In 1996 the chemical and energy producer DuPont decided that in the spirit of corporate cost cutting, it needed to trim the legal expenses it incurred from employing more than 300 geographically dispersed firms. With help from Arthur Andersen, DuPont developed an Internet-based communications system to allow outside counsel to access and share the company's legal documents. Most of the law firms that worked with DuPont at the time balked, and then panicked, at the new extranets.
DuPont retained 34 U.S. firms that had demonstrated a progressive use of technology, and over the next two years, its legal costs dropped dramatically. The firms that remained with DuPont now enjoy more business from the company and are paid more quickly. But those that lost an important client were left wondering which clients would move to the Internet next.
Stories as dramatic as DuPont's are still rare in the legal profession. The Internet has not yet radically altered the competitive landscape for legal services, because few firms believe a technology strategy is advantageous. Instead, most firms continue to see technology as an unfortunate reality - one that is leaving their attorneys bewildered and their information technology directors in a constant state of
frustration. Over the next few years, however, attorneys will feel pressured to provide faster, cheaper service to satisfy clients' demands and to compete with both tech-savvy law firms and the technology startups that are automating many of the legal services traditionally provided by outside law firms. The Internet has already turned the banking and travel industries upside down; in due time, it will do the same to the legal services business. In preparation, law firms that have acknowledged the trend are increasing their IT budgets and beginning to think creatively about how they use technology systems. If they don't keep up, they may lose valuable business to their clients' internal counsel, to more agile law firms, and even to Internet startups.
LAW SCHOOLING
It's well known among professionals in the $114 billion legal services business that machines running MS-DOS can still be found at many firms. On average, law firms spend just 2 percent of gross revenues per attorney on technology, according to Altman Weil, a management consultancy for law firms. Technology adoption rates do vary by practice type - litigation, intellectual property, and immigration have become more technology intensive - as well as by firm. But because most firms are structured as partnerships, in which there are as many decision makers as owners, there tends to be a direct correlation between technology investments and the partners' take-home pay. "Money for technology is looked at very carefully," explains Di Clark, legal administrator (or business manager) of Schenk, Price, Smith & King. As a result, she adds, "Only a small minority of firms want to be at the bleeding edge. The vast majority of law firms latch on to new technologies only when absolutely necessary."
Jon Klemens, an investment banker at First Renaissance, which has funded several legal services Internet startups, estimates that only 10 to 15 percent of law firms presently embrace the Internet. "And most are simply building marketing sites; very few are doing things that affect their business model," he says.
Of course, a handful of progressive firms are embracing the Internet and related technologies aggressively. They include Howrey & Simon, a leading intellectual property litigation firm known for using IT to reduce expenses and produce multimedia trial exhibits; Womble Carlyle Sandridge & Rice, which formed a technology consulting team in-house; and the Venture Law Group, a small Silicon Valley firm that has automated much of its practice to serve the technology industry. Firms like these are setting the pace for innovation, and it won't be long before mainstream firms have to follow suit.
At Howrey & Simon headquarters in Washington, D.C., Managing Partner Ralph Savarese says the firm began prioritizing technology strategy as early as the'70s. Today the 300-attorney firm specializes in complex business litigation cases and relies heavily on advanced systems and software for producing multimedia courtroom presentations, organizing and accessing the massive amounts of data and documents it needs for lengthy trials, and sharing that data with its bluechip clients via extranets. "We're constantly trying to find sustainable competitive advantages, and making a commitment to technology that other firms can't match is one way we can do that," Mr. Savarese says.
At the Winston-Salem, North Carolina, offices of Womble Carlyle, technology strategy has been put to a more creative use: generating new revenue streams. In 1996 the firm established a division called ClientPlus, which develops and implements technology systems for the firm's most valued clients. For example, to help a banking client manage an explosion in consumer bankruptcy cases, the firm developed a system with which the bank could track consumer and small-business pleadings. Now Womble Carlyle transfers the files electronically to local counsel nationwide and charges the bank hourly fees for implementing the system and training employees to use it.
As these firms illustrate, Internet-based document management systems and extranets - if used and managed properly - promise to eliminate time-consuming tasks and to cut down on the reams of paperwork that flow between clients and their lawyers and between firms and the courts. It is even possible to extract significant marketing benefits and additional revenues out of technology investments.
NET COSTS
Certainly, there are trade-offs. For one, new security issues surface. According to the American Bar Association's two 1998 technology surveys, although many lawyers communicate via the Internet, more than 75 percent of small firms and 6o percent of large firms do not transmit sensitive information electronically because of privacy concerns.
In addition, the time and costs associated with training employees to use new technologies mean that gains in productivity - measured specifically by lower staffing ratios of secretaries to attorneys - often aren't realized until several years after a technology is purchased. Philip Hamilton, legal administrator for Gurney & Handley of Orlando, Florida, explains, "We've lowered our staffing ratio from one-to-one to two secretaries for every three attorneys. But in order to do this, secretaries had
to learn to manage data instead of input data; it's not easy to change people's roles like that."
More fundamental issues arise as well. The prevailing revenue model in law firms is hourly billing for services provided; however, even as practices become more efficient, they still need to pass along the costs of technology investment to their clients. Some firms charge premium rates for technology-intensive work to recoup their investments, but such alternative billing structures have proven to be unsavory to clients and attorneys alike, says Mark Radcliffe, an attorney at Gray Cary Ware & Freidenrich in Palo Alto.
STRAIN OF THOUGHT
Finally, there is the most troubling question of all for legal advisers: how to embrace the information age without sacrificing the quality of the advice they provide. Increasingly, attorneys are struggling to offer well-reasoned legal advice to a clientele that has come to expect faster service through technology. "The demand is for an instant response, not a reasoned response," says Mr. Hamilton.
Unfortunately, Internet forces won't leave attorneys much time to ponder that important legal question. Already, a number of online resource centers and software vendors are poised to divert revenues from traditional law firms (see table). "Law firms will have to become more efficient because people won't need to go to a lawyer for every bit of legal information," predicts Peter Krakaur, director of strategic alliances for a legal-resource Web site called FindLaw.
Not only do traditional firms face a threat from Web companies, but their biggest clients, large corporations, are finding ways to minimize the need for outside counsel. After having to pay damages in a costly patent infringement case, General Electric's Power Systems division commissioned Jnana Technologies in 1997 to develop a Virtual Patent Advisor application for the corporation's intranet that would allow engineers to move efficiently through the patent clearance process more independently. (The software interviews an inventor about a proposed invention and automatically searches U.S. and international patent databases for all patents similar to the new invention. It then generates a report for the patent counsel, who can better assess and investigate patent infringement risks.) "That's the kind of stuff that's coming, and most law firms are aware of it," says Mr. Klemens (whose bank, First Renaissance, has advised Jnana).
Because the legal services market consists of such a wide range of practices, individual firms will feel the effects of new competition at different times. On one hand, in Los Angeles, where Morris Schorr is director of administration for the firm Ginsburg, Stephan, Oringher & Richman, it's hard to imagine how technology could change the firm's competitive landscape. "We all have the same set of technology tools," he explains. "With our clientele of insurance companies, I don't see how we'd gain an advantage from being a leader in technology use."
On the other hand, Gray Cary's managing partner, Margaret Kavalaris, has concluded that a technology strategy is essential to the firm's business: "Clients choose a firm for its network of people. If I can access that network faster, I'm much more useful to my client." She concedes that law firms do not need to lead the technology charge, "but if I had my way, I would triple our IT director's budget." (Gray Cary's IT budget has grown from roughly 1.5 percent of revenues in the early '90s to about 4 percent today.)
COURTING DISASTER
All signs indicate, however, that the near future holds a shakeup for the legal services market. With competition from new online players, it's easy to imagine that internal counsel armed with better software systems will reduce their reliance on outside firms, that West Coast firms - under greater pressure from Silicon Valley clients to use advanced technology - will take business from established East Coast firms, that smaller firms will use online research and case management resources to become more efficient and take business from larger firms, and that younger, more Internet savvy attorneys will be capable of handling more business than the older attorneys who frown at the change.
Attorneys, administrators, and IT managers universally agree that technology - especially the Internet - is disrupting the legal services business. Simply ignoring that disruption won't make it disappear. "Some firms are way ahead of the curve; others don't have a clue," says Mr. Krakaur, "but the Internet is going to change the profession for all of them."
Write to nikki@redherring.com
(Published in the April 1999 issue of The Red Herring, http://www.herring.com/ Used by permission).