Sunday, November 06, 2016

Legal Education in England & Wales and Germany: New Paper

Anna Mountford-Zimdars, Kings Learning Institute, Kings College London, and I have written a new paper on legal education in England & Wales and Germany focusing on barristers' education and German advocates. It's on SSRN.

Here's the abstract:

This paper explores the relationship between legal practice and type of university attended and degree course studied for English and German lawyers.  For England, some of the analysis is only based on data for barristers. We find that university attended matters a great deal for English barristers if they tend to have graduated from elite universities within the stratified British higher education system. In contrast, the flat German higher education system is also mirrored in the profile of lawyers were graduates in the top jobs come from a wide range of institutions.  For Germany, attainment at university and graduating in law are keys to unlocking elite positions whereas the status of university seems second to none in the British system, trumping having studied law as a first degree.  The paper thus empirically confirms anecdotal insights that knowledge and skills directly related to law matters more for early career entry in Germany and generic skills and socialization at elite universities matters more for transitioning into elite legal employment in England.  It is unclear from the available data whether the different structures mean that the social make-up of the legal professions differs, but it is clear that different ways of accessing this key profession operate in the two contexts.


Tuesday, September 20, 2016

Financing Law Firms: New Law versus Old Law: Good or Bad?

It seems to be the season of law firm/business surveys. We're hearing a lot about New Law, pushback from clients, less for more and so on. Smith & Williamson, an accounting firm, have surveyed law firms about their future finance decisions. 

Law firms are facing increasing competition from other firms. This isn't surprising as most below the Magic Circle are fungible. And it would be the same in the US too. The choices are maybe to merge or downsize into a boutique. Indeed it is the boutiques that are causing the competitive pressures on mainstream law firms. 

One solution is to buy them, rather like Facebook and Google buying smaller but useful companies. Think Facebook and Oculus. The problem for law firms is that they are shy when it comes to external financing. They like to borrow from banks with revolving credit facilities or, worse, via overdraft. (I know this is external but it isn't perceived in that way by lawyers.)

Aside from personnel, one of the biggest expenditures for law firms is technology, especially if they are trying to commoditise part of their services--e.g. online term sheets. Altman Weil say their survey found the biggest threat for law firms was CCCT (competition, commoditisation, competition [from alternative suppliers], and technology.  Calls for capital contributions from partners and overdrafts are primitive ways of funding the future. The Legal Services Act 2007 gave law firms (or more strictly legal services providers) the opportunity to become Alternative Business Structures so they could attract external investment. 

Big law hasn't really taken advantage of this yet. The most common form of entity is still the limited liability partnership. None of the big firms have incorporated, because they fear external scrutiny and pressures for change. However, Smith & Williamson found around 32% of their respondents (about 50 of the top 100) were prepared to see private equity as a source of funding. 

The funding would be used to buy "bolt-on" acquisitions, the boutiques that are the source of frustrating competition for the mainstream firms. I suspect law firms think this type of funding will be easier to control than other kinds. This is speculation but the fact that law firms haven't yet incorporated or gone public (pace Slater+Gordon) suggests to me that either they don't know how or don't want to subject themselves to market disciplines. Given private equity works on a three year timeline to exit, I can't see them taking a back seat on financial decisions in the law firm. Cost cutting, commoditisation and asset stripping are the usual weapons of private equity, so I don't see law firms being immune. And of course the private equity investor's favourite investment technique is debt loading. Law firms are used to being encumbered with debt as that's what they do normally. PE debt will be fiercer. 

So as much as law firms think of themselves as businesses, and they are, in many ways they are still immature in matters of the market. If they don't start to learn market disciplines and see themselves as something other than chummy clubs, when they go to market [I considered a number of metaphors here from dull to unprintable, so insert your own] it will be a case of, to use Goffman's phrase, "cooling the mark out".


Thursday, September 01, 2016

What Happens When the NSA Gets Hacked?

My colleague, Adrian McCullagh, and I published a story on about the NSA hack by a group called the Shadow Brokers.

Shadow Equations: Where IT Security Fails

Everyone now lives on the internet and security is paramount except we seem so bad at providing it. Businesses and governments receive thousands of cyber-attacks a day from countries like China. In the wake of infiltrations into Austrade and the Australian Defence Department’s networks, the prime minister’s cyber security adviser, has admitted the Australian government is attacked on a daily basis. It was even thought the failure of the Australian online census was due to a denial of service cyber-attack, which helped foment nationwide privacy scares. The story we tell here indicates that we are at a tipping point in cybersecurity.Recently a hacker group known as the ‘Shadow Brokers’ published on a particular open web site a sample of source code of particular malware (MALicious softWARE) claiming that the malware had been downloaded from an organisation known as ‘Equation Group’ (NSA)......


Thursday, August 18, 2016

What Is Going on with the Legal Profession?

The other day I was asked to write a paragraph about the future of the legal profession and here's what I wrote:
The legal profession of the 21st century has been described as having encountered its own Cambrian explosion. Rather than extinction the legal profession is facing rapid change as the result of increasing use of technology, globalisation, the deregulation of legal services markets. Australia and the UK were early adopters of alternate structures for the provision of legal services, which in the case of the UK is placing small legal practices under immense pressure as, for example, online providers (e.g. LegalZoom and DivorceOnline) enter the market using loss leader pricing to capture business. Some refer to this as the Uberisation of the legal practice. Outsourcing of legal work to “cheaper” markets such as India and South Africa has reinforced the trends working through globalisation. Millions of dollars are being invested in new legal enterprises such as ROSS Intelligence based on IBM Watson, and Ravn, which use big data to research and answer legal questions and predict outcomes of cases. 
I don't think there's anything particularly startling in that paragraph although the reader in my law school was shocked. All one has to do is read Jordan Furlong, George Beaton et al to see where the profession and legal services are heading. But I wonder.

The counterfactuals won't go away, so how right is New Law? Dealbook reported in the New York Times that law firm revenues rose by 4.1% for 2016 H1 compared to 3.3% for H1 of 2015. Law firms have experienced growth, albeit in single digits, for the last four out of five years. There are no signs of it slowing down.

Those doing bankruptcy and litigation are thriving while transaction lawyers are faring less well owing to the stupidity of Brexit (sighs in exasperation at those idiots). Yet we've seen Big Law doing well on M&A work. Cravath raised starting salaries to $180,000. Hourly billing hasn't been abandoned. London law firms have been reporting big rises in lawyers' earnings (as PEP).

So, I'm confused by the conflicting signals. Maybe it's not a Cambrian Explosion. But there are explanations. The New York Times is talking about big law firms whereas we know smaller firms are feeling the heat from alternate suppliers, especially online providers. Big Law is relatively secure because there are no realistic alternate suppliers for what they do. Axiom and Lawyers on Demand pick low hanging fruit, the work that is easily standardised, not the big jobs like M&A. The Big 4 accounting firms are credible threats but how different are they from law firms?

Perhaps we need a big London law firm to convert to an ABS and redesign itself and see if that sets change in motion. I recall that it was the merger of Coward Chance and Clifford Turner, in the late 1980s following Big Bang, that led to a rush of law firm mergers all over the world. I don't know how close we are to that yet.


Monday, August 01, 2016

Professions and Technology: History and Transformation

I gave a presentation at a roundtable organised by the Royal Society on professions and machine learning recently. This is the text:

Professions and Technology: History and Transformation
One way of characterising professions is as vehicles that convey expertise to consumers who are unable to generate that expertise themselves. To this basic formulation we add professions are usually self-regulating for which entitlement they form compacts with the state to prevent exploitation of consumers because of asymmetrical relationships, all of which results in a social licence to operate. Over the years, to follow Sciulli, professions have functioned within structured situations as opposed to fluid sites. For lawyers, this is the court; for doctors it is the hospital. These institutions granted the professions status, autonomy, and the right to determine the socio-cultural conditions of reproduction. Having gained independent authority in civil society, these professions have been able to monopolise resources and create closure. States sanctioned moves towards professionalism thereby entrenching it in society. In this paper I focus on law with medicine as my comparator.

The history of law and medicine shows how the professions have altered in structure and institutions. Despite their central importance, law and medicine were small-scale enterprises, almost guild-like. Relationships were based on collegiality and patronage. The professional was a single person delivering services and different components within occupations competed with each other to dominate their fields of practice (e.g. solicitors v barristers; doctors v chiropractors). The French Revolution brought physicians to the fore as the treatment of the body was separated from that of the soul and the modern hospital was born. Industrialisation hastened hospitals’ development and consolidated their place as sites of treatment and research.

Within law the archetypal lawyer was the sole practitioner whether barrister or solicitor. But the division of work practices between the two, augmented by status concerns, created different constellations of practice. Barristers focused on the court, which also represented potential judicial career progressions for them. Rules such as the cab rank rule helped impose a commitment to sole practice and deterred the formation of firms and partnerships. Most barristers were located in London, close to the courts. Solicitors, while technically officers of the court, applied their skills and talents elsewhere, and they became agents for barristers. They were men of capital and located throughout the country. According to Sugarman, solicitors were the conduits for capital flowing around the country. They drafted contracts and agreements, and transferred property titles. And as London became the financial capital of the world, the law firm grew as the key legal institution to serve capital both nationally and internationally. Freshfields, one of the big City law firms, formed its main relationship with the emerging Bank of England in the 18th century, a relationship that endures today.

Both institutions—hospitals and law firms—have grown massively through the 20th and 21st centuries. And while both have the missions of health and justice, they have been driven by commercial concerns, which raises questions about their commitment to the public good or interest. This leads me to a crucial point in this discussion, that the ethos of business is now endemic in professions and professionalism. The ABA, for example, in 1986 attempted to restore ‘principle’ over ‘profit’ with little success. Similarly, hospitals are driven by commercial concerns whether in for profit areas or social medicine. Hanlon argues that we should talk of ‘commercialised professionalism’ emphasising technique, managerialism, and entrepreneurialism. If we look at how law firms are evaluated today one of the more common measures is ‘profits per equity partner’ based on billable hours. Lobby groups like CityUK applaud the £23 billion contribution to GDP made by legal services and the Lord Chancellor entreats foreigners to litigate in the English Commercial Court.

The value system of professionalism has shifted and changed over the course of the last 200 hundred years. The distinction between professions and expert occupations is harder to justify and the ideal of the autonomous professional has transformed into an expert with degrees of discretion. It is even reflected in the way regulation has moved away from self-regulation towards more external regulation—evident in both legal services and health care. These changes refer to internal and institutional factors like the rise of global law firms and managed health care companies. The consolidation of power and authority in fewer hands has had to be balanced by stricter regulation.

The transformations beginning to flow into health and law now are separate, but related, to the changes outlined above. Technology is increasingly penetrating the world of professionals and redefining their work. Their business models (and so their ideas of professionalism) are slowly and painfully adapting. The first autonomous surgical robot tied perfect sutures in a pig and IBM Watson Oncology is assisting in cancer diagnosis and treatment. However, the hospital is a site of research as well as treatment. Law firms are not engaged in research and development although they may innovate occasionally. This difference means law has less ability in its traditional form to manage the incursion of technology, which will probably reach a crisis point in the near future.

The big law firm has relied on employing large numbers of associates and paralegals to administer complex litigation, for example. Discovery of documents means examining thousands, if not millions, of documents to exclude those ineligible for disclosure. E-discovery done by legal process outsourcers in India using sophisticated algorithms is accurate, faster, and much cheaper than humans. This is standard fare and generally affects junior members of firms—neo-professionals and paraprofessionals. What is potentially more interesting is where professions are being exposed to and made subject to the environment of competition. In Britain the Legal Services Act 2007 opened up the ownership of legal services providers to those outside law and so to new business models (ABS). Perhaps the biggest development is in the provision of online legal services that dispense with lawyers or minimise their involvement. For example, companies like LegalZoom and Rocket Lawyer provide legal documents online; Divorce-online sells automated divorce packages; and Radiant Law uses technology to analyse companies’ contracts in order to expedite contract formation over time. Modria is already automating online dispute resolution without the intervention of lawyers. The emergence of new legal ABS compromises the legal profession’s claims to expertise and closure. Yet the legal profession still exists, so perhaps these moves should be interpreted as boundary movements rather than fundamental change.

Are professions secure or is the possibility of radical mutation likely? Two developments in legal services convince me insecurity is reasonable. One is the advent of blockchain and related technologies, e.g. smart contracts and decentralised autonomous organisations (DAO). I won’t pursue this further now but to say the ramifications are profound. And the other is the introduction of artificial intelligence in law. Riverview’s Kim is a virtual assistant for inhouse counsel to improve decisionmaking through triage procedures. ROSS Intelligence is a legal research tool based on IBM Watson. Watson has been ‘fed’ data—legislation, cases, articles, etc—on bankruptcy law and it responds to natural language enquiries to produce tailored answers as relevant as possible. ROSS improves its predictive capacity the more it is interrogated. While it is designed to augment and supplement lawyers’ expertise, it is not difficult to imagine AI beginning to supplant lawyers. If we tie this to the DAO, for example, the potential for AI in law increases enormously.

For the legal profession, in existence for hundreds of years, new technologies will be disruptive innovations as modelled by Christensen. Already traditional partnerships are under strain and the Bar is shrinking the more legal work is unbundled. Does it mean the end of professionalism or its redefinition? The answer will emerge over time as technology and law collaborate or contest each other. And I haven’t discussed what this means for education: what will the new lawyer need to know?


Tuesday, July 26, 2016

Thought Experiment: What Does the Uberization of Legal Practice Mean?

Yesterday I had lunch with Joanna Goodman, a journalist who writes for the Guardian and the Law Society Gazette on matters technological, and we talked about the conservatism of law when it came to incorporating technology.

This has led me to a thought experiment I'd like to try out here. First, a couple of assumptions: this is speculation into a distant future. I say this because in my experience it takes approximately a generation for lawyers to change. That although this is a thought experiment I would like to make a distinction, often lost, between expert occupations and professions. Professions have elements of judgment, wisdom and the like that derive from the long cultures that back them. We can't deny that law, as an occupation/profession, has hundreds of years of cultural development and history that are transmitted in all sorts of ways--memes, apprenticeship and knowledge. Expert occupations are often devoid of, or avoid, this type of cultural environment.

The thought experiment. The rise of Google, Facebook and Uber signify a number of fundamental changes in the way we live. Data is free. Communication is seamless and no longer bound by time and space as it was in the old days. Ownership is mutating into sharing (the gig economy). Data is empowering in that we can now manage and manipulate huge amounts of unstructured data. Google has successfully incorporated this into its autonomous vehicles. Amazon is developing autonomous drones to deliver packages to customers.

Uber is disrupting the taxi industry everywhere by using data to enable people to use their cars as a taxi service when they want. Of course, Uber is facing backlash from conventional monopolistic taxi businesses. Despite this the move towards uberization seem inexorable.

We know from Google, Tesla, and Uber that the weak point in the chain is the human. Humans don't behave like machines and have accidents. Tesla claimed that the failure of its recent enhanced cruise control was far rarer than normal traffic accidents. Moreover, the patch to fix the problem will be transmitted to all Teslas when ready. Compare that to traditional automotive recalls that necessitate individual action.

Underlying Uber's strategy is the removal of the human driver. Google's autonomous vehicle would answer this. There is a further aim behind this which is to move people away from "owning" vehicles that are used partially and are wasting assets. Instead of owning we would adopt, rent or subscribe to "personal transport solutions". To get from A to B, I need transport of a kind not necessarily my own vehicle.

Streets would be clearer, congestion reduced, and air cleaner. So onto lawyers.

At present, we have a lawyer or a law firm. In a pre-Uber sense we own it. The law firm is an expensive conglomeration of people, land and other assets, which makes it expensive to use, and reduces access to justice.

Much of legal work can be done without human intervention or minimal human intervention. For example, minor dispute resolution can be done online: divorce, parking tickets, complaints about banks. Document construction relies on computers. With the increasing sophistication of AI and tech, we have entities like ROSS Intelligence based on IBM Watson, Kim, and Ravn that are using unstructured data to improve legal power.

What then is the purpose of the law firm? At the moment it is a signalling device: my law firm is bigger or better than yours. This is the bet the bank type of deal. But for most law firms at the consumer end of the market, there appears to be little justification except that they satisfy their owners. And for most business owners there is a feeling that lawyers and law firms don't understand their businesses or want to. How much of what companies need in terms of contracting could be put into smart contracts on blockchain?

What if law firms were uberized? Much work would be automated--think compliance, IP, and regulation management. Remember Stuart Brand said "data wants to be free" back in 1984. So much of legal information would be free, like medical information, and the AI will shape it to individual ends.

The work that requires a human dimension could be done by real people but wouldn't necessarily require firms. If we need those intangible attributes of professionals like judgment and wisdom or high level advocacy, then we seek out humans for them. But much of this could be done through networks than physical firms. After all, there is little to distinguish one law firm from another. They are largely fungible.

I won't begin to speculate what this means for law schools....


Monday, January 04, 2016

How Mortal is Big Law?

Despite all the theories put forward, the forensic evidence adduced, the conspiracies mounted, Jack the Ripper wasn't caught and so didn't meet his just deserts. It keeps retired coppers and others in business however. The fate of Big Law is similar. 

Today an article in the Financial Times (accessible here) proudly proclaimed "dominant New York corporate law firms increase market share." This links to a post I wrote last year, "Death of Big Law Announced Prematurely..." There has been so much fatalistic talk about the demise or collapse or unsustainability of Big Law that it ought to be six feet under but it isn't.

My evidence for the continued longevity of big law firms depends on a particular category of work, mergers and acquisitions (M&A). M&A is big ticket work--the deals are large and the fees generated are huge. And M&A deals create so much work it doesn't stop when the deal is "completed". For law firms there's considerable follow-on work out of each deal. In 2015 M&A surpassed the $5 trillion mark, many of which were mega-deals. 

I analysed the structure of Big Law at a conference in St Gallen last year where I argued the segmentation of the legal market, globally, was now so extreme that the position of the dominant law firms could be unassailable. The key firms occupying the legal stratosphere are Skadden Arps, Cravath Swaine and Moore, and Wachtell Lipton. Their respective deal values are:

Skadden                          $1.4tn       (25%)
Cravath                           $888.4bn  (18.7%)
Wachtell                         $760bn      

A Citibank law firm adviser said:
“Consider the megadeals that have just been announced in the last few weeks and the timeframe — it’s going to take these firms well into 2016. And if you consider any antitrust issues, any regulatory oversight needed, that could also further lengthen the time of the work that’s going to be involved. The corporate advisory work that stems from those deals, and the boost from solidifying client relationships, should also help them get hired for future matters.”
Of the top 10 law firms doing big M&A work nine are based in New York and the only London firm is Freshfields at number 9 which worked on the Royal Dutch Shell-BG Group and ABInBev-SABMiller mergers.

The legal market is highly stratified and parts of it are highly successful and appear impregnable to the threats articulated by Susskind, Beaton, or MacEwan. Does this mean the doomsayers are wrong? There is something about their respective analyses that seems to dent their conclusion that Big Law is on a downward trajectory. The picture is far more complex than we have allowed for.

Elite law firms have been resolutely placed in the same category as other professional service firms and despite some big insolvencies law firms have been resilient. The big New York and London law firms occupy a unique category. They fit the "winner takes all" category defined by McKinsey some years ago. They mostly focus on their core strengths, promote clear and strong brands, and are venerated by CEOs and general counsel.

I'm not going to predict the imminent death of Big Law since it proves its resilience (for more than a hundred years). The numbers will be winnowed no doubt as there are too many fungible law firms which take the middle ground, scrabbling for the same work. Some will reinvent themselves into New Law but most will continue the same. The result is the stratification of law firms will become even more embedded. It's rather like the decline of the middle class in America while the 1 percent grows richer.