The LVN Council of Luminaries is comprised of veteran thought leaders and pioneers in the business of law community. The objective behind assembling this group is to establish a brain trust of recognized, experienced and progressive leaders who can help interpret developments in the market, provide advice on how to successfully approach and navigate challenges, predict future trends and changes to prepare for, and to participate in targeted special projects to benefit the legal industry as a whole.
The below meeting was conducted primarily with the Council Of Luminaries CLIENT-SIDE group.
We spent the started by discussing Baretz+Brunelle’s new research on Captive ALSPs, which can be downloaded at https://marketing.baretzbrunelle.com/home-court-advantage-new-law-report.
Luminary 1 - of the 123 Am Law 100 or Global 100 law firms, 48 have some sort of captive ALSP. Non-US Global 100 firms have a much higher percentage as 13 of the 23 have captives. 35 of the Am Law 100 have them.
In US almost all do eDiscovery but only 40% have eDiscovery only and 60% do something else. The idea that these are eDiscovery operations and nothing else is not true anymore. The other areas: Contract review is #1. Following are: Lease abstraction, IP Services, due diligence M&A. Mostly eDiscovery and contract review in the US, but oversees we see bigger number in IP Services, M&A due diligence.
The other thing interesting is that going in we thought that most of these were launched as a reaction to the great recession. We took the data of when operations were launched, divided them into 4 waves: Before 2008; 2008-2012; 2013-2017; and since 2018. Interestingly (in the U.S.) only 21% launched between 2008-2012 after the great recession. Almost 40% launched since 2018 so this is ticking up.
Luminary 2 – Did you look at how many were during 2005-2006 – the new FRCP came out including ESI?
Luminary 1 – Only K&L Gates, Morgan Lewis and maybe a couple others were formed before 2005.
Luminary 3 – The 60% who don’t only do eDiscovery – do they do other things well? Or are they just saying they do other things?
Luminary 1 - About half of the firms completed a survey – we asked what percentage of revenue is derived from these types of operations. We only counted ones that were over 10%. The others that did not respond – we tried to test by doing more research via websites, etc. So we have reason to believe that, for the most part, those operations offer those services in a real way.
Luminary 3 – This is robust methodology!
Luminary 4 – Have you seen an uptick in these ALSPs where they are actively leveraging technology to do work more efficiently as a typical ALSP would expect them to do?
Luminary 1 – Let’s get back to the definition of ALSP - it was a two-tier test. 1st – Do you have people doing work? 2nd test – Are they doing work in innovative or non-traditional ways such as – are they leveraging technology, built in process, in a different or offshore office? We didn’t keep track who was doing which of these. We believe they are almost all leveraging tech in some way but didn’t test who was using what.
Luminary 4 – I am aware some firms have been developing innovative tech solutions – for example, Reed Smith spun theirs off. Is there a growing trend where firms are investing in technology development or is this the exception and not the rule?
Luminary 1 – Anecdotally, we think a lot are and we see a trend towards investing in IT as the glue between off-the-shelf systems. There is no point in writing, for example, an AI based pre-execution tool as there are good ones on the market. But when you want to do something with the data – we see they are developing systems of analysis.
Luminary 5 – Is predictive coding considered AI? When is comes to M&A and due diligence they are using ALSPs and predictive coding?
Luminary 1 – I would argue that predictive coding is considered AI. While a technologist might argue this, it is using technology tools that allows for faster analysis. If it walks and acts like a duck – it’s a duck. This is what this is all about, taking lessons learned in eDiscovery and applying them throughout the firm.
Luminary 5 – That’s why it makes sense in the contract management review process and with due diligence, M&A and lease abstraction.
Luminary 4 – Out of those firms that you got more deeply engaged with – how ingrained is the captive ALSP in the firm – how much do the M&A partners move the M&A due diligence to the technology? Are the partners leveraging it, are they suggesting it to their clients? It’s one thing to have a captive ALSP and to market that to clients, but it’s another thing to have it ingrained into the culture of the firm and its systems.
Luminary 1 – While this too was not a tested area in the survey, anecdotally, answers range between hardly ever and never. I don’t believe there are any firms that are touting that captive ALSPs are fully ingrained in the firm that that is the first option in every applicable area. Some firms have some partners who feel there is an advantage by doing so and there are others where the single biggest impediment to using this option is getting their own partners to know about, trust, and use it. Most firms have to market internally to their partners to hopefully avoid missed opportunities.
Luminary 3 – Two of our top firms are K&L Gates and Morgan Lewis and them being listed in your survey surprises me because they have never once mentioned their use of captive ALSPs to me. I can only hope they are using it on the back end and I am just not aware of it but this information was news to me. It is my opinion that until we move away from billable hours, firms are going to have no incentive to use these things. Captive ALSPs are siloed at the firms and partners are not going to want to use it because ultimately, they make less money. Unless we push them to take this seriously – they have to figure out how to lower costs in order to make more money – it will continue to be siloed and fractured.
Luminary 6 – Agreed! My guess is that you have to market this internally to the partners but there is still a financial incentive for partners to be generating lots of work for associates. Making your associates more efficient isn’t necessarily an advantage.
Luminary 1 – There are a lot of issues at play here. As you pointed out, there is a financial reason for partners to keep associates busy, but there is also the emotional reason to keep your associates busy (“these are my people, my team”.) There is also the compensation program within firms. From what I see a captive ALSP can be more profitable than traditional work done by associates. Think of it this way: if you take 90% of the work out of it and charge 50% less – firms will make more money. But for firms to do that, partner compensation has to change. On top of all this, there is the issue of trust –“I don’t believe the ALSP can do the work to my standards,” there is the issue of “offense/defense”. Lawyers are risk averse and so they think about how this might affect a current book of business. They ask “will I be able to sustain work for my associates, will I make less money for my firm?” But more entrepreneurial lawyers may think about how if they can figure this out, they can go sell this to clients and get more work.
Luminary 4 – It makes little sense to me, they make a conscience investment as a partnership – at the management level – to make a monetary investment in developing these capabilities and the biggest internal fight is getting those people who make these decisions to take advantage of the technology, pitch it to clients and win the business.
Luminary 6 – You are thinking of a law firm is a monolithic entity. This is not the case. Partners are not all on the same page. Many weren’t paying attention or weren’t in agreement with the decision that was made to build something.
Luminary 1 – I think this is correct – an example is if I am a litigator, I might be thinking that it’s nice what they are doing over there in IP, for example, but that doesn’t affect me. It’s that partner’s thing over there and I am doing my own thing over here.
Luminary 4 – For me it’s not so much partners across practice areas, its partners who know they have an M&A, due diligence, captive ALSP but I am not leveraging it. What is their motivation to make less money? I don’t think lawyers are well versed on profit margins.
Luminary 6 – That’s just it – it’s the business model that’s been used forever. And, associates are not going away – they can be thought of as somewhat of a fixed cost and you have to get as much revenue from that fixed cost as you can. Until there is a different business model, a technology margin doesn’t mean much to them.
Luminary 4 – For the lawyers who work at law firms, do you see a trend in lawyers wanting to move to captive ALSPs. Is there a “better quality of life” there?
Luminary 1 - Good question. I think in today’s environment – there is a life there. Getting partner track associate positions in a firm isn’t that easy anymore and keeping them isn’t that easy. I don’t get a sense that a lifestyle at a firm that uses captive ALSPs is any better than at a firm that doesn’t use them. I don’t think there are many places that keep that type of information.
Luminary 2 – I want to make the observation that the lifestyle in firms with captive ALSPs is not better – in fact, elements can be worse because of the level of professional respect for those lawyers can be lower. Someone who starts on a more traditional path and then goes this route – it probably feels like a step back.
Luminary 4 – You hear about lawyers leaving because work life balance is poor and they are leaving firms. Can the captive ALSP space offer a better work life balance and be a route for more diverse lawyers versus these people simply leaving the practice of law?
Luminary 7 – In my prior experience at a firm, we had a small captive team that focused primarily on eDiscovery and then expanded into other areas. There were comments and discussions then about the level of technology and sophistication of the tools being more advanced than the tools that were being used otherwise in the firm and some associates were interested in this route. But there was constantly a struggle for business development of this team to try and sell themselves and get projects.
Luminary 1 - Part of this issue is risk, too. If partners are not incentivized to keep that work within the firm at the eDiscovery/captive, then when something goes wrong and I am the partner and I can shift the blame to an outside provider, why wouldn’t I prefer that option? There’s no incentive to keep the work at the firm, and incentive to be able to point fingers outside the firm if necessary.
Luminary 5 – The ability to point the finger elsewhere is important and you hit on something here. Changing gears – did the survey include anything about how some firms are taking the defensive position as a reaction to the factor of the Big 4?
Luminary 1 - This was not included in the survey. But I do think that when you look at the fact that 57% of the non-US Global 100s have captive ALSPs, I speculate there is a higher percentage oversees because of the global nature of the Big 4.
Luminary 4 – Thank you for putting this together, it is very interesting material.
The group then shifted gears to year-end collections
Luminary 4 – How do you treat year end? How much pressure do you get from firms to get them paid by year end? Do you make exceptions to get firms paid?
Luminary 5 – We get a lot of requests and well in advance. Most of our firms are already on an expedited basis. We sometime want to make sure we a bill gets paid in FY20 or 21, but we don’t usually make many exceptions. Again, we already have expedited turnarounds.
Luminary 6 – I tell them we pay it the way we pay it. We’ve got $500,000 invoices that need to be reviewed, that’s a big job. If we didn’t have to do line by line review, we might be able to pay faster. It might be easier to expedite on flat or fixed fees.
Finance sends out a notice that no invoices will be paid in 2020 if approved after date X. Our firms consistently misunderstand that. Just because we won’t pay if the bill comes in after a certain date doesn’t mean that we promise to pay if it comes in before. We have our terms, but we don’t always pay timely – these are sophisticated invoices.
Luminary 4 – Every year is like Groundhog Day. They say, “I iwas told that if we got invoice in by Nov 30, we’d get paid by year end.” No you haven’t. That’s never been true.
Luminary 6 – Our company is trying to push out payment dates to 90 days. What do yours do?
Luminary 4 – We are at 90, except if a few jurisdictions where we can’t be.
Luminary 1 – Does the fact that you do a lot on flat fees have an impact on your ability to implement that?
Luminary 4 - Because of the flat fees, they get to bill at the beginning of month. So July work gets billed on July 1, not Aug 15, and 90 days is really like 45.
Luminary 5 – Our value-based arrangements are the same way.
Luminary 6 – What about firms submitting very late invoices?
Luminary 4 – Our policy is if it is more than 3 months after work is done, we can refuse it or cut it. But it’s more of a threat than anything. We don’t typically do that.
Luminary 6 – We say we have a right to deduct 5% if late, but it’s enforced by the attorneys at their discretion, which is how I think it should be.
Luminary 4 – It’s the same for material changes – you have to notify us quickly. We have to be informed proactively. We look for firms to be proactive and timely.
Luminary 5 – We had that problem years ago, and it can really have an impact to accruals and budgets. So we put in some safeguards, especially for big billers. Legal ops does it to ensure bills come in on a timely basis because we are concerned about carry over.
The final topic discussed was diversity tracking
Luminary 5 – We are looking to get started aggressively towards diversity tracking. Are any of you using your eBilling system to track that?
Luminary 6 – We do. We use Passport.
Luminary 4 – Because we do so much on of flat fees, we can’t easily track who is doing what work in our systems. But we do track anecdotally in after action reviews.