Strategy in the Law

Volume 3 • Issue 4 • May/June 2017
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What Else Should We Do?

Thinking outside the box to succeed in tomorrow’s legal industry

As the lead article of this issue of The Practice makes clear, law firms need strategy. One way of defining a firm’s strategy could be based on a firm’s ideal positioning in the market when it comes to revenue per lawyer versus lawyer head count. However, that is not the only way to define and understand strategy. With the legal marketplace now more competitive than ever, and with seemingly all parties demanding more for less, law firms and in-house legal departments are increasingly likely to turn to novel strategies that push them beyond traditional areas of service and competition.

In this article, we take a closer look at two examples of these emerging strategies—one coming from an in-house legal department and the other from a law firm. First, we explore the story behind British Telecom’s in-house legal department and how, in just a few years, it transformed from one of the company’s cost centers to a unit that was generating profit. Second, we look at Dentons’ attempt to harness the forces of disruption in legal services by providing space and resources to promote and benefit from the work of disruptors. Through the creation of Nextlaw Labs, the law firm is carving out a new strategy of growth and differentiation—one defined less by traditional markers of size and reach (though these factors undeniably remain important) and more by technological prowess and innovation. In looking at these case studies, it becomes apparent that strategy across the legal profession is increasingly becoming multipronged and multidimensional. It’s no longer simply about going global or increasing head count—it’s about competing along the cutting edge and defining where the industry is headed. The profession is thinking outside the box.

British Telecom and BT Law

As this pressure to produce more for less continues to mount throughout the legal profession, corporate legal departments are innovating new strategies of their own. Perhaps the clearest instance of this is the development and maturation of BT Law Limited (BT Law), a sort of internal law firm owned by and born out of the U.K. telecommunications giant, British Telecom (BT). BT Law, which sells its services to outside clients, is a prime example of outside-the-box corporate legal strategy: turning an in-house legal department from a cost center to a revenue generator.

BT had long been a sprawling communications enterprise, being a state-owned utility prior to becoming wholly privatized in the 1990s. Along the way, the company had gained a reputation for its bureaucracy, complicated internal infrastructures, and lack of corporate nimbleness. As such, BT found itself ill-prepared to respond to the global financial crisis (GFC) of the late 2000s, in which even the best managed companies struggled to cut costs and do more with less. Therefore, in the aftermath of an especially brutal 2009, BT brought in Dan Fitz to head up its legal team as general counsel. The hope was that Fitz, a recent American chair of the Association of Corporate Counsel (ACC), would bring with him a fresh outsider’s perspective to make the tough but necessary decisions for the legal department (BT Legal) and help steady the ship. The board made his mission clear from the outset: find a way to lower spending by 5 percent each year. The catch was that Fitz was not to lay off any of BT Legal’s 425 employees.

An early part of Fitz’s strategy was based on an internal audit of BT Legal’s functions and hierarchy—a more typical strategy of cost reduction through increased efficiencies. Analyses of the department revealed a host of inefficiencies, from how the organization was structured to how its lawyers spent their time. Fitz and his team started chipping away at these slowdowns and resource pits by reorganizing BT’s lawyers and outsourcing some of the lower-level routine work that had previously taken up their time. The reorganization brought many lawyers back to the central legal team based in the United Kingdom. With many of its lawyers now centralized, there were new opportunities for management and collaboration that were previously unfeasible. The goal from there, as Fitz put it, was to “change the lawyer mindset. People come to BT Legal from private practice, where you just bill more hours to the client.” Now, efficiency was paramount.

The board made his mission clear from the outset: find a way to lower spending by 5 percent each year. The catch was that Fitz was not to lay off any of BT Legal’s 425 employees.

However, in addition to this more traditional strategy of cost cutting through increased efficiencies, BT Legal would attempt something far more revolutionary: turning a legal department into a revenue generator. In this regard, the legal department had an ace in the hole. While Fitz’s restructuring efforts certainly created greater synergy, a very specific part of BT Legal—its liability claims processing team—had already developed highly efficient systems for handling certain low-level claims in-house. Indeed, they were so efficient that they had excess capacity—so much so that they would be able to outsource these services to other companies. A Harvard Law School case study, “BT Law Limited: Cost Center to Profit Center,” captures how this seed would grow into a revolutionary development in the delivery of legal service.

It turns out that BT was in a unique position to pursue this strategy. Due to the company’s roots as a public utility, apart from its tens of thousands of employees, it maintained much of the United Kingdom’s physical telecommunications infrastructure, including phone and data cables. This meant that its legal team earned more than its 10,000 hours processing the liability claims associated with maintaining this vast network pertaining to things like damage to cables or damage to one of BT’s many repair trucks. In the 1990s, BT Legal brought all this liability claims processing under one roof in an attempt to generate greater efficiencies. Prior to this, the processing of these claims had been hugely decentralized, with claims bouncing around offices depending on severity and type. Over the next decade, however, their centralized office, which was tucked away in the affordable city of Sheffield, developed highly effective systems for handling low-level liability claims work—systems that required next to nothing in terms of BT lawyers’ time. Because of these efficiency gains, the office began to handle claims of greater and greater importance until eventually 95 percent of all of BT’s liability claims were processed without the need for direct lawyer involvement. The claims management systems that drove the revolution included support for liability claims in all phases, save for litigation.

Therefore, when BT was searching for ways to reduce expenses in the aftermath of the GFC, it got BT Legal thinking: What if we productized our liability claims processing team? For this opportunity to be possible for the entire claims process, including litigation, a major regulatory change was needed—a change that the 2007 Legal Services Act provided (for more on this, see “How Regulation Is—and Isn’t—Changing Legal Services”). Once that legislation took full effect in 2012, the liability claims processing team at BT Legal was among the first to apply as an alternative business structure (ABS), and BT Law was born. As an ABS, the team could now follow the claims process through litigation and represent its clients in court—business that had previously been off-limits to enterprises not owned by lawyers.

“We factor BT Law Limited in the make-or-buy decision when we’re considering whether we should go outside or build it inside within BT,” says BT Group General Counsel, Dan Fitz.

To obtain ABS status, however, BT Law needed to establish clear policies to address potential conflicts of interest—namely that it would not offer its parent company preferential treatment while it offered its services to external customers. As an ABS, BT Law would be, in effect, a separate entity from BT Legal, wholly owned by the BT Group but offering services to outside clients. Its revenues, however, went right back to BT Legal, where it could then offset expenses. As Fitz explained:

If the total cost of BT’s legal spend—money going out the door for salaries, pension, and the like—was projected to be £100 for the coming year, for example, then that’s my budget and it’s what I’m managing against. If BT Law Limited brings in, say, £5 in revenue that otherwise would not be coming in, then I get a credit for that revenue, and the total cost of legal to BT is reduced to £95. This is great, because, by the way, BT is going to ask me to reduce my budget by 5 percent, and BT Law’s revenue has helped me do that and provide essential services.

Looking to the future, Fitz concludes, “We can see this expanding into other areas where we’re spending money externally. We factor BT Law Limited in the make-or-buy decision when we’re considering whether we should go outside or build it inside within BT.”

Other corporate legal departments are following suit, attempting to productize their expertise to external clientele. For example, Microsoft’s Matter Center was originally designed as a way for the company to organize its own legal matters when its Corporate, External, and Legal Affairs group quickly realized that they had created a service that other companies would pay for. Rolling this functionality into its Office 365 suite of programs, Microsoft developed Matter Center. Once again, in-house legal innovation came from leveraging what the company already produced for its own legal needs to create a product that others would purchase, thereby generating revenue. Time will tell how many more in-house departments move in this direction, but the gauntlet has been laid down. In-house legal departments need not simply be cost centers and, given the right conditions, can become revenue generators.

Dentons and Nextlaw Labs

Turning to innovative strategies employed by law firms, Dentons, the largest firm by lawyer head count in the world, has taken up a strategy of investing in and supporting new legal technologies as part of its central mission—so much so that it brands itself as the “law firm of the future.” The clearest manifestation of this strategy is Nextlaw Labs, a platform wholly owned by Dentons for existing legal technology companies to work in collaboration with lawyers and clients. The Practice recently sat down with Joe Andrew, global chair of Dentons, and John Fernandez, global chair of Nextlaw Labs, to learn more about the strategy behind this recent venture.

Asked to define Nextlaw Labs in their own words, both referred to the enterprise as a “skunk work,” borrowing a term from the technology and engineering world referring to an incubator or space set aside for designing innovative and often experimental products. “At its core,” Andrew says, “Nextlaw Labs is a collaboration platform that brings people together to work on things that will allow all lawyers—namely our lawyers, who happen to be the original investors here—to provide objectively better legal service to their clients.” Nextlaw Labs was created to confront lawyers’ natural ambivalence toward innovation head-on, says Fernandez. “We had one of those moments of candor where we had to acknowledge that trying to accelerate and drive change in a very old profession—one that has not historically been a vanguard for change and innovation—was going to take an asserted effort. It’s a tough task in any business, but the nature of the legal industry and the nature of law firms themselves make that an even more difficult challenge.”

“Even though we all know it could be in the best interests of the client to use new technology, there has to be some, if not an economic benefit, then at least not an economic disadvantage,” says Dentons Global Chair, Joe Andrew.

Andrew and Fernandez—who have worked together for more than 30 years and boast a rich background in innovation, technology, entrepreneurship, and administration—were two of the key figures in the creation and rollout of Nextlaw Labs. The hardest part of such a creation, explains Andrew, is anticipating the rollout. “Our biggest problem, and this is true whether you are at the 480-person law firm of Sonnenschein or the more-than-8,000-lawyer firm that Dentons is today, is getting people to adapt and adopt to make sure that they recognize the virtues of the changes you are trying to make.” He continues:

Even though we all know it could be in the best interests of the client to use new technology, there has to be some, if not an economic benefit, then at least not an economic disadvantage. That has always been a challenge with even the most basic technology like electronic search. When I started in this process as a young lawyer, I might go down to the library and bill 10 hours. About two years ago I could do the exact same work on LexisNexis or Westlaw in about an hour. So in essence, my law firm would pay LexisNexis or Westlaw for the privilege of losing nine hours of revenue. Improving the alignment between client and lawyer interests is a fundamental challenge for adopting technology at law firms.

Nextlaw Labs aims to bridge this gap. As a wholly owned subsidiary, the platform allows Dentons to own a part of the technology that would otherwise impede its revenue stream. “The new technology may take money out of one of our pockets,” Andrew says, “but it’s putting money right back in the other pocket.” Fernandez adds:

We’re not doing this as some kind of marketing ploy—Nextlaw Labs and Nextlaw Ventures are actual businesses that we fully expect to make money. Like any fund or investment arm, the idea is to build a portfolio that you can manage effectively so you can target the right kind of investment opportunities, nurture them, grow them so that they increase in value and ultimately generate revenue through either distributions or capital gains.

The hope is that the firm’s ownership of these businesses transfers over to a sense of ownership in the hearts and minds of its lawyers. To develop this kind of personal investment, Nextlaw Labs relies on lawyers for product feedback and testing. This serves as a measure of quality control by taking the guesswork out of anticipating the needs of lawyers, which ideally improves the usability and user-friendliness of its products. It ensures that whatever is being introduced will actually allow lawyers to be more effective at their jobs, theoretically putting the interests of clients in better hands.

Critically, this strategy is meant to be self-sustaining, which Andrew describes in three-and-a-half steps. First, the introduction of Nextlaw Labs acts in many ways as the official introduction of an atmosphere of innovation at Dentons. Second, the firm brands that innovation so that clients are aware of what they are doing. Third, they figure out how the technology is being used, by whom, and whether or not it is genuinely useful. This, Andrew admits, is hard to track. “That’s a difficult thing to have a hard number on. It’s not like people are punching in on a clock where we know they’ve turned on the innovation machine and we can track the number of hours they’re on it. It’s much more subjective.” Nevertheless, these three pieces of the strategy, Andrew explains, logically form a circle that spirals upward:

By having an innovative culture, you’re more likely to have a brand for innovation. By having a brand for innovation, your clients ask for innovation and expect to get it. If your clients ask for it, guess what? You actually produce it! You’re more likely to have lawyers who are willing to adopt new technologies and adapt to a world of technology because their clients are asking for it. No one in leadership is telling you that you have to do it. The client is asking for it. And so it’s a circle—each part builds on the other and reconfirms the other.

The last “half piece,” as Andrew calls it, “is all this does a great job of recruiting talent.” Dentons is banking on other lawyers doing the math and reaching the same conclusion. For lawyers who see the value in a law firm being the first mover in embracing technology and finding a way to make it work in the delivery of legal services—whether or not Nextlaw Labs has yet delivered on that promise—they will be that much more likely to move their practices to Dentons as opposed to more-hesitant competitors.

“We’re not doing this as some kind of marketing ploy,” says Nextlaw Labs Chair, John Fernandez. “Nextlaw Labs and Nextlaw Ventures are actual businesses that we fully expect to make money.”

Dentons is keeping track of how this strategy plays out. “Apart from Nextlaw Lab’s ability to simply generate revenue, we’re looking at metrics that relate to the quantity of deal flow, the quality of coinvestment partnerships, and the pipeline of ideas that are being pitched to us externally or internally.” If all goes according to plan, all parties will benefit—the firm, the lawyers, the clients, and the technology companies, as well as any other business partners.

Nextlaw Labs has been operating for nearly two years now, and others have since followed suit, including the U.K. Magic Circle firm Allen & Overy, which recently announced the upcoming launch of its own legal technology incubator, Fuse. While the long-term payout of these ventures remains to be seen, it is clear that law firms are increasingly thinking outside the box in defining their strategy.

Seizing the opportunity

Between in-house legal departments and law firms, the legal market is demanding greater leaps of innovation to keep up. British Telecom, looking to reduce costs in its darkest hour, turned one of its internal strengths into a profitable legal service provider for external clients. No sooner had the legislative avenue been created with the Legal Services Act of 2007 than BT Law Limited was established as one of the first alternative business structures in the United Kingdom, selling legal services as a wholly owned subsidiary of an entity other than a law firm. On the other end, in Dentons’ Nextlaw Labs, we see a law firm build its strategy around prioritizing and establishing market share in legal technology, which has for years cast a specter threatening to change firms’ lucrative status quo. By being among the first to take the dive into a more holistic embrace of technology, the global giant has positioned itself well for a more technology-dependent future. In both cases, we see strategies that demonstrate a willingness to take risks and try something with little to no precedent—to blaze a path for others to follow without flinching at the possibility of becoming a cautionary tale. The question now is who will follow?

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Strategy in the Law Volume 3 • Issue 4 • May/June 2017

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