joe dearingby Joseph Dearing*

Don’t expect the pace of change in the legal industry to slow in 2014. The industry remains in a state of frenzied transition, and a list of the key challenges reads like a compilation of the law firm executive’s worst nightmares: relentless budget pressures, out-of-control data volumes, increasingly complex cases, fewer new hires to address increasing workloads for associates, demand for more rigorous internal controls and accountability, and business models that seem to change with each new year. All of this is having a major impact on the business and culture of law firms, and frankly, there’s no turning back.

Law Firms: Outsourcing Up, IT Budgets Down, Firms Return to Core Services
Perhaps the most important law firm trend that is likely to accelerate in 2014 is a sharp increase in outsourcing. In the past, legal process outsourcing (LPO) has been linked to persistent concerns about quality, but that has changed as firms have come to recognize the intrinsic value and quality control capabilities of vendors—at least those vendors who have long-term, proven expertise in e-discovery and legal technology. Today’s legal work typically involves more data, more complexity, heavier workloads and demand for faster outcomes. Not that long ago, law firms were busy building up their own internal e-discovery capabilities in order to address these mounting challenges. Now, those same firms are realizing that rapidly evolving technology requires significant capital investment, and at the same time their clients expect service levels that are much higher than they can achieve on their own without outside expertise. That realization represents a significant change.

As these challenges increase, expect to see fewer law firms performing e-discovery services in-house. Firms will continue to trim the number of non-practicing lawyers and litigation support personnel, who are often inconsistently utilized. In general, the low complexity tasks that have traditionally been performed by junior associates and paralegals – such as document review, contract management and legal research – are increasingly being outsourced to services providers who can do the work more efficiently and at lower cost. The obvious benefit for firms, apart from the potential cost savings, is that they can re-focus on their core competency: delivering highly complex, value added legal services to clients.

At the same time, as law firms seek out competent LPOs they can trust and who understand their unique needs, the typical relationship between a law firm and LPO is undergoing a significant transformation. These relationships are increasingly extending across multiple client matters and often spanning the firm’s entire litigation portfolio rather than individual cases. Tactical, transactional relationships between the firm and the vendor, which until recently have tended to hinge on per-gigabyte pricing, are being replaced by partnerships that focus on more long-term strategic considerations. Firms are also pressuring vendors to come up with flat fees or fixed-fee alternatives to unit pricing, and they are choosing vendors who have the ability to proactively (and defensibly) reduce cost by using current technology to eliminate irrelevant data before incurring large processing, hosting and review expenses.

In short, law firms are increasingly on the lookout for LPO partners who can quickly and effectively analyze an organization’s entire litigation lifecycle, drill down to identify specific business processes that can be done more efficiently and cost-effectively, and assist them and their clients with capturing the significant savings that can be achieved from the appropriate use of powerful, cutting-edge technology. Firms are also turning to vendors who can help them and their clients keep a tighter rein on budgets with better monitoring and business intelligence tools.

In keeping with the theme of more efficient processes and the renewed focus on cost control, law firms will also reduce their IT budgets in the coming year. Most firms have experienced increased overhead costs and many have endured years of inaccurate risk and budget forecasting as well, which has resulted in lower per-hour revenues. E-discovery in particular has the potential to pose significant financial and reputational risk. Law firms need to find ways to increase data security for themselves and their clients without a corresponding increase in spending, and a likely outcome of this scenario is that more and more firms will adopt cloud-based services that can be managed more efficiently, cost-effectively and securely by outside providers. The old “build vs. buy” argument for firms considering technology investments is rapidly becoming moot, as firms cut entire IT departments in favor of outsourcing or even insourcing—i.e., moving IT functions and projects to domestic regions where rates are lower.

Finally, as firms move more non-core functions to LPOs, that doesn’t necessarily mean they will be using more vendors. Firms recognize that having too many vendors can pose a greater data security risk, and many will consider partnering with end-to-end solution providers and they may take a more active role in monitoring vendor compliance. There is increased awareness that law firms need to get a better handle on what vendors are doing to protect sensitive law firm and client data. This includes understanding what kinds of employee training, policies and procedures vendors have in place to prevent insider breaches and hacks from outside the network. Expect to see more firms taking specific measures to protect themselves, by negotiating contracts with strict protections and assurances, hiring consultants to inspect a vendor’s network access controls and evaluate their policies and procedures, and by limiting the number of third parties handling client data, all in an effort to limit risk and exposure.

Law Schools: Declining Enrollment Numbers, Consolidation, Practical Skills Training
Not surprisingly, the budget pressures on law firms (not to mention corporate legal departments) are having a significant downstream impact on the legal education system. Enrollment in law schools is declining, with no end in sight. Data posted by the ABA in January 2014 indicates that the number of new students enrolling in ABA-accredited law schools in the fall of 2013 was down by just over 8%. Some schools fared much worse: 13 recorded declines of 30% or more, and 27 saw declines in the 20%–30% range. In all, 132 of 199 schools experienced enrollment drops.(i) Overall, U.S. law schools have not experienced these declining first-year enrollment numbers since the 1970s.(ii)

Many recent law school graduates have found themselves loaded with debt and struggling to find work in the current environment. As a result, potential law school applicants are not choosing a legal career. This trend is reflected in the declining number of LSAT and law school applications, and many schools are reporting lower median scores for applicants.  This decline will likely affect law schools in different ways, with many elite schools choosing to admit fewer applicants rather than dilute the overall quality of their incoming class, while other schools with rapidly diminishing resources and increasing costs may elect to hold enrollment numbers steady in order to maintain their current tuition income levels.

Meanwhile, law schools across the spectrum still have to pay the salaries of faculty and support staff, and many are scrambling to find the funds necessary to maintain expensive clinical programs, as well as the large law libraries required for ABA accreditation purposes. University of Colorado law professor Paul Campos (iii) created a stir last fall when he published an analysis indicating that 80% to 85% of ABA law schools are operating at a deficit. As the money crunch tightens, look for some consolidation among schools to save on the considerable overhead it takes to run an accredited law school.

Many law firm clients are now quite vocal about their determination to stop paying top hourly rates for the fairly basic legal work that most junior associates traditionally handled. This has translated into fewer externships being available for students and fewer jobs for new graduates. That, in turn, has encouraged an increased focus on practical skills and training in legal education, as law school try to find new ways to prepare their students for the current realities of the job market.

Some law schools are changing their curriculum accordingly, turning the third year into more of a practicum—something like a residency in medical school—while others are partnering with service providers to give recent graduates real experience working with actual legal matters and hands-on training using cutting-edge legal technology. Developing legal and technical expertise in the issues that clients currently face with exploding amounts of data, highly complex privacy and security issues and enormous e-discovery costs represents a huge opportunity for new law school graduates. Proactive law schools will provide their students with more opportunities to become familiar with these issues and develop proficiency in the critically important (and constantly evolving) technology used in our legal profession.

References: (i) Karen Sloan, “ABA Releases Details of Law Schools Enrollment Declines” The National Law Journal, 3 March 2014 + (ii) Jennifer Smith, “First-Year Law School Enrollment At 1977 Levels” The Wall Street Journal, 17 December 2013 + (iii) http://www.lawyersgunsmoneyblog.com/2013/11/80-to-85-of-aba-law-schools-are-currently-losing-money

* Joseph Dearing is Executive Vice President of Global Legal Solutions at UnitedLex, a leading global provider of legal and data management and consulting services.  Joe leads the UnitedLex Academic division, which focuses on partnering with leading universities in order to drive value and advance educational development. He is also active in both UnitedLex Litigation and Intellectual Property practice areas. Before joining UnitedLex, Joe served as Assistant General Counsel for IP at Toshiba Global Commerce, a Toshiba and IBM company. He began his legal career at Steel Hector & Davis in Miami, Florida after receiving his law degree from Columbia Law School in 1992.