Legal Tech and Law Firms: Navigating Strategic Options
Technology companies catering to the legal industry have been around for many years, but "legal tech" only became a recognized term roughly a year ago. With an astoundingly fast pace, the topic rose from complete obscurity to the #1 subject of industry conferences and publications worldwide. For an industry known to be conservative and thriving for centuries on maintaining the status quo, this is a landslide expected by few. But how to turn the talk of the town into tangible business?
Conference talks and academic discourse are one thing, of course. More practically speaking, making use of the opportunities presented by legal tech can be extremely difficult. Even with the best of intentions and an entrepreneurial mindset focused on innovation, the landscape of opportunities and potential partners to help leverage such opportunities is confusing.
Essential skills, as well as ways of working and communicating, are not going to change overnight. This applies to both lawyers and IT experts, two professions with inherently different cultures. Consequentially, grabbing the much talked about opportunities by the horns is not as easy as it may seem at first glance.
Legal departments and law firms are fundamentally different
For corporate legal departments, identifying technology-driven opportunities and implementing solutions is relatively easy. Cost and efficiency pressures, the diverse skill set and investment strength found within a larger corporate structure, and a clear hierarchy of expectations, roles, and decision makers tend to be conducive to innovation. Needless to say, the legal department setting doesn't come without its challenges. But they are pale in comparison with what law firms are experiencing. Law firms -even the most forward thinking and entrepreneurially minded ones- tend to struggle amidst all the buzz about legal tech. Since virtually all law firms are organized as some form of partnership, and in most jurisdictions cannot have outside investors, the basic framework is challenging already. Rarely do all stakeholders share the same vision and determination to execute on it. This is exacerbated by the still prevailing business model based on hourly fees, which by definition is a strong deterrent against making things faster or more transparent through the use of technology. As a result of the internal and external incentivization, certain know-how, processes, and staffing resources are typically viewed as the de facto property of individual partners. This opposes the economies of scale required for making technology-enabled approaches feasible, and often results in difficult internal discussions rather than the brisk pursuit of opportunities. To make matters worse, there is a confusingly wide range of legal tech solutions on offer. Because the industry by and large has only very recently started to discuss legal tech, industry discourse still is in a state of excited chatter, and has not yet reached the maturity of solid strategic segmentation. The following observations focus on challenges and opportunities specifically for law firms. Legal departments, companies in closely related fields (such as insurances and banks), and legal tech start-ups operate within different frameworks.
Law Firms need to decide on basic strategic options first, then execute rigorously
For law firms set on making sustainable use of the opportunities presented by legal tech, it is crucial to cut through the clutter of buzzwords and futurology. Instead they need to identify and decide on a basic strategy, then focus on its razor-sharp execution. Academic discourse over artificial intelligence, blockchain, smart contracts, or automated dispute resolution tends to obscure the actual strategic options law firms have today. Essentially, current technology provides law firms with the tools to pursue three very different -but combinable - strategies:
1.(Immediate) Revenue Generation
For centuries and up to today, most law firms did not have the opportunity to generate immediate revenues. Their business model typically is built on a lengthy sales funnel, generating leads and then slowly converting them into customers. In some cases (e.g. word-of-mouth / referrals), this approach is reasonably cost efficient, though still built on many years of networking and experience. In other cases (e.g. publishing articles, event marketing, or purchasing advertising), acquisition costs can be questionably high, or opaque at best.
In the digital age, lawyers finally have direct access to customers, going well beyond advertising through yellow pages and firm websites. With basic, commodity type of work, firms can now generate immediate revenues by circumventing the traditional sales funnel, instead taking a direct route to the customer that essentially is e-commerce. Other industries selling goods and services to consumers and corporations alike have done this for years. Digital platforms run the gamut in virtually every industry, some of the more prominent being Amazon, AirBnb, Uber, TaskRabbit, or Upwork.
So why not lawyers? Regulatory restrictions frequently serve as a defence mechanism in attempting to protect the status quo, but rarely actually are an obstacle, at least upon closer inspection. Some firms worry about tainting their premium reputation by offering their services with a low price tag and through outlets with mass market appeal. But other industries have found an answer to this conundrum decades ago, and called it two-brand strategy. Another frequent challenge for law firms is that they tend to have a preference for pursuing a limited number of high-ticket assignments, as opposed to a high number of small tickets. However, particularly the big-ticket firms find it hard to balance staffing against workload, and as a result find themselves with unused resources ideally suited to generating revenues. Coincidentally, commodity work such as trademark services, incorporations, document reviews, and administrative filings lend themselves perfectly to a high degree of process automation, which decreases production costs to next to nothing and increases margins far beyond current legal industry standards.
Building a sustainable digital sales channel of course requires domain expertise and skills few lawyers have. Lawyers work in the legal industry, not in the digital industry, and convergence does not mean having to become a Jack-of-all-trades. Because of the mechanics of platforms and e-commerce, a law firm trying to build their own platform would be ill advised (with some rare exceptions). Smart participation in a professionally run digital platform is the by far more effective and therefore preferable avenue. For law firms, this approach combines low investment and low risk with a steep learning curve and potentially significant mid- to long-term upsides.
Platforms such as LegalZoom, Rocket Lawyer, and Avvo in the United States, Legalbase in Germany, or NextLaw in Switzerland are leading the way when it comes to giving law firms the opportunity to generate revenues from customers entirely digitally. Some of those platforms work with dozens of law firms and generate multi-million revenues for those firms already today. Looking at the digital evolution of virtually every other industry, this is
without any doubt just the early stages of what will become the new normal for commodity legal services. Just like in any other industry, digital platforms will add plenty of formerly untapped customers to the demand side of the market, and platforms will gobble up the majority of transactions. For law firms with a solid strategy behind it, being an early part of this development will pay off manifold.law.
2. (Mid-Term) Lead Generation
For non-commodity work, the traditional lead generation approach to business development in the legal industry will of course continue to be around for many years. But how can technology help to make it more efficient? More precisely, how can the sales funnel be filled with more leads, and how can more of those leads be converted into customers, all at a lower cost?
Technology-driven strategic options to this end are abundant. Some approaches, such as digital content marketing, search engine optimization, or consistent branding throughout all channels have been around for many years, and by now are being embraced by more than just a few law firms. However, in this changing landscape, generating relevant leads and converting them profitably requires more creative ideas and implementations.
Lead generation mechanics are heavily dependent on individual law firms, their practice areas, customer bases, market positioning, and size. But despite all intricacies, sales ultimately is a numbers game. As any experienced salesperson knows, more leads at the top of the funnel are the most valuable prerequisite to more conversions at the bottom end of the funnel. Generating leads requires reach. And if done properly, the internet is the by far most cost efficient place to generate reach, which is why marketing budgets in every industry have massively gone digital in recent years.
In practice, one potential strategy for generating reach off the beaten path is to participate in platform approaches, even when the type of work and ticket sizes to be generated there in the short term are not on strategy. Every small-ticket transaction scored on a platform is also a lead for more substantial work. Even though this first transaction does not immediately bring in much revenue, the firm now has an attorney-client relationship it did not have before. The small transaction not only represents a prospective customer, but an existing relationship and a qualified lead towards more financially rewarding work. If for example a platform customer registers a trademark through a certain firm, chances are the same firm will be sought out when complex trademark disputes arise later on, especially if until then the firm manages the funnel smartly. Customers mature, and then tend to be loyal to service providers that were with them from the beginning.
Obviously there needs to be a vetting system in place, to separate promising leads from freeloaders, and firms need to rank leads accordingly. But again, this is an essential step of any sales process in any industry. Being afraid of wasting time on not-so-promising leads won't help. Working with long established best practices from other industries is the much more sustainable path.
There are plenty of other strategies to pursue innovative and highly efficient lead generation digitally. They range from off-the-rack services offered by providers such as for example Avvo in the U.S. and Anwalt.de in Germany, to low-threshold self-service offerings provided for example by Cooley LLP under the "Cooley Go" brand, to -- at the lower end of the market -- participation in Q&A services such as for example Freeadvice.com in the U.S. or 123recht.net in Germany. Again, many established firms will view this as a poor match in terms of brand and resources. However, rethinking the status quo is the key to leveraging opportunities and remaining competitive. Firms that do not shy away from finding creative solutions now, while still being in a comfortable position, will be the winners in the new order of the legal industry.
3. Workflow Optimization
Optimizing and automating internal firm workflows and customer collaboration probably is the most obvious tech-enabled strategic option. Especially for law firms, it can also be one of the more difficult areas. This is mostly because many law firms still operate on hourly fee models. Charging by the attorney hour just does not encourage doing things faster, and it creates little incentive to let machines do the work instead of racking up attorney hours.
The only way to address this is to take a very close look at what exactly can be done, then decide on what and how to implement. Software and digital services offering workflow optimization for law firms currently fall into four categories:
a. Practice Management (e.g. Clio, Kleos, RA Micro)
b. Customer Collaboration (e.g. Busylamp, Synergist)
c. Document Assembly (e.g. Hotdocs, Exari)
d. Analytics and LPO Software (e.g. Leverton, Pangea3, Edicted)
Categories a) and b) are easy. Law Firms do not make any money with their internal administrative processes, because unlike customer-facing work, they cannot charge for it. There is a strong incentive and not too many practical hurdles to engage software that does as much of the job as possible. Not surprisingly, almost all law firms have for years automated at least some areas of their practice management, despite the often outdated and unfortunate user experience provided by some of the established software on the market. Customer collaboration tools are a newer sub-category and essentially serve to improve customer satisfaction and retention. They tend to be adapted opportunistically as market demands change.
Categories c) and d) however directly compete with the traditional revenue and incentivization model of most firms. Such software solutions and software-driven external services essentially eliminate the ability to charge customers for work that previously was done by scores of law firm associates. It is very clear that in today's market environment, customers are simply no longer willing to continue paying the steep fees of the past. Trying to change this reality is a lost cause. Law firms are much better served by finding smart revenue models specifically for those services. Options are plentiful and heavily depend on individual circumstances. For example, due diligence services or basic drafting services can be sold as low-priced flat fee entry level services, creating leads for high revenue work, or improving customer loyalty. Through automated interfaces, they can even be given into the hands of customers to a certain extent, enabling customers to do preparatory work, thereby streamlining processes (and improving margins) on the law firm end. Inspiration can be drawn from several other industries, where customers are made to do more and more of the work themselves. Customers tend to perceive their active participation as a benefit, giving them a sense of empowerment, while in effect they help service providers' bottom lines. The accounting industry has done this for many years. The same can be observed with airlines, where customers willingly do all the clerical work leading up to being flown from A to B, and with e-commerce, where based on customers' own entries and without any human interference, products are recommended for purchase with striking accuracy. In essence, all software-based legal workflow optimization options offer business opportunities that far outweigh any perceived threats to a model that is on a rapid and irreversible decline anyway. There is a historic opportunity for the legal profession to "re-boot" and build businesses that are much more rewarding than they have ever been before, because of better scalability, less sitting over gruesome tasks holding little value, and greater financial upsides. Leveraging those opportunities does however require a very careful look at one's specific work and customer base, and a good dose of creativity and courage.
Speedy and consistent execution is key
In deciding which strategic path to pursue, there is no use in waiting. While the majority of the industry currently is still hanging on to time-tested models -- and often still doing very well --, much of the opportunity lies in being a leader rather than a follower. Holding out for other law firms to test and scale successful models, and then trying to copy them, may work in some individual cases but is unlikely to really create a lot of winners.
Any law firm that truly listens to their customers' needs, while improving their own service model economics, will build a massive advantage over firms not actually executing change quickly. The perfect piggybacking solution will most likely never come, because of the increasingly complex legal industry landscape. Succeeding in the new environment is an iterative process of individual analysis, trial, error, and improvement, which needs to be completed by each firm:
1. Define your strategy
2. Experiment with what is available
3. Refine your strategy based on learning’s
4. Get your processes and workflows aligned
5. Make smart use of what is to come
Lean and agile methodologies borrowed from the startup world can be excellent tools in making this happen. Because those methodologies are highly adaptable, cost efficient, and accessible, they work for global law firms and single practitioners alike. The drastic ecosystem changes essential put the legal industry is essentially in startup mode. And just like with any other startup company, using tested and established tools will be the most reliable path to success.
About he Author
Daniel Biene, Serial Entrepreneur, former lawyer and founder Smartlaw (now WK) and LegalBase (now LegalZoom). Daniel Biene is a Berlin based serial entrepreneur. Among the ventures founded by him are Smartlaw, a digital legal document service which was acquired by Wolters Kluwer in 2014, and Legalbase, a platform for commodity attorney services which was taken over by LegalZoom in 2017. Before becoming an entrepreneur, he held senior management positions in the media industry with Axel Springer and Ganske Publishing Group in New York, Berlin, and Hamburg. He was trained as a lawyer in Europe, the United States, and Asia, worked for Freshfields Bruckhaus Deringer, and holds a Ph.D. in media law & economics from the Max Planck Institute for Innovation and Competition