In writing up the week 4 summary of “How Innovation Diffusions in the Legal Industry,” I discovered that it is near impossible to write about Axiom without referencing a larger change narrative.

Founded in late 1999, Axiom was likely the legal industry’s first venture-backed start-up.  Now, 18 years later, with over 2,000 employees in 17 offices in the US, Canada, Europe, and Asia, nearly 50% of the Fortune 100 as clients, and $300 million+ in annual revenue with continued double-digit growth, Axiom has become the leading exemplar of the NewLaw sector.  Indeed, in the graphic above, which is used by Axiom professionals to explain the evolving legal market, the orange in the bar on the right is what makes the “New Model” new.

Yet, here is the rub: 18 years is a long time for something to be new. And that says more about the legal industry “social system,” see Post 004 (innovation diffuses through a social system), than it does about Axiom. It also makes Axiom a great diffusion theory case study.

For summary of Week 2 guest lectures (Pangea 3, Practical Law Company, Hotshot), see Post 032. For week 3 (consultative sales at Thomson Reuters), see Post 034.

Tom Finke’s story

For the week 4 guest lecture, we were very fortunate to have Tom Finke, Axiom’s Managing Director of West Region Operations.  Tom has a JD/MBA from Northwestern, where he teaches a course called “The Evolving Role of the Law Department in the Modern Corporation and Legal Industry.”  Prior to joining Axiom in 2008, Tom spent five years as an associate at Sidley Austin LLP before switching into a series of business roles in the online media space.

Note: this is really a story about how Tom developed a very novel mindset and perspective — a combination of strategy, sales, operations, and law — and how this rare mix of talents is used by a shop like Axiom.  For those interested in having challenging work they believe in, this is not a trivial narrative.

Used cars

Tom Finke is very funny and self-deprecating, attributing much of his career to lucky breaks, starting with a summer stint as a 17-year old used car salesman in Phoenix, Arizona.  Since Tom knew very little about cars, he had to fall back on simple questions like, “what are you looking for?” After that, his only tool was listening.  Eventually he realizes that if you’re sincerely trying to be helpful, a reasonable number of customers will talk themselves into a sale.  Indeed, there are few better ways to qualify a customer than their willingness to walk around a car lot in 110 degree heat.  You just need to walk with them.

Tom’s first big break in law comes with his job at Sidley.  He interviews in the fall of his 1L year. Fortunately, the partner he interviews with loves the used car stories, and Tom gets an offer — before 1L grades come out and anyone from Sidley can review his less-than-Sidley first-semester transcript. Another break was getting into the MBA program at Kellogg, as Tom applied as the law school and Kellogg were expanding the joint program.  As the years unfolded, the training and connections of the dual degree enabled Tom to credibly wear both a business and legal hat.

“It’s hard to escape law”

After five years as an associate at Sidley, Tom decides to transition to a business role.  After a year of searching for high quality opportunities, he discovers that “it’s hard to escape law,” as the corporate world has a limited appetite for experienced lawyers working in business roles.  By then, it’s 1998 and internet is exploding as a new business platform with companies like Yahoo, AOL, and Excite.  The tight labor market creates an openness to less conventional sources of talent, and Tom finds an opportunity with an online classified ads company called Classified Ventures, a joint venture of major U.S. newspaper companies.  He joins as Director of Business Development, not as a lawyer. Later, he becomes president of a separate business unit focused on online auctions.

Repeating advice he received as a young lawyer, Tom tells the class that the early part of your legal career is about “brand building.”  Credentials and reliably good work are what matter for developing a reputation at the firm and with clients.  Yet, when Tom leaves Sidley, a firm client pulls him aside and says, “Now that you are in the business world, it’s all about track record.” In other worlds, to steadily advance, Tom has to put up outstanding numbers over a period of years.

After serving as CEO of an online business that fell victim to the Internet crash, Tom takes a job at the Tribune Company right before 9/11.  Despite the business upheavals of the early 2000s, the Tribune continues to do well as a newspaper publisher and broadcast conglomerate.  Moreover, Tom’s unit, Tribune Interactive, enjoys explosive growth that eventually reaches more than 30% year-over-year. With the passage of time, however, the decline of print journalism accelerates. These challenges coincide with a plan to turn the publicly held Tribune Company into one of the world’s largest ESOPs.  That transaction ultimately puts a crushing debt burden on the company’s balance sheet.

As the entire economy drifts into a tailspin in the fall of 2008, Tom sees the writing on the wall and contacts one of his best friends from Kellogg, who is running the Chicago office of McKinsey & Company. The colleague passes along a tip that a company called Axiom was looking for someone to start their Chicago office.  Tom applies and in December of that year gets the job. A week later, the Tribune Company files for bankruptcy.

The early days of Axiom Chicago

When Finke joins the Chicago office of Axiom in December 2008, the office had two full-time employees — one attorney along with a junior analyst — and roughly $10,000 in booked revenues.  His second day is the office holiday party, which includes 15 attorneys on Axiom’s “wait list” — i.e., approved for assignment to Axiom clients but without a current match.  Ironically, the sole actively engaged Axiom attorney is working onsite in Des Plaines (a suburb of Chicago) and hence couldn’t attend.

Despite the stark imbalance between qualified attorneys and paid client work, Tom remembers going home that night and telling his spouse, “I think this company has a chance.”  Why? Because he is blown away with the quality of lawyers/people that Axiom has managed to recruit.

Tom comments, “I was very lucky to start in 2008, as general counsel were looking for something different.  Because of the financial crisis, they had budgetary pressures and no ability to hire additional in-house attorneys.” Relatively quickly, the office added three powerhouse Chicago clients: Accenture, Baxter, and Wrigley.  “Because our attorneys did a great job for them, they allowed us to use their name as a reference client.  I often joke that I said the names of those clients more often than my children’s names in 2009 and 2010, but it might be true.”

Obviously, this is a key diffusion theory point, as these clients were viewed by in-house peers in Chicago as early adopter/opinion leaders, see Post 020, signaling that Axiom is a credible supplier of high-quality legal talent.

Tom is very direct on this point. “When you have no brand of your own [like Axiom in Chicago in 2008,] you have to leverage off of someone else’s.”  In diffusion theory, this connects to the “cultural compatibility” factor for innovation adoption.  See Post 008 (discussing key factors related to rate of adoption). Axiom attorneys had the same educational credentials and work experience as a law firm associate, yet they were 40-50% less expensive and had in-house experience. By the end of 2010, sales for the office exceed Tom’s long-term projections by several million dollars. Indeed, Axiom total revenues as a company went from $25 million in 2007, to $50 million in 2008, to more than $300 million in 2017.

Axiom’s evolving business model

As we make our way through life, most of us want to conserve our mental energy by putting things into familiar boxes. Because Axiom doesn’t neatly fit within any established box, accurate categorization has long been a challenge for the company, albeit the effect is often an underestimation of the company’s capabilities, growth, and client base.

Since its founding, Axiom has curated a highly credentialed and experienced legal workforce that can be used to cost-effectively manage peaks, surges, or temporary gaps in corporate legal departments. This is the Axiom’s secondment (or talent platform) model. It continues to generate significant revenues and growth.  However, since just after the financial crisis of 2008, Axiom has been building out large teams of lawyers and other professionals in several “centers of excellence.”  For this workforce, which focuses on large-scale specialized projects and managed service engagements, the value-add for clients comes in the form technology, process, and data analytics that drive up quality, predictability and transparency of the delivery of legal services while driving down per-unit cost.

Depending upon the engagement, the talent platform and service delivery models can be paired together.

An example: The Kraft/Mondelez spinoff

To illustrate how the key pieces of the business work together, Tom picks up a grease marker and begins diagramming a corporate transaction.

A publicly held company — in this case, Kraft Foods, Inc. —  wants to spin off approximately 1/3 of its business into a new publicly-traded entity that focused on the North American grocery store business.  But here’s the problem — to enable this transaction, Kraft Foods has thousands of contracts with customers and suppliers that need to be identified, organized, and evaluated so the in-house lawyers can develop a game plan for assignment, termination, buyouts, and renegotiations, etc.  Kraft identifies 40,000 documents that are potentially relevant to the transaction. For cost reasons, having a large law firm manually review and abstract the contracts is off-the-table.

Looking for a solution, the Kraft legal department contacts Finke at the Chicago office of Axiom. By 2011 (the year the transaction got underway), Axiom had developed expertise in process-driven document review for litigation.  Drawing upon the resources and capabilities of its service delivery center in Chicago, Axiom retooled its Relativity platform so it could efficiently and reliably identify and eliminate duplications and other extraneous documents. After the service delivery unit does its portion, the 40,000 documents yields 10,000 contracts. Then, leveraging process and project management skills, attorneys in the delivery center review the 10,000 contracts to determine the impact of the spin-off.  The final step in the project is to obtain consent from counterparties and re-negotiate many other counterparty contracts, which is legal work  completed over a period of months by more than 10 Axiom lawyers from the talent platform.

The combination of Axiom’s talent and service delivery platforms was a significant enabler of the Kraft/Mondelez spinoff and subsequently became the basis for Axiom receiving a 2013 ACC Challenge Award. It is worth noting that Kraft’s strategic counsel for the transaction was Cravath Swaine & Moore.

Where things are going

The Kraft/Mondelez transaction was a major milestone in Axiom’s history, as it marked the beginning of a new line of business to enable major corporate transactions. This new area of emphasis in 2012/2013 substantially coincided with a decision to get out of the litigation document review business, which Axiom’s leadership concluded would need a massive investment in technology to remain competitive.

During class, Tom shows a slide that summarizes of Axiom’s recent deal work:

  • 80+ corporate transactions completed over the last two years
  • Specific examples of M&A support, spinoffs & divestitures, reorganizations, and joint ventures for an impressive list of corporate clients
  • $400 billion in transaction value over the past four years
  • 500+ Axiom contract specialists and M&A lawyers

Axiom is also growing, likely at the expense of other service providers, particularly law firms.

With this information in mind, it is worth putting side-by-side Axiom’s evolving legal service delivery model with the Post 013 evolving litigation model created by Alan Bryan, Walmart’s head of legal ops and outside counsel management. [click on graphic below to enlarge.]

It is obvious that both graphics are signaling the identical future — one where law firms are called upon for strategic and exceptional events and the balance of the run-the-company work is split between in-house departments and outside service providers based upon efficiency and value.

A changing talent market

According to Finke, the evolution of the legal market over the last decade has created significant industry-level pressures on talent.  Since 2008, major law firms have hired significantly fewer entry-level associates, which in turn impacts Axiom’s traditional talent pipeline.  Although Axiom’s flexible work model and blue-chip client base remain highly attractive for many law school graduates, higher student debt-loads affect the timing of when lawyers can make the jump.

Tom notes that over the last decade, in-house lawyers have become “the owners of core operating functions” and that “BigLaw is competing for marketshare with their clients’ legal departments and losing.”  Cf. Post 003 (showing rapid increase in in-house lawyering over last 20 years). At present, over 70% of the lawyers on Axiom’s talent platform have in-house experience, which clients generally find more valuable than law firm-only experience, at least for work that supports a company’s business units. Thus, in recent years, consolidated legal departments following a corporate merger have become an important source of talent for Axiom. Yet the market overall is tightening for the right kind of experienced lawyers.

The key takeaway is that the traditional law firm apprentice model is breaking down. The incoming numbers are lower; and from the client perspective, the law firm skill set has become less valuable.  Ultimately, these economic realities impact law school applications and enrollment, particularly as student debt loads remain at historical highs.  Tom noted this was a industry-level problem with no easy or risk-free solution.

An focus on technology

Recent additions to Axiom’s leadership arguably signal the company is positioning itself for a future where technology will be a major differentiator.   In the fall of 2016, Axiom’s co-founder and CEO Mark Harris recruited Elena Donio, former CEO of software giant Concur, to replace him.  Furthermore, Axiom recently hired a chief technology officer, Doug Hebenthal, who formerly served as Director of Engineering at Amazon and held numerous technical positions at Microsoft.

Referring to Hebenthal, Finke observed, “If someone had told me in 2008 that Axiom would one day hire a CTO of that caliber, I doubt I would have believed them.  But our business has evolved in response to a changing market. And tech-enabled delivery of legal services is clearly where things are headed.”

Diffusion theory takeaways

The methodology of the class is take in take a deep dive into examples of legal industry innovations — always a combination of people and organizations — and to examine relative successes and failures through the lens of diffusion theory.  In most cases, we are referencing Everett Rogers’ rate of adoption model, which was covered in foundational post 008 and summarized in the figure below [click on to enlarge].

Within this model, the “Perceived Attributes of the Innovation” category tends to be the most important.  Without a sufficient quantum of these factors, the social system adoption process will not get triggered.

Applying the rate of adoption model to Axiom’s 18-year track record of growth, the combination of three factors appears to be key:

  • Relative advantage: 50%+ cost savings over law firms.
  • Cultural compatibility: work done by attorneys with BigLaw training and in-house experience.
  • Trialability: giving Axiom small, low-risk projects until the client obtains confidence in the lawyers’ ability.

The 50% cost saving by itself would have been insufficient for Axiom’s adoption. Further, the financial austerity created by the 2008 financial crisis was a key factor in changing the relative advantage calculus. 50% saving post-2008 was a lot more valuable than 50% pre-2008. Cf. Post 032 (David Perla also acknowledging that the financial crisis was a major accelerant for Pangea3).

Likewise, Axiom invests heavily in “Efforts of Changes Agents” by fielding a large team of consultative salespeople.

In the fall of 2016, I had the opportunity to participate in a meeting of Axiom’s Western Region sales team. Basically, to handle sales in the Midwest (Chicago, Minneapolis, Detroit, St. Louis, and Ohio), Axiom employed 15 full-time sales professionals.  Of the group, the vast majority were MBAs; only two had law degrees, and only one had practiced law.  I asked why Axiom had built out the sales team in this way.  Tom acknowledged the advantage of the JD credential.  Yet, experience revealed that it was easier to get an MBA to acculturate into the legal world (such a Rebecca Thorkildsen from Week 3) than to get a lawyer to (a) feel comfortable providing pure business advice and know-how to prospective clients, and (b) deal with the frequent rejection that comes with a sales role at a company seeking to disrupt the industry.

By necessity, law is ceding ground to various allied professionals. Because this brings new perspectives, this bodes well for future innovation.

What’s next? See The Decline of the PeopleLaw Sector (037)