The Business of ADR is Changing

Bruce A. Edwards, IAM Distinguished Fellow

Those of us who have been in Alternative Dispute Resolution (ADR) for the past 25 years have seen it grow from an industry in modest infancy to thriving adulthood. In the beginning, we grappled with a business model of franchisor or franchisee. Mediators were challenged by potential conflicts of interest and were constantly in danger of being labeled as anything other than “neutral,” based on our law firm affiliations.

In the 1990s, some ADR practices, mine included, made the leap to our own mediation firm start-ups. We marketed to law firms, offices of general council, and insurance companies, extolling the virtues of mediation. We were motivated by convincing the courts about the benefits of ADR and perhaps someday seeing it made mandatory. Many of us saw our companies and revenues grow. We progressed from having to define ADR, mediation in particular, to its becoming an integral part of our U.S. court system.

Many professional mediators are now in danger of falling victim to our own accomplishments. Instead of enjoying the successes of our past labors, I would challenge us to create a new vision for our industry. Everywhere around the globe, individuals with conflict resolution skills could make a significant impact. We who have been in the field for many years have the competency and experience to instill the knowledge about ADR that those individuals need.

The legal industry is reaching a new financial normal 

The legal industry is reaching a new normal of stagnation rather than growth. What are the implications for large ADR service providers, such as JAMS, in an industry that tends to mirror the rise and fall of law firm practices?

Competition for legal business is intense and in-house counsel make more decisions. Insurance companies are bringing work in-house, away from private firms. Revenues are virtually flat – firms budgeted, on average, 3 to 4% growth in 2013, 1 to 2% in 2014 and 1 to 2% in 2015. Billable hours are almost flat: a 2012 survey of 130 large law firms showed only a 5% increase in billable hours. There is an intense downward pressure on rates with, for example, reverse bidding auctions. Alternative fee arrangements are approaching 20% of law firm revenue.

Law firms can no longer rely on the notion that a rising tide will lift all boats. In fact, trends of the past few years suggest the tide is out. And to paraphrase Warren Buffet, “Only when the tide goes out do you discover who’s been swimming naked.”

What’s ahead for ADR firms

Rate increases and more hours alone can no longer drive growth for ADR firms. Our projected revenue is expected to increase by only 1 to 2%. The sophistication of our clients will put downward pressure on hours. Alternative fee arrangements don’t hold much promise, given the ethical issues. Our marketing must target general counsel, as well as law firms. We must continue to find ways to differentiate ourselves by maintaining the highest level of service. Healthy growth will come primarily from increased market share, targeted specialization and global expansion.

A challenge for the future

I challenge everyone in the ADR industry to think more broadly, even globally, about our practices! What markets exist beyond the world of litigation? Why haven’t international law firms been quicker to embrace ADR? Why is there only one JAMS rather than ten or twenty? Why aren’t there twenty-five law schools out there with the success that Pepperdine has had training future mediators? In a world desperate for conflict resolution skills, how can we bring mediation training to an audience never before addressed? How can we cultivate the best and the brightest of the next generation of mediators?

These are the questions that should be central to any discussion of the business of ADR.

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