Henderson, W D --- "A blueprint for change" [2013] LegEdDig 21; (2013) 21(2) Legal Education Digest 20

• A blueprint for change

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A blueprint for change

W D Henderson

Pepperdine Law Review, Vol. 40, No. 2, 2013, pp 461-508

United States legal education needs to change. Simply stated, there is a shrinking demand for the product we offer. At the vast majority of American Bar Association (ABA)-accredited law schools, graduates are not obtaining full-time, permanent employment as practicing lawyers. This situation is partially driven by lawyer overproduction – for the last several decades, the number of law schools and law students has steadily expanded. At the same time, demand for traditional legal services has flattened and is now on the decline.

I am offering one blueprint for change.

The financial viability of law schools depends upon three interrelated factors: (1) a law school needs prospective students willing to enrol (‘students’); (2) a reliable way to finance the students’ desire to enrol (‘ability to pay’); and (3) upon graduation, students enjoy enhanced employment prospects and earning power (‘professional employment’).

Among these three factors, the third is the most important: high quality professional employment. Like water running downhill, the jobs attract prospective students; and the reliable earning power of those jobs attracts a method of finance.

In the current environment, there is enormous risk that law schools will focus on the short term issues of enrolment, rankings management, and tightened budgets. Yet, if we take that tact, we will not invest in a longer term strategy for cultivating more employment opportunities for graduates.

If a law school is performing well on professional employment for its graduates, the threats of insufficient quality students and inadequate financing mechanisms will largely fall away, or be less severe than for competitors. This is why a law school, acute as the short term problems might be, needs to build an infrastructure to deliver long-term employment outcomes. But before we can better prepare students for a changing legal marketplace, we need to understand for ourselves how legal work is changing.

As a general matter, the economic engine of law schools has been lawyers working in private practice.

As the economy has become more complex, interconnected, and regulated, there has been a massive surge in paid employment for lawyers. Over the last three decades, lawyers working for organisational clients, either as in-house attorneys or outside counsel, have prospered the most. The primary driver of this prosperity has been a relative shortage of sophisticated and highly specialised lawyers – a shortage that has been cured by the rise of the large law firm.

At the same time the number of technically sophisticated lawyers has proliferated, industry data suggest that the total number of jobs in private law practice has plateaued and may now be on the decline.

This pattern, however, is not necessarily attributable to a corresponding shrinkage in the entry-level market. Rather, it is likely due, at least in part, to a surge in supply. With the supply of entry level law school graduates outstripping demand, entry-level salaries have declined precipitously.

Outside of the elite national law schools, between 30 per cent and 42 per cent of law graduates are failing to obtain permanent employment following graduation. In short, this is an industry-wide crisis.

As chronicled by Brian Tamanaha in his important book, Failing Law Schools, the collapse in both jobs and earning power of law school graduates coincides with a relentless increase in student debt.

As Professor Tamanaha ably demonstrates, in the current job market, many if not most law graduates have very little prospect of even keeping up with, much less paying off, their educational debt. This creates a highly volatile political and economic issue that will likely grow over time.

When the federal government is experiencing lower levels of repayment for law school graduates, and the graduates themselves are complaining about the terms of the loans, what is the likelihood that the federal government will continue to issue a blank check to US law schools? The federal government’s lending for legal education is premised on the belief that a law degree enhances a recipient’s human capital, and surely that is true. But at what cost? At today’s tuition rates and levels of student indebtedness, it is possible that for many students the value of a law degree is not worth the cost.

Things are getting tougher for law schools because we train our graduates for the legal services market. Yet, the legal services market is gradually being upended by new entrants who are offering legal inputs and legal products to law firms, legal departments, and average citizens. The principal attraction behind a legal input or a legal product is very simple: technology or a better designed process is reducing the need for expensive, artisan-trained lawyers.

This is a paradigm shift. The best commentator on this shift is Richard Susskind, the British lawyer, technology expert, and futurist. Along a continuum that moves left to right, Susskind asserts that legal work is gradually migrating from bespoke (eg, court room practice), to standardised (eg, form documents for a merger), to systematised (eg, a document-assembly system for estate planning), to packaged (eg, a turnkey regulatory compliance program), to commoditised (eg, any IT-based legal product that is undifferentiated in a market with many competitors). These changes are made possible by identifying recursive patterns in legal forms and judicial opinions, which enables the use of process and technology to routinise and scale very cheap and very high quality solutions to the myriad of legal needs.

Susskind’s model became less abstract during the summer of 2010 when I examined data from the U.S. Census Bureau County Business Patterns dataset. The nature and composition of economic activity continuously evolves, so every few decades the entire classification system needs to be replaced. This last happened in 1997, when the North American Industrial Classification System (NAICS) supplanted the Standard Industrial Classification (SIC) system. The economic trends I observed in the summer of 2010 (limited to data through 2008, as the data has a two year lag) got my attention.

The NAICS code for legal services is 5411. In 2010, this sector employed 1,172,748 employees (as of March 15, 2010). Of these workers, 91.7 per cent are employed in law offices (NAICS 54111), which is down from 94.2 per cent in 1998.The second biggest category in the 5411 category is Title Abstract and Settlement Offices (NAICS 541191), which is driven by the requirement in some states that lawyers participate in real estate closing. This subsector employed 69,399 in 2010 – down from the 85,759 high-water market in 2006 – which is a clear fallout from the real estate bubble that nearly took down the entire US economy. The only other 5411 subsector is the catch-all ‘All Other Legal Services’ (NAICS 541199). This subsector has steadily grown from 9,800 workers in 1998 to 23,504 workers in 2010.

What companies comprise the 541199 subsector? Because County Business Patterns data include payroll and headcount information, which is information that company would like to withhold from rivals, it is anonymous and aggregated at the county level. As a result, we don’t know the identities of these companies.

Based on my readings and monitoring of the legal industry, my best assessment is that some substantial portion of these companies are contract registry services that assemble contract attorneys for large electronic discovery and due diligence projects. One of the biggest is Robert Half, which has 26 locations throughout the United States and Canada.

As substantial as these contract attorney registry companies appear, they are increasingly competing against legal process outsourcers (LPO), who provide the same staffing and process services for large legal transactions and litigation matters, yet accomplish it with foreign lawyers. One of the most well-known LPOs is Pangea3, which was started in 2003 by a US lawyer and his Indian-American MBA counterpart with $1.5 million in venture capital funding. The company was subsequently purchased by Thomson Reuters (NYSE symbol: TRI) in 2010 for a deal rumoured to be worth between $35-40 million. With core operations in Mumbai, additional facilities in Delhi, India, and Dallas, Texas, and corporate headquarters in New York City, Pangea3 has consistently grown between 40 per cent and 60 per cent per year. It now employs over 850 lawyers worldwide, and the company expects its historical growth rate to continue for the next several years.

Although the legal market is terrible for law graduates in the United States, the market is booming for Indian law graduates. Why? Because LPOs are growing very rapidly and competing with the traditional Indian legal employers. As the LPOs have become larger, more sophisticated, more stable, and more global in reach, the competitive advantage has begun to switch from labour arbitrage to process engineering. In a May 2012 story in the Hindu Business Line, an Indian law professor was quoted, ‘There is a rising trend of students opting for LPOs. The nature of work is changing and these places offer good packages and work culture. Moreover, I believe, promotions also come faster in LPOs’.

The attractiveness of LPOs is corroborated by the experience of Pangea3, which had a retention rate of 94 per cent after its first year of operation.

Not only are the Indian law graduates getting the employment, they are learning valuable skills that are entirely – entirely – absent from US law schools.

Another industry that reflects Susskind’s view of the future is the emerging industry loosely called ‘predictive coding’. In essence, it is machine algorithms partially replacing humans altogether in the search for relevant information.

Companies operating in the predictive coding space include Recommind, which specialises in e-discovery, compliance, and information management. Recommind has approximately $15 million in annual revenues and approximately 100 employees spread over facilities in Massachusetts, California, London, Germany, and Australia.

All of the companies discussed above are profiting from the migration away from bespoke legal work. As I reflect upon the array of non-lawyer talent and capital that has assembled itself into formidable, rapidly growing companies, I have a difficult time identifying a realistic stopping point that will preserve a domain exclusively for artisan lawyers – i.e, the type of training that U.S. law schools ostensibly provide.

Changing employer behaviour is complicated, particularly in the legal market, where reliance on an ingrained prestige hierarchy produced a century of steadily growing profits. Changing employer behaviour requires: (1) a lot of current knowledge on the legal marketplace; (2) deep relationships with legal employers who are willing to experiment; (3) an agreed upon specification of high performance; (4) a critical mass of law professors willing to build and teach a curriculum designed to produce high performers; and (5) a reliable system of measurement that can quantify the value-add. I doubt any one law school has the resources and personnel to accomplish this at a world class level. A consortium of law schools, in contrast, would have a much better shot.

First, the types of education that will attain the highest valuation are complex problem-solving skills that enable law school graduates to communicate and collaborate in a highly complex, globalised environment.

This is not vocational training; it is the creation of a new model of professional education that better prepares our graduates for the daunting political and economic challenges ahead.

Second, we academics are on thin ground when we claim that we must operate apart from market influences in order to develop critical thinking among our students.

Whether we like it or not, we already operate within a market. Further, within the university, our higher base salaries are justified based on the opportunity cost of private practice income. At the same time, there is a glut in the market for entry level law graduates. Further, virtually all lack the skills needed to differentiate themselves or to be economically valuable to an employer or client without additional training.

This brings us to the third reason we need to focus on labour market outcomes: Simply stated, the market for traditional legal education is drying up. An education that is attuned to this changing marketplace is a valuable education.

This is the type of large gap that only a consortium of law schools would be able to fill. Outside of the purview of ordinary faculty governance, this group of willing legal educators would have the resources and latitude to create the type of curriculum and teaching methods that could attract the interest and allegiance of employers who are themselves locked into their own fierce battle for market share.

This cooperative effort might begin as a consortium-based summer program for underemployed law students during their second summer of law school. If the program is met with enthusiasm by students and employers, it could be migrated to consortium-based 2L and 3L programs. Unlike curricular reform at the school level, which is often characterised as being long on discussion and short on actual change, a dean has the latitude to commit one or two enthusiastic faculty members to a consortium effort that will build and experiment with new approaches to legal education. Within one or two years, the consortium moves from ideas to actual results. And, if it works, results are successes that resonate with students, employers, and alumni.

The key to moving an entry level labour market is clarity between educators and employers on the requisite knowledge, skills, values, and behaviours that amount to high performance. Very few legal employers, including law firms, government agencies, and corporate legal departments, have analysed their human capital in a sophisticated way. After defining the criteria for high performance, the shared goal should be the creation of measurably better law school graduates.

What I am advocating is the creation of a competency-based curriculum.

Building a competency-based curriculum is complicated. Because of the emphasis on process and technology now taking hold within the legal industry, the practical technical skills and domain knowledge that might have held us in good stead in 1980 or 1990 may be inadequate for a large proportion of law students graduating in the year 2015.

To ensure the long term viability of our law schools, our students need a reliable pathway to high quality professional employment. Focusing only on traditional legal employment is too risky. Some might argue that law schools should become more affordable by slashing budgets and increasing teaching loads. Although this might reduce student debt in the short to medium term, it does nothing – zero – to prepare our students for the changes occurring in the legal profession and the broader legal industry. From my perspective, the inadequacy of legal education today is a problem at least on par with its high cost. We need to solve both.