This post is adapted from a presentation on Transaction Development given by Office & Dragons on 24 September, 2020 to a group of leaders and influencers in law and legal tech. An audio recording of the presentation will be released soon!
Worst. Deal. Ever.
Worst. Deal. Ever. It’s a phrase I heard for the first time after I finished my first “real” deal at Kirkland & Ellis, where I used to work as an M&A lawyer. The kind where you get stuck in, you’re up late nights, you pull an all-nighter… When we got it done, one of my colleagues came up to me and said ‘Man, that deal we just did… I think that was the worst one our office has ever seen.’
When I heard that, I actually felt relieved, thinking ‘Oh, okay, well that was the worst, I guess it can only get better from here.’ Then the next big deal rolled around, and I was up even more late nights. We pulled back-to-back all-nighters. After that one got done, another colleague came up and said ‘No, I think this one, this must be the worst deal our office has ever seen.’
You can only hear that so many times before you notice a pattern: things seem to be getting worse. In the interest of self-preservation, I started thinking about what was going on, why was this happening?
The world is changing.
Eventually, I came to what might seem to be a pretty obvious conclusion: the reason this is happening is because the way our clients, the way businesses transact, the way they do deals like M&A and IPOs, is changing.
Deals are getting faster and timelines are always getting shorter. They’re getting more complex, as transactions like private equity buyouts mature and clients want to eke out value in new ways, or as new transaction types emerge, like what we saw with cryptocurrency in 2017 and beyond. Furthermore, in every industry, transactions are getting more competitive, which compresses deal timelines further and drives up stress levels. As deals continue to change, we lawyers are scrambling to keep up.
Late nights. All-nighters. Going hundreds of pages deep into dozens of contracts to make last-minute changes in that rush of stress before closing. Each time, I learned a few things and had more precedents to look at, but I didn’t capture that learning in a structured way that I could just plug in to make the next deal easier. The next one was just as hard.
This kind of scrambling and toil is not the kind of work smart firms want to do. It doesn’t help them win clients. I used to help partners put together fee estimates and billing summaries. This kind of stuff usually ends up being either really low-margin because it’s not factored into the fee estimate (imagine putting $50,000 of first-year copy/paste work in an estimate…) or else just written off the bill.
Some will win. The others....
So, what does help law firms win clients and make money? Clients choose law firms primarily based on their reputation, and reputation is built on delivering excellent service. What excellent service looks like changes to reflect the way businesses transact. We’re seeing this play out at a more advanced stage in financial services, where the way people interact with payments has totally changed. As payments go digital, ATMs and branches become irrelevant. A bank in your pocket that’s always available and quick to get started with is a much more excellent fit for the times. Especially in the UK, we see challenger banks like Monzo, Revolut, TransferWise, Tide, Starling, and more finding great success delivering their services this way, first with consumer banking and now increasingly with business banking. Incumbent banks are forced to invest heavily to catch up.
In legal services, we're seeing three things that clients really want:
transparency and clarity: to know what's going on in their deals in a simple way without confusion;
instant delivery of work product (or something approaching it): when the terms are agreed, there's an expectation that the contract should be finished right away; and
data-driven decision-making: no longer relying on the expertise of just one or two people, but, taking a cue from other industries, expecting that data is being collected and analysed and feeding into decisions to improve them
How can we deliver all that, when we're still scrambling to keep up with all the basic stuff keeping us up at night and driving us crazy?
How do we win?
That's what Transaction Development is meant to address. Transaction Development is a new way to deliver deals. To explain what it is, I'm going to use the analogy of a factory (I used to work in factories in my teenage years in Michigan).
In the olden days, when you wanted to build a part for something you were building, each of those parts would be made individually by a craftsperson. They would cut the parts one at a time. You would get some very finely crafted parts, but it wasn't scalable. You weren’t going to put that product you were building in every home. That's what manual processes are like in legal. A lot of fine craftwork going into the contracts and other work products people are producing, but it doesn’t scale.
Moving forward in time, a major innovation in manufacturing was the introduction of plastic molding machines. With molding machines, you make big, expensive mold and use it to crank out lots of parts very quickly. However, they are always the same part. So, what you have are a few standard parts that you can crank out rapidly at scale. It’s really great, until you need a part that doesn’t fit the mold, and then you’re stuck. You either have to mold a similar part and do a lot of manual cutting and shaping afterwards, or else you just make it manually from the start.
This is Document Automation. It’s great for your thousandth employment agreement. LegalZoom built a great business around that. In law firms, however, there’s been very limited application. When we ask lawyers and legal tech professionals why that is, they tell us ‘Our work is bespoke. We’re not just choosing between a few stock clauses in a standard form. Furthermore, we work on very tight deadlines. Spending a bunch of time making templates won’t help.’ So, they’re stuck in the manual process.
Bringing the factory analogy forward to today, we're currently witnessing the revolution of 3D printing. 3D printing changes the game, because it is a scalable way to craft any part with any customisation. What's interesting about 3D printing is that it's not about the shape of the part you're making, it's about the process by which the part is being made. That's how we see Transaction Development.
Transaction Development is 3D printing for deals. It's not making templates. It's putting in place a framework that guides and supports the way deal terms are developed and contracts produced for any deal, even where all the contracts are new and bespoke. It’s not just about the technology, it’s a mental shift as well. It's moving our thinking one level up: rather than thinking about how individual documents or sets of documents are produced, we’re thinking about thinking about how deals are delivered as a whole.
Transaction Development platforms transform lawyers from authors of documents into developers of deals, equipping them with engineer-like tools which allow them to deliver deals in a simple, rapid and scalable way. I don't mean coding – Transaction Development is not about learning how to code. It's about applying engineering principles and patterns to support a better way of working.
In terms of what that looks like concretely, I’ll mention briefly Office & Dragons and what we're building. The core principle behind O&D is the separation of deal terms from documents (which is the application of a software engineering principle known as “loose coupling”).
When you’re working on a deal using O&D, rather than taking the deal terms, like purchase price, parties, etc., and sticking them directly in every document, you put that information in just one place (currently, a simple spreadsheet). Now, rather than hunting through dozens of documents for a piece of information, everyone knows exactly where to look and can find it quickly, without confusion.
Normally, changing any of these terms is painful, because you have to make conforming changes one-by-one across every affected document (on top of hunting through all of the documents to uncover which ones are affected). With O&D, you make the change in just one place, and all of the documents are updated at once.
Today, knowledge is siloed. It's scattered between documents and scattered between the minds of the professionals who did the deal. With O&D, that knowledge is kept in one place and structured in a sufficiently uniform way to make aggregation and combination simple, allowing you to plug it into the next transaction you're working on and make it meaningfully easier and better informed.
What does winning look like?
Legal services are unique in that we have an AmLaw 100, a Magic Circle, a Silver Circle… essentially, many firms of similar size, with similar revenue, doing the same deals for the same clients. Other industries, especially product industries, look very different. Take video streaming: there’s Netflix, Amazon Prime, HBO, Hulu, Disney, YouTube and that’s about it. Or cloud providers: there's AWS, Azure, Google, Oracle and that’s about it. We don't have a Streaming 100 or a Cloud 100, and we won’t have an AmLaw 100 much longer, either. Instead, well see the rise of “the Amazon of law firms”.
Transaction Development removes friction from the delivery of legal services and captures deal experience in a way that law firms can use to deliver expertise at scale. Accordingly, firms that invest in Transaction Development will see a shift in their economic model. It will start to look less like a service model and more like a product model. ‘Product’ is a dirty word for some lawyers, who often conflate ‘product’ with ‘commodity’. They are not the same thing (I don’t think anybody has ever called a Tesla a commodity), and from a business perspective, there are two big reasons to get excited about a product-like model over a service model:
Digital products have much higher margins than services.
Digital products have practically unlimited distribution.
Put another way, imagine if each client matter you completed was more profitable and you could work with many more clients. With these economics, law firms that lead in the adoption of Transaction Development and succeed in transforming their business model will be able to capture increasing market share from competitors who trail them. They will grow to dominate the market, while their competitors shrink into niche players or disappear altogether.
Be the change you want to see.
Transaction Development is a new category of solution we are bringing to market, and we’re very early in that journey. However, we're starting to see evidence that it can work.
At one of our pilots firms (a top global law firm), the asset finance team was instructed on a really big deal to put in place a ton of financing documents for a fleet of aircraft on a super tight deadline. Although they staffed a large team, they weren’t sure how they were going to manage to get it done on time. They were coming up against their Worst. Deal. Ever. One member of their deal team, however, started looking at it one level above the documents at what needed to be delivered. He decided to try O&D as a way of getting that deal done. In a nutshell, he was able to individually save 80% of time versus what others on the team had spent doing the same kind of task manually. Due to this, the team was able to get that deal done not just on time, but without working overtime, which everyone was very happy about. Through O&D, Transaction Development has started to spread within the global asset finance practice, and when the partners leading the practice look at their bottom line, they see a fast and meaningful return on their investment. They're moving on from the pilot to a production deployment of O&D. Again, it’s early days, but we're hoping that by taking this journey together, we continue to learn and continue to improve and come to a place where they never again see another Worst. Deal. Ever.