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Over the past two decades, litigation lawyers saw litigation support technology transform their work. At the turn of the millennium, transaction lawyers are poised to see technology transform their practices as well. On the leading edge is the recent emergence of virtual deal rooms — Web-based electronic meeting places that can reduce the cycle time for a deal, reduce risk by maintaining a secure audit trail, reduce the effort of physically handling documents and travel time, and allow clients to get closer to a transaction and participate at whatever level they choose. And yet a recent survey carried out on behalf of The Financial Times found that fewer than 10 percent of the 100 in-house lawyers surveyed thought they were likely to use a deal room within the next 12 months. Our own research and experience suggest that few, if any, corporate counsel have elected to introduce deal sites of their own. WHAT’S GOING ON HERE? In 2000, four of London’s “magic circle” of firms — Allen & Overy, Clifford Chance, Freshfields Bruckhaus Deringer, and Linklaters — announced virtual deal room offerings for their clients. Andersen Legal and other Big Five firms were quick to follow, announcing their own competitive services. At the same time, leading-edge U.S. law firms began to introduce virtual deal rooms as extranet services for individual clients and major transactions. Finally, a number of commercial third-party services, such as Intra-Links and e-Room’s hosted sites, have appeared. WHAT DEAL ROOMS ARE Virtual deal rooms are Internet-accessible Web sites designed to support corporate transactions. They are particularly valuable for complex transactions that extend over long periods of time and involve geographically dispersed parties from multiple organizations. Deal rooms come in many flavors. The plain vanilla ones consist of online repositories for electronic documents and relatively static information relevant to the deal. Most important, they contain the current versions of all documents in a transaction. They may also support useful reference materials, status reports, billing information, and assignment and scheduling information. On a more sophisticated level, virtual deal rooms incorporate technology that helps the transaction team work together more effectively across distance, time, and organizational boundaries. Electronic team rooms support ongoing collaboration between the parties throughout the life cycle of the deal. These team rooms might include linkages to e-mail, group scheduling tools, electronic meeting tools, electronic discussion groups, and even application sharing or document collaboration services to support collaborative drafting efforts. At their most elaborate, virtual deal rooms incorporate work process automation and even automated document generation. These actually lead the lawyer through the work processes necessary to complete the transaction, including due diligence. In order to prepare first drafts of documents, the system asks the lawyer questions online and then, based on the answers, uses text fragments to assemble a document customized to the specifics of that individual deal. Many would argue that a deal room functioning at this level is more an expert system than it is a virtual deal room. At the fundamental level, most virtual deal rooms work basically the same way. Parties who are authorized to participate in the deal room use a Web browser and the Internet to access a Web site hosted by some organization. The Web site controls security, runs an application, and stores all of the electronic files and documents. The site may also serve as a gateway to the Internet or to other repositories of information useful to the transaction team. Deal rooms distinguish themselves from each other in three major ways: how the site is hosted, the level of security provided, and the application software used. While some law firms are hosting deal rooms on their own networks as extranets, third-party hosting services, including application service providers, are also popular. Applications range from out-of-the-box electronic team rooms that are tailored to specific needs to custom-developed software that is unique and proprietary. These applications are the element that is most visible to the transaction team, as well as the element that differs most dramatically between deal sites. Security is an area of major concern for deal rooms. Transaction lawyers lose sleep at the prospect of a highly confidential deal being made public as a result of a security breach on their deal site. Therefore, deal sites are designed with security levels tailored to the sensitivity of the transaction. The security features include, at a minimum, authentication for access, encryption of data during transfer and storage, and file access security. THE BENEFITS Cutting-edge law firms see significant marketing advantages in creating their own brand of virtual deal room and incorporating it into their total service offering. These firms understand that virtual deal rooms can strengthen their bonds with clients. Deal rooms can showcase a firm’s work processes and its ability to manage and organize a transaction. These firms also understand that virtual deal rooms, because they are not yet commonplace, differentiate them from other firms in the marketplace. War stories are told about winning business over competitors by demonstrating a customized deal site for an existing or prospective client. Many firms also believe that hosting the site themselves strengthens arguments that the contents are confidential and protected by attorney-client privilege. Virtual deal rooms, at first blush, seem to offer the promise of transaction utopia. Even the simple document repositories greatly improve the life of a transaction lawyer. Imagine being able to stay in touch with a deal any time and from anywhere that you have access to the Internet. Imagine being able to find anything about the deal, using a Lexis-like, full-text search. Imagine being alerted automatically to a pending deadline and being able to find out quickly who is working on it, when it’s due, and what the status is. Most important, imagine the benefits of having a single, controlled master document repository. No need for faxes and e-mails to circulate drafts for review and comment. No need for team members to keep all of those faxes and e-mails in order to figure out what is going on. And no need to leave footprints about the deal in the e-mail systems and fax rooms of every party involved. Collaborative deal rooms offer even more. If you can’t participate real-time in matters as they evolve, imagine being able to connect at your convenience, review what’s happened since your last connection, frame issues that require analysis and resolution, and make assignments to team members. Instead of interminably circulating drafts for comments and review, you can meet online with members of the team to discuss changes to a document and see them being made in real time. There is another, somewhat more subtle benefit to virtual deal rooms. While it is easy to think of them as tactical tools that simply improve individual transactions, they are, in fact, an important knowledge asset for an organization. Think about the expertise that is captured and codified in a deal room as a byproduct of doing the work. A deal room includes resolutions of drafting issues and analyses of legal issues that can be fed back into the firm’s forms libraries and best practices collections. The room also contains information about how individuals involved in the deal work and think — valuable information to have if and when you work with them again. Comparing rooms against each other over time allows firms to develop a better understanding of the work steps, time, and level of effort associated with certain types of deals — information that can help them cost and perform similar work more profitably in the future. For these reasons, organizations may want to link deal rooms into their knowledge-management programs rather than simply archiving them once the deal is done. INHERENT ISSUES Like all new technologies that have an impact on traditional work practices, deal rooms currently carry with them a number of controversial issues: If a firm incurs special and extraordinary costs associated with maintaining a deal room infrastructure and supporting the specific deal site, should the costs be recovered from a client, or should they be considered a cost of doing business? Interestingly, most of the early adopters are charging only nominal fees, or providing the service free of charge. If a third-party provider is selected and each party to the deal “pays its own way” in terms of infrastructure and access charges, one organization typically assumes the tasks of deal room administration, incurring personnel costs to staff that function. Should those costs be recovered in some fashion from other participants? If so, how? Or does the firm supporting this function derive significant benefits that more than offset the costs? Do the contents of a deal room represent intellectual property, and, if so, who owns it? Does each participant own only its own contribution, or does it have a right to the entirety? At the close of a deal, who gets copies of the deal room contents and in what form? This becomes a particularly thorny issue if a deal site is opened to opposing parties or if there is a dispute between the parties during the course of a deal. Who owns the intellectual property represented by the software design and work processes embodied in a deal room? This can become particularly contentious if a deal site is opened to a competitor of a law firm. There are those who would argue that this is an old economy protectionist question, and that the real answer lies in ongoing innovation to remain ahead of your competitors. How should a deal site be designed and operated so that it does not inadvertently jeopardize attorney-client privilege? If a deal room becomes the primary method of performing work on a deal, and the system fails at a critical point in the deal process, who might bear liability for the failure, and how would damages be measured? FUTURE TRENDS Where are deal rooms likely to go in the future? Several trends seem likely. First, it seems safe to predict that rooms will expand to encompass even more of the transaction process. At the moment, deal rooms generally stop short of the actual deal execution and filing processes. However, technologies already exist that support legally valid, electronic execution of documents and even filings. Some of the most progressive work on this front is already occurring in the areas of real estate and loan transactions, and it is sure to spread as it becomes accepted in those venues. As deal rooms proliferate, it is also likely that we will see an increasing demand for neutral third-party hosting sites. As deal rooms become more a commodity than a marketing advantage, law firms may come to view third-party hosting services as a viable way to reduce the burden and costs of developing, hosting, and supporting virtual deal rooms on a round-the-clock basis. In addition, as deal rooms begin to encompass the full life cycle of a deal, it will become essential that all parties have access to the site. And it is clear that opposing parties are likely to be more comfortable working in a neutral third-party environment rather than one operated by a competitor. Finally, we are likely to see an increasing demand for adoption of standards. Consider the plight of deal room participants if the current fragmented approach continues. Initially, a lawyer may be delighted to use a virtual deal room for a major transaction, and use the system provided. However, as the number of deals and variety of solutions multiply, the lawyer can quickly become overwhelmed by too many disconnected deal rooms and too many different ways of working. In this sense, deal rooms could become victims of their own success unless standards are adopted that make it easy for lawyers to use the same skills for different systems. Another important byproduct of such standards would be the ability to integrate deal rooms more effectively with matter management systems now used by corporate counsel. THE FINAL FRONTIER Despite the obvious benefits of deal room technology, it remains on the edge of the adoption curve. Unfortunately, the behavior and skill sets of many lawyers can present a major barrier, slowing adoption of this technology. Deal rooms need the full participation of all parties to be most effective. Therefore, lawyers must become comfortable with the technology and the “etiquette” of online meetings and collaboration. While some may still be able to delegate even e-mail to others, it is almost impossible to delegate participation in electronic collaboration. It seems inevitable, however, that over time this barrier, and the other early growing pains of this technology, will be overcome, making deal rooms as much a staple of legal practice as litigation support. Sally R. Gonzalez is a co-founder of Michael Farrell Group Ltd., an East Coast-based technology management consulting firm specializing in the legal industry. She can be reached at [email protected]

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