The legal industry is still fragmenting. Pre-2008 it was an easier game: a buoyant economy, predictable government and a converging world flattened by globalisation and the internet. Law firms sought to be ‘global’ and ‘full-service’ and merged or opened offices accordingly. The business model was simple: bigger clients, bigger teams, higher utilisation, higher rates. Hold onto more rainmakers than your rivals and the fortifications of a professional monopoly took care of the rest.
What has evolved post-2008 is a buyers’ market that shows no signs of abating. ‘There’s more choice of providers now than ever,’ says Chris Fowler, general counsel of BT Technology. ‘Alternative providers have a far greater share of wallet. There’s more of them and a wider spread, and then you’ve got the Big Four coming into play. The key thing coming into focus now is choice.’
Choice, of course, extends beyond new entrants waved in by liberalised regulation. Law firms, increasingly, provide only links in a complex value chain as clients become more surgical about supply choices. ‘Disaggregation is often the right answer,’ says Nick Roome, partner and head of KPMG Law. ‘It’s saying if you break down the components of what somebody needs, then the same model can’t necessarily service all those components in an effective way. You don’t need to opt for the one-size-fits-all approach, which often can mean a poorer outcome or experience and often you significantly overpay for what you need.’
Alternatives abound. Stanford University’s CodeX Techindex now lists over 1,750 legal tech providers, almost three times the number listed in 2016. Worldwide legal tech patents, meanwhile, have followed a similar trajectory rising from 831 in 2017 to 1,369 in 2019. Venture capitalists have sensed opportunity in the industry and invested over $1bn in 2019 alone.
Navigating this new universe of supply falls to increasingly influential and business-minded legal operations professionals. Their task is to optimise delivery of legal services either in-house at law firms, or more commonly at corporate clients. Rising numbers are both an indicator of change and also of concern, industry-wide, over cost, efficiency, knowledge and vendor management. The Association of Corporate Counsel survey 2016 found that 48% of in-house departments had at least one legal operations executive, a 20% increase on the previous year. By 2019 that figure had reached 57%, with almost 20% making operations hires in the preceding 12 months (LDO Index, 2019). According to Roome, one effect of a surge in supply is that ‘very few clients are simply defaulting to a law firm for every single requirement’.
The law is becoming more multi-disciplinary. Project management, data management and qualitative metrics now vie with legal expertise and experience in certain quarters. ‘If the work is repeatable and needs delivering to certain set outcomes at a certain price point, you become agnostic as to who is actually doing the work,’ says Fowler. The cult of the individual, alongside brand power, might be deteriorating in importance to clients.
The net result is that competitive rivalry is now a global concern, with new entrants and substitute services available digitally out-of-jurisdiction. Buyers are exercising choice and learning to be less dazzled by firms’ traditional sources of competitive advantage.
With material change in power dynamics, the structure of competitive rivalry, along with mindset and cultural change, a strategic upheaval from law firms might be expected. Instead, with exceptions, the response has been cautious, incremental, operational and reactive.
Ben McGuire, Simmons & Simmons’ innovation and business change director, asks: ‘When people say things to me like “the partnership model is dead”, my question is, “where, when, which part of it? Which part will survive?”. There’s no great CEO muscle move here and that has got to be right, because we have essentially 280 separate businesses operating across oodles of jurisdictions in completely different markets, where one thing would work, and another thing won’t.’
Theories of disruptive change can be illuminating, but its evidence base is overrepresented by mono-dimensional industries: electronics manufacturing, music, newspapers. The span of civil and commercial law, encompassing everything from challenging a parking ticket to papering credit securitisations, as McGuire suggests, demonstrates certain limitations in industry-level analysis (see box, below).
Central to predictions of industry disruption are exponential upward curves characteristic of Moore’s (processor speed), Kryder’s (data storage), and Robert’s (data costs) ‘laws’. Human potential, in contrast to technological development, is flat and will inevitably be overtaken, the argument goes. But is it safe to assume technology will destroy rather than enhance human competencies? Evidence in the legal industry to date suggests not.
Predictive analytics, for example, might appear directly substitutable for human judgement; instead, they plug a void in objectivity and enhance critical thinking. ‘It is a starting point, not an end point,’ says Gideon Cohen, co-founder of litigation analytics provider Solomonic and a barrister at One Essex Court. ‘It’s a very important way both to think about how you reach a particular conclusion and also how you justify that conclusion. It’s not treating the data as the end of the discussion, but it is a conversation structured around data in a way that leads to a much more rigorous kind of discussion.’
In this instance, technology provides context. ‘Often litigation decisions are the only high-value, high-stakes decisions that boards are being asked to make in the absence of data,’ adds Cohen. ‘They’re being asked to sign off on [vast sums] on the basis of the feelings lawyers have as to what might happen.’
This striving for a baseline of greater objectivity is common among legal tech providers and marks a discernible shift in approach to quality. Clarilis, an intelligent document drafting platform, aims to provide the same. ‘What we’re able to do is capture best practice,’ says commercial director, John Lillie. ‘So effectively you’ve got your best draftsperson, or contract writer, captured from a mechanical perspective, so that you’re producing the best quality draft… in a tenth of the time.’ But he notes that the mechanical aspects comprise only 90% of a first draft. ‘You’ve then got to apply your lawyerly brain to drop the deal into the contract,’ he says.
Right first time
Technological insurgency, as witnessed in other industries, follows a pattern of going to market with an unthreatening and conspicuously substandard product, then improving it meteorically while incumbents flock to higher-margin work. But like conspicuously substandard surgeons, such products in the legal industry are seldom thought worth the risk. Doing due diligence before investing in Clarilis, Lillie was taken aback that technology considered routine 20 years ago in other industries was absent in the law. ‘I spent several weeks talking to a lot of the top 50 law firms. It turned out to be the biggest graveyard of failed projects I’d seen. The reason is, I think, that a lot of people had underestimated the size of the task, the complexity of the task, and the skillsets required.’
‘It’s got to be perfect,’ says Lillie. ‘You’re dealing with document production, contracts and risk, so you can’t really go to market with a minimal viable product.’ So much for design thinking, then.
Legal industry incumbents therefore enjoy stronger natural defences against disruptive technological change, despite a 360-degree competitive squeeze. While technology is a key driver of industry change, disruption tends to flow from revolutionary business models. The world’s most disruptive companies, according to a recent KPMG survey, are all multi-sided platforms engaged in removing gatekeepers, overcoming information asymmetries, and employing network effects to scale rapidly across different sectors. In doing so, they find new sources of demand and new ways to deliver value.
By contrast, legal services remains implacably a ‘pipeline’ business. That is, a business that takes in problems at one end of the pipe, and outputs solutions at the other. But that’s not to suggest the industry is static. Certain business model components are shifting; others less so. Most obviously, value propositions are evolving. Comparing practice today with 2016, Richard Batstone, senior knowledge and innovation manager at Slaughter and May, says: ‘Lawyers running a transaction today can spin up a diligence platform in the Cloud, produce their first drafts at a click of a button and have their proof reading taken care of by a machine. That’s very different to when I was in practice.’
Trailing somewhere in the wake of new tools and new features is a mindset shift. Stephen Allen, vice president of ‘enterprise solutions and get sh*t done’ at Elevate, is fond of neologisms and if they’re also portmanteaus, so much the better. He enthuses about ‘satisficing’, and ‘solutioneering’, among others. Satisficing is ultimately about pragmatism, and a counterpoint to more familiar ‘scorched earth’ tactics and ‘leaving no stone unturned’. ‘Satisficing gives you a real benchmark,’ he says. ‘You look at all the alternatives, and you pick the one that satisfies demand, and is sufficient to be able to do that.’
It aims to prevent overservicing and the fee write-offs that inevitably follow. ‘It’s a mentality shift for the buyer as well,’ he adds.
It amounts to being less legalistic, more collaborative and more solution-driven. Solutions, increasingly, are products but, according to Allen, underpinned by greater alignment of firms’ and clients’ economic interests. The Big Four are on board too. ‘We’re seeing how we can combine technology and legal expertise into solutions,’ says Bruce Braude, chief technology officer at Deloitte Legal. ‘We’re calling them digital legal solutions, but it’s less about purely selling a piece of technology and more about solving legal needs.’
Braude talks about a self-service product called Four Corners Intelligence in which data from bundles of clients’ contracts is captured and can be interrogated as needed with guidance available online, and can also be a pathway to escalate more complex queries to specialist lawyers. ‘It’s a better way of getting that guidance beyond what historically would have meant picking up the phone either to in-house counsel or a law firm provider. It’s more efficient, but it’s also a better user experience,’ he says.
Tackling similar issues, the LOD and SYKE partnership has developed products that have cut legal service requests by between 30% and 50%. According to LOD co-founder Simon Harper: ‘Up to half of all queries are some form of frequently asked questions and it’s a case of matching legal service requests to a form of digital content library.’ At present, such libraries of knowledge are siloed within each organisation’s pipeline. Harper, however, can see a more radical future. ‘I’m really fascinated by the next phase of this, where people start pooling knowledge and pooling each other’s FAQs.’
Even without a transformative business model, value propositions generally are evolving, with firms differentiating by improved performance, better customisation, greater convenience and greater accessibility. Transparency, reduced cost and reduced risk are the desired outputs. Technology is the driver and enabler, of course, but for most firms it remains a value-add rather than a core activity. Therefore there has been a rapid proliferation of point solutions, tackling single, sometimes narrow, problems, rather than more comprehensive enterprise-wide legal offerings. In short, technology remains modular, not architectural, and is accordingly less disruptive.
How sustainable technology-based differentiation might prove from a strategic standpoint is an open question. Indications are that the use of legal tech is already sliding towards becoming a ‘hygiene factor’ for client RFPs, that is, a baseline requirement more notable when absent. ‘It has become more of a benchmark for corporate clients looking to bring firms onto their panel,’ says Sharan Kaur, a legal technology expert. ‘The expectation is that tech-driven savings will be passed onto the client. Whether or not that is happening is questionable. In my experience, the cost savings, as a result of using legal technology, are not consistently passed onto the client. Corporate clients are tech savvy and want to know more about how the matter is handled and what technology, if any, was used.’ Quantification of value is therefore a growing priority and a stronger differentiator.
With changing value propositions come changes in core activities that in turn necessitate a shift in front-line resources. Solutioneering is inherently more multi-disciplinary. Braude, for example, is routinely in front of clients: ‘As CTO of Deloitte Legal I’m regularly in client pitches, playing a significant role together with our lawyers and our legal partners. And if client requirements relate to certain system requirements, we can bring in our consulting experts around a vast range of different technologies.’ Behind them stand Deloitte’s 4,500 data scientists.
Those at the operational frontier (see box below) foresee legal services being complemented by statisticians, data scientists, cognitive scientists and linguistics experts. That journey is a work in progress, but an undeniable break with tradition: ‘It always appears to us that the partner wins the work, the partner prices the work, and the partner delivers the work,’ says Fowler. ‘I struggle with that in today’s world.’
Arguably more influential are the business model components that are not shifting. Few firms, for example, are looking outside traditional market segments, notwithstanding they have the resources and capabilities to do so. The under-served legal market is more dispersed, but potentially vast with some estimates suggesting that 95% of middle-income and small businesses in the US cannot afford legal advice. Says Allen: ‘It’s not just about the people with no money, but how business can get instantaneous answers to questions because the impact of getting that stuff wrong is so exponential.’ His rule of thumb is that the cost of correct legal advice relative to getting it wrong ‘must be one to 50, or one to 100’.
Client relationships are also relatively static, particularly for complex, bespoke services (see box below). ‘The critical barrier to entry for premium legal services is deeply held relationships, which are hard to break into,’ says McGuire. ‘We know because we have tried. And it takes a couple of years before you’ve developed any sort of revenue per client.’
The final parts of the business model jigsaw – cost structure and revenue streams – are perhaps the most significant and enduring characteristics of the profession. ‘Until you get to a point where they genuinely measure themselves against a customer outcome metric other than their own revenue, or their own profitability, then the conversation won’t really change,’ concludes Fowler. ‘Law firm CFOs are managing staff based on utilisation of time, because that’s the only thing that they can measure.’
Absent such change, tinkering with aspects of the business model while leaving cost structure and revenue streams untouched amounts to little more than tech-washing. And here, for the most part, though veneered in modernity, the edifice of the equity partnership and billable hour stands firm, and in crucial segments will remain so.
Different parts of the industry are facing different strategic challenges, are disrupted to different degrees, and have divergent future growth trajectories.
To make sense of these dynamics, a four-box model (below) illustrates four notional segments. The axes represent continuums based on the complexity and repetitiveness of work and segments the industry accordingly. Box B is a small slice of the market limited to big-ticket, high-value, high-risk, bespoke work mainly for listed entities – public M&A, complex litigation, capital markets. Perhaps 100 global firms compete for this limited pool of highly profitable work. Technological change in this quadrant is evident but limited. Business models are fundamentally unchanged, and suggestions of imminent disruption can be confidently dismissed, and they are labelled ‘untouchables’ because of their strategic focus, ability to erect barriers, exploit information asymmetries and profit from market inefficiencies.
Box A is typified by the Big Four. Tech-savvy and enable to command immense resources, those at the ‘operational frontier’ combine ever-improving operational effectiveness with a global client base. As the operational frontier expands, those on its borders will likely be crushed. A flight to complex and bespoke won’t save everyone.
Commoditised practice areas are growing in number, and the onslaught from boxes A and C will likely crush the laggards.
At present, industry players inhabit one or more boxes. Those in all four may need to become more selective. And those still touting a ‘cradle-to-grave’ service may start to question whose grave they’re talking about.