In this article we take a close look at the business models of the dispute resolution field, present and prospective. What are the challenges and opportunities for practitioners? To gain an understanding of current business models as well as the strategies and vast differences among firms and geographic areas, we interviewed ADR leaders and informed observers around the world.
Although some business models have reached stability, we predict disruptive innovation in ADR. As with other industries, the source of the disruption in the ADR market is likely to be not the established players but new ones. The good news for the established participants, however, is that, unlike in some other industries, the innovations seem more likely to open up new ADR markets and types of service than compete for existing ones.
That’s a good thing, because even in the United States, the established market for ADR still cannot be called large. The percentage of Fortune 1000 companies reporting ADR as the preferred strategy for conflict resolution went from 37% in 1997 to 49% in 2011. (For a discussion of how use of ADR has evolved among Fortune 1000 companies, see the article by Ryan Lamare on page4.) But the overall market is still small. One close observer estimates that the entire US market for commercial ADR is currently about $500 million in billings annually. That may sound like a lot, but not in comparison to law firm billings; $500 million about equals the annual revenue of the 50th-largest US law firm. All by itself.[i]
Networks Supplying Neutrals
In the US, the two dominant providers of commercial ADR services are the American Arbitration Association (AAA) and JAMS. Each bills out something like the dollar value of all other US commercial ADR providers put together.
Both organizations represent a class of providers that now exists in many countries, supplying neutrals to parties in disputes. The main challenge to this type of provider is how to get both parties to buy in. Once a dispute has taken root, parties are rarely inclined to try alternative dispute resolution, so a willingness to consider ADR, when it occurs, tends to be the result of considerable pressure from someone influential. Judges or other such influencers are likely to continue to be crucial for such “referral models.” Otherwise, these providers depend on parties opting for their dispute resolution system before disputes arise, in a contract.
Scaling up a neutral-supplier model takes many years, and the organization depends on partnerships with others to make that model work. An ADR provider has to convince either referring authorities or lawyers who draft dispute resolution clauses that the provider’s dispute resolution system best serves the interests of the clients. The relatively limited numbers of cases that are referred to mediation and arbitration indicate that the system lacks sufficient incentives to encourage such referrals.
JAMS has sought, with some success, to sign up neutrals who will most likely be acceptable to high-dollar commercial litigators and then to develop the neutrals’ caseloads. Ten to 15 years ago, this strategy involved roughly comparable numbers of former judges and experienced lawyer-mediators (or lawyer-arbitrators) who had not served in the judiciary. But the strategy does not appear to be working equally well for both groups. Our understanding is that the law firm partners who make most of the selections for particular cases on behalf of their clients predominantly choose former judges over the often highly experienced mediators without judicial backgrounds. Increasingly, according to a JAMS insider, the lawyer-mediators who do “make it” in this setting are those with a strong substantive-expertise specialty, such as IT or insurance.
The AAA, meanwhile, as a century-old nonprofit with roots in arbitration, seeks to serve a rather broader cross-section of disputes than JAMS does. For instance, it has an established presence in labor arbitration and a variety of government- and consumer-oriented programs. For many of these disputing areas, AAA is the “pre-set” mechanism for resolving the dispute, and no outside pressure is needed to get the parties to use the process. The AAA panels of neutrals operate differently from the way JAMS’ panels do, often with parties alternately striking names from a sub-list supplied by AAA until one name remains. The AAA maintains extensive rosters of neutrals for different processes and types of disputes.
Both the AAA and JAMS appear to have reached a degree of stability in their business, and radical changes or a rapid push into new types of markets are not visible. In contrast, both organizations have sought entry into new geographic markets; both JAMS and the AAA have had international divisions for some time, and their caseloads are growing. The AAA’s international caseload, for example, passed the 1,000-per-year mark in late 2013.
Stability also has arrived at the CPR Institute. Like the AAA, CPR is a nonprofit, and it maintains a roster of neutrals, but its strategy can be described as more educational than operational and as more focused on influencing the strategic level of firms toward broader use of ADR than on providing services to “tactical” corporate officers or case-handling lawyers.
In most of Europe, similarly, a kind of stability is now visible in commercial ADR, though this does not represent as robust a case stream as in the United States. The leading provider in Europe has long been the United Kingdom’s Centre for Effective Dispute Resolution (CEDR). It estimates that the British market for commercial mediation adds up to about 8,000 cases annually, of which CEDR administers about 10% to 15%. (In comparison, JAMS has a caseload of about 12,000 cases annually.)
CEDR’s strategy, like that of other dominant providers across Europe (and much of the rest of the world), depends on a lively and quite lucrative training market; JAMS, in contrast, does very little training except for continuing training of its own roster members. CEDR also sees a large part of its commitment as being toward the growth of the field as a whole, and it puts significant effort into developing contacts, and to some degree markets, at some remove from London. Dublin is an obvious office location for CEDR to set up in; Hong Kong might not be, but there they have been, for the past two years. CEDR also takes on other roles, such as administering a consumer dispute system (using a separate staff of adjudicators and conciliators), which involves a large number of relatively small disputes. In the same vein, its strategy for the future includes looking at ways to expand consulting work, including proactive work to try to forestall conflicts.
The most remarkable fact about the existing ADR market across Europe, however, is how small it still is. A recent study for the European Commission[ii] estimated that about half of European countries have fewer than 500 mediation cases a year apiece – several years after the European Commission began to push all European legal systems in the direction of using mediation more often. No one is really sure how – or when or whether – this might change, unless the exception proves to be an inspiration.
The exception is Italy, whose experience of ADR is unique but worth noting in some detail because it provides a clue to what is not happening elsewhere. From the early 1990s up to 2011, the entire Italian mediation market never rose much above 2,000 cases a year. But from 2011 to October 2012, it went to 200,000. (No, this is not a misprint.) In October 2012, the market plummeted, even below the former 2,000-case level. And as of today, the big numbers are back. What happened?
In a word, “mandatory” mediation happened, which can be seen as a particularly strong form of the referral model. Facing intractable delays in the court system, the Italian legislature made mediation of civil litigation mandatory – in the face of a national lawyers’ strike, called by the Bar Association specifically to protest the law. Caseloads rocketed as major litigants such as insurance companies, some with thousands of cases on the docket, scrambled to achieve compliance. But the market collapsed a year and a half later, when Italy's highest court overturned the law on constitutional grounds, after the Bar Association stopped striking and began lawyering against the law. Recently, in very Italian fashion, a deal was reached (in part requiring that parties bring a lawyer to many mediations), and a revised bill was passed with the bar’s agreement.
It’s too soon to assess the effects on perceptions of justice, costs, or other large questions that attend such a major policy move. But it seems safe to predict that under this statute, the time that a typical Italian litigant spends waiting for some sort of resolution will probably fall sharply. A strong policy push of litigants and lawyers toward mediation has successfully created an enduring market before, notably in the state of Florida. We are, in fact, not aware of any jurisdiction worldwide where a truly large caseload in mediation has been achieved without such a push from above – even if, after some period of time, the political or judicial force can safely be relaxed without the market then collapsing, as parties and lawyers become accustomed to the new approach to doing business.
Because the existing models have lived up to expectations and gained a substantial share of the market for conflict resolution in only a few places, looking at some emerging models is a worthwhile exercise.
Unilaterally Imposed Systems
Perhaps the most important development to date has been the opting out of litigation by repeat-player defendants. In the United States, consumers, employees, and clients of government services are now likely to use dispute resolution systems designed by their opponents. The best of these systems offer a full range of dispute resolution services, incorporating complaint-handling, a diagnosis phase, mediation, and arbitration.
The underlying business rationale is straightforward. Companies want to reduce their dispute resolution costs, the costs of damages awards, and uncertainty. They aim also to increase customer satisfaction. So they set up dispute systems themselves that try to strike a balance between these goals. There is an ongoing temptation, however, for the company to design a system that “stacks the deck” in its favor. (We will not delve into this further here, as it has been widely discussed in these pages and elsewhere.)
Integration into Legal Services
Increasingly, dispute resolution services are being integrated into other products. Their unique selling point is that they can offer speedy and fair resolution at low costs. So they are most likely to be combined with services already delivered on a fixed-fee basis to clients or prepaid by these clients. Clients may be individuals or companies.
Legal expenses insurers, for instance, may develop into wholesale providers of dispute resolution services. In the United States, such insurers so far operate primarily as an employee benefit negotiated with a (generally very large) employer. In Europe, by contrast, the market for legal expenses insurers has taken off, and the biggest provider of legal protection insurance, D.A.S., now has more than €1 billion of premium income through subsidiaries in 16 European countries. Recently it set up shop in Canada and South Korea.
Legal expenses insurance business models differ by country. Some jurisdictions allow insurance companies to employ anyone they consider capable of addressing the legal problems; others require them to hire lawyers who have been admitted to the bar, which usually is a more expensive talent pool. The most adventurous of these insurers have also started to offer fixed-fee services to clients who did not take out insurance. For example, a client with a simple case may pay €200 for advice, €400 for an attempt to settle the case, and €800 for representation in an adjudication procedure at a specialized court or tribunal.
Specialized law firms are now also moving into fixed-fee products. Once fixed-fee services of reasonable quality are widely available, clients will be less likely to hire a lawyer on an hourly fee basis. This disruption has been predicted for a long time, but it is certainly not yet widespread. Most law firms report that they use alternative billing methods only occasionally. But whatever the timing of this disruption, conflict resolution expertise now seems to be indispensable for making all the fixed-fee and prepaid business models work: Unless lots of the cases are settled early, litigation costs stand to overwhelm the revenue.
Integration in Adjudication by Courts
Conflict resolution skills are also used by courts. Judges increasingly use mediation skills during settlement conferences, and some courts even offer judicial mediation. Other courts redesign procedures for specific types of conflicts or crimes. In problem-solving procedures, conflict resolution know-how is likely to be integrated in the intake process for new cases and in the design of court hearings.[iii]
If conflict resolution knowledge is integrated into adjudication, the “business” model is still that of a court, based on court fees or government funding. Dispute resolution professionals may not have the opportunity to participate in these models depending on the court rules, governing legislation, and the courts’ human resources, all of which may be rather restrictive. One so-far-rare but welcome development, however, is the modification of judicial recruitment standards to take into account the increasing mediation component of judicial work.
Online Dispute Resolution
Dispute resolution professionals may yet combine their services with another development that promises fair and speedy resolution: online conflict resolution systems. An ODR platform can empower users to solve disputes themselves and is also likely to offer personalized coaching and advice through telephone helplines or other communication channels. For clients, mediators, experts, and adjudicators working through the platform, this integration and standardization holds the promise of radical cost savings.
For example, Modria, which offers its platform to JAMS, the AAA, and CPR, provides a configurable framework for administering cases, including modules for diagnosis, negotiation, mediation, and arbitration. It is also entering new markets for customers who have to cope with a high volume of disputes, such as eBay (of which Modria is a spin-off), the financial services industry, and government bodies that have to assess property values as a basis for taxation. The latter provides an example of the rate of change: After going into business in 2011, by 2013 Modria (which, for the purposes of full disclosure, the authors note we have worked with[iv]) had contracts with British Columbia; Nashville, Tennessee; New Orleans; and two of the three counties that make up Greater Atlanta. This tiny percentage of the property-taxing jurisdictions generated 50,000 cases handled through the Modria platform. Early in 2014, Modria was selected to handle AAA’s New York No Fault (NYNF) caseload of around 100,000 cases per year.
This is just one of the new case areas under active development by ODR firms, and Modria is far from the only firm in, or getting into, ODR. Together the firms in “this space” represent the most remarkable growth story in the dispute resolution field.
The typical revenue model for these platforms is a fee to configure the platform to the unique needs of the disputes plus a fixed fee per user of the platform. In return, these providers ensure that the platform is updated regularly so that state-of-the-art services are available, reflecting the latest legal developments. In all this work, very human dispute resolution expertise will still be key to the platforms’ ultimate success. The business model for dispute resolution professionals who handle individual online cases will be based on high volume with short, very effective and thus highly valuable interventions per case, now that low-end tasks (such as scheduling and getting parties’ basic claims and essential facts stated clearly) will be automated and stripped away from the assignment. But while the firms may primarily hire software experts and engineers, the software has to be designed to do a conflict management job. As Modria’s founder Colin Rule notes, “The (ADR) expertise is embedded in the software.” Someone has to put it there, which suggests employment possibilities for a new kind of ADR specialist.
Several of these models come together in what we call the upstream market – i.e., the market for work that tries to avert conflict instead of waiting for it to occur and then resolving it.[v] Since the 1980s, mediation methods have had a strong link to negotiation and thus to the formation and strengthening of relationships rather than just their breakdown in a conflict. So it was only natural that dispute resolution professionals also offer their services as neutrals to help draft agreements that serve the interests of both parties in a sustainable way.
Although transaction mediators have not replaced the services of law firms in transaction practice or even augmented them to any degree, new models are now emerging in this area. LegalZoom and Rocket Lawyer are the foremost providers offering agreements and legal documents to be assembled online. They bring in revenues in the hundreds of millions of dollars in the United States, and in 2013 both expanded into the United Kingdom. These document assemblers combine a fair dose of standardized web-based intake processes with access to telephone helplines and services of lawyers to tailor agreements further if needed. The standardization process, in turn, is likely to have some moderating effect on the contract language and procedures suggested, since the same language and explanations are easily available to the other party. There is accordingly a “mediative” element in the process design and the model-language-writing, at least to a degree.
Business models from these online services firms suggest how this market, and perhaps the broader dispute resolution market as well, may develop. For example, LegalZoom offers documents for fixed fees but also sells monthly subscriptions for all the documents a company may need, which can be enhanced with more expensive products, including attorney support.
In the market for dispute resolution professionals, what is visible worldwide from year to year is a certain predictability (except for Italy) in the strategies and markets of each country. We believe, however, that with or without any broader adoption of the Italian “new model,” this picture may change quite radically over the next few years.
The major changes are likely to come in the markets where dispute resolution know-how becomes integrated into existing as well as quickly developing products. Over a decade or two, some of the new players may grow at a rate that will make the markets they serve more conspicuous than any of those now being successfully addressed by existing firms. So dispute resolution practitioners seeking work and a bright, sustainable future should broaden their perspectives about how they define “this work” and “this field.”
Maurits Barendrecht is a Professor at Tilburg University, Netherlands, specializing in private law and dispute system design. He is also Research Director at HiiL Innovating Justice, an advisory and research institute developing evidence-based procedures for courts and other justice-sector organizations. His many English language publications include recent reports for HiiL on worldwide trends at courts, legal services for individuals, and rule-making. He can be reached at firstname.lastname@example.org.
Christopher Honeyman is a conflict management consultant based in Washington, DC. He has directed a 20-year series of research and development programs in conflict management and has served as a mediator, arbitrator, or in another neutral capacity in more than 2,000 disputes since the 1970s. He is author or co-author of more than 80 articles and book chapters and co-editor of the four-volume Rethinking Negotiation Teaching series, The Negotiator’s Fieldbook (ABA 2006), and the recently launched Tan Pan: The Chinese-English Journal on Negotiation. He can be reached at email@example.com.
[i] Urska Velikonja, Making Peace and Making Money: Economic Analysis of the Market for Mediators in Private Practice, 72 Alb. L. Rev. 257 (2009) (providing an overview of data on the private mediation market).
[ii] Committee on Legal Affairs, ‘Rebooting’ the Mediation Directive: Assessing the Limited Impact of Its Implementation and Proposing Measures to Increase the Use of Mediations in the EU, (Jan. 2014), available at http://www.europarl.europa.eu/RegData/etudes/etudes/join/2014/493042/IPOL-JURI_ET(2014)493042_EN.pdf.
[iii] See HiiL Innovating Justice, Trialogue, Releasing the Value of Courts (2014), available at http://www.hiil.org/data/sitemanagement/media/Trialogue.pdf.
[iv] Both of the authors have worked with Modria, and one heads a nonprofit, HiiL Innovating Justice, which is doing so currently and on an increasing scale.
[v] See Christopher Honeyman, Julie Macfarlane, Bernard Mayer, Andrea Schneider & Jeff Seul, The Next Frontier is Anticipation: Thinking Ahead about Conflict to Help Clients Find Constructive Ways to Engage Issues in Advance, 25 Alternatives to High Cost Litig. 99 (June 2007). For an example in practice, see the integration of these ideas in various specifications and checklists in International Finance Corp., Toolkit 4: Resolving Corporate Governance Disputes (2011), available at http://www.gcgf.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/global+corporate+governance+forum/publications/toolkits+and+manuals/adr_toolkit.