The legal industry is known for adherence to precedent, not innovation. While precedent remains a guiding principle in the practice of law, innovation is transforming the models, methods, and players involved in the buy/sell process of legal services. Technology, process, access to institutional capital, re-reregulation, client demand for enhanced value, and changes in other professional service industry delivery models—notably medicine and accounting-- are legal innovation’s principal drivers.
Legal innovation has lagged compared with other industries. Law’s Uber has yet to pull up to the curb. But that does not mean that the breadth, scope, and pace of legal delivery innovation has not picked up in recent years. Consider, for example, that in-house corporate departments and legal service providers (read: legal providers that do not ‘engage in the practice of law’ but deliver ‘legal services’) now account for nearly half of total legal spend. The rapid growth of these new supply sources—and their tech and process savvy delivery capability and corporate structures that are better aligned with client standard operating procedure—is a paradigmatic shift away from the long-dominant law firm partnership model. So while no dominant provider has emerged to replace traditional law firms, it’s clear that the search for new delivery models is well underway and yielding an ever-expanding array of client options.
BigLaw partners still rake in princely sums, and entry-level lawyers at their firms earn a lavish lunch less than $200K, but that hardly makes the case that the traditional law firm model is alive and well. Consider the shift in buying practices among corporate clients and the delta between overall legal demand and flat demand for law firm services during the past five years. Then note the shrinking number of equity partners, the smaller classes of incoming associates and the overall declining percentage that large firm lawyers represent in the overall legal population. This is the fallout from changing customer expectations that no longer align well with the traditional law firm partnership model. In-house growth--a panacea not a cure to the search for BigLaw alternatives--and a steady migration to well funded, tech and process savvy service providers is the story here. Customers are looking for a new delivery paradigm. It's coming. Money and entrepreneurs are pouring into the once static legal vertical. New delivery models and players will push the already rapid pace of innovation.
Let’s consider for a moment ‘disruptive innovation,’ the oft-misapplied term coined by Clayton Christensen to describe a paradigmatic industry shift. Professor Christensen’s theory posits that change takes hold in the lower end of a market, introducing new customers into the marketplace by creating ease of access, lower cost, and greater efficiency. That’s precisely what is happening in the retail segment of the legal industry.
LegalZoom, a legal technology company that now has over 3 million customers—and sky-high approval ratings-- is successfully using technology to improve access, promote efficiency, and reduce the cost of legal services. The company is also bringing new customers into the market and creating a template for how, when, and for what service level lawyers are required for different tasks and functions. LegalZoom is pioneering levels of 'lawyer touch' determined by the value assigned by the customer, not the provider. This ranges from self-serve (standardized documents); to limited access (short online chats with lawyers or calls on a fixed fee basis); to full-blown engagements (with approved panel counsel). This 'as much lawyer as needed' approach is a paradigm shift worthy of the ‘disruptive innovation’ moniker. More importantly, it is one that will migrate to more complex matters in the corporate segment of the legal market. The issue is: who and what is the appropriate resource to deploy for a specific task, matter, or portfolio based upon its value to the client?
Corporate clients are already engaged in this process—a paradigm shift—in a number of ways: (1) an increasing willingness to procure services from providers with delivery models different than the traditional law firm partnership model; (2) taking more work in-house; (3) sourcing work—either internally or externally—to providers that are better aligned than law firms with the company’s risk tolerance and enterprise objectives; (4) utilizing technology, process, and ‘the right person for the right task’ to promote efficiency, mitigate risk, and reduce cost; and (5) rejecting the longstanding myth that only law firms—and lawyers—must perform all ‘legal’ tasks. Legal problems are increasingly viewed as business challenges raising legal issues.
Why have law firms not taken more aggressive steps to innovate and protect market share?
There are several reasons: (1) there was little need to innovate until the global financial crisis of 2008 changed the way business is conducted—even law; (2) law firm senior partners lack the financial incentive to invest in the firm’s future because their ‘equity’ is not residual; (3) law firms were able to prop up profits by internal cost-cutting measures rather than client-centric innovation—no more; (4) firms lack the investment capital to make long-term investments in innovation and there is a generational/economic divide between older and younger partners; (5) rather than innovate, many firms have tried to ‘reinvent’ their brands by merger. This is neither innovative nor is it a generally a winning formula based upon a recent study conducted by ALM Intelligence that concluded that 'bigger is not better' for most firms.
Law’s Uber moment has yet to occur, but there is a wealth of evidence that innovation is driving change—in the buy/sell dynamic; in client expectations; in the more widespread and effective deployment of technology and process in legal delivery; in the tasks that lawyers perform and by whom they are employed/managed; in the price sensitivity for all but the highest-value tasks and matters; and for the melding of legal, technological, process, and collaborative skills now required to deliver legal services efficiently. And while a handful of law firms—Seyfarth and Allen&Overy are two prominent examples—are traditional model outliers that have engaged in real innovation in service delivery, the bulk of corporate legal innovation has come from in-house departments and a handful of elite legal service providers. Is it any wonder, then, that these two groups now account for almost half of total legal spend?
Big money is eying—and investing in-- the legal vertical because of its immense size and disruption potential. Legal technology companies are proliferating, and artificial intelligence is already part of the legal landscape. Just last week, for example, a UK insurance company teamed with an Alternative Business Structure (ABS) legal service provider to role out an AI-powered app to answer coverage questions for policyholders. Global legal service providers like Axiom and UnitedLex are well capitalized and have global footprints and nine-figure revenues. Consumers are embracing these and other delivery options that are different than the traditional partnership model. This will stoke the innovation fire already ablaze in the legal industry.
The pace of innovation in legal delivery will continue to accelerate during the next few years. And while many envision disruption in binary terms--law firm vs. service provider; AI vs. lawyer; insource vs. outsource—it will be more nuanced than that. Disruption in legal delivery will not be a ‘one-size-fits-all’ approach. Clients assign different values to different tasks, functions, matters, and portfolios. Value is derived from context. For example, a product liability case is nuisance value if it’s a one-off but high value if it could give rise to a multiplicity of similar actions.
The value of a matter drives the election of resources most appropriate to meeting the client’s objective. The disruptive legal delivery model will be one that provides a scalable array of solution tools—human and technological; legal and business; embedded and agile-- that produce efficient, cost-effective, and risk-appropriate resolutions to client challenges. That’s precisely what top lawyers have historically delivered, and it will be the winning formula going forward--minus the incumbent partnership structure.