Legal innovators yearn for a big payday. The obstacle course in their way? A messy, fragmented, and chaotic legal market.
Why is the legal industry so slow to change? This question gets asked all the time – particularly during conference season – but it gets more than its fair share of airtime year-round. It is ever-present in the blogosphere and hotly debated on Law Twitter at least once a week.
However, the most frequently given answers are largely unsatisfying and the ensuing discussion often recursive. If the legal industry is on tape delay, the change conversation may be stuck in a Delos-worthy loop.
Legal innovation stands at a critical juncture. With mounting momentum comes heightened scrutiny, and though we may be on the cusp of significant breakthroughs, we also stand on the precipice of an industry-wide chasm. It’s time to acknowledge that we are working within an environment of extraordinary complexity and inefficiency, where innovation offerings are at clear and overwhelming risk of faring poorly.
(Market) Context Matters More Than (Lawyer) Character
One popular fallback is a narrative that I’ll call “because lawyers.” Because lawyers are skeptical, because lawyers are conservative, and the list goes on (and on and on). The “because lawyers” train of thought goes something like this: because lawyers are different, the legal industry must also be different, and what has worked to advance positive change in other industries will not apply here. I disagree.
How “Because Lawyers” Fails the Industry
The “because lawyers” narrative can offer insights of value to would-be change agents, but I tend to think it suffers from two limitations that are closely related:
- Firstly, it is better at explaining failures than explaining successes (and there have been some successes). This suggests that the “because lawyers” narrative lacks explanatory power: designing around lawyerly tendencies is likely a necessary but insufficient condition to driving systemic change.
- Secondly, “because lawyers” is an intrinsically blame-based narrative, built on hypotheses about highly stable aspects of lawyer disposition and personality. This is especially problematic where it invites proactive defensiveness from lawyers and engenders cumulative resentment in change agents. These two consequences conspire to erode rather than promote collective psychological safety. Cf. Laura Delizonna, “High-Performing Teams Need Psychological Safety. Here is How to Create It,” Harv Bus Rev (Aug. 24, 2017).
Instead, I think we (legal innovators and change agents) would reap greater benefit from thinking and talking more specifically about target markets. For example, which buyers have underserved needs that they are willing to pay to address now? And what, precisely, are those needs?
Buyers Rarely Beat the Proverbial Path to Your Door
Developing new products and services is hard – in any industry. Even when there is a proven customer base with clearly articulated and well-understood needs, incremental improvements do not readily and reliably translate into profit. Disruptive products and services are another order of magnitude difficult: they occur because of discovery of a whole new set of needs not yet known or understood by anyone (we want 1000+ songs on demand at all times); or because of a wholly new configuration of value creation and delivery that substantially displaces the current solution (we want to order every book and eventually every product under the sun and have it delivered tomorrow).
In either context – incremental improvement or true disruption – would-be innovators must proactively define a reachable target market. Because new things take time to refine and scale, the survival of new ideas often depends on identifying and addressing the correct market first.
This implies a deep understanding of buyers and markets:
- how buyers currently organize and identify themselves into groups;
- how each group might differently perceive their needs and potential options to fulfill those needs; and
- how they prefer to buy and consume products and services that present a solution.
This is especially tricky because markets for new things are fluid and sometimes cut across existing or obvious demographic segments. Indeed, as this publication has well established, receptiveness to new things – in any context – are more dependent on psychographic attributes than demographic ones. See Post 007 (covering the basics of adopter types).
Ideas Need Market Feedback to Become Real
In the legal industry or anywhere else, ideas are rarely in short supply. Ideas are necessary but insufficient for meaningful progress – what we need are effective and reliable means to validate and refine ideas into tangible products and services that will survive contact with reality. This almost always requires the participation of potential buyers.
Unfortunately, optimal buyers in early markets do not always self-identify or congregate conveniently in a physical marketplace that innovators can visit to announce or demonstrate their idea. Instead, as the graphic above suggests [click to enlarge] the innovation team has to think creatively and undertake all manner of legwork outside the lab, to discover or pull together niche markets or sub-segments who will provide feedback and stress-test hypotheses about how the new process, product or service should work.
The onus to find the right prospects and convince them to try new things rests with the innovator, entrepreneur or intrapreneur. Yet, how often do we revert to the “because lawyers” narrative to explain away the many promising ideas that have stalled without achieving significant adoption? If a product or service is actually effective in addressing a problem that matters to the customer, the change management burden can be reduced (although perhaps never fully eliminated). Cf. Post 008 (49 to 87% of the rate of adoption typically turns on just five product attributes–relative advantage, simplicity, cultural compatibility, trialability, observability).
Unfortunately, “going to market” has become shorthand for any number of sticky problems and nebulous questions to work through. When we use that phrase, we need to acknowledge the enormous time, effort and difficulty that lies ahead.
As an industry, we are not yet mature in our collective ability to define and size new markets for innovative offerings. In simpler terms, our most critical gap isn’t ideation and it probably isn’t change management either. We have a commercialization problem, and to improve our industry-wide win rate we need to address the actual choke point.
Legal Innovators Face Extreme Conditions
In a recent discussion, Bill offered this insight: the legal industry isn’t different; rather, it’s extreme. I think this is a superior framing device to drive constructive dialogue and to advance our thinking about legal innovation.
Two distinguishing features of the legal industry’s structure contribute to make it an unusually unfavorable ecosystem for innovation: (1) extraordinarily balkanized and (2) fractally opaque. That sounds highly academic and esoteric, so I explain in plainer English below, with some supporting figures and visuals.
Balkanized and Isolated
Many industries are fragmented (i.e. crowded without a clear or dominant market leader), but legal is something more: extremely fragmented into many smaller units that are mutually hostile or uncooperative. This is true at the establishment level (individual firms) and at the segment level (the categories and subgroups into which firms roughly organize themselves).
The above diagram [click to enlarge] conceptualizes the evolving landscape of legal service providers, along the two-hemisphere model advanced by Heinz and Laumann and Susskind’s bespoke-to-commoditized continuum. See Henderson, What is more important for lawyers: where you go to law school or what you learned? (Part II), Legal Whiteboard (July 19, 2015). The left side of the chart captures the broad categories of incumbents (“the artisan guild”). The middle and right regions capture the broad categories of emergent competitors who seek to leverage new technology or process innovations to offer a different value proposition. This graphic is effective in communicating the increasing complexity of the legal marketplace.
However, it’s important to note that the above depiction of market composition is conceptual and categorical – it is not a scale representation of current market share along any quantitative measure. To add a more quantitative dimension, the below chart [click to enlarge] relies on U.S. Census data to show the composition of the legal services market by establishment size:
While this is an incomplete view of the market and a fairly imprecise mapping of segment to firm size, it still offers added quantitative support to the idea posited first in Post 005 “Six Types of Law Firm Clients” and clarified recently in Post 048 “Confusing Conversations with Clients”: namely, that we talk past each other because we each bring varying perspectives from different work contexts.
Most market composition analyses are based in revenue share. On infrequent occasions, the point is made that the vast majority of firms are solos or small firms (over 90% in the Census data above). But it is an analysis of job share that gives a more accurate sense of our industry as well as the best real-world explanation of why we often talk past each other.
Roughly 1,200 of the largest companies in the legal market account for about a third of all jobs, with small firms and solos splitting the remainder fairly evenly. If a Martian visiting Earth to learn about our legal ecosystem were to randomly select 3 people who work in legal services, the most likely scenario is that he will end up with 3 people who come from dramatically different work contexts and have almost no consistent information to offer. Even if our Martian were to beat the odds and pull together a focus group of 3 individuals who at least work in similarly sized organizations (he has about a 3.7% chance of getting that lucky), it’s also likely they come from firms with different specializations serving different client segments, who are accustomed to completely different workflows, technology environments, and compensation and incentive schemes.
Like any balkanized region comprised of hostile states, the legal market is difficult for outsiders to navigate or understand. For those of us on the inside, we should remember that each of us brings to the table a labyrinthine set of customs and experiences that create significant divisions and critical barriers to cooperation.
Fractally Opaque → Perpetually Lost in Translation
By and large, we remain in our silos and fail to cooperate. The “lone wolf” proclivities of lawyers (so autonomous and so competitive!) have been cited frequently as a primary barrier to open communication and collaboration. However, I think the phenomena is subject to more contextual explanation. Some legal work is intrinsically adverse and nearly all of it is highly confidential in nature. These factors serve to anchor a high baseline of opacity and create communication infrastructures that are designed to impede, rather than promote, the efficient sharing of information.
Despite the efforts of some forward-thinking corporate law departments to drive deeper collaboration across their supply chains, firms within each category tend to engage in vigorous competition, which in turn drives even greater opacity. The intensity of that competition has only increased in recent years as corporate budget pressures and insourcing strategies have depressed demand growth for the “artisan guild.” Subsequently, an open exchange of new ideas or practices within categories is more the exception than the rule, and usually only happens under diligent and hands-on management by a shared client.
In the current state, we also see very little systemic cooperation across segments (e.g. sustained strategic alliances or partnerships across service provider types). The artisan guild tends to regard newcomers with suspicion, and many forward-thinking incumbents are embarking on long-range initiatives to future-proof their businesses against down-market threats. In this, the incumbents engage in completely rational competitive behavior: many new entrants seeking entry points into the corporate buyer ecosystem are essentially positioned to displace corporate legal spend that has historically been held captive by the artisan guild.
In the legal industry, very real differences are present at many different resolutions: across segments, firms, practices, case teams, and individual roles. The resulting translation barriers add opacity to an already complex ecosystem, and that opacity is fractal in nature. In other words, you can take any subpart of the legal industry and it will display structural features that make each part just as opaque as the whole.
Even when we want to, many of us working in legal businesses find it challenging to relate meaningfully to each other. The emergence of new types of businesses and the continuing proliferation of new roles for allied professionals add more dimensions of complexity and friction in communication:
If innovation is a process by which new ideas spread across a social system, see Post 004, then legal innovators and change agents would be well served to recognize that the legal industry is not one single monolithic social system. Rather, it is a complex and complicated network of distinct and disparate subsystems, with almost every organizing principle conspiring to create friction in the diffusion process.
In an illustrative comparison, our close cousins in accounting have a slightly easier time. About 50% of accounting jobs are concentrated in firms of 500 employees or more. The perennial focus in legal press on the fates and fortunes of the richest firms, see, e.g., “The Super Rich Are Getting Richer” in American Lawyer (April 2018), also conspire to give a broad sense that the legal market is exceeding top-heavy. In short, the legal market appears to be a textbook example of the top 1% claiming the lion’s share of clients, revenue and profits, but this turns out to be a distortion of reality. The legal market most likely suffers from a slower pace of innovation because it is not top-heavy enough.
Though an apples to oranges comparison, the Big 4 enjoy much greater advantages of scale and scope relative to even the largest global law firms because they’ve consolidated a much larger portion of market share. Collectively, the Big 4 clocked about $130bn in global revenues in 2017 – more than revenues of the Am Law 200 combined.
Historically, the Big 4 draws roughly 40% of its revenues from the Americas and about 30% from audit. To match the Big 4’s Americas topline, the largest 32 Am Law firms would need to pool their collections. Because each of those 32 firms is organized into its own unique matrixed structure of regions and practice areas, the adoption decision must be made many times over, whether on a collective or authority basis, see Post 008 (type of decision affects rate of adoption). Either way, overall cost and effort required to spread new ideas through law firms are exponentially greater.
Market Inefficiencies → Innovation Inefficiencies
These structural barriers to the spread of new ideas are very real, even for the vast majority of the market conducting business as usual and merely looking for ways to drive incremental improvements to how they work. However, their adverse effects are perhaps felt most keenly by those trying to drive significant change in the industry.
In the aggregate, these structural barriers are experienced as friction in the procurement process and as inefficiencies in the marketplace. What do I mean by inefficiencies? In classic economic theory, an efficient market is one in which asset prices accurately reflect true value. Clearly, the ongoing dialogue around the need for pricing innovation – as well as the anecdotal evidence of high price dispersion for similar services – suggests the legal services market is highly inefficient.
But I also think the current makeup of the legal services market makes it highly inefficient in the literal and colloquial sense of the word: it takes too much time and effort for buyers and sellers of specific services to find each other, and once they meet up it also takes a great deal of time and effort to agree upon a fair rate to exchange money for services. More often than not, buyer and seller arrive at some accord using highly technical methods best described as “eh ¯\_(ツ)_/¯ looks about right.”
Assessment and evaluation of new substitutes implies an even greater burden of time and effort, along with the added element of risk in what is defensibly an environment of exceptionally low tolerance for failure. Moving fast and breaking things is great for startups… until Cambridge Analytica happens. Generally speaking, breaking things is less great for lawyers who are often hired to prevent bad things from happening or to argue over liability for bad things that have happened.
To succeed in this unforgiving ecosystem, innovations must offer an undeniable value proposition that functions as a complete solution to a material customer problem. In the next post, we will revisit the five adopter types with the goal of understanding the specific and unique contributions each type can offer to the would-be change agent seeking to cross the chasm.
What’s next? See A playbook for innovation magic (052)