model specification and sampling.<br />
For example, we excluded firms from our sample that were involved either in antitrust suits<br />
or in bankruptcy proceedings – see Model 6. We also obtain consistent results when remeasuring<br />
the dependent variable, In-house lawyers, as a simple count and then analyzed in<br />
Poisson panel count models – see Models 7-8. Results remain essentially unchanged when<br />
employing different variable definitions (e.g. we varied Internationalization to account for<br />
the number of foreign jurisdictions with differing (from US) legal system and rule-of-law<br />
traditions) and when excluding possible outliers (e.g. R&D intensity values above 30%).<br />
Another issue we explored further is the measurement of supplier portfolio<br />
concentration. On average, we expect that a high number of law firms undertaking work for<br />
the focal firm is associated with low concentration in the supply of legal services. However,<br />
this relationship is less clear when there are changes in the type of representation. For<br />
example, assume firm A employs 4 different law firms in four different practice areas<br />
(M&As, patent litigation etc) while firm B similarly employs 4 law firms but in one practice<br />
25
area. As it stands, our measure suggests that both corporations have the same level of supplier<br />
concentration. However, firm B clearly has a less concentrated portfolio of suppliers given<br />
that it has 4 different suppliers for the same practice area. To account for this, we counted the<br />
number of law firms undertaking work for the focal firm in each practice area (this<br />
information is available from ALM) and then averaged these. A high number of this measure<br />
suggests that the focal firm has multiple suppliers in the same practice area, which is<br />
indicative of low concentration in the provision of legal services. Consistent with our results,<br />
the coefficient for this variable remains positive and significant at the 6% level.<br />
DISCUSSION AND CONCLUSION<br />
A substantial body of research has examined the conditions under which plural<br />
sourcing is likely to occur. Moving beyond the question of when it occurs, the issue of how<br />
firms choose the balance between making and buying in plural sourcing has remained underexplored.<br />
This study fills that gap. In doing so we identify two mechanisms that dictate the<br />
make-buy balance in plural sourcing, namely resource co-specialization and supplier<br />
concentration. Our framework enables us to predict the make-and-buy mix in the context of<br />
legal services provision.<br />
<strong>The</strong> empirical findings support the view that when making and buying, firms exploit<br />
resource co-specialization and supplier selection to tip the balance in favor of in-house<br />
production and delivery. Dynamic panel regression analysis uncovered broad-sample<br />
statistical support for five of the six hypotheses derived from our plural sourcing framework.<br />
We noted statistically significant and practically substantial increases in the reliance on inhouse<br />
lawyers with increases in the number of countries where the firm had operations, with<br />
increasing R&D and advertising expenses as a percentage of sales, when the GC is part of the<br />
firm’s TMT, and as the number of law firms providing work for the firm increases. <strong>The</strong>se<br />
trends proved robust to alternative estimation strategies that took full advantage of the panel<br />
26
study design and accounted explicitly for omitted variable issues and for the possibly<br />
endogenous determination of key independent variables. Overall, these findings provide<br />
broad-based support for our make-and-buy framework that explains how firms decide to<br />
balance internal and external activities.<br />
To help interpret the regression results and add additional insight in the legal services<br />
context, we draw on evidence from semi-structured interviews with just over fifty in-house<br />
lawyers at corporations and banks in the US and UK. 5 A key finding of this study is that<br />
opportunities for co-specialization of legal and other firm-level resources enhances the extent<br />
of insourcing in plural sourcing. Internal legal resources may be utilized for co-specialization<br />
in various arenas, including when firms internationalize, and when they wish to harvest the<br />
results of R&D and advertising. According to one GC:<br />
[I]f we’re developing a new market, then we will make it our job to ensure that we<br />
understand the legal and regulatory environment in that market and that we train<br />
managers how best to exploit opportunities in that market, whilst complying with the<br />
company’s policies and processes.<br />
Arguably, external counsel would be just as knowledgeable about such regulatory<br />
issues in general. However, managers can be better assisted in exploiting market<br />
opportunities by the in-house counsel who has an intimate knowledge of the business. For<br />
example, another GC noted:<br />
It hasn’t really altered my fundamental belief that the work should be done internally,<br />
and can be done internally, more cost effectively and more efficiently, by a very<br />
commercially attuned and commercially embedded legal function.<br />
Such intimacy extends to the interaction between the R&D function and the in-house<br />
intellectual property (IP) lawyers:<br />
5 Interviews were undertaken by the first author during May 2010 and December 2010. <strong>The</strong> interviewees also<br />
confirmed the appropriateness of the setting to study the design of plural sourcing strategies.<br />
27
[W]e have a large research centre on this site, where we do R&D and test-tubes and all<br />
that kind of stuff, and we have patent attorneys sit here, supporting them. … We have a<br />
process by which all the guys on the test-tubes over in the lab, when they invent<br />
something, they will write up their lab notebooks. …we have a patent attorney, an<br />
inventor and a business manager all sitting in the same room, because then the<br />
strategic relevance of the patent is tested rather than just that it is chemically a great<br />
idea.<br />
In the interviews, we also found notable instances of the GC in the company’s TMTs<br />
who prefer the use of internal over external legal resources. <strong>The</strong> following quote is<br />
illustrative:<br />
Because of the particular sector (financial services) that we’re in, the risks and the way<br />
you manage risks has a higher profile and requires higher intensity from us than it has<br />
ever done before. <strong>The</strong>re’s a move towards more of the lawyers focused around legal<br />
risk issues. It’s not really work that can be done by external lawyers in the same way.<br />
A second key finding of this study is that the number of suppliers chosen to outsource<br />
to is not independent of the proportion that is bought. Prior research has tended to treat the<br />
extent of outsourcing and the concentration of external resources as separate considerations.<br />
In the legal context, a portfolio of law firms that in-house legal departments retain is known<br />
as the panel. We find evidence from our field interviews that some legal departments see the<br />
benefits of having a concentrated panel with fewer law firms. Two GCs noted:<br />
[O]n the basis that if you spread your job too thinly, people don’t have much<br />
knowledge of your business, and you might save a bob on one deal but I bet you it will<br />
come back and haunt you.<br />
You cannot manage 60 law firms in any coherent or effective manner, and persuade<br />
them to act better, do things for us, help us run our business better.<br />
28
<strong>The</strong>se in-house legal departments carried out a ‘panel review’, and reduced the<br />
number of preferred law firms as part of an exercise to reduce the overall legal spending. A<br />
tighter control over external spending resulted in internalizing the plural sourcing balance.<br />
Developing relational contracts with a smaller number of law firms has facilitated this. <strong>The</strong><br />
following quotes are illustrative:<br />
Only three firms were chosen for the panel. I don’t let our panel law firms compete<br />
against each other. What I mean by that is, if I have a piece of work, I don’t say to all<br />
three of them, “Give me a price.” We tend to spread the work around, and we work<br />
with each of them individually. We’ve got good relationships with each of them, and<br />
it’s a non-confrontational approach.<br />
Implications for theory and research<br />
Our study has important implications for strategy theory. First, our study extends the<br />
plural sourcing research by going beyond important but still basic questions of whether and<br />
when firms engage in this practice to theorize about firm-level mechanisms, including<br />
resource co-specialization and supplier selection, that determine the mix of sourcing modes.<br />
Second, these co-specialization opportunities exist for resources lying in different<br />
corporate functions. Thus, whilst our empirical context is the legal department as a focal<br />
corporate function, other corporate functions also engage in plural sourcing by balancing<br />
internal and external resources within the firm. In particular, in-house accountants work<br />
alongside outside accounting and audit firms, in-house engineers with outside engineering<br />
consultant firms, in-house marketing departments with marketing and PR agencies, and<br />
internal strategy consultants with outside consulting firms. In these and other contexts, we<br />
think our theoretical framework can provide researchers with relevant guides for making<br />
inferences about make and buy strategies.<br />
29
A third research implication relates to methods. We suspect that the dearth of research<br />
on sourcing decisions in legal services is due to the absence of good data and the difficulty in<br />
making causal inference. Despite their still relatively short time-series (i.e. seven years) and<br />
limited cross-sectional coverage (i.e. Fortune 500 firms), our panel data provide us with<br />
advantages relative to single firm case narratives (e.g. Smith, 2001) or one-time crosssectional<br />
surveys (e.g. Schwarcz, 2008). Most importantly, the panel nature of our ALM data<br />
permit us to use state-of-the-art dynamic panel estimators. In this way, we give future<br />
researchers guidance on how to address challenges of mutual causation in other plural<br />
sourcing contexts where panel data is increasingly available and dynamic panel estimators<br />
increasingly expected.<br />
Implications for practice<br />
<strong>The</strong> findings of this study draw practitioners’ attention to a few, yet important, aspects<br />
of the sourcing decisions in legal services. Some of them may appear paradoxical. First, in<br />
legal circles, the last two decades have seen vigorous debate on the proper size and scope of<br />
work for in-house lawyers. One view championed by the US giant, General Electric<br />
(Heineman, 2010; Smith, 2001), argues for substantially increasing the number of in-house<br />
lawyers and giving them primary if not exclusive responsibility for legal transactions and<br />
litigation cases. In-house lawyers are expected to increasingly play a dual role of being a<br />
lawyer and a business partner (Green, 20<strong>12</strong>). <strong>The</strong> chief legal officer (CLO) is said to be ‘one<br />
of the mightiest figures in the C-suite’ 6 . This is because the 2002 Sarbanes-Oxley Act, the<br />
2010 Dodd-Frank Act and the 2008 financial crisis have heightened the need for compliance<br />
and risk management, making companies turn to lawyers to prevent corporate bosses from<br />
going to jail and to fend against endless threats of lawsuits. Our study indicates that whilst the<br />
power and status of GC may be on the rise, the resulting trend towards insourcing leads to<br />
6 ‘A guardian and a guide’, Schumpeter column, <strong>The</strong> Economist <strong>April</strong> 7, 20<strong>12</strong><br />
30
usiness benefits only if resource co-specialization benefits are exploited. In other words, our<br />
broad sample statistical study demonstrates that insourcing is less desirable when there are no<br />
co-specialization opportunities.<br />
Second, plural sourcing strategies are not a transition towards the dominance of one<br />
or the other mode. Instead, it is a self-reinforcing, sustainable alternative system of service<br />
production, closely supported by the nature of relational contracts with external suppliers.<br />
<strong>The</strong> multi-sourcing of legal services, including the use of law firms and other service<br />
providers such as legal process outsourcing (LPO) providers, is now well recognized in legal<br />
practice and scholarship (Regan et al., 2010; Sako, 2009; Susskind, 2008). But to date, the<br />
TCE-focused analysis in legal scholarship has not been able to explain the co-existence of<br />
multiple sourcing modes. Our plural sourcing framework provides a clear rationale for multisourcing.<br />
It also gives a limited, yet significant, range of factors that affect the mix of<br />
multiple sourcing modes. In particular, our findings suggest that ‘panel reviews’ leading to<br />
the selection of fewer law firms can co-exist with heavy reliance on outsourcing.<br />
Limitations and further research<br />
A number of limitations of this study are worth noting. <strong>The</strong> first limitation in the<br />
analytical framework is self-imposed to simplify the analysis. Plural sourcing in legal<br />
services in full manifestation involves multiple sourcing modes (make, buy, ally) from<br />
multiple types of providers other than law firms, including LPO providers, legal technology<br />
providers, and contract lawyers. By limiting our analysis to the co-existence of ‘make’ and<br />
‘buy’ only from law firms, we did not take into account the impact of the growth of providers<br />
other than law firms on the number of law firms and the consequent make-buy balance.<br />
<strong>The</strong> second limitation lies in available data. Our study links the number of in-house<br />
lawyers to the number of outside law firms, not the number of external counsel or hours spent<br />
by these lawyers. In an ideal world, we would have better data on internal to external legal<br />
31
personnel or hours worked. We deal with this limitation by including a number of control<br />
variables and employing a dynamic panel data estimator. Future research may see more<br />
information available on the identities of such outside law firms permitting a closer matching<br />
of internal and external personnel and hours.<br />
A third limitation relates to sampling and generalizability. We think our framework<br />
and evidence can be generalized to other large, established firms in the US, the UK and to<br />
other such firms domiciled elsewhere but with substantial business and or secondary share<br />
listings in the US or UK. But this leaves many other firm types where we are reluctant to<br />
generalize and advise additional study on make and buy strategies. <strong>The</strong> discount consumer<br />
services purchasing giant, Groupon, was founded in 2008, but did not have a full-time inhouse<br />
counsel until 2011 when it already operated in 48 countries generating $1.6 billion in<br />
annual revenue 7 . Groupon’s history suggests that explanation of plural sourcing strategies for<br />
legal services in entrepreneurial firms may require quite different framework assumptions<br />
and empirical methods to account for confounding effects related to organizational newness<br />
and management professionalization.<br />
Conclusion<br />
We began this study by asking how firms develop plural sourcing strategies important<br />
to their survival and success. We end it with a call for strategy researchers to continue<br />
developing plural sourcing frameworks and evidence relevant to different organizational<br />
forms and different product and service producing activities. We chose legal services and<br />
demonstrated how such frameworks and evidence could help us understand the relative size<br />
of in-house legal departments, an exercise quite different from what Shakespeare’s character,<br />
7 ABA Journal. 2011. <strong>The</strong> new normal: Make or buy in the age of the free-agent lawyer. ABA Journal.com.<br />
October 26. Available electronically at: http://www.abajournal.com/legalrebels/article/inhouse_lawyers_make_or_buy/<br />
<br />
32
Dick the Butcher, wishes for lawyers in Henry VI, Part II, Act IV, Scene 2. 8<br />
Even so, we<br />
think the counting exercise important for understanding make and buy strategies for<br />
professionals including not only lawyers but also accountants, financial analysts, consultants,<br />
engineers, and marketing specialists, who have a choice between working in corporate<br />
functions or at professional service firms. Hitherto, strategy scholars have undervalued the<br />
analysis of what Porter (1980) and others refer to as “support activities” to the firm. Our<br />
study suggests that they can be essential to the firm’s strategy for gaining and maintaining<br />
competitive advantage. In this context, we should count all the inside and outside<br />
professionals as part of the search for an optimal make and buy mix in corporate functions.<br />
Research on firm boundaries will be enriched by placing plural sourcing decisions in<br />
corporate functions on a par with vertical (dis)integration decisions for the primary activities<br />
of the firm.<br />
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Vogelsang TJ. 20<strong>12</strong>. Heteroskedasticity, autocorrelation, and spatial correlation robust<br />
inference in linear panel models with fixed-effects. Journal of Econometrics 166(2): 303-319.<br />
Walker G, Weber D. 1984. A transaction cost approach to make-or-buy decisions.<br />
Administrative Science Quarterly 29: 373-391.<br />
Williamson OE. 1985. <strong>The</strong> economic institutions of capitalism. <strong>The</strong> Free Press: New York.<br />
Windmeijer F. 2005. A finite sample correction for the variance of linear efficient two-step<br />
GMM estimators. Journal of Econometrics <strong>12</strong>6(1): 25-51.<br />
Zaheer S. 1995. Overcoming the liability of foreignness. Academy of Management Journal38<br />
38(2): 341-363.<br />
37
Table 1. Variable names, descriptions, sources and expected impact in panel regressions<br />
Variable name Variable description Source<br />
In-house lawyers<br />
Internationalization<br />
Natural log of the number of lawyers working in the legal<br />
department of firm I in year t divided by sales in US$100<br />
billions.<br />
Natural log of the number of countries where firm i has<br />
subsidiaries in year t.<br />
ALM Legal<br />
Intelligence<br />
S&P Capital IQ<br />
Expected impact on<br />
dependent variable<br />
Dependent variable<br />
Positive (H1)<br />
R&D intensity R&D expense divided by sales for firm i in year t. Compustat Positive (H2)<br />
Advertising intensity Advertising expense divided by sales for firm i in year t. Compustat Positive (H3)<br />
General counsel on TMT<br />
Outside law firms<br />
0-1 dummy taking the value of one when the firm i’s general<br />
counsel is senior or executive vice president in year t<br />
Natural log of the number of outside law firms providing<br />
significant legal services to firm i in year t.<br />
Product diversification Entropy measure calculated as Div = ! P ! ×ln 1 P ! where<br />
P j is the share of sales attributed to industry segment j for fim<br />
i in year t.<br />
Debt<br />
Profitability<br />
Total debt divided by total assets in US$ millions for firm i in<br />
year t.<br />
Operating income (EBITDA) divided by sales in US$<br />
millions for firm I in year t.<br />
S&P Capital IQ<br />
ALM Legal<br />
Intelligence<br />
Compustat<br />
Compustat<br />
Compustat<br />
Positive (H4)<br />
Positive (H5)<br />
Control variable<br />
Control variable<br />
Control variable<br />
Employees Number of employees in 1,000s for firm i in year t. Compustat Control variable<br />
SG&A<br />
Litigation<br />
Natural log of Selling, General & Administrative Expenses:<br />
Indirect commercial expenses of operation incurred in the<br />
regular course of business, including legal expenses in US$<br />
millions for firm i in year t.<br />
Number of litigation cases where firm i in year t was either a<br />
defendant or plaintiff.<br />
Compustat<br />
ALM Legal<br />
Intelligence<br />
Acquisitions Number of acquisitions undertaken by the firm i in year t. ALM Legal<br />
Intelligence<br />
Bankruptcy<br />
0-1 dummy taking the value of one when firm i in year t is in<br />
bankruptcy proceedings.<br />
ALM Legal<br />
Intelligence<br />
Control variable<br />
Control variable<br />
Control variable<br />
Control variable<br />
Table 2. Descriptive statistics and pairwise correlations<br />
Descriptive statistics<br />
Pair-wise correlations<br />
Variable Mean St.Dv. Min Max (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (<strong>12</strong>) (13) (14)<br />
1) In-house lawyers 5.37 1.10 1.44 8.44 1.00<br />
2) Internationalization 2.24 1.48 0.00 4.55 0.36* 1.00<br />
3) R&D intensity 0.02 0.05 0.00 0.53 0.30* 0.41* 1.00<br />
4) Advertising intensity 0.01 0.03 0.00 0.21 0.17* 0.14* 0.07* 1.00<br />
5) General counsel on TMT 0.79 0.41 0.00 1.00 0.19* 0.02 0.05 0.06 1.00<br />
6) Outside law firms 1.83 0.93 0.00 3.95 0.14* 0.21* 0.<strong>12</strong>* 0.02 0.09* 1.00<br />
7) Diversification 0.90 0.36 0.00 2.05 0.01 0.17* -0.11* 0.09* 0.00 0.03 1.00<br />
8) Debt 0.04 0.07 0.00 0.46 -0.02 0.04 0.00 0.02 -0.10* 0.06 0.00 1.00<br />
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<br />
10) Employees 3.67 1.11 0.00 6.32 -0.08* 0.24* 0.06 0.10* 0.08* 0.29* 0.15* 0.01 -0.03 1.00<br />
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.<strong>12</strong>* 0.36* 1.00<br />
<strong>12</strong>) Litigation 0.13 0.44 0.00 3.00 0.21* 0.18* 0.29* 0.<strong>12</strong>* 0.02 0.18* -0.04 0.04 0.23* 0.<strong>12</strong>* 0.06 1.00<br />
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.<strong>12</strong>* -0.04 0.15* 1.00<br />
14) Bankruptcy 0.00 0.06 0.00 1.00 0.04 -0.01 -0.03 -0.02 -0.02 0.08* 0.01 0.03 -0.07* 0.04 -0.13* 0.07* 0.10* 1.00<br />
N=945, * statistically significant at the 5% level<br />
38
Table 3. Panel data regression models of corporate legal services make and buy balance<br />
No of lawyers<br />
Dep. Variable<br />
In-house lawyers<br />
(count)<br />
(1) (2) (3) (4) (5) (6) (7) (8)<br />
Lagged dep. variable<br />
Fixed<br />
effects<br />
Fixed<br />
effects<br />
System<br />
GMM<br />
System<br />
GMM<br />
System<br />
GMM<br />
System<br />
GMM<br />
0.310** 0.305** 0.973** 0.882** 0.883** 0.882**<br />
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)<br />
Fixed<br />
effects<br />
Poisson<br />
Random<br />
effects<br />
Poisson<br />
Explanatory variables<br />
No of countries (log)<br />
0.055 0.041** 0.040** 0.039** 0.043 0.270**<br />
(0.818) (0.005) (0.008) (0.008) (0.661) (0.000)<br />
R&D intensity<br />
2.878* 0.770 † 0.764 † 0.9<strong>12</strong> † 0.518 † 2.407**<br />
(0.028) (0.072) (0.078) (0.051) (0.068) (0.000)<br />
Advertising intensity<br />
0.350 2.442* 2.389* 2.469* 1.636* 1.240*<br />
(0.778) (0.0<strong>12</strong>) (0.0<strong>12</strong>) (0.017) (0.013) (0.049)<br />
General counsel in TMT<br />
0.090* 0.090 † 0.090 † 0.0938 † 0.180** 0.161**<br />
(0.034) (0.094) (0.079) (0.082) (0.000) (0.000)<br />
No of law firms (log)<br />
0.023 0.041 † 0.041 † 0.0389 † 0.019** 0.014*<br />
(0.1<strong>12</strong>) (0.069) (0.072) (0.076) (0.000) (0.017)<br />
Control variables<br />
Product diversification<br />
0.006 0.021 0.022 0.000 0.0301 0.103**<br />
(0.937) (0.653) (0.641) (0.990) (0.236) (0.000)<br />
Debt ratio<br />
-0.139 -0.213 -0.179 -0.229 -0.218 -0.234 -0.405* -0.605**<br />
(0.686) (0.562) (0.132) (0.165) (0.200) (0.144) (0.010) (0.000)<br />
Profitability<br />
-1.092** -1.026** -0.444* -0.346* -0.343* -0.290 † -0.057 -0.227**<br />
(0.000) (0.000) (0.037) (0.029) (0.045) (0.075) (0.486) (0.006)<br />
No of employees (log)<br />
-0.344** -0.344** 0.003 -0.009 -0.010 -0.0<strong>12</strong> -0.000 -0.024<br />
(0.000) (0.000) (0.825) (0.593) (0.553) (0.502) (0.995) (0.356)<br />
Selling, general & admin -0.118** -0.117** -0.018 -0.040** -0.040** -0.035* 0.093** -0.049**<br />
expenses (log)<br />
(0.005) (0.005) (0.204) (0.008) (0.007) (0.032) (0.000) (0.000)<br />
No of litigation cases<br />
-0.028 + -0.040* 0.065 0.046 0.047 0.053 0.000 -0.010<br />
(0.096) (0.013) (0.169) (0.141) (0.132) (0.106) (0.923) (0.175)<br />
No of litigation cases t-1<br />
-0.021 -0.009 -0.014 -0.0<strong>12</strong> -0.0<strong>12</strong> -0.059 † -0.010 -0.000<br />
(0.529) (0.765) (0.746) (0.722) (0.730) (0.084) (0.174) (0.922)<br />
No of acquisitions<br />
-0.003 -0.0<strong>12</strong> -0.030 -0.055 † -0.055 † -0.079* -0.004 -0.019+<br />
(0.911) (0.722) (0.369) (0.088) (0.089) (0.020) (0.682) (0.057)<br />
No of acquisitions -1<br />
-0.034 -0.035 -0.014 -0.029 -0.028 -0.0301 -0.018* -0.027**<br />
(0.270) (0.266) (0.683) (0.380) (0.391) (0.440) (0.036) (0.002)<br />
Bankruptcy<br />
-0.463* -0.467* -0.480 -0.389 -0.382 0.0210 -0.0228<br />
(0.049) (0.045) (0.411) (0.344) (0.356) (0.625) (0.601)<br />
Sales (log)<br />
0.141** 0.331**<br />
(0.000) (0.000)<br />
Constant<br />
5.952** 5.658** 0.325 0.674* 0.676* 0.680* 0.264<br />
(0.000) (0.000) (0.257) (0.0<strong>12</strong>) (0.013) (0.0<strong>12</strong>) (0.339)<br />
Year dummies Yes Yes Yes Yes Yes Yes Yes Yes<br />
N (number of firms) 945(285) 945(285) 945(285) 945(285) 945(285) 921(280) 945(285) 945(285)<br />
Wald x 2 (R 2 ) (0.344) (0.361) 3119.9 4885.9 5060.1 5006.39 218.64 347.7<br />
Arellano-Bond test AR(1) -3.80** -4.15** -3.97** -4.10**<br />
Arellano-Bond test AR(2) 0.31 0.23 0.23 -0.42<br />
No of instruments <strong>12</strong>6 249 249 248<br />
Hansen test 106.2 224.74 224.74 214.95<br />
p-values in parentheses, † p ≤ 10%, * p ≤ 5%, ** p ≤1%<br />
39
Figures 1A-E. Locally-weighted scatter-plot smoothed and comparative bar-chart analyses of in-house<br />
lawyer counts<br />
Figure 3. Lowess results - Internationalization<br />
Lowess smoother<br />
Figure 4. Lowess results – R&D Lowess intensity smoother<br />
loglawyers_per_sales<br />
2 4 6 8<br />
In-house lawyers<br />
0 20 40 60 80 100<br />
No_countries<br />
No of countries<br />
bandwidth = .8<br />
Figure 5. Lowess results – Advertising Lowess intensity smoother<br />
1A<br />
loglawyers_per_sales<br />
2 4 6 8<br />
In-house lawyers<br />
0 .1 .2 .3 .4 .5<br />
rndintensity<br />
R&D intensity<br />
bandwidth = .8<br />
Figure 7. Lowess results – No Lowess of law firms smoother<br />
1B<br />
!<br />
loglawyers_per_sales<br />
2 4 6 8<br />
In-house lawyers<br />
0 .05 .1 .15 .2<br />
advert_intensity<br />
Advertising intensity<br />
bandwidth = .8<br />
loglawyers_per_sales<br />
2 4 6 8 10<br />
In-house lawyers<br />
1C<br />
loglawyers_per_sales<br />
2 4 6 8<br />
In-house lawyers<br />
Figure 6. Box plot – General counsel in TMT<br />
0 10 20 30 40 50<br />
no_of_lawfirms<br />
No of law firms<br />
bandwidth = .8<br />
1E<br />
1D<br />
0 1<br />
No<br />
Yes<br />
CG in TMT<br />
40
<strong>The</strong> <strong>Shrinking</strong> Pyramid: Implications for <strong>Law</strong><br />
Practice and the Legal Profession<br />
Sustainable <strong>Law</strong> Firm<br />
Models: Beyond the<br />
Pyramid?<br />
Friday <strong>April</strong> <strong>12</strong> th , 3:45-5:30 pm<br />
Moderator: Aric Press, American <strong>Law</strong>yer Media<br />
Panelists: Paul Smith, Partner, Eversheds and Eversheds Consulting; Blane<br />
Prescott, Chief Executive Officer, Brownstein Hyatt Farber Schreck, LLP; Steven J.<br />
Harper, publisher, <strong>The</strong> Belly of the Beast; author, <strong>The</strong> <strong>Law</strong>yer Bubble: A Profession<br />
in Crisis<br />
(1)<strong>The</strong> Economic Crisis: What Happened to Associates and What Does the<br />
Future Hold for <strong>The</strong>m?<br />
Lisa Rohrer, <strong>Georgetown</strong> <strong>Law</strong>; Peter Sherer, Haskayne School of Business,<br />
University of Calgary<br />
(2)Limiting the Damage of Lateral Partner Movement: Exit Quantity,<br />
Geographic Focus, and Multiple Movers<br />
Rhett Brymer, Farmer School of Business at Miami University; Len Bierman,<br />
Mays School of Business, Texas A&M University
Variation in Large <strong>Law</strong> Firm<br />
Career Paths: Implications<br />
for Associates and <strong>Law</strong><br />
Students<br />
Lisa Rohrer and Peter Sherer<br />
This paper is available from the authors upon<br />
request. Please email cle@law.georgetown.edu<br />
should you like access to this paper.
Limiting the Damage of Lateral Partner Movement:<br />
Exit Quantity, Geographic Focus, and Multiple Movers<br />
Rhett Brymer<br />
Miami University, Farmer School of Business<br />
Len Bierman<br />
Texas A&M University, Mays School of Business<br />
Partner movement between law firms has become commonplace in the legal labor<br />
market. While historically the movement of partners was a relatively rare phenomenon compared<br />
to the movement of professional managers within other industries, law firms now must cope with<br />
the realities of an active lateral market. <strong>The</strong> human capital loss when partners exit presents<br />
several organizational issues – partner disruption of social structures and their associated<br />
routines, diminished firm expertise, and the erosion of firm-client relationships. Greater amounts<br />
of turnover are associated generally with negative firm performance outcomes, such as decreased<br />
returns on sales. What is not understood well, though, is what types of partner loss are more or<br />
less detrimental. Further, organizations may be structured in particular ways that can help<br />
mitigate possible negative effects. Thus, it is of strategic importance that law firms understand<br />
the implications of who leaves and how to structure the firm to best brace human capital loss.<br />
As such, this study seeks to answer the following research questions: What variables<br />
determine the impact of the loss of partners from law firms? Specifically, what characteristics of<br />
the remaining firm, the exiting partners, and their destinations erode the focal organization’s<br />
value generating capability? Finally, what strategies can law firms employ to ameliorate the<br />
damage from exiting partners?<br />
Using over 19,000 lateral partner events within the American <strong>Law</strong>yer 200 law firms over<br />
an eight year period (2000-2007), this study examines the effect of exiting partners on the<br />
financial performance of the firm. Consistent with turnover research in other industries, greater<br />
amounts of partners leaving is associated with decreasing return on sales (ROS) performance.<br />
For example, five partners leaving is associated with a 8.2% decrease in ROS the following year.<br />
Fifteen exiting partners is associated with a 13.2% decrease. Interestingly, these performance<br />
impacts are independent of several measures of lawyer quality, such as lawyer rating, tenure,<br />
level of education, and law school quality. <strong>The</strong> characteristic of exiting partners that does make a<br />
notable impact is whether or not the partner is a “multiple mover”, i.e., a partner who has<br />
switched firms in a previous year and thus has moved laterally at least twice in her/his career.<br />
Losing more multiple movers ameliorates the negative performance effect. If the concentration<br />
of these multiple movers is high enough in the exiting partner group for any given year, the<br />
subsequent effect on the performance of the firm can actually turn positive.<br />
Additionally, firm structural variables are tested to determine which organizational forms<br />
are more robust to high levels of partner exit. <strong>The</strong> leverage of the firm, i.e. the number of<br />
associates per partner, has a direct negative effect on ROS, but has no effect when coupled with<br />
the number of partners exiting in a particular year. However, more geographically diverse firms<br />
are subject to worse firm performance when many partners leave as compared to geographically
focused firms. <strong>The</strong> redundancy of partners in particular branches when firms are geographically<br />
focused may allow remaining partners to extract more knowledge from the exiting partners, and<br />
thus, the negative performance effects are not as high.<br />
<strong>The</strong> implications of this study point to three primary prescriptions for large, US-based<br />
firms. First, engendering firm loyalty and reducing the amount of partner turnover will, on<br />
average, produce better financial performance for firms. Second, by staying more geographically<br />
focused on particular markets, firms can mitigate many of the negative effects when partners do<br />
leave. Finally, losing partners who did not start their career at a particular firm is not as harmful<br />
as losing partners that did. <strong>The</strong> evidence even points to a potential benefit to losing partners that<br />
have switched firms before. Firms, therefore, concern themselves much more with preventing the<br />
loss of internally promoted partners as opposed to multiple move partners, i.e., those that have<br />
been hired externally.
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