Creative Destruction: Transforming the

Legal Profession into the Legal-Services

Industry

Timothy D. LaBadie, J.D., M.B.A. Candidate

Industry Analysis – Atkinson Graduate School of Management

December 7, 2011

Rob Wiltbank & Sean Campbell

The recession forced corporate America to look hard for savings, and the people who were being

paid hundreds of dollars an hour to nitpick were an obvious target. Some lawyering requires exceptional

skills and deserves high pay. But law firms were often charging stiff rates for routine work done by

trainees. Clients are right to demand better value for money. Law firms can increasingly oblige them

with the help of technology and globalization. —The Economisti

Clients say they want their lawyers to provide excellent service, at competitive and predictable

prices, in a timely and professional manner, and all of this is true. But what clients most want from their

lawyers, what they’re really purchasing, is peace of mind. When a client buys a legal product or service,

he or she is buying reliability, security and assurance — in a word, trustworthiness. –Jordan Furlongii

Roadmap: This report is intended for two main audiences. First, attorneys who want to understand how

the legal industry is changing (or, the New Normal), to understand client needs better, and to increase

their competitive advantage. Second, for a general business audience and clients who want to know how

they can get more value for their legal spend.

What the report is not about: it’s not about marginal changes (e.g., “You can use an iPad to stay in touch

and communicate with clients, use it in depositions, in court, and so forth.”). Rather, its focus is on

fundamental, structural changes facing the legal industry.

Nor is the report directed at readers or “lawyers who have incredible lack of interest in changing legal

marketplace.”iii, or those who do not believe the legal industry is changing or are generally resistant to it.

Many have good reasons for doing so. Attorneys coming into the latter part of their practice naturally are

habituated to the old model. But younger attorneys and those who find themselves in “mid-practice”

should find the report more salient.

This report will argue that legal industry is fundamentally changing because of changes in three broad

categories: (client) demand, technology, and globalization. The paper will proceed by analyzing the

trends in each of these three categories.

I. Key Findings and Trends

1. Demand (The Client)

a. Corporate clients are continuing to insist on cheaper legal services from law firms and in-

house legal departments, while simultaneously insisting on higher value. Corporate

clients are still less-than-satisfied with many of their law-firm suppliers. Hence, it is still

decidedly a buyer’s market.

b. The most popular way to achieve these dual goals (higher quality at lower cost) when

corporate clients choose to continue using law firms are through alternative-fee

agreements (AFAs).

c. There is a strong corollary trend of moving work previously done by law firms in house,

or limiting work given to a few select, preferred firms because businesses can control

costs more easily this way and many law firms have been proven slow to innovate.

d. Corporate clients are increasingly unwilling to pay first- and second-year associates

historic billing rates.

2. Globalization (Supply Side)

a. Perhaps the most important, most profound trend is the rise of legal process outsourcers

(LPOs), which are increasingly taking the bread-and-butter work away from many law

firms, such as e-discovery, document review, contract drafting, patent filings, legal

research, etc.

b. Contract or adjunct attorneys are increasingly being used by in-house legal and law firms.

3. Technology

a. Individual clients and small businesses are underserved. These markets are being

penetrated by many internet providers, such as LegalZoom and RocketLawyer.

b. The internet is also offering new ways for lawyers to market themselves through

crowdsourcing websites (i.e., sites that allow users and potential clients to receive

answers to legal questions from numerous attorneys, such as LawPivot and Quora) and,

to a lesser extent, social media (LinkedIn, Facebook, Twitter, YouTube, blogs, etc.).

c. Cloud-based and virtual practice constitutes other emerging trends, which allow attorneys

to simultaneously cut costs and communicate with clients more effectively (increase

quality). It is transforming the face of law practice, and smart firms have been using

these tools to deliver better results to clients.

II. Industry Background:

The Old Normal: The 1980s Called—It Wants Its Business Model Back

To understand the current trends in the legal industry and the structural changes taking place (the new

normal) it is necessary to sketch what the old normal looked like, especially for those who are less than

familiar with the industry.

The legal industry earned great profits and grew rapidly during the latter half of the 20th century,

going from a mere 0.4% of America’s GDP in 1978 to 1.8% in 2003, thus growing four times faster than

the economy as a whole.iv By 2000 this translated into the typical U.S. law-firm lawyer making

$191,000, compared with a mere $64,000 for all Canadian lawyers and $90,000 for Australians during the

same timeframe.v Barriers to entry (occupational licensing rules, ABA accreditation of law schools, and

rules against non-lawyers investing in, or owning, businesses that do legal work) also helped to limit the

supply of lawyers and retard competition in the legal sector.vi These barriers, when coupled with an

almost ever-present revenue growth, resulted in a gilded age, at least from the profession’s point of view.

But things were even sweeter for law-firm partners1. The old law-firm model is often described as

pyramid-like: relatively few partners at the top, with many associates (i.e., generally younger attorneys) at

the bottom. Partly because law schools have not emphasized practical training, associates had to learn on

the job—and thus on the client’s dime.vii

Strikingly, it typically takes an associate 10,000 hours on the

job before he or she rises to mere competency or proficiency. So partners would have associates do the

more menial legal work (reviewing documents, drafting routine contracts, due diligence, etc.), and would

1 I.e., attorneys that own equity in the firm. Under U.S. rules, nonlawyers are not allowed to own or manage a law

firm, which includes companies that offer legal services and advice.

bill the client anywhere from $100-300 per hour for the associate’s work, while paying the associate a

small fraction of that rate. How could a firm not make profits? The essence of the model was summed up

aptly by a law professor, John Heinz:

A senior partner in a large Chicago firm told me that, until a few months ago, hiring more

associates and more paralegals was, “like printing money.” A larger number of subordinates per

partner provides “leverage” for the partner’s assets. The firms bill the clients considerably more

than the firms pay for the time of these employees.viii

Business clients were the first to get savvy, albeit probably belatedly. ix

No wonder by 2010, and

after they themselves were being squeezed by the recession, almost half of law firms reported that

corporate clients refused to pay them for work done by their first- or second-year associates!x Large

business and corporate clients were only half of the legal “hemisphere”, though.xi The other half consists

of individual and small-business clients, many of whom cannot afford to hire a private attorney,

especially because of stagnating real wages.xii

In fact, two legal-industry economists have recently

concluded, after controlling for a range of factors that would explain higher wages for U.S. lawyers, that

out of the $170b spent on American lawyers annually, about $64 billion is an “unearned premium”

produced by market distortions, with another $10 billion in annual “deadweight loss”—lost or wasted

economic activity.xiii

Hence, it is no wonder that the legal industry has been rife for change, innovation,

and competition from new entrants in both hemispheres of the legal profession: for both arguably over-

served large business and corporate clients, as well as under-served individuals and small businesses.

The Recession as a Tipping Point for the Industry

The change seems well underway. Since the 2008 recession, many law firms have seen revenues and

profits falling significantly.xiv

Thus the recession has been described as a tipping point, where hitherto

“fake pressure became real pressure” with respect to clients’ demand for change in how law firms operate

and serve them.xv

Further, most industry observers attribute the falling profits to creative destruction

forces, and which are the focal points of this report, namely: (1) changing client tastes and preferences,

or buyer power; (2) globalization (largely in the form of outsourcing), and (3) technological

change.xvi

No, It’s the Economy, Stupid

As mentioned above, many lawyers are reluctant to the changing legal landscape, holding out hope

that the economic rebound will restore the profession to business as usual. Given the lucrative last few

decades, it is not difficult to understand why some attorneys take this position.

But this is probably wishful thinking. Though the vast majority of industry experts disagree with this

rosy prognosis, there are good empirical reasons for thinking the changes are fundamental, and not merely

cyclical. First, in-house attorneys—as opposed to law firm attorneys—are seeing salary increases;

companies are lifting salary freezes, and cash bonus levels are approaching pre-recession levels, yet many

law firms (i.e., external legal suppliers) are not seeing a rebound in work.xvii

Second, clients were

displeased with the majority of legal services offered by law firms even at the height of the economic

boom. In 2006, about 70% of large business clients reported that they were unhappy with their primary

law firm, and 50% reported they planned to switch firms for substantive matters in the future.xviii

Thus,

the “recession as tipping point for structural change” in the industry seems a much stronger hypothesis

than that that legal business will return to business as usual once the economy picks up again (See also

Appendix A: Porter’s Five Forces analysis).

III. The New Normal: Changes in (Client) Demand: A Client’s Market

Summary of Trends in Demand: Cost-cutting, Alternate-fee arrangements (ADAs), Refusal to pay

(train) young associates, A move to In-House, and Greater Value Demanded from Firms.

Imagine you as a law-firm owner-partner hire a new associate. She has graduated from the top 10%

of her class, was a law review member, and was a decorated moot court member. In short, she has

sterling credentials. In the first few months, she works on various matters and performs well, even on the

less-glamorous, but necessary, menial tasks such as reviewing discovery2 documents. You pay her

competitively ($60 hour). And she performs well on these matters. You then learn that much of the

document review she has actually outsourced to a smart worker (but nonlawyer) with a mere bachelor’s

degree, whom she has paid $15/hour. She has effectively made a 300% profit margin. This is pretty

much sums up the old law-firm business model. She has merely followed the old law-firm model—she

has “leveraged”.

WTF!? This is the position in which corporate clients found themselves vis-à-vis law firms.

Needless to say, they are no longer willing to pay for this.

Corporate Law Departments under Huge Pressure to Cut Legal Costs—Trickling Down to External Law

Firms

Since business clients have become more sophisticated and knowledgeable about lawyering, they are

demanding that firms cut costs, yet insisting on higher value. Why is there so much pressure to cut legal

spend? First, as companies have faced increasing competition, and thus pressure to cut costs themselves,

this has trickled down to corporate legal departments and law firms. xix

Second, as mentioned above,

corporations were already displeased with most of their legal suppliers before the downturn. The Great

Recession merely put law firms on the front firing line. Third, business people almost universally view

lawyers as a mere expenses, rather than as revenue generators, so paying high fees for most legal matters

does not make sense from a ROI point of view. Fourth, law firms are frankly quite pricey; from 1998 and

2009, large law firms’ hourly rates increased by more than 65%.xx

Consequently, most chief legal counsel consider legal-spend cost control as the number-one priority

in the next year according to Altman Weil, a leading legal consulting firm.xxi

Further, corporate counsel

considered the most important metrics for evaluating the effectiveness and efficiency of outside counsel

as (1) “legal fees spent on outside counsel” (79%) and (2) “total legal spend as percentage of annual

revenues” (70%).xxii

The metric of predictability in legal billing is a close second to cost-consciousness

for business clients; two-thirds of corporate legal departments analyze past billing to predict and manage

future costs, and 90% discuss specifics of new project budgets with outside counsel according to a 2011

survey.xxiii

2 I.e., gathering and exchanging evidence, often documents, between litigants prior to trial.

These factors have understandably led to probably the biggest trends in client demand—alternative-

fee agreements (AFAs) and keeping legal work in-house, thus lowering demand for external law firms.

AFAs

AFAs are particularly popular for mid-level legal work, or where good enough is good enough. In

contrast, businesses are more willing to use the billable hour for important, high-profile, or bet-the-

company matters. They are also more willing to use a billable-hour basis with niche firms with rare,

specialized expertise.xxiv

Companies have increased their use of AFAs from 77% to 84% since 2009;

though the amount of AFAs remains relatively low at 11% to 14%.xxv

Interestingly, online bidding and

reverse auctions (in which buyers-clients post a job, and sellers-firms would bid) are only used by about

4% of corporations, which could provide substantial cost savings to corporate clients.xxvi

So it is unclear

why this approach has not been more popular. Although the immediate goal is to reduce costs,

corporations seem to have a broader, long-term goal of incentivizing law firms to improve their

efficiency.xxvii

Further, in 2010 almost half of law firms reported that corporate clients have refused to pay for work

done by first- or second-year associates.xxviii

As a result, some firms have changed their training

programs, and not allowing associates to bill at all. This is useful both as a marketing tool (“We won’t

ask you to pay for on-the-job training for our employees”), but also useful to help associates focus on

getting up to speed as soon as possible, rather than being distracted on mere billings.xxix

Call it a “first

things first” kind of approach.

The Trend to Keep Corporate Legal Work In-House: Damn it, We’ll Do it Ourselves

Some companies are cutting out some or all of their outside counsel and law firms, opting to

capture efficiency gains through in-house counsel instead. The savings can be striking. One survey

reported that the total cost of in-house lawyers were 46% cheaper on average than the top law firms used;

even though 80% reported that their company’s legal needs are increasing.xxx

And 60% of businesses

surveyed reported that they decreased outside spending on law firms. In the last three years, only about

13% of legal departments said they planned to increase spending on outside counsel.xxxi

These are dismal

numbers for law-firm attorneys. The upshot is that, legal work is picking up again, but not much of it is

returning to law firms. The economy is recovering, but traditional law firms are not.

How responsive have most firms been in responding to the new normal in client demand?

Generally, corporate clients are still not pleased. While virtually all corporations are putting heavy

pressure on law firms to cut costs, they exert at best only moderate pressure for firms to change the way

they deliver their services, though the trend is getting stronger.xxxii

Relatedly, most corporations believe

that law firms are not serious about changing their service-delivery model to provide greater value to

clients. 3 And only 45% of general counsel surveyed mostly or wholly agreed that their external lawyers

were recognized as “essential partners” in delivering financial value; the term “necessary evil” cropped up

in several interviews. In sum, many, perhaps most, law firms are viewed as an “unwelcome, albeit

necessary, cost” by corporate clients and counsel.xxxiii

3 I.e., scoring a median of 3 on a scale of 1 to 10 for 2009, 2010, and 2011. 0 = not at all serious. 10 = doing

everything they can. The mean however is slowly ticking upwards the last three years, 3.4, 3.7, and 4.7 respectively.

Id.

What do corporate clients chiefly value? In answering this question, a good starting point is the

Association of Corporate Counsel’s (ACC’s) major initiative, the ACC Value Challenge”, which offers

guidelines, metrics, and best practices for law firms to cut costs while increasing value added.4 A

minority of firms are emulating the ACC guidelines (See e.g., Appendix C for list of firms and case

studies that are, including the firm Clearspire). Further, there is ample room for innovative marketing

approaches. For example, only 35% of in-house counsel formally evaluates outside counsel’s

performance on a regular basis, and only 17% report those results to counsel.xxxiv

So firms that create a

convenient and meaningful evaluation process with their corporate clients will stand out, and this will also

help to build long-term relationships, which over time, competing firms will find hard to imitate.

Strikingly, corporate counsel rated “spending time to understand our business” as the single most

important marketing strategy for law firms looking to secure their business.xxxv

All in all, what clients currently emphasize and value, or the new normal, is summarized in

Appendix B: Changes in the Legal Industry's Value Canvas.

IV. The New Normal: Globalization and Global Competition - Outsourcing Menial Legal

Work by both legal departments and law firms, Offshoring, and Contract attorneys

First Thing We Do, Let’s Cut Out the Lawyers

Perhaps the biggest and most transformative trend facing the legal industry is outsourcing legal

services to non-law firms, or legal service providers (LPOs). Although outsourcing legal services is still

relatively small at $1b a year (out of $180b spent each year annually on attorneys), it is growing at 20-

30% a year (or $200-300m per year).xxxvi

Impressive growth, to say the least. Businesses are pressuring

law firms to outsource more and more menial work that their associates used to bill out at hundred-dollar

rates—such as e-discovery, document review, due diligence, and legal research.xxxvii

This has largely

been led by in-house counsel: 13% of corporate legal departments themselves have taken the initiative,

outsourced e-discovery, document review, due diligence and legal research work that they said they

would have given to law firms in the past.xxxviii

Additionally, some corporate legal departments are

“offshoring” legal work abroad, to India for example. In 2011, about 10% of corporate legal departments

offshored legal work, and about 90% expected this to increase or to stay the same next year.xxxix

More efficient work by outsourcers has not only saved a lot of cash for business clients, but on

litigation matters as well. Litigation costs have rose markedly during the last decade. In large part, this is

due to the monumental inefficiency of discovery. On average, and depressingly, it takes about 1,000

pages of produced documents in discovery to yield one page worthy of being used at trial. In 2008, the

average number of pages produced in discovery was almost 5 million, while only about 4,800 pages were

marked for use at trial. xl

This corresponds to a miniscule utility or “hit” rate of .1% for produced

documents.xli

These dismal numbers are crying out for six sigma, and some larger firms are already

implementing the discipline long used by businesses.xlii

For example, general counsel for Cisco, Mark

Chandler, reported in 2007 that there was no quality difference between using “armies of associates” to

conduct document review and a more automated, data-mining driven system used by outsourcing

vendors—but that there is a huge cost difference.xliii

4 See: http://www.acc.com/ValueChallenge/resources/avcresources.cfm?rs_aud=420.

Cheaper Law Firm Substitutes: Leading Legal Process Outsourcers – Pangea3 and Novus Law

Pangea3, the world’s biggest LPO, was acquired by Thomson Reuters, the largest legal-systems

and information company in 2010.xliv

Although based in Mumbai, India with 650 employees, the

company has recently opened a Dallas, Texas office to better serve the U.S. market for legal matters that

require a U.S. presence.xlv

It applies six-sigma principles to a wide array of legal services, including those

that hitherto were the bread-and-butter work of law firms and younger associates, including:

Corporate work (contract drafting, M&A due diligence, etc.),

Litigation (review, organize, and catalogue documents pertinent to litigation, expert and

lay witness background reports, etc.),

Intellectual-property work (draft patent applications, patent research, etc.),

General legal research.xlvi

Pangea3 garners world-class clients. American Express, GE, Sony, Yahoo! and Netflix have

already started using Pangea3 for basic legal work.xlvii

Law firms are catching on, too. Currently, 25% of

Pangea3’s business comes from law firms.xlviii

Another leading outsourcer, Novus Law, which

specializes in document review for complex litigation and due diligence, has seen its revenues double

yearly.xlix

Novus’s approach uses cheap offshore labor and operational efficiencies to snatch up

businesses that also used to hire law firms at a much higher price. l Further, some corporations are

creating their own in-house LPO infrastructure. GE, for example, has their in-house lawyers supervise

other legal staff and attorneys in India, thus cutting costs dramatically.li

Another complementary trend is that both law firms and corporate legal are increasingly using

contract or adjunct attorneys, thus further managing costs.lii This trend doesn’t seem to be going

anywhere any time soon either. In 2010, 55% of law firms reported that their firm had used contract

lawyers, up from 44% in 2009.liii

This allows firms to cut down their fixed costs, and gives them more

flexibility to hire specific expertise needed for certain projects, thus cutting their fixed costs.

For Lawyers: The Silver Lining of Outsourcing

Much of the work done by LPOs is, as admitted by most attorneys, miserable drudgery. The

blessing of LPOs is that it can allow attorneys to hone more prized skills, and for them to follow the

marketing maxim, “Do what you do best, and outsource all the rest.” It simply does not make economic

sense for lawyers to consistently do work that does not require a law degree, no more than it makes sense

for a lawyer to type up his or her own dictation. That said, the LPO substitute will divert a hitherto huge

revenue channel for many firms.

Smaller firms, however, may be the biggest beneficiaries of LPOs. First, it allows smaller outfits

and boutique firms to better compete with “big law”, who, as a tactical ploy, would inundate and

overwhelm the little guy with a flood of documents. Utilizing a supplier like Pangea3 could obviate that

small-firm disadvantage, and level the playing field. Second, LPOs can transform fixed costs into

variable ones. Firms need not take the risk of paying staff round the year, reducing profit, and

necessitating layoffs when times get tough. If combined with virtual office space (see next section,

below), it could result in a truly lean or low fixed-cost business—the holy grail of most business models.

Indeed, the bare bones of lawyering is essentially a very low-cost service—as opposed to manufacturing,

which requires large investments in land, equipment, machinery, and inventory. Smart firms are taking

advantage of this (see e.g., Clearspire and Axiom Law, in Appendix C: New Law-Firm Model Case

Studies and Firms).

V. The New Normal in Technology – “Get my Computer on the Phone.”

Technology is transforming professional-services work in general, allowing mere laymen or

amateurs to do what professionals did before. liv

Think: TurboTax meets the legal world. Now, it is

possible for technology to do the work that, in the past, only lawyers or paralegals could do. For a large

section of underserved middle- and lower-class consumers this is welcome, and long overdue. For at least

the past two decades, there has been a trend in self-representation (or pro-se work), as many people

cannot afford to hire an attorney.lv

Technology is simultaneously offering major opportunities and threats, especially to smaller-

firms. Probably the most drastic, disruptive change in technology will be caused by internet-based

substitutes for law firms.

Technology that Competes Directly with Law Firms – The Online Disruptors

LegalZoom.com. The site allows online, cheap legal services, such as routine business

formation/incorporation, patent applications, and simple wills. A consumer can pay $75-100 for

a simple will, as opposed to paying a traditional attorney $500-$1,000, for example. Since its

formation about 10 years ago, Legalzoom.com has served over 2m clients. It is earning over

$100m in revenue annually, and is profitable.”lvi

Several prominent venture-capital firms just

infused $66m into the company, and it looks to be preparing for an IPO.lvii

It thus seems that

LegalZoom will grow as a potent displacing force.

RocketLawyer.com is a fast follower of LegalZoom. It allows online “clients” to fill out, store,

and share legal forms on the web. It has 70k users a day, and has doubled its revenue for four

years straight, earning over $10 million in 2011. As with LegalZoom, Rocket Lawyer provides

online legal forms, from wills to business incorporation documents, which regular folks can fill

out and store and share on the Web. For $20 a month, consumers can also have their documents

reviewed by a real lawyer and receive legal advice at no additional cost.”lviii

Google Ventures

invested $18.5m in the startup 2011.lix

CyberSettle.com and LawEscrow.com (settle your legal case online services). These sites offer

confidential and round-the-clock dispute resolutions settlement services online. If a case does not

settle, they then provide online facilitators to move disputes toward settlement. Cybersettle

boasts it has handled over 200k transactions in the past 10 years, totaling about $1.6b in

settlements in bodily injury and other insurance claims.lx Its users also include insurance

professionals and attorneys, especially for smaller cases.

These are serious threats to firms, especially smaller ones. How can attorneys counteract this

threat? Essentially what these websites offer are unbundled legal services, or “an agreement with a client

to provide only a portion of the services, such as a consultation or document preparation, as an alternative

to full representation.” Law firms need to better market themselves as offering unbundled, and hence

more affordable legal services—most people are unaware that law firms can offer unbundled legal

services. Although 70% of persons are completely unaware of unbundled services, about 66% said they

would be very likely or somewhat likely to use them.lxi

The unbundled option was, unsurprisingly,

especially attractive for households making less than $50k per year.lxii

Yet about half of solo practitioners

and small firms (with two to nine lawyers) reported offering unbundled legal services, and only 25% of

lawyers in a California study reported that they did not offer any unbundled services.lxiii

Thus lawyers

could do much better in making middle- and lower-class segments aware of this option.lxiv

Online Technology that Augments Law Firm Practice

Other web-based technology is also complementing and augmenting law practice, allowing

attorneys to reach more potential clients and market themselves more effectively.

Take LawPivot.com and Schpoonkle.com, which are crowdsourcing sites where lawyers respond

to legal questions, thus drumming up potential business. LawPivot, for example, focuses on mostly on

startups.lxv

Users can ask questions publicly or privately. They can then post jobs such as contract

review, business incorporation advice. Clients can then mark whether the advice was helpful or not.

Moreover, it links directly to the lawyer if the user wishes to hire the attorney.

The websites offer a good deal of information, allowing users to test-drive potential attorneys.

Take a typical example:

User: “I am a daycare director and want to know if I can copyright a handbook that I have put together?”

Attorney: “Yes you can mark it as copyright, with the "c" in the circle. However if you did it as part of

your job, it is probably ‘work-for hire’ and as such it may belong to your employer.”

The site also conveniently cross-links to Facebook, LinkedIn, Twitter, Google +, and other social

media, allowing clients and attorneys to further research and communicate with one another. Lastly, it

assists clients to link up with lawyers within a fixed price range or budget.

Social Media and Marketing – Probably Won’t Get You to a Retainer Agreement, but Clients Want to See

It

Social media (Facebook, LinkedIn, blogging, YouTube, Twitter, etc.) has garnered a lot of

attention in the legal press. Empirically, its effectiveness as a marketing tool for bringing in clients seems

slight, however. Only about 10-12% of attorneys reported actually retaining a client using various social

media.lxvi

As with most any business, personal referrals still matter the most, and are far-and-away the

most potent way of marketing and getting clients in the door. About 80% of people looking for an

attorney for a personal matter said they would rely on either the advice of a personal acquaintance (46%)

or an attorney they have already known or used before (34%).lxvii

Only 7% would search online and 8%

would look in the yellow pages or other printed directory.lxviii

This is a big change from the late 1980s

and early 90s, when yellow pages or print directories were used anywhere from 13-34% of prospective

clients,lxix

though those with incomes below $15,000 were most likely to still use the yellow pages.lxx

The primacy of personal referrals holds true for corporate and large business clients as well. The

three strategies that received the corporate legal’s top rating were (1) personal contacts, (2) free training

programs and (23) written material demonstrating legal expertise. However, even the highest-ranking

activity rated only 6.7 on a 0 to 10 scale (0= no effect and 10 = extremely positive effect), while a number

of other standard marketing efforts scored very poorly.”lxxi

Technology for Law Practice – Cloud Computing

How much does the typical small or medium-sized firm spend on technology? About 55% of

firms spend 2-4% of revenue per year on technology, which is still down considerably since the

recession.lxxii

Just under half reported spending $8k-17k per attorney.lxxiii

Increasingly, tech funds are

being spent on a growing and important trend—cloud computinglxxiv

(e.g., Dropbox, Salesforce.com).

Thirty-three percent of firms indicated they are implementing a cloud strategy, up from 17% in 2010 and

9% in 2009.lxxv

So this is a rapidly growing trend. Firms are attracted to cloud computing because of

browser access from anywhere (as 70% reported), round-the-clock availability (55%), and the low costs

and predictability of monthly cloud-based expenses (49%).lxxvi

Cloud computing in conjunction with virtual-office technology offers a range of benefits, even

accounting for security concerns. First, the cloud facilitates more of a paperless office, and large gains in

efficiency. Consider the waste each year when attorneys and staff moving to grab physical copies of files,

or as often happens, cannot locate the file and has to go on a search expedition to find a file or document.

Second, the cloud allows for easy backup when hardware goes on the fritz, and can provide duplicate

copies, thus cutting down on malpractice risk if documents are lost or destroyed. Third, it cuts down on

paper and office-supply costs. This seems to be an incipient, but strong trend: about 15% of attorneys

now operate a virtual-type law office, based on cloud technology.lxxvii

There is a plethora of practice technologies available. The reader is directed to Appendix D:

Further Law-Practice Technology Resources. Given the glut of emerging technologies, perhaps the best

way to describe how technology is changing the practice of law is by way of illustration.

A Day in the Life of the Tech-leveraging Lawyer

After seeing his kids off to school, an attorney, Jim, sits in his home office, receiving emails from

his paralegal, who, as he does, often works from home. They are finalizing the drafting of an important

complaint. The client retained Jim just yesterday, and it turns out the statute of limitations will run by the

end of the week, so the he wants to get it filed today. Although the paralegal did not see the request from

Jim to draft the complaint until early this morning, she finished the initial draft within half an hour, a

fraction of the time it used to take, by using a document-automation software, HotDocs.

Jim posts the revision to a Google Docs-like program because he wants his associate to take a

look at a provision of the complaint (the associate recently did some research on a nuanced area of law

implicated in the complaint). They collaborate inside of the “virtual” office made possible by cloud

technology. The team discusses it, makes corrections, and finalizes it for filing. As with most matters,

the client instantly receives an online copy of the final pleading, an plain-language explanation of what it

means in their terms, and a bill. No postage is incurred unless the client insists on a hard copy of the

document, as indicated in a client-intake questionnaire.

After fairly typical rest of the morning working at home (talking to clients on the phone or via

video conferencing, emailing, and drafting letters), Jim meets with a potential new client at rented space

or shared space, offering the high-end type of accommodations without the fixed cost of doing so. Jim

talks to the prospective client in nonlegal terms whenever possible, emphasizing the problem and the

client’s options in plain language. A law clerk and second-year associate tag along to the meeting to

observe and to learn more about how real-world law practice is done—something they lacked in their

law=-chool educations. The client is not billed for their presence; the point is to train and apprentice

them. The young attorneys value this pragmatic approach and the opportunities for mentorship. As a

result, the firm has a good retention record, low turnover, and has little trouble attracting new talent.

As Jim returns home, he receives client feedback on work she has done on a recent business

matter. He then spends the afternoon finalizing client bills, some of which are AFAs, and some are

billable-hour basis, depending on the client’s needs and the type of legal matter involved.

While working on another case, he remembers a colleague of his who worked on a similar project

or issue several years ago. He searches his cloud database, organized by practice area and cross-tagged

with legal issues, and finds it within seconds. He reads the memo, and finds it somewhat useful overall,

but the real utility is that it only took him a few minutes to locate it. Things would be different if he had

to take more than say 10-15 minutes to look for it, or had to wait hours or days for a call back from his

colleague, who likely would not remember much of the specifics anyhow.

Jim drives home, and is reminded by his iPhone that he needs to dictate a one-page letter to

opposing counsel. He does so in the car via Dragon Dictate (DD), which he can (1) either send to his

assistant to type or (2) the DD application will transcribe the audio for him, which he can then read or

send.

Upon arriving home, Jim meets with his a consultant regarding the production of a software

program that will allow the firm to determine whether potential clients are eligible for expungements of

their criminal record. The statutes determining the conditions under which certain crimes are eligible are

tangled and complex, often taking an associate or paralegal an hour or so to determine. He has seen

similar software used for complex statutory schemes with export controls and certain statute-of-limitation

statutes. Cutting down 30-45 minutes of research to a matter of minutes or seconds would allow a high-

volume but lower-margin stream of revenue, allowing the firm to undercut the $500-1,000 charged by

competing firms. Big business opportunity. Further, if the software works, this could open the door to

more lucrative rates should the client wish Jim to represent them at a hearing in court. Of course, clients

are made aware that they can bundle in-court advocacy or proceed after the necessary filings and

determination by themselves if they wish.

VI. The New, New Normal? Things for Law Firms to Pay Attention to and Keep on the

Radar Screen going Forward

This report has described the structural, fundamental changes taking place in the legal industry.

Put differently, it has described the forces of creative destruction in the form of changing demand, forces

of globalization (esp., outsourcing and offshoring), and technological change. Yet there is another classic

creative destruction dynamic to consider: deregulation.

The U.S. has not seen much deregulation, nor any major changes to legal ethics rules and other

laws that define the boundaries and nature of the legal industry. But other countries, notably the U.K.,

have. Deregulation would further disrupt the legal market. Therefore, lawyers and business people alike

should keep abreast of any developments. But the most important thing to keep an eye on the short and

medium term is any change in the existing rules of law-firm ownership.

Wal-Mart Legal???

Presently U.S. law firms must be “fiscally and managerially separate” from firms that have non-

lawyer investors.”lxxviii

“Law firm” is broadly defined as any business that offers services or legal advice.

This rule has long been questioned. But just this year, the U.K.’s Legal Services Act took effect, allowing

nonlawyers to invest in and share in management responsibilities of law firm companies. This is a major

development, as the U.K. is the second biggest legal market behind the U.S. American attorneys should

pay attention to several aspects of this development in the U.K.:

First, British firms will have a comparative advantage over U.S. firms, as they can raise large

amounts of cash from capital markets and public investors. This will allow them to capture other

comparative advantages, such as: to more easily expand into foreign markets, the ability to hire

consultants and experts, to develop and implement new technology quicker, to be able to absorb greater

risk, etc., etc.lxxix

It is likely that this will trigger a “race to the bottom” dynamic, in which the U.S. will

be forced to follow suit in order to compete globally.lxxx

The question seems to be when rather than if this

will happen.

Second, as a consequence of this liberalization, the U.K. has been termed the world’s legal

laboratory. Though it is still early, analysts have predicted that various innovations in legal service

delivery are underway in Britain, including being able to access routine legal services via kiosks; one-

stop-shopping professional firms whereby clients can have their accounting, legal, and financial needs

taken care of; and legal clinics in shopping centers, akin to Wal-Mart’s proposal to offer medical clinics

in its stores. Hence, American lawyers should pay attention to how legal services are being offered in the

U.K. to anticipate further changes in the future, and how it might impact practice in the U.S.

Appendix A: Porter’s Five Forces – Legal Industry

Appendix B: Changes in the Legal Industry’s Value Canvas

Appendix C: New-Law Firm Model Case Studies and Firms

1. Axiom Law, D.C.lxxxi

2. Clearspire – To comply with ethical rules on law firm ownership, Clearspire has a dual structure.

One entity has salaried, employee lawyers, and the other focuses on rainmaking and business

support for the attorneys. Clearspire also institutes fixed fees that reward attorneys if the project

is completed faster or cheaper than promised, the lawyer receives a third of the savings. Clients

report that the firm charges a fraction of what traditional firms have charged for just-as-good

work.lxxxii

3. Law Pivot

4. Novus Law

5. Paragon in San Francisco

6. FSB Legal in Atlanta,

7. Outside GC in Boston and

8. Philips & Reiter in Houston

9. Morgan, Lewis & Bockius

10. Slater & Gordon (Australian law firm) who launched an IPO in 2007.

11. The Blackstone Group (publicly traded while still retaining partnership status).

12. Delegatus Inc.: Reinventing Legal Services

13. Fenwick & West LLP: FLEX by Fenwick

14. Aliunde LLC: Expedited RFPs for Legal Matters

15. Waller Lansden Dortch & Davis, LLP: Schola2Juris – Reinventing Student Recruiting

16. Stokes & Stokes, Ltd., aka http://www.halfpricelawyers.com.lxxxiii

Appendix D: Further Law-Practice Technology Resources

ABA Legal Technology Survey, which costs $1,550 to $1,800 for members and non-members5

for the six-volume set covering:

* Vol. 1: Technology Basics

* Vol. 2: Law Office Technology

* Vol. 3: Litigation and Courtroom Technology

* Vol. 4: Web and Communication Technology

* Vol. 5: Online Research

* Vol. 6: Mobile Lawyers

ABA’s Law Practice Magazine > 2011 SEPTEMBER / OCTOBER 2011 | VIRTUAL

PRACTICE ISSUE.

(http://www.americanbar.org/publications/law_practice_magazine/2011/september_october.html)

. Stephanie L. Kimbro, Virtual Law Practice: How to Deliver Legal Services Online.

5 The volumes can also be purchased for $350 singly (http://apps.americanbar.org/abastore/index.cfm?fm=Product.AddToCart&pid=2680106PDF).

Appendix E: Sources, References, and Endnotes

i “The price of legal services: How to curb your legal bills.” May 5, 2011. (http://www.economist.com/node/18651204). ii Slaw Magazine. Your Client is Not Your Enemy. Dec. 21, 2010. (http://www.slaw.ca/2010/12/21/your-client-is-not-your-enemy/). iii ABA Journal: Lawyers Have Incredible Lack of Interest in Changing Legal Marketplace . http://www.abajournal.com/news/article/incredible_lack_of_interest_in_the_changing_legal_marketplace/ iv Law firms: A less gilded future | The Economist (http://www.economist.com/node/18651114). v Barriers to Entry in the Legal Profession: Not enough lawyers? Economist, Sept.3, 2011. (http://www.economist.com/node/21528280). vi (http://www.economist.com/node/21528280). vii

“What They Don’t Teach Law Students: Lawyering”. New York Times. David Segal. Nov. 19, 2011. (http://www.nytimes.com/2011/11/20/business/after-law-school-associates-learn-to-be-lawyers.html?_r=3&sq=law%20school&st=cse&adxnnl=1&scp=2&adxnnlx=1323234875-wBNqF6kxumkQivjI1himlg). viii “When Law Firms Fail.” John P. Heinz. Suffolk University Law Review. 2010. P. 71. ix Law firms: A less gilded future | The Economist (http://www.economist.com/node/18651114). x Law Firm Leaders Survey (Lexis), infra. xi (Heinz, p. 78). xii http://www.brookings.edu/opinions/2011/0729_deregulate_lawyers_winston_crandall.aspx). xiii Barriers to entry in the legal profession: Not enough lawyers? The Economist. Sept. 3, 2011. (http://www.economist.com/node/21528280). xiv (http://www.abajournal.com/magazine/article/paradigm_shift/ xv Alternative law firms: Bargain briefs | The Economist. Aug. 13 2011. (http://www.economist.com/node/21525907). xvi Ibid. xvii HBR Consulting on Lawyer Compensation, 2011, “In-House Counsel Pay is Improving” Press Release. (http://hbrconsulting.com/downloads/HLDS_2011_Press_Release%20_Compensation_110811.pdf) xviii

Legalmarketingblog.com, citing BTI Consulting survey. March 5, 2006 (http://www.legalmarketingblog.com/marketing-tips-325-bti-survey-693-of-large-clients-unhappy-with-primary-law-firm.html). xix The New Normal. What Aspects of Legal Services Are Most Likely to Get Standardized? Posted Aug 1, 2011. By Paul Lippe. (http://www.abajournal.com/legalrebels/article/what_aspects_of_legal_services_are_most_likely_to_get_standardized/) xx Offshoring your lawyer: Outsourcing can cut your legal bills. Dec 16th 2010 | NEW YORK | from the print edition (http://www.economist.com/node/17733545). xxi Altman Weil, infra. P. ii. xxii Id., at p. 17. Other primary metrics reported were Number of lawyers per $B of revenue (47%), Ratio of fully loaded inside budget to outside counsel spend (35%), ratio of paralegals to lawyers (15%), and ratio of support staff to lawyers (11%). Note the last two measure a degree of leverage, though associates to lawyers is lacking. Law firms should likewise track these metrics as an operating measure and marketing data. See page 18 of the report for “quality and satisfaction”, financial, and other metrics that a firm might use (http://www.altmanweil.com/CLO2011/). xxiii Altman. P. 10. xxiv HBR Consulting Law Department Survey, 2011, Press Release on Outside versus Inside Legal Spend Survey, 2011. P. 1. (http://www.hbrconsulting.com/downloads/HLDS_2011_Press_%20Release_111007.pdf) Infra, supra. Note: this consulting firm has conducted surveys for the past 25 years. THe full survey is available at

(http://hbrconsulting.com/lawdepartmentsurvey.html) at $3,500 to $4,500, depending on membership/participation status. xxv Altman Weil, p. 14. The amount of non-billable hours refers to the mean. Median rates for 2009, 2010, and 2011 are 7%, 10%, and 10%, respectively. xxvi Id., p. 15. xxvii Top Ten Tips for Leveraging Cutting-Edge Legal Research Technology to Control Legal Costs and Drive Client Value. ACC Website. May 5, 2011. Thomson Reuters. No. 6. (http://www.acc.com/legalresources/publications/topten/Technology-for-Controling-Costs.cfm). xxviii Law Firm Leaders Survey (Lexis), infra. xxix “What They Don’t Teach Law Students: Lawyering”. New York Times. David Segal. Nov. 19, 2011. (http://www.nytimes.com/2011/11/20/business/after-law-school-associates-learn-to-be-lawyers.html?_r=3&sq=law%20school&st=cse&adxnnl=1&scp=2&adxnnlx=1323234875-wBNqF6kxumkQivjI1himlg). xxx Corporate Legal Department Spend Increases 6% as Clients Boost In-House Capabilities Posted Oct 11, 2011. (http://www.abajournal.com/news/article/corporate_legal_spend_increases_6_as_clients_boost_in-house_capabilities/). Specifically, the survey found: “219 survey participants, of which 70 percent have revenues at or above the Fortune 500 level, the median fully-loaded inside hourly cost per lawyer is approximately 46% below the median average hourly rate of the company’s top three billing firms.” xxxi Altman Weil, p. 9. Comparing CLO surveys from 2009, 2010, and 2011. xxxii Altman, at 12. The average (mean) pressure for law firms to change their underlying value proposition for legal-services delivery from corporations in 2009, 2010, and 2011 were 5.5., 5.3, and 6.4 respectively. xxxiii “General Counsel: Vague About Value” Report. Nabarro. p. 17. (http://www.nabarro.com/downloads/gc_report_2011-2.pdf) xxxiv Altman Weil CLO Survey, supra. P. ii. xxxv Altman Weil CLO Survey, p. 17. xxxvi Offshoring your lawyer: Outsourcing can cut your legal bills. Dec 16th 2010 | NEW YORK | from the print edition (http://www.economist.com/node/17733545). xxxvii Altman weil, p. 8. Supra/infra. xxxviii Id., p. ii. xxxix 2011 Chief Legal Officer Survey. Altman Weil, p. i. (http://www.altmanweil.com/CLO2011/). xl A Toolkit For Change: How The Federal Civil Rules Advisory Committee Can Fix A Civil Justice System “In Serious

Need Of Repair” Topic: Civil Justice Reform. By Daniel E. Troy, Senior Vice President and General Counsel at GlaxoSmithKline, and John O’Tuel, senior counsel at GlaxoSmithKline. Legal Backgrounder, May 21, 2010, 4 pages. Washingtion Legal Foundation.org. http://www.wlf.org/publishing/publication_detail.asp?id=2167. xli Ibid. xlii Maura R. Grossman & Gordon V. Cormack. Technology-Assisted Review in E-Discovery Can Be More Effective and More Efficient Than Exhaustive Manual Review. XVII RICH. J.L. & TECH. 11 (2011). http://jolt.richmond.edu/v17i3/article11.pdf. See Also: Six Sigma Solutions. Seyfarth Shaw, LLP. (http://www.pwc.com/en_US/us/general-counsel-forum/assets/gcf-chicago-082008.pdf). xliii “Using Technology to Cut Legal Costs”. The National Law Journal. April 19, 2007. (http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1176887059469). xliv (http://www.pangea3.com/thomson-reuters-acquires-pangea3.html). xlv (http://www.pangea3.com/pangea3-opens-major-us-location.html). xlvi See http://www.pangea3.com/legal-outsourcing-services.html). xlvii Offshoring your lawyer: Outsourcing can cut your legal bills. The Economist. Dec 16th 2010. (http://www.economist.com/node/17733545). xlviii Ibid. xlix Ibid. l http://www.abajournal.com/magazine/article/paradigm_shift/). li Ibid.

lii See ABA Journal. “Make or Buy in the Age of the Free-Agent Lawyer.” Mike Evers. Oct 26, 2011. (advising on best practices for using and integrating contract/adjunct attorneys). liii Law Firm Leaders Survey 2010, ALM Media, LLC. Dec. 2010. Accessed via Lexis-Nexis. liv The Economist | Schumpeter: Angst for the educated. Sept. 3, 2011. (http://www.economist.com/node/21528226?frsc=dg%7Cb) lv “Perspectives on Finding Personal Legal Services: The results of a public opinion poll.” 2011. ABA. p. 17 http://www.in.gov/judiciary/probono/survey-report.pdf). lvi http://kowalskiandassociatesblog.com/2011/08/11/are-law-firms-going-to-be-replaced-by-internet-based-providers-of-legal-services/ lvii Kleiner Perkins invests in LegalZoom — IPO on the horizon? May 3, 2011. Anthony Ha. (http://venturebeat.com/2011/05/03/kleiner-perkins-legalzoom/). lviii http://kowalskiandassociatesblog.com/2011/08/11/are-law-firms-going-to-be-replaced-by-internet-based-providers-of-legal-services/ lix (http://www.forbes.com/sites/danielfisher/2011/08/11/google-jumps-into-online-law-business-with-rocket-lawyer/). lx See http://www.cybersettle.com/pub/home/about.aspx. lxi “Perspectives on Finding Personal Legal Services: The results of a public opinion poll.” 2011. ABA. pp. 19-20. (http://www.in.gov/judiciary/probono/survey-report.pdf). lxii Ibid. lxiii Id., p. 17. lxiv Id., p. 21. lxv Alternative law firms: Bargain briefs | The Economist. Aug. 13 2011. (http://www.economist.com/node/21525907). lxvi“Legal tech now: Social media effectiveness, software trends, mobile security, more.” ABA. October 2011. (http://www.americanbar.org/newsletter/publications/youraba/201110article01.html). lxvii Perspectives on Finding Personal Legal Services: The results of a public opinion poll. 2011. ABA. p. 8. (http://www.in.gov/judiciary/probono/survey-report.pdf). lxviii Ibid. lxix Id., p. 9. lxx Id., 10. lxxi Altman Weil, at ii. lxxii

(2011 ILTA/InsideLegal Technology Purchasing Survey. Page 1, 2. http://insidelegal.typepad.com/files/ILTAInsideLegalTechnologyPurchasingSurvey2011.pdf). lxxiii Ibid. lxxiv“Legal tech now: Social media effectiveness, software trends, mobile security, more.” ABA. October 2011. (http://www.americanbar.org/newsletter/publications/youraba/201110article01.html). lxxv Id. p. 1. lxxvi “Legal tech now: Social media effectiveness, software trends, mobile security, more.” ABA. October 2011. (http://www.americanbar.org/newsletter/publications/youraba/201110article01.html). lxxvii How to Integrate a Virtual Law Office. Findlaw.com. Stephanie Rabiner. November 3, 2011. (http://blogs.findlaw.com/technologist/2011/11/how-to-integrate-a-virtual-law-office.html). lxxviii See ABA Comm. on Ethics and Prof. Responsibility, Formal Op. 96-401 (1996); ABA Comm. on Ethics and Prof. Responsibility, Formal Op. 94-388 (1994). lxxix John P. Heinz. “When Law Firms Fail.” P. 77. lxxx John P. Heinz. “When Law Firms Fail.” P. 77. lxxxi Alternative Law Firms: Bargain briefs. (http://www.economist.com/node/21525907); see also “Nonconventional law practice makes inroads in D.C. market” - The Washington Post. Sept. 11, 2011. (http://www.washingtonpost.com/business/capitalbusiness/alternative-model-law-firm-makes-push-into-washington/2011/09/07/gIQAjLmqKK_story.html). lxxxii Alternative law firms: Bargain briefs | The Economist. Aug. 13, 2011. (http://www.economist.com/node/21525907). See also www.clearspire.com.

lxxxiii ABA article at: http://www.abajournal.com/magazine/article/half_off_nevada_lawyer_bets_on_discount_model/#clarification).