The future of transactional law

Feature

posted 2 Oct 2001 in Volume 4 Issue 6

The future of transactional law

There are historical barriers to conducting high value transactions over the internet, which new technologies are removing and in doing so are creating opportunities. Henry Steen of Business Integrity Ltd discusses how this is of vital strategic importance to the legal industry, due to the declining level of deals, the uncertain economic environment, client pressure on fees increasing, competition intensifying, and the exceptional lawyer being in higher demand.

Use of internet - lessons from experience

One of the early lessons from the internet was that substantial revenue could not be generated by subscription-type services. Various revenue models have been tried, from subscription to advertising, but all have withered on the vine, with exception of advertising on the super portals such as Yahoo!. The lesson is that the only real way to make a business from the web is if a transaction takes place. Exactly the same principle applies in delivering law over the internet. Subscription-based services that provide general advice will only ever provide a certain level of branding and improved customer service with low levels of associated revenue. The real income and opportunity will come from supporting transactional law over the internet.

The issues

It is an over-simplification, but in every occupation there is creative value-adding part of the job and an overhead of non-creative work. The clients of law firms instinctively understand this.

The client appreciates the value added by a lawyer who is client focused and innovative in his advice, but grudges paying for the production of documents that appear to be superficially similar from transaction to transaction.

In order to strengthen client loyalty, improve competitive edge and keep the best brains in the firm, then a lawyer's time must be freed up to better understand the client and the client's needs.

Documents are at the heart of the issue. The production and checking of transaction documentation can take up to 40 per cent of a lawyer's time. This work is frequently tedious and unpopular. The introduction of professional support lawyers (PSLs) recognises that bespoke drafting needs to be reduced. It is self evident that to make even greater progress, the production of these key documents needs to be automated. Even though there have been document automation systems around for some time, they have not yet achieved widespread use or delivered the required benefits. This is primarily for three reasons:

1. The precedents of firms are frequently not in good enough shape to automate and they are in a state of continuous flux and amendment. Typically, they are inconsistent in style, out of date compared with current practice, contain errors and there are multiple versions are in use.

2. The programming of the automated document templates is expensive, difficult, uncertain and lengthy. Indeed, some corporate contracts are so complex they are almost impossible to programme with conventional techniques.

3. The resulting generated documents from conventional systems do not have a level of trust whereby the generated contracts could carry the legal liability of the firm without a human legal check. This is because the output from traditional programming methods is inherently uncertain without lengthy and expensive testing. The lag implied by this development and testing usually means that the law has moved on in the meantime. Lawyers are therefore justified to have concerns regarding both the legal integrity and the currency of the resulting documents.

As a result current implementations of document generation systems, including those from magic circle firms, amount only to an in-house automation of the first draft that still needs to be proofread and checked by a lawyer. They are rarely applied to the most complex transactions and the associated multiple document sets that are required.

The solution

The root of the problem is that current systems start with the wrong conceptual model, suggesting that if you start in the wrong place you will get the wrong answer.

Master precedents reside at the centre of a firm's database and know-how reserve. The master precedent codifies all the possible combinations of clauses in a contract It is what lawyers understand and use, and it is in English.

Current document automation products make a computer programme replica of the master precedent and then use this to drive their systems. This is where problems arise. Programming the replica is time consuming and difficult, and keeping the precedent and the computer programme synchronised are almost impossible in the timescales of the business.

New technology

New technology, which has been in operation in Standard Chartered Bank for nearly two years, has recently come on to the market. It is about to be adopted in one of the world's largest law firms and is under evaluation in several leading UK firms. This technology works with the precedents as they are and does not require them to be re-programmed. It can take an existing precedent and, using artificial intelligence techniques, process it to produce:

An audit report of errors and inconsistencies (a perfect precedent without errors has yet to be found),
An updated, cleansed and consistent version in the desired house mark-up style,
An enhanced version with added information, notes and guidance for use,
A training version for new lawyers.

In this way the firm can rapidly and inexpensively update and perfect its know-how to a point where it embodies the firm's experience in a high quality and consistent representation in the format the lawyers understand (they do not need to understand a computer programme). From this starting point the PSLs can maintain the precedents that contain the know-how, at the edge of new legal constructs and practice. This provides a unified, up-to-date, error-free and consistent body of master documents, which are the foundation of the firm's value and branding. It is, in fact, the firm's know-how in a living and evolving form.

Perfected precedents that have been corrected and updated are a pre-requisite for automating the production of individual instances of contracts.

In fact, this new technology creates both, the input forms for the transaction and the subsequent generation of the documents, as by-products of the cleansing and updating process.

A watershed feature

Not only is the know-how and the generation of documents automated, they are also 'trusted'. If the precedent is clean and signed off, then every individual example and instance of a generated document will have legal integrity, and the firm's legal liability can be appended to it. This is because as a perfected precedent has been re-generated by the system and then signed off, then by definition the software has been eliminated as a source of errors.

The importance of this cannot be over-estimated. It means that automatically generated documents do not need checking, that a junior can complete a term sheet and get a perfect resulting contract and ultimately that the client can generate its own 'trusted' documents.

Of course new terms, legal constructs, refinements and variations will still need to be made by qualified lawyers. However the nature of their job changes. They are no longer looking for drafting errors, but are looking to see how they can improve the deal and protect their client better. This is the enjoyable part of the job that the client also values.

The benefits and implications

The business implications of this are profound.

Branding of the firm

A subtle, but potentially highly important, change is the implication this has for the branding of the firm. The intellectual assets of the firm can now be contained in its library of perfected precedents, and do not solely exist in the minds of the individuals of the firm. The precedents now represent the accumulated know-how of many lawyers gathered over time. Moreover, these precedents can evolve continuously in line with new requirements. Thus the brand of firm becomes more important than its individual lawyers and is continuously refreshed. As lawyers work more from the firm's knowledge base than their own, it means that the firm is less vulnerable to defections, salary pressures and recruitment expense. It also enhances client retention because the client's loyalty will be more to the firm and its style not the current lawyer relationship.

Charging methods

Charging methods can be revised if required, where a fixed charge is made for the production of the documents, but the billable hour remains for added value services where the base documents are refined. This is akin to the business model of a software company who charges a software licence fee for the intellectual property of the software, but charges time and materials for customisation of the basic package.

Internal productivity and client service

If up to 40 per cent of a lawyer's time can be saved, if the work can be done by a paralegal, if a document that usually take two weeks to produce can be produced in two hours, then there is a potentially massive reduction in costs and improvement in client service. An objective measurement will usually show that, with the downward pressure on fees, in most firms document drafting is already losing money or is on the margins of profitability. Clearly, this can have a major impact on the scale and charging methods that the firm chooses. It is question of 'when' not 'if' automated documentation is introduced, and how charging methods will be amended.

The ultimate destination: client-generated documents

The sine qua non of generating documents over the internet is 'trust'. Can the firm trust the output from the document generation system enough to assign its professional indemnification to the documents and allow, if desired, the client to generate his own documents? Without this level of trust, systems will only ever be clever first drafting tools for internal use.

However, if the documents can be 'trusted' in this way, the lawyer's job can be completely re-engineered. The client completes the term sheet online and, using the know-how database of the firm, generates his own contract. The lawyer can now get intimately engaged in the deal, see the angles, innovate and add value. Just what the client wants... and the turnaround times are slashed dramatically.

Instead of checking documents for errors, which is a negative operation, the lawyer is looking to see where he can add value to them, which is a positive operation. He can do this in the knowledge that the base documents he is working with are error free, and represent the latest embodiment of the firm's know-how.

Significantly, this will change the know-how department from a cost centre to a profit centre.

The ultimate way to exploit the power of the internet for a law firm is not via subscription services, but to use it to conduct transactions. This requires new types of precedent automation, which can attach the required levels of trust to the generated documents.

This will change the way lawyers work, the way they charge, the service levels to the client and the relationship of the firm with its clients. These capabilities can be used in many ways: to improve competitive edge by better client service, to reduce costs by automating much of what an assistant lawyer does, or to increase revenue. Ultimately this translates into a win-win situation. The firm increases its profitability and the client receives superior legal services.

Henry Steen is the chairman of Business Integrity Ltd, and can be contacted on HENRY.STEEN@terra.es. For further information about his company, visit the Business Integrity website at www.business-integrity.com. Before launching Business Integrity, Steen was the general manager of Strategy Partners International, a Europe-wide consultancy specialising in knowledge and document management technologies. He enjoyed a distinguished career in a variety of executive and international VP roles at IBM and the Amdahl Corporation.