eLawForum: Transforming Legal Services - Part III

Sunday, August 1, 2004 - 00:00

Clayton M. Christensen and Scott D. Anthony
eLawForum

Part I appears in the June 2004 issue and Part II appears in the July 2004 issue of The Metropolitan Corporate Counsel.As illustrated in Figure 5, the benchmarks against which savings are measured are what the corporation would have expected to pay for an equal number of cases based on its historic cost - legal service cost (fees and expenses) and the liability cost. Against a projected legal service cost benchmark of $38.9 million, the corporation locked in savings of $28.4 million. Against a projected liability cost benchmark of $29.8 million, the winning law firm expects savings of 25percent ($17.5 million) to 50 percent ($14.9 million) and, when the final case is resolved, will earn one-third of this liability savings.

Case Study 5: Asbestos Litigation
The second representative aggregation (total cost management) involved eLawForum packaging a Fortune 500 corporation's asbestos litigation. The assignment envisioned that the majority of the 625 cases would be future claims rather than existing ones. The eLawForum prospectus stipulated that the fixed fee would be paid in 20 equal quarterly installments. Twenty-nine firms, including 13 incumbents, were invited. As illustrated in Figure 6, the highest proposed fixed fee was $45.8 million, while the best proposal was $10 million; the spread was $35.8 million.

As illustrated in Figure 7, the benchmarks against which savings are measured are what the corporation would have expected to pay for an equal number of cases based on its historic cost - legal service cost (fees and expenses) and liability cost. Against a projected legal service cost benchmark of $39.7 million, the corporation locked in savings of $29.7 million. Against a projected liability cost benchmark of $53.1 million, the winning law firm expects to save 50 percent and will earn one-third of this liability savings.

Conclusion
The 50 eLawForum competitions we studied demonstrate the clear advantage to corporations in seeing a large number of fixed fee proposals. Large spreads and dramatic savings are only possible when a broad field of pre-qualified law firms take part in the competition. The results of eLawForum's process dispel some fundamental myths and concerns of the legal services industry (see box).

The ABA considered eLawForum's results so compelling that it featured one of eLawForum's competitions in its August 2002 billable hour study. As the General Counsel of Nationwide Insurance, Pat Hatler, explained, the eLawForum process focused Nationwide's legal team on "the strategic approach we wanted to bring to these cases. We had to really understand the nature of these cases and to think about them in a different way."1

eLawForum's four stages of business model development have resulted in progressively greater savings. In Case Study 3, eLawForum saved its corporate client $16 million with a 50 percent reduction in legal service cost. Rather than spread the legal work in a practice area across two or three dozen firms, demand aggregation gives the winning law firm the role of national counsel or national coordinating counsel. In the two stage-four deals described in Case Study 4, eLawForum saved its corporate clients $25 million and $30 million respectively in legal service cost. eLawForum was able to move from half to two-thirds legal service cost reduction through combining liability savings-sharing with demand aggregation. Managing for total cost (legal service cost and liability cost) multiplies the size of the deals and generates the greatest saving.

eLawForum's unique business model is supported by enabling technologies. eLawForum invested millions of dollars in developing specialized Internet-based software. Without this platform, it would be impossible to exchange enough data (gigabytes) with the large number of qualified law firms required to create a competitive-source/all-inclusive fixed fee/total cost market. eLawForum's business model breaks historical tradeoffs between liability cost certainty ad price and between quality and price.

Success bred success. eLawForum repeatedly innovated to hone its disruptive model. It recognized that fixed fees were indispensable to achieving measurable savings. It used demand aggregation to generate larger savings. Its latest innovation generated still larger savings by providing law firms with the opportunity to profit based on results. eLawForum's success in working out the details of these innovations is seen in the magnitude of the value eLawForum created in the case studies we examined.

As long as corporations have no alternative to the sole-source/billable hour/cost-plus market, law firms can play a cat-and-mouse game, hoarding productivity gains without taking any risk. The emergence of eLawForum's competitive-source/all-inclusive fixed fee/total cost market changes the rules. Corporations now see productivity advances in law firm specialization translated into substantially lower prices. And, as we have witnessed in other industries, a dynamic marketplace will drive yet more innovation and lower prices.1 American Bar Association, "ABA Commission on Billable Hours Report," August, 202, p.34.

Clayton M. Christensen is a Professor at Harvard Business School and Scott D. Anthony is a Partner of Innosight, LLC. Republished in part from Innosight, LLC's monograph, eLaw Forum-Transforming Legal Services. Copyright 2004 Innosight, LLC. Innosight case studies are intended for discussion. They are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Certain facts in the case have been disguised or stylized.

Please email John Henry at jhenry@elawforum.com with questions about this article.