Back in January, we invested in a company called FirstDocs.  Essentially, it was an investment in the Law Firm 2.0 thesis that I’ve been blogging about. 

I’m pleased to announce that they have renamed, re-branded and re-other things and are now Brightleaf.

Check out their new website and not only will you (hopefully) marvel at the new pretty graphics, but more importantly get a very clear idea of what they are developing just ahead of their public launch, which will be in the next month or so.

I’m really happy with the progress that Dan, Luke, Tom, Muthu and Anil have made and can’t wait until they are live and in public to share with those of you interested. 

Nice job, gents. 

When is a layoff not a layoff?  Simple.  When your firm basically says "you suck – find another career."  But we don’t do layoffs. 

Sounds crazy, but this is exactly what Wilmer Cutler Pickering Hale and Dorr is doing.  But don’t call it layoffs.  They’ve, instead, decided that they have a material amount of folks on payroll who don’t meet their standards.  Maybe they should tell their recruiting department to find another career, as well. 

From Jeff Jeffrey of The Blog of Legal Times:

William Perlstein, co-managing partner of the firm, tells the BLT that some associates and counsel have been told that they won’t have jobs at the firm after this coming fall. Perlstein acknowledges that at least some of the cuts are tied to the economic downturn, though he stresses that the firm isn’t having layoffs.

“There is certainly an economic component in situations where you have someone who is doing OK and who would otherwise be kept. But with less work, and if they’re not making the progress they should, they are being told they should start looking for another position,” Perlstein says. “Nobody is being handed a check and told that they have to leave tomorrow. They’re being told they have a number of months to find other work.”

Perlstein says that the reductions for senior associates and counsel come as a result of a new career advancement program that the firm implemented late last year. Under the new program, associates and counsel are either promoted within specified time frames, or told to “pursue other careers” if they aren’t likely to be recommended for advancement. With promotions scheduled for later this year, Perlstein says that for the first time, the firm is issuing advanced warnings to those unlikely to make the cut.

“This isn’t anything formal. It’s is more of a heads up,” Perlstein says.

As I’ve written before about layoffs, different firms take different approaches.  Some are straight forward and honest about their layoffs, while others try to hide them in stealth.  This strategy by Wilmer, however, is new to me.  Wow. 

While at the NVCA meeting, I had a good discussion with a general counsel of a venture capital firm (name unreleased) who posited that cultures at law firms are dead / dying.

His theory was that 10 years ago, one could hire a law firm not only based on skill, but also culture.  Some firms where aggressive, some more laid back, some more nerdy technicians, etc.  In short, you could find good lawyers with cultures that either were similar to yours, or were needed for a particular matter.

Today, however, his feeling was that law firms have become homogenous.  The last ten years have seen legal fees and legal salaries grow exponentially.  With this, we’ve seen more transition and firm switching with lawyers than we’ve ever seen.  Because of this, firm DNA has been diluted.  Consider it the free agency era in law firms.

Furthermore, the layoffs that are occurring are only speeding up this process.

It’s an interesting theory and one that sounds correct.  I’ve certainly noticed over the years that the unique firm cultures that existed a while ago are disappearing.  Yes, there are still cultures at firms and some of the "old guard" still reflect the attitudes 10 years ago. That being said, I think he has a point.  What do you think?

After the initial explosion of attention generated from my first post about 10 months ago where I took many startup lawyers to task on fees and over lawyering, there has been solid, but declining media attention on my follow up series Law Firm 2.0.

Ironically, the first post was only meant to be a wake-up call, whereas the follow-up articles were the “meat” of the argument. Of course, controversy sells and I am media-experienced enough to know that the original post would probably take most of the headlines.

I’ve spent quite a bit of time thinking about these issues – years in fact. The original rant (as some termed it) was not an emotional reaction, rather something that has been in my head for a long time.

In case you missed it, here were the major posts in the series (the whole series is here):

1. Why Startup Lawyers Frustrate Me – the post that started the series, including the quick follow up to clarify some points and poke fun at some whiny lawyers;
2. Why can’t financings be easier and cheaper? – A look into making financing transactions more efficient;
3. Let’s change billing practices before it is too late – Exploring alternative billing practices and ramifications for keeping the status quo;
4. Re-architecting the Law Firm – Specific recommendations for redesigning the business plans of law firms with specific topics:
   1. Associate Retention and Hiring;
   2. Cost Structures;
   3. Compensation; and
   4. Outsourcing;
5. Lawyer Bill of Rights – What Clients need to do in order to help law firms change;
6. Lawyer Layoffs – What It Means To You; and
7. What might the future of law firms look like? – Some guesses for the future.

So what’s become of all of this? Well, I’ve met a lot of progressive lawyers and do believe that there are many out there who realize the issues and are working hard to change things. Whether or not they have the influence to do so within their large corporate structures is another issue. I’ve also gotten to meet many smaller firms that have created new business models. It will be exciting to watch these firms evolve.

I’ve also been fortunate to garner a ton of comments on specific posts. To me, this is the greatest satisfaction and greatest strength of the series. I think the comments are in many case more persuasive and valuable than my original thoughts. I’d highly encourage fans of the series to go back and read your comments. They really are great.

Furthermore, I’ve been incredibly lucky to meet entrepreneurs who not only share my frustrations, but are creating companies to service Law Firm 2.0. These technologies are incredibly exciting and I hope to see them integrated into the practice soon. Our investment in FirstDocs is representative of technologies that we believe Law Firm 2.0 will use.

And with that, you have Law Firm 2.0. Actually in review, it’s really “Law Firm 1.8” as it needs some work, but I figured after “body slamming” my former colleagues, I owed them more than just criticism, but some real ideas. Hopefully some change will come of it, because if the amount of email that I’ve gotten from entrepreneurs is any indication, there are a lot of negative feelings out there. And it’s not realistic for the clients to force change. They may pay the bills, but it’s too hard for them to organize and put any real pressure on the firms to change. Rather at some point, they’ll just pay someone else and quietly walk away. This I am sure of.

Let’s keep the discussion going. For now, I’m done. I invite any name brand firm that is serious on making real changes to contact me if they’d like to discuss. Let’s see how creative, inventive and full of entrepreneurial spirit these firms can be along the lines of the clients they service.

(P.S. – I’d like to thank some “big company lawyers” who called and emailed with suggestions of how to make things better. There are clearly some folks with their hearts in the right place; it’s just that steering the massive ship into the waters of change will take some very strong captaining. Of course, none of them wanted to go directly on the record, but I thank you folks for all of your encouragement and help with this series).

Today, Wilson Sonsini Goodrich & Rosati announced the release of a new client tool:  The Venture Financing Term Sheet Generator.

I’ve been using beta versions and it’s cool what they’ve come up with.  And to note, their own attorneys are using the tool.  Per their statement:

Our attorneys use a more extensive version of the tool to generate initial drafts of documents for Series A preferred stock financings, including Certificates of Incorporation, Preferred Stock Purchase Agreements, Investor Rights Agreements, Right of First Refusal and Co-sale Agreements, Voting Agreements, corporate approvals, and closing documents.

Anyone who knows my Law Firm 2.0 series knows that I’m a huge fan of technology in the law firm.  Congratulations to WSGR on taking a real positive step. 

In my continuing Law Firm 2.0 series, today I ask the question: So what will the future of the law firm look like, especially if the status quo situation remains?

Here are some predictions.

First, the continued splintering of the relationship between the client and the firm will splinter in ways that will minimize their involvement over time. Lawyers who really want to practice in the traditional start-up ecosystem and function as true outside general counsels may be forced to leave their large firms and create and / or join smaller, boutique firms with radically different cost structures. I think that as clients use their lawyers less they will begin to see legal services as a commodity, a prediction also made by Richard Susskind.

Second, there is an argument that legal services will become all the more compartmentalized. One can imagine separate, smaller firms whereby one or two areas of law are practiced. Maybe there will be firms that just specialize in venture financings, for instance. This was actually an idea that I wrote a small business plan on back in 1999. Even before the recession, I received several calls from senior associates and / or junior partners claiming that they are thinking of breaking off on their own with similar folks at other firms to create start-up boutique firms, so that they can practice their craft without the same billing rate pressures.

Third, costs, compensation transparency and quality of life issues must be addressed, otherwise law firms will continue to throw dollars at associates to get them to put up with the current state of affairs. And in throwing dollars at the problem without fixing the real issues, those costs will be passed onto their clients.

Fourth, outsourcing will occur. Whether it is offshore, or simply somewhere other than the home office, the associated cost reductions with outsourcing can’t be ignored.

Fifth, I think the billable hour will, eventually, for most areas go away. Legal services will start to look like other services with fixed fees. The Washington Post has a great article with the quote “The economic crisis is giving the prosecution a boost in the case of Fixed Fee v. Billable Hours.” Even a presiding partner at Cravath, Evan Chesler argues for the death of the billable hour.

Sixth, technology will drastically change the way that lawyers work. I can’t begin to explain it as eloquently as Richard Susskind, but technology will end some lawyers’ careers while enhancing others. Lawyers had to be drug kicking and screaming into the email and word processing world (and for God’s sake who still uses Word Perfect? Argh) and will now have to adapt to social media and “always-on” connectivity. Furthermore, lawyers who can use technology to enhance their practices will prosper, while others will be replaced by it. I personally think that document automation platforms will be very important in the future and is why we invested in FirstDocs. We saw technology change the way discovery was performed by our successful investment in Stratify.

So what could Law Firm 2.0 look like? Who knows, but here are some early candidates of firms already doing things very differently:

One is Axiom Legal. In a nutshell they’ve used the professional consultant business model (and corresponding cost structure) and employee former big firm lawyers and experienced in-house counsel that charge half the rate. From what I know, all of their lawyers are 8-10 years or more experienced and charge what junior associates charge at some firms. They are venture backed and are hitting the cover off the ball from what I have heard. I wish that I was in the deal.

Second, I received an email from a “large but not particularly well known firm with offices throughout the southeastern United States.” They have a model of having offices in many non-traditional U.S. cities where work can be farmed out. In the words of a lawyer there with a sophisticate, international practice, he said:

“Most of us choose to work in cities where the cost of living is lower.  That means our salaries and draws are lower, but our hourly rates are also lower.  We can out-source work from our higher priced cities, for example, Washington, where I am, by sending labor-intensive work such as document review and due diligence, to talented and motivated lawyers in, for example, Memphis, Tennessee, and Jackson, Mississippi.  Our expectation of billable hours for lawyers at all levels is considerably lower than that of other large law firms.  As a result our lawyers are fresher, happier, and more likely to stay out our firm longer.”

Third, Craig Johnson, former founder of Venture Law Group, has created a new virtual law firm, aptly named Virtual Law Partners. This looks to be a hybrid model between Axiom and a traditional law firm, but is certainly interesting. Their name says it all – forget the expensive real estate plays and hire your lawyers virtually.

I also had the pleasure of recently reconnecting with an old Cooley alum and his partner: Raj Jha and Todd Smithline. They are primarily an IP / Licensing firm, but use a subscription model to bill their clients instead of the well-worn hourly model

Or maybe all of this is wrong, the traditional law firm will adapt and morph and create its own Law Firm 2.0 vision, one far better than invented by a guy who has been outside of firm life for the greater part of a decade (but I doubt it). The one thing that I do know is that there will be change.

If you are a lawyer and haven’t read Richard’s book, you should.  And no, reading the reviews and the articles about the book won’t suffice.  Buy the book, sit in a quiet room and read deeply about his predictions of the future of the practice of law.

The title is provocative, for sure and he doesn’t really argue that lawyers are going away, but a central tenant is that much of the legal services we use today will soon be commoditized.  In other words, many lawyers’ practices are headed downward as outsourcing (both human and technological) is rapidly on it’s way.

I’ve written a lot of what I see are the changes going to occur in the legal world in my Law Firm 2.0 series.    I’d say that Richard is at least Law Firm 2.5 to my 2.0.  He has many interesting thoughts, but two really struck home to me.

One of his first propositions is that lawyers aren’t getting paid to give legal advice, so why are we paying them for it?  He says that if you ask a lawyer (especially a corporate lawyer) why they are "successful" not one of them will say "because I know the law."  In fact, most technical lawyers are shunned to back rooms while the "relationship managers" make the big bucks and bring in the clients. 

I’ve seen this and even made the statement myself.  I never thought that I got ahead by knowing the law better than anyone else, rather knowing enough law that I could then give good business advice.  In fact, I subconsciously have always considered my legal knowledge "my commodity" while I considered my judgment my "secret sauce."  So I can see where Richard feels that the practice of "core law" is going to become commoditized.

Secondly, Richard believes that innovation in the legal profession will occur in two areas.  First, there will be innovative technologies that will change the way that lawyers practice.  We’ve seen it first hand with companies like Stratify in the e-discovery space and believe that we’ll see it again (soon) in the document generation space and have made an investment in FirstDocs.  He also predicts that other innovation will occur at the highest level of the legal practice – new theories, new ways to apply law to fact, new ways to deal with new legal structures, etc… – the stuff that you are willing to pay big bucks to top partner level people.

The big issue is where does that leave the "middle class" of lawyers (defined either as by ability or by seniority) if the top parts of the practice are being innovative and valued and the bottom parts of the practice are being commoditized by technology and outsourcing. 

This short review doesn’t even scratch the surface of the book and like all books there are plenty of theories that I don’t see happening, but it’s the most in-depth look into the future of lawyers that I’ve seen and a must read for anyone who makes their living by the billable hour.

Edwin Miller of Sullivan and  Worcester recently published an article called Time to Reboot the Basic VC Deal Structure, in which he argues that we should radically change the way VC deals get done.  In his words:

"New York Times columnist Tom Friedman recently suggested that “It’s Time to Reboot America,” meaning that the financial crisis gives us a chance to fundamentally re-examine the way government and the private sector operate. Perhaps it is also time to re-examine the basic venture capital deal structure that has changed little since the 1970s.

A related issue is bloated legal documents. Simple forms that address only realistic scenarios are desirable. Sensible legal documents do not have to paper to death every one-in-a-thousand scenario. Simple, common-sense documents are easier for all parties to understand and be comfortable with, and they are cheaper and quicker to negotiate and sign. This approach may be a competitive advantage, or if broadly accepted, would promote a better outcome for all parties."

He had me at "bloated."  For those readers of my Law Firm 2.0 series, it should not come as a surprise that I think today’s legal documents are indeed, bloated.  Edwin’s thesis that many of the terms included and negotiated in today’s financing documents are unnecessary, irrelevant and / or just plane crazy is both thoughtful and correct. 

If you are interested, you should read the article.  He addresses many of the major deal points found in VC financings.  I agree with most of his assertions, but feel compelled to push back (quickly) on a few of them.

Registrations Rights:  I couldn’t agree more that any time spent negotiating reg rights is wasted time for entrepreneurs and venture capitalists and billable hours for lawyers.  However, I have been in situations that I’ve needed demand rights on a company that blew a filing and was no longer eligible for S-3 registrations.  I’m very far away from being a public company lawyer, so perhaps this doesn’t matter any more, but did then.

Anti-Dilution Rights: I am a VC, so I’m clearly biased, but I wouldn’t agree to the termination of Anti-dilution rights.  I think they are appropriate for two reasons.  One, there are large information asymmetries between a VC and a company and no amount of due diligence will ever put a VC into the same knowledge shoes as an investor.  Second, I’ve seen situations where a new potential VC to the company (who wants to invest in a lower priced round) teams up with management to try to squeeze out an early round VC.  They promise management an option refresh making them whole and the new VC would get an outsized share of the company.  For this reason, I want the protection to protect against such opportunist behavior.

Liquidation Preferences:  Alright Edwin!  I’ll take your new paradigm.  Problem is that I don’t think that I can find high quality entrepreneurs who will agree to this.

Founder Guarantee:  I think that I’d rather keep how we operate now in that there is no guarantee of ownership, as I think that properly incentivizes management.

That being said, I love the concept of dumbing down the NVCA model documents and making things easier.  Ediwn, nice job and keep the ideas coming. 

In case you haven’t heard, lawyers and legal professionals are being laid off at a rate never seen before. According to Law Shucks, one of my favorite blogs, over the past twelve months 3,489 lawyers have been laid off. This doesn’t include the 4,890 staff (paralegals and assistants) laid off, nor does it include “stealth” layoffs or layoffs from smaller firms. Law Shucks has been all over the carnage and if you want to see detailed information by date and firm check out their Layoff Tracker.

Yes, this is somewhat due to the current economic climate, but also indicative of what’s wrong with the current big firm business model that I’ve been critiquing in my Law Firm 2.0 Series. I won’t belabor those points today; rather provide an opinion on what the layoffs might mean to you.

It depends who you are: client or lawyer. And for that matter, let’s look at the law student perspective, too.

Layoffs are bad for clients. If you note, few partners have lost their jobs, rather associates, paralegals and other staff have been let go. This inevitably will lead to what a colleague of mine refers to as “billing creep.” To paraphrase him:

What has been really noteworthy to me with all the announced law firm cuts is their focus on associates and staff. Partners seem to be saved for the time being. If the slumps of the early 90′s and 2001 are any guide, work will now move up the chain. Associates will hold on to work previously delegated to paralegals in response to less work and partners will do work they would previously hand off to associates. Add to this the natural tendency for overkill and inefficiency when you are struggling to meet billable hour targets (ignoring the increased likelihood of flat out padding) and you have the recipe for many billing disputes and billing creep.

I couldn’t say it any better. The irony is thick that law is one of few industries that can tighten the corporate belt and its customers end up paying more in the end.

Layoffs are bad for the lawyers, too. Duh, Mendelson, they lost their jobs. But it’s actually much worse than that. I don’t think that any economic recovery will create enough big-firm jobs to absorb those who were laid off. I think that most of the lawyers laid off will be permanently dislocated from the big firm profession.

This doesn’t mean that they won’t continue to be lawyers, but they most likely will get jobs at smaller firms and make less money. They certainly won’t be on partner track at an AmLaw 100 entity.

The junior lawyers laid off are going to have to compete with the 1000s of law student graduating each year and vice versa. If you are a law firm that decides to hire a junior lawyer, would you rather have a laid off 1^st through 3^rd year attorney or a newbie direct from law school? Well, it depends…

If you are a mid-sized or smaller firm, you probably hire the more experienced lawyer. Your business model doesn’t work so well to take on direct from law school folks. If you are the large firm, you are wary of hiring a big-firm layoff (prestige and all), but also you need to re-create the pipeline of associates from the law schools which you’ve effectively shut off today. So you begin to hire again directly from law schools to fill your junior ranks instead of reabsorbing those left behind today.

Then again, the big firm is probably never going to hire law students at historical rates given they’ve experienced two sets of layoffs in the past 8 years and from what I see are the certain changes coming their way in the future. All in all, it’s a scary time to be in law school. What seemed like a reasonable expectation to go to school, do well and come out making $150,000+ a year now seems like the exception, not the norm.

Whatever may happen, I’m fairly certain that the situation is completely different from the last few instances of layoffs and it’s not because of the unusual economic circumstances that we are facing, rather I think it’s a permanent change in the legal ecosystem.

Well, I’m back. I took some time off blogging about Law Firm 2.0, as I wanted to “take in” all the layoffs and such – a blog on that is coming soon. But without further delay, here are my thoughts on outsourcing as a critical change coming soon to a law firm near you.

As a venture capitalist, I’ve seen the advantages of outsourcing. One of our largest success stories, Stratify, controlled costs and provided 24/7 support through a well-managed outsourcing strategy. Most professions are outsourcing at least part of their work, why not lawyers?

I can see two potential ways outsourcing can work in the legal setting .

The first way is simply outsourcing outside of metropolitan areas that are expensive to live in. Why make all of your lawyers commute to New York City or the Silicon Valley to work in an office where they never see their clients? In fact, many of these lawyers would prefer to live outside the city centers to avoid the higher costs of living. I would posit that after some type of apprenticeship program at the law firm, well-trained associates could move anywhere in the country and work effectively. I know for a fact that most law firms have some lawyers working from home in locations where offices aren’t located and no one knows the difference. Maybe now it’s time to do that wide scale. Law offices could start to look like consulting offices in that most of their now smaller and cheaper office space is for visiting professionals. Salaries could be adjusted on cost of living analysis. The law firm could increase margins and pass some of the savings onto their clients. As an example of one firm thinking outside the box, Orrick has outsourced its entire back office to West Virginia. Why not some of the lawyers? Wouldn’t many Silicon Valley lawyer prefer to practice from home in San Francisco or Marin? Who says all the good lawyer want to live in expensive places to live? Who says that good lawyers don’t exists in secondary or tertiary markets today?

The second way would be to actually outsource work to other countries. This clearly works better for some practice areas than others, but if it works for processes as complicated as software development, it will work for the legal process. I think patent drafting, licensing / contract drafting, diligence and some other non-client facing tasks can easily be outsourced. I’m sure most lawyers reading this will brush it off saying it’s too hard, but nearly every other industry has figured out outsourcing. One reader of this blog suggested the following:

Although the model did not work well in the airline industry, I think that smart law firms should develop “budget line” practices for routine work.  These could be staffed with Indian attorneys, part-time stay at home attorneys and maybe attorneys in smaller markets with lower costs of living – in all cases, non partnership track attorneys.   They would be supervised by the higher paid, partnership track attorneys with a roughly 10%/90% split of time between the supervising attorney and these lower cost attorneys.  These groups would not handle things like general client counseling,  high stakes litigations or large scale M&A.  The managing attorney would manage the allocation of work between the value line and the main line of the firm.  Given the lower cost of labor and the increased possibility of leverage, assuming a reasonable mark-up, this proposal still might maintain per-partner profits

I actually think he’s got a good point.

Something to consider. As always, fire away…