As the above syllabus excerpt suggests, there is now a law school course on how innovation diffuses in the legal industry. This new ground is being tilled at Northwestern Pritzker School of Law, where I am visiting this fall. It is one of the few courses at Northwestern Law that enrolls both JD and Masters of Science in Law (MSL) students. This enrollment is ideal, as the diverse educational backgrounds and professional experiences of the MSL students are a terrific complement to the 2L and 3L students who have already internalized a surprisingly large amount of legal culture.
The class started last Monday (10/16) and runs for eight classes. As diffusion theory is part of an applied research tradition, see Post 004, we spent exactly one class on the underlying theory and the legal industry before moving to examples.
The examples are supplied by legal innovator and early adopter guest lecturers. For Week 2 (10/23), we had the pleasure of hosting David Perla, co-founder and former co-CEO of Pangea3, and Ian Nelson, who was part of the original US sales team of Practical Law Company (PLC) and more recently co-founder of Hotshot, a tremendously innovative e-learning company focused on legal professional development.
NewLaw and legaltech start-ups are now widely covered by the legal press. But that was hardly the case during the booming mid-2000s when all the focus was on soaring BigLaw profits and salaries. I wanted to start our guest speaker series with David and Ian because during this hey day period, both quit top-of-the-food-chain jobs to pursue obscure and speculative business opportunities (David in 2004 and Ian in 2006). At the time, the future we are now living in was far from obvious. Yet, when their respective companies sold to Thomson Reuters a few years later at valuations and multiples on-par with highly successful Silicon Valley start-ups, it became clear that NewLaw and legaltech were sectors with enormous opportunity for the innovative and ambitious.
Over the years, I have heard several renditions of Pangea3 founder stories. But Monday’s edition provided a new twist, as David focused on the preeminent importance of professional relationships and how, in hindsight, the long game is the only game that really matters.
David went through a long litany of examples of how a decade’s worth of professional contacts accumulated since law school (by both he and Pangea3 co-founder Sanjay Kamlani) were crucial to opening doors or indirectly supporting the fledgling start-up. From getting free access to 1,200 Indian lawyer resumes from Monster.com so the duo could stand-up a work team in India over the course of a few days (David had just quit the GC position at Monster to launch Pangea3); to several months of office space at Katten Muchin so Pangea3 could signal a midtown Manhattan address (David was a former Katten associate); to an initial investment by a prominent Indian-American lawyer who had credibility in both US and India venture capital and legal circles, thus greasing the skids for everything that followed (this came through Sanjay’s tenure at PWC and OfficeTiger, a first-generation business process outsourcer in India), each story illustrated the tremendous importance of relationships. Cf. Post 020 (discussing crucial role played by “weak-tie” relationships in the diffusion of innovation).
The most surprising and powerful story was David’s family connection to the head of litigation of a major global bank. The family friend took David’s call, but said at the outset, “I am happy to help you in any way I can through mentoring and coaching, etc., but I’m never going to send any documents to India.” David replied, “I understand. Is it okay if I check in with you every six months?” The head of litigation said “Sure.” David foreshadowed that this connection would turn out to be key to the ultimate success of Pangea3.
In the meantime, David and his colleagues were trying to crack the code of the large global banks. One of their prospective customers broke the disappointing news that “we innovate in our trading strategies, but not in operations or sourcing. For that stuff, we’re a second mover. So if you want us to hire you, go get [list of global banks] as one of your customers. Then we can talk.”
Fast forward a couple of years, the big break for Pangea3 was the turmoil in the financial services market in the fall of 2008 and the resulting global recession. David fields a call from one of his board members, who buoys his spirits, “Doubledown on sales; recessions are good for outsourcing.” Shortly thereafter, David takes a call from the family friend / head of litigation at the major global bank. “David, the General Counsel just informed us that our budget has been cut by 25%. I know I said never, but never just happened. Can you be here this week for a meeting?”
That meeting resulted in Pangea3 landing its largest and highest-profile client, which in turn sped up the sales cycle for several other large banks waiting to go second. David acknowledged that he did not have the benefit of diffusion theory when he was building Pangea3. Yet, on both the investor and customer side, he could see how certain key early adopters had the effect of making a wide array of disparate pieces fall into place. David specifically referred to these people as “influencers.” Cf. Post 020 (discussing how “opinion leaders” within a social system are “able to informally influence other individuals’ attitudes or overt behavior in a desired way with relative frequency”).
I first met Ian Nelson in the fall of 2008 at a legal innovation conference–in hindsight, the first of its kind–organized by USC law professor and economist Gillian Hadfield. By 2008, Ian had been working at PLC for two years, initially in content creation but then transitioning to a lead role in sales. Although PLC had already become a dominant force in the UK, the US was a bigger market governed by different law. Thus, for all practical purposes, Ian had joined a US-based start-up.
There are two reasons why the PLC model is highly relevant to anyone interested in legal innovation. First, Thomson Reuters’ acquisition of PLC in 2013 remains the high-water mark for financial success among legal industry entrepreneurs. See “Thomson Reuters buys Practical Law Company,” Telegraph, Jan. 23, 2013 (reporting the size of the deal between £200 and £300 million, all of it achieved without outside investment). Second, there remains a wide array of activities currently performed non-expertly by law firms and legal departments that could be turned into highly successful businesses by carefully applying the core logic of the PLC model. In fact, this logic is very much at work at Ian’s current company, Hotshot. Thus, let’s briefly review the PLC model.
Practical Law began life in 1990 as a trade journal focused on the UK legal market. Some of the most popular features were practice tips that pulled together and explained the technical aspects of new and emerging methods of finance. This is not surprising because PLC’s two founders, Robert Dow and Chris Millerchip, began their careers as associates at Slaughter and May, a leading Magic Circle firm specializing in M&A and sophisticated corporate finance. Quipped Millerchip, “We created the thing that we wanted when we were practicing.” Ross Todd, “Web Practice Tools for Transactional Lawyers,” Legaltech News, Jan. 23, 2009.
With the growth of the web, PLC’s offerings became simultaneously better and easy to access via an online subscription model. Relatively quickly, firms were being placed in a competitive disadvantage if they lacked access to PLC work product, which included document templates, standard clauses, practice guides, and deal checklists. In theory, firms could create this content on their own. Yet, the ability to scale across the entire corporate bar enabled PLC to deliver higher quality work product at a much lower per-unit cost. In effect, PLC had become a privately run shared service relied upon by the vast majority of top UK law firms. The economics of a shared services model make it virtually impossible to dislodge a well-run first mover — and PLC fit that description to a tee. Cf. Thiel, Zero to One 97-98 (2014) (“[M]oving first is a tactic, not a goal. … It’s much better to be the last mover—that is, to make the last great development in a specific market”).
During his guest lecture, Ian recounted his early days as a NYC corporate associate when he first encountered some of the quality gaps later filled by PLC and now being targeted by Hotshot. The first instance occurred within a few days of hiring when Ian was dispatched to a far-flung city for due diligence on a “reverse triangular merger.” The supervising partner instructed Ian to review a large volume of contracts and flag anything that “looked weird.”
Despite his law review credentials, Ian had no idea what a reverse triangular merger was, much less the definition of weird. Thus, for the next 48 hours, Ian was thrown into a silent panic, fearing that his legal ineptitude would should be exposed to the world. Yet, what he soon discovered was that neither the partner (and apparently the client) cared about the inefficiency of the process, as Ian’s overinclusive approach to copying “weird” provisions for further study at the firm’s headquarters was all being billed by the hour. Had Ian had access to Hotshot, he would have had on-demand videos and practice guides enabling him to get the answers that the supervising partner lacked the time or interest to provide.
A second formative incident occurred a couple of years later when Ian headed to London to work on-site at a UK firm that was co-counsel on a major transaction. During a tour of the office, Ian was shown the cafeteria, the copy room, and the work area for the PSLs. Ian asked, “What’s a PSL?” He was flabbergasted to learn that in the UK it was common practice to have “Professional Support Lawyers” who were responsible for, among other things, organizing and cataloguing the firm’s work product so the very best precedent could be quickly located for use on future client matters. Ian subsequently returned to the US and lobbied his firm for the creation of a similar role, as it would replace the then-common practice of firm-wide emails soliciting documents that could be used as a starting point for current client matters. Upon hearing these ideas, however, the partners shrugged with indifference.
Six years into corporate law practice, these were some of the formative experiences that caused Ian to respond to a job ad for PLC — experiences that really struck a chord with the students. At my request, Ian did a deep dive into Hotshot. However, Hotshot as a business and product offering warrants its own future post.
What diffusion theory insights did we learn?
As I reflect on Week 2, three themes stand out.
- There is no innovation without execution. It’s easy to discuss innovation as something conceptual, but until the early adopter end-user receives full value, innovators are just trafficking in ideas. Although this terrain is covered in LE’s “Crossing the Chasm” and “Hype Cycle” series, see, e.g., Posts 024–025, it was made more vivid by Perla’s description of solving funding and operational challenges while also hunting down the early adopter customers. Standing up a quality-first operation in India (the putative innovation) is extraordinarily complex, time consuming and costly. Although Pangea3 was able to hit its ambitious sales targets relatively early, the time span between a signed deal, doing the work, and getting paid — particularly when large corporate clients string out vendors for 45 to 90 days — resulted in a “near death” experience for Pangea3. Suffice it to say, there is enormous risk in translating an idea into an innovation that warrants diffusion. Innovator-leaders like David and Sanjay who can skillfully coordinate the technical talents of others are very rare and very valuable.
- There are usually several social systems that matter; not just one. As I listened to David and Ian, it became obvious that several social systems were interacting with one another. For example, David describes how inroads with the New York global banks had little to no impact with legal departments at large US tech companies. In fact, it was an investment by famed Silicon Valley VC firm Sequoia Capital (on less favorable terms that other VC shops, though the discount was worth it) that opened doors with tech companies on the west coast and, in turn, reverberated throughout India, signaling to young Indian lawyers that Pangea3 was the firm to join. In Ian’s case, the early adopters at Hotshot were all Silicon Valley-based law firms who saw real advantages to having better-trained associates who could actually understand and do the math in venture capital deals. A credible roster of west coast-based AmLaw 200 firms were eventually enough to open doors on the east coast and in the midwest where the deal flow was more traditional M&A. Cf. Post 004 (“Rogers’ core insight … is that the diffusion of innovation is a process that occurs through a social system“).
- Relative advantage, cultural compatibility, and trialability really matter. Apparently, for a large global bank, the difference between “never” and “this week” is a 25% budget cut. Thus, drawing upon the Post 008 rate of adoption model, Pangea3’s big break turned on a sudden shift in the “relative advantage” of legal process outsourcing. Likewise, regarding cultural compatibility, both David and Ian emphasized how their status as former BigLaw corporate lawyers, including knowledge of cultural norms related to speech, dress, and credentials, opened both minds and doors. Finally, Ian gave examples of how trialability was key to making sales for PLC and Hotshot, while David discussed how small projects resulted in growing sales, including a mandate from a major client that Pangea3 would be used by all outside counsel for all large-scale document reviews. Apparently, nothing is more convincing than tasting the soup. If it tastes good, your early adopter customers will set off a chain reaction (within a firm or legal department, or among peer firms or legal departments) that will do the work of an army of salespeople. Cf. Post 025 (Geoffrey Moore noting that word-of-mouth marketing is essential to crossing the chasm).
Week 3 of How Innovation Diffuses in the Legal Industry features three highly accomplished Thomson Reuter professionals:
- Joe Borstein, Global Director of TR’s Managed Legal Services (formerly Pangea3) and Innovation Columnist at Above the Law
- Rebecca Thorkildsen, Global Director of Legal Solutions (a person with an amazingly broad and deep grasp of the rapidly expanding legal ecosystem)
- Paul Stroka, Director of Legal Solutions (a very capable corporate lawyer who has a deep understanding of consultative sales — i.e., selling as a second-order effect of customer problem solving — which is the core skill of a change agent)
I’ll do my best to pass along what we learn.
What’s next? See The 2017 Forum on Legal Evolution (033)