Articles Posted in Non-Law Firm Costs

Charles Christian’s American Legal Technology Insider, Feb. 2011 at 3, describes the newly formed Legal Service Providers Association (LSPA). The LSPA aims to provide legal product and service vendors with access to training, educational programs, supplier discounts, and other resources the vendors could not obtain as favorably alone.

This post’s point comes from LSPA’s founding directors, Greg Bayless and Jerry Correia, who said that 90% of US legal service providers have revenue of $50 million or less, www.legalspa.org

Law departments that license from or buy services from small vendors run risks, to be sure. Can the small company provide adequate support and invest sufficiently to keep up? Will the small company be acquired? Is the founder plus one or two others the core of the company and how stable are they? Small is beautiful, yes, and nimble, dedicated and creative, but it is also problematic and risky.

Kronos, the second ruler of the universe according to Greek mythology, learned from the Delphic oracle that one of his children would dethrone him. Prudently, Kronos proceeded to eat his children. That vivid image of incestuous cannibalism, the opposite of succession planning and embracing competition, has several applications for law departments.

Entrenched law firms, ruling the relationship with a client and its law department, will try to eliminate firms that seek to overthrow that incumbency. An insecure general counsel might surreptitiously or even overtly undermine possible successors; if there is no one internally to replace you, no coup d’état can happen. In the many sectors of the cottage industry around law departments, Kronos thrives and has a big appetite. Market competition shows up many ways but one of them is to swallow (buy or wipe out) a company that would elbow into your turf.

The Kronos effect comes from Tim Wu, The Master Switch: The Rise and Fall of Information Empires (Knopf 2010) at 25. Wu invokes it repeatedly and effectively to describe how the companies at the top of the pole in information industries throttled up-and-comers, often by costly litigation or intrusive regulation.

A recent book on networks mentions that “you’ll typically find that the top three suppliers account for between a third and two-thirds” of any manufacturing or commercial category. Richard Koch and Greg Lockwood, Superconnect: Harnessing the power of networks and the strength of weak links (Norton 2010) at 108, observe this level of concentration in almost any field.

If we had market share data on the various niches of commerce that serve law departments, would this same concentration pattern hold? In the matter management system sphere, do the two or three largest user bases account for 40-60 percent of the installed systems? (I think not.) What about with publications, where Corporate Counsel, InsideCounsel and the ACC Docket surely account for that level of dominance. Software for Boards of Directors, patent annuity tracking services, and red-lining have probably reached this level of convergence. Surely the online legal research market, overwhelmed by LexisNexis and Westlaw bears proof. In general, however, the cottage industries ringing law departments have a long way to go to reach such a degree of concentration.

The law firm market, notably, has not. The Gini coefficient of concentration there nowhere resembles the typical end state of a mature industry. Nor does e-discovery and LPO, both of which service groups are bound to shrink dramatically to a handful of dominant providers. SuperConnect goes further and says that on the internet, concentration reaches even higher levels. A single winner tends to take nearly all. LawDepartmentManagementBlog, anyone?

Navigant Consulting and the U.S. Chamber Institute for Legal Reform asked the Fortune 1000 general counsel to provide data on their lawsuit load, costs and discovery. Of that group, 48 responded. Nearly two-thirds of them reported that they managed 100 or more civil cases in 2007.

“On average, 45-50 percent of respondents’ civil litigation costs in 2007 related to discovery activities.” This finding corroborates other estimates of discovery-related costs. More specifically, “Discovery of ESI [electronically stored information] accounted for, on average, a significant share (between 33-39 percent) of total discovery costs.” Bear in mind that this data comes from about three years ago and the e-discovery battlefield may have changed markedly since then.

“Costs associated with e-discovery vendors were reported in 63 percent (20 of 32) of large cases. When used, e-discovery vendors accounted for, on average, 10-12 percent of total costs.

Ben Hawkins offers the following description on LinkedIn.of his company: “Commercial Litigation Funding Limited [CLFL] specialises in the funding of large commercial legal cases. Via its Jersey based Protected Cell Company LitFUNDING PCC, we agree to fund the litigation costs and assume responsibility for adverse costs in exchange for a share of the damages.”

“Since our establishment in 2007, we have worked with some of the leading litigation firms in the UK, reviewing approximately 100 cases per year and have agreed to support approximately 5% of those. Although litigation funding is relatively new to the UK legal system, it is estimated that in 10 years, 30% of all [presumably commercial] litigation will be funded.”

“Typical cases that we consider require funding of £500k upwards – breach of contract, intellectual property disputes, Competition Act cases, shareholder disputes – indeed anything where the outcome is likely to produce damages of around £3m upwards.”

A report available from ValueNotes, veteran analyst of the Indian LPO market, summarizes the dynamism and size of that market. “The India revenues from legal services offshoring are slated to … reach $640 million by end 2010. … The number of employees is expected to reach 32,000 by end 2010.”

The services provided by the more than 100 LPOs include “Legal transcription, Document review, Litigation support, Legal research, Intellectual Property, Contract related services, Secretarial and Legal publishing services.” Legal publishing services could include a wide variety of support activities but the description I read did not elaborate.

At the top of ValueNotes list are “frontrunners” which includes CPA Global, Evalueserve, Integreon, Mindcrest, OfficeTiger, Pangea3 (now owned by Thomson Reuters), and Quislex. The study also identified ”emerging players” within niches, including Aptara, New Galexy [sic], Lason, Quattro BPO, SDD Global Solutions, and Tusker Group.

The Economist, Dec. 18, 2010 at 132, predicts increasing use of legal offshore providers. Three points deserve mention.

“Of the $180 billion that Americans spend on lawyers each year, only about $1 billion goes to outsourcers. If the $180 billion is total fees paid to law firms in the United States annually, might we assume two-thirds of those fees come from corporate clients? If so, of $118 billion or so, almost one percent goes to outsourcers? That seems high as other estimates have put the industry at $500 million or so (See my post of June, 30, 2010: estimate of India at about $440 million in 2010.).

As to the fees paid “this is growing at perhaps 20-30% a year, for the simple reason that legal costs are out of control.” Not too sure of that. If legal spending as a percentage of revenue has remained fairly stable for the past decade or more, where is the touted and uncontrolled spiral? The Economist, inexplicably, pins its explanation on the claim that “Between 1998 and 2009, big law firms’ hourly rates shot up by more than 65%, according to the Corporate Executive Board.” An online calculator for cost-of-living increases tells us $400 an hour in 1998 would have risen to $526. That is a 32% increase simply from inflation. If the “big firms” – the ones with national reputations, expensive locations, and impressive specialization – rose twice as fast, it does not shock me. I would not be surprised if the average hourly rate paid by firms increased less, since smaller firms probably raised their rates less. Moreover, average chargeable rates do not equal average realized rates. In fact, perhaps the percentage of fees paid to “big firms” dropped for many US companies during that decade. Basic economics would affirm that increased costs reduce demand.

Cassandra Burke Robertson, A Collaborative Model of Offshore Legal Outsourcing, Case Western School of Law Working Paper 2010-35 (Nov. 2010),presents a thoughtful discussion of the topic. One point that is clear, from her paper and other sources, is that many countries besides India have seen the arrival of LPO providers.

She mentions that a PWC LPO/Outsourcing Survey published in January 2010 refers to legal outsourcing providers in Sri Lanka. Including the behemoth, India, that brings to 11 the number of countries that have been mentioned as providing low-cost law-related services to international clients (See my post of Jan. 27, 2006: Accenture and Mauritius; Nov. 27, 2007: Israeli offshoring; April 13, 2008: Kuala Lumpur, Malaysia; March 6, 2009 #3: South African LPOs; June 17, 2009: China and the Philippines; Nov. 10, 2009: New Zealand; and Feb. 9, 2010: French speaking lawyers looking to Romania and Morocco.).

Here is a guest post from Equivio, an e-discovery software provider, which I have edited and shortened.

“The eDiscovery Institute has released its Judges Guide to Cost-Effective E-Discovery http://www.ediscoveryinstitute.org/JudgesGuide/ detailing strategies for better managing e-discovery costs. Recent emphasis has shifted from the preservation and production of ESI, to managing e-discovery in a more cost-effective manner.”

“Predictive coding is emerging as a useful way to reduce litigation review volumes and costs. With predictive coding software, samples of documents are reviewed by a senior attorney with intimate knowledge of a case. The software uses these samples to identify content patterns and attributes that distinguish relevant and non-relevant documents. Such technologies have been shown capable of retrieving 80-90% of the relevant documents in a collection, versus 20-30% for keyword matching, the most common method.”