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New Business models for the Legal Services Market

March 17, 2017

Linking Empirical Academic thinking with Legal Practice

 

A business perspective on legal services differs strongly from a purely legal perspective. Empirical vs. normative. Many lawyers in business are not fully familiar with that perspective on their own work. An empirical perspective lets one better understand concepts of demand and supply for legal services, or in other words the market for legal services. Markets do not behave how it should be, but the information from the past may provide tools to understand how markets will behave in the future. That market is a rather special market, for example because products are not dearly defined, and the market is not transparent. 

 

What we know about the market, is that it is on the move, mainly caused by external pressure. This pressure calls for adjustments related to the way earnings are generated in the profession. 

The way earnings are generated is the business model. To be able to cope with the external changes, the business models have to be adapted, in other words business model innovation. 

 

In this article I describe what is currently happening in the market – with a focus on the Big Law market- and thereby provide a preview of the legal services business model of the future. First of all, I’d like to describe the turbulence in the market. Secondly I will define the business model; first in general and then for the legal market. Finally I will make an attempt to determine, based on a few examples, which part of the legal business model is in need of innovation and how innovation can be done.

 

The turbulence in the market can be illustrated through a few examples, such as the emergence of digital developments like in the Netherlands: DoeHetZelfNotaris, Firm24, the convenience store- or Hema-notary and others. Innovation guru Christensen together with his co-authors describes new forms of services, especially legal services. From an American perspective he focuses on the Anglo-Saxon examples from the US, such as Axiom, AdvanceLaw and LeClairRyan with their Discovery Solutions Practice and the British Lawyers on Demand. Christensen et al.’s article published in Harvard Business Review in May 2013 is now already a few years old, but still very relevant in legal practice. The article is about disruption, the most important buzzword in entrepreneurship and innovation nowadays. But do these examples of innovative legal services lead to real disruption of the market? We don’t know yet.

 

In the legal services, market changes can partly be illustrated by the emergence of niche offices. Niches usually stand for the market niches. Apparently there is a demand for services in a separate niche. If this is actually about full market niches is doubtful, since they coincidentally run parallel to the fields of law, as taught at universities. So, that suggests supply-side niches, where demand is needed. But is there a demand for these specializations?  Or are these niche firms simply more efficient than the large firms? Or do niche firms reach their clients better? It’s the customers call on what specialty he or she is looking for. Trends in the market for consulting services show that there is a movement going from full to modular advice; in other words from firms with a wide range of services to niche firms.

 

One of the most transparent items in the market until now has been the hourly rate of lawyers. Although not freely available information, figures on the hourly rates for all kinds of lawyers have been known in the market. Clients can use these data to compare between lawyers. They can compare the hourly rate, but not the price for a particular legal service. The rates have also been seen a way to measure quality, partly because there is no better measurement of quality available. 

 

With many clients, the perception of prices has changed. Prices are going down because of the reduction of costs and because changes in demand. The costs are going down, due to technology, improved working processes and other ways of hiring staff. Price consciousness can lead to a different kind of demand. Demand changes occur in a very particular way – clients value the services of lawyers differently than in the past. Clients more clearly want a solution to a legal problem, instead of buying legal services by the hour. An example of buying different services is the hiring by businesses of temporary lawyers as internal legal counsel, instead of purchasing external legal advice.

 

For many law firms the number of billable hours are not their main key performance indicator anymore, but rather less hours, higher sales and a customer who keeps coming back. But certain law firms are now beginning to see the deleterious effects of hourly billing. Baker mentions 19 effects. Ranging from the misalignment between demand and supply of legal services, to transferring the risk of the size of the fee to the customer. The latter means: the client pays more if the work is done inefficiently, but with a fixed fee the law firm bears the risk of a possible mismatch between revenues and expenses. The credit crisis can be mentioned as a cause of market turbulence and also a reason to cut costs. By making greater use of ICT and specifically the internet, companies operate more efficiently. Therefore, opportunities to compete on price are arising. Or the choice to offer products through the internet because of a differentiation strategy: ease and speed are seen as key product features by some customers. Differentiation means that a focus is put on features that customers consider important. Do the legal service providers monitor what their customers need or want? According to Christensen et al. the market for legal services is traditionally not transparent, particularly on the matching of demand and supply with regard to the contents, or in other words, do law firms provide what customers want or need, how customers value legal services?

 

Christensen et al. describe that new market entrants are disrupting this market. Disruption is the shaking up of existing markets, mainly because of innovations. Innovations can lead to more efficiency (i.e. lower costs) and more effectiveness (i.e. better service). Existing business models are becoming worthless and there is a need for new ones. Innovation can occur in various ways. A method to cover all types of innovations is to divide innovations in four types - products, processes, positions and paradigms Perhaps the more towards the latter, the more disruptive. The paradigm shift is mainly about the way we think about business on an abstract level, specified as the business model.

 

Although the phenomenon of a business model has been established for some time now in business discourse, in the Netherlands it remains a vague and broad concept, a many-headed monster. Business models are focused on constructing a value proposition, and creating customer value and many other market-based elements, combined with revenues and expenses. It also involves the network of stakeholders - from suppliers to customers, competitors and the mix of permanent or temporary employees. In brief, the business model may be defined as a combination of strategy, marketing, profitability and organizational structure. Do lawyers work with concepts such as customer value, value proposition in the legal services market?

 

More than in most of the other parts of the business world, the market for legal services is about knowledge, or rather the application of knowledge. 

The legal market is similar to the markets of other service providers, such as accountants and management consultants. But it also differs from these other markets. The legal market is broader than the accountancy market, because it has more subject areas. 

Differences between those market segments are mainly determined by legal content. Accountancy products are also defined more clearly – an audit of the financials of a company has a limited scope, whereas legal services needed on a very wide range of topics mainly occur when some undefined problem

arises. Legal knowledge is democratized. Because higher education is accessible for the majority of the population, the possession of knowledge, legal knowledge, is available to many people, more people than in the past. Furthermore, all laws and most of the jurisprudence in the many countries are freely available online. 

The access to legal knowledge is not restricted to having a legal education anymore. Computers may be able to solve legal problems all by themselves in the near future, because of the free access to much of the available legal knowledge and increasing computational power. Susskind et al. describe an expected exponential growth of information technology in professional services.

 

 

René Orij, Managing Director Center for Entrepreneurship and Innovation at Leiden Law School

 

 

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