For frustrated legal innovators, one of the missing pieces might be found in this new book on trust.
Todd Henderson and Salen Churi, two law professors, have written a deep analysis of trust — its cultural history, social mechanics, economic elements, and of course how it relates to law and regulation. As they put it, the goal of the book is “to establish trust as a lingua franca for discussion of issues that are often thought of as discreetly political but actually needn’t be” (p. xvi).
The inspiration for their effort was Uber, which I will discuss a little more in a minute. But while the book covers a great deal of ground — from securities regulation to dinner parties to the Hanseatic League — it does not pause to unpack the implications for lawyers themselves. I’d like to do a little of that below, because the margins of my copy of The Trust Revolution are full of graffiti on that topic.
Disclosure: Dan Currell and Todd Henderson are former classmates at University of Chicago Law School and occasional academic collaborators. However, as you’ll see below, Currell’s essay is less a freestanding review than an original analysis of how the book’s insights apply to the legal industry. I am confident that Legal Evolution readers will find value in this analysis. wdh.
Trust Revolution’s basic story
A test of a true insight is that it seems novel on first encounter but obvious in hindsight. From there, it sits comfortably in your analytical toolkit alongside things you’ve known for decades. I think the key insight that begins Trust Revolution clears that bar. Here’s my distilled version.
We all learned at a young age not to get into a stranger’s car. Now Uber has millions of us getting into strangers’ cars every day. So, before Uber is about technology or convenience, Uber must be about trust. Uber has many elements designed to engender trust, but driver and customer reviews are central to their approach.
We can analyze the trust point further by observing that we got into strangers’ cars before Uber — they were called taxis. Remember those? And we got into taxis not just because they were yellow and the light was on but because the taxi commission regulated them, set the rules, set the fares, and made us feel — well, “safe” might be an overstatement, but we got into the taxi.
In both instances, the key is the presence of trust. We’re not getting into just any car. We’re getting into a regulated car. In that sense — and this is the critical insight — Uber isn’t competing with taxi companies; Uber is competing with the taxi commission. Through crowdsourced ratings and other tools, Uber builds trust more efficiently than taxi commissions, and thus millions of us are willing to get into strangers’ cars. Uber and Lyft may be so good at what they do that an arm of the government will be competed into nonexistence (though perhaps never in London).
The sharing marketplace — Uber, Airbnb, Eatwith (yep , that’s meals in strangers’ homes), and more — is a lot more interesting through the trust lens. These companies aren’t selling a product or a service; they are selling a private alternative to public regulation. Henderson and Churi call them “microregulators”, as they specialize in regulating a narrowly defined type of transaction across a large marketplace (p. 30).
“Competing with the government” is a weird idea. But when you are competing on agility and ease of use, the government can be pretty easy to beat. Take the problem of taxi longhauling as described in Trust Revolution: “[O]ne iteration of the cab commission’s approach to solving the longhauling problem involved riders filling out, notarizing, and mailing in a ‘Long Route Voluntary Witness Statement’” (p. 145). Uber’s competitive alternative to that half-day process takes maybe ten seconds. You give the driver a one-star review. Not only is it easier, but far more effective. How many New York cabbies really feared the appearance of a “Long Route Voluntary Witness Statement”? All Uber drivers appear to fear the one-star review.
Tech companies are great at creating consumer convenience, and that’s a big advantage for these microregulators. It’s hard for governments to keep up with the pace of change, and tech-based microregulators provide a fast-moving (and well-funded) alternative.
Perhaps surprisingly, they have a trust advantage over the government, too. The technology industry is the most trusted of all major business sectors according to the 2019 Edelman Trust Barometer (p. 21). And in all countries but China, it is vastly more trusted than the government.
So the trust revolution, as described by Henderson and Churi, is really about private regulation, which isn’t new. The securities industry has long had the Financial Industry Regulatory Authority (FINRA), one of several instances of a longstanding self-regulatory organization (“SRO”) that is reasonably analogous to an Uber-style microregulator.
One of the advantages of a single-industry non-governmental regulator is that its narrow focus and the lack of certain legal constraints can allow more granular and detailed regulation, with the ability to adjust the rules faster in response to market needs. Citing an influential argument by William O. Douglas in the 1930s when SROs were young, the authors note that “private regulation offers ways of getting into the cracks of misbehavior that government cannot reach. Uber too can regulate customer transactions in ways that the taxi commission of a US city cannot. Uber tailors regulation, gets immediate feedback, and even rates customers, thus incentivizing good behavior on both sides” (p. 137).
So, in summary, regulation is about trust — a resource that governments sometimes struggle to create. A new crop of microregulators has arrived and they are asking us to purchase trust from them privately rather than rely on the trust that is provided by the government. If these entrepreneurs succeed, it will have wide-ranging impacts on economy and society — including changing (and in some cases eliminating) the government’s regulatory role.
What does this mean for legal innovation?
Now that we have identified trust as a precondition for valuable economic activity, and something that can be provided more or less efficiently depending on the arrangement, there are many possible implications for legal innovators. I will say three of those things, and I hope these thoughts will stimulate a conversation that extends to many more.
1. Trust in the legal profession hasn’t (yet) been scaled
The opening point of Trust Revolution is that web 2.0 has created the possibility of scaling trust by crowdsourcing evaluations and providing greater visibility into vendor performance. Law has not experienced this, in spite of some efforts in this direction.
I believe that an Uber-style trust revolution is not coming to law any time soon. Work is confidential, lawyers are litigious (or at least cantankerous), clients are repeat players with their lawyers and cannot afford to offend them, and a cloudy notion of privilege prevents lawyers from trumpeting (or even discussing) work done for clients. Avvo may have promised at its outset a free-market review and search mechanism a la Amazon, primarily in the personal legal services market. But there are many barriers to entry, including angry bar associations who resisted Avvo using its platform to bundle legal services. See, e..g, Kerri Spencer, “The End of Avvo Legal Services,” BLF, Oct. 16, 2018. In the market for corporate legal services, AdvanceLaw (full disclosure: friends and former employer) is certainly in the trust business, but it isn’t designed to look much like Uber or web 2.0 approaches.
Moreover, much of the most valuable legal work is broken down into sufficiently tiny specialties that the market for any given competency is very small. Indeed, it’s hard to get reviews into all the nooks and crannies of the specialized legal market. Cells with zero observations are the death of any rating system, and law would have many.
But trust is as essential in law as in the taxi business. Clients need to cross the trust threshold with a lawyer or firm before anything else can proceed. Since trust is highly valuable in law, but accurate and granular ways of signaling trust are largely absent, two market characteristics prevail that every lawyer will recognize:
(a) Trusted brands reap out-sized rewards, and
(b) Lawyers continue to use the most primitive methods of building trust.
The obvious opportunity is for some intrepid legal innovator to hack the legal trust algorithm and pull down some very high margins by under-selling elite law firms through under-priced (but still expensive) trust.
As to (a), naming and pricing trust as part of the value chain is one (and perhaps the main) way to reconcile the flooded market for lawyers with Kirkland’s annual revenues and earnings. See Roy Strom, “Kirkland Poised to Keep Top Am Law 100 Rank After Another Stellar Year,” Law.com, Mar. 20, 2019 (reporting 18% growth in revenues and $5 million in profits per equity partner). In high-beta situations, and particularly where group decision-making is in play (more on that below), trust commands not just a premium but a multiple. The fact that there are thousands of highly affordable lawyers available who could bang away at the task is hardly relevant. Indeed, their very existence might reinforce the buying psychology of “getting above the mob.”
As to (b), Henderson and Churi poke fun at the “old ways” of building trust:
In our neighborhood, several old bank buildings, made of expensive materials hauled over great distances from rock quarries and built with human toil, sit empty, their grandeur a trust-inducing mechanism of a bygone era. A hundred yards away sits an ATM (p. 26).
It pleases me to consider that they wrote this while looking out over the grand (and largely decorative — in stone!) architectural landscape of the University of Chicago.
It will please cost-conscious clients somewhat less to remember that their law firms have statues in the lobby because they build trust just like the old bank facades did. Law’s price multiple on trust is so high that the statues (and the paintings, and the Hickey-Freeman suits, and the lush carpet . . . ) are clearly worth it. It’s status-positional signaling, yes, but the positional jockeying matters because firms make their money on the most valuable, risky and sensitive client matters. Those matters do not go to the lowest bidder. In many cases, even in the era of legal operations discipline, they go to the highest bidder. (If you doubt this, please review any available copy of the AmLaw rankings.) The high price itself is a trust signal — and it more than pays for the statues.
As to the innovator’s opportunity to hack the legal trust algorithm, I have recited above Scrooge’s list of why it can’t be done. With that in mind, it will serve society and the profession well if some smart (likely young, probably better looking than me, and soon to be very rich) souls get it done anyway.
The opportunity is, I believe, straightforward: lucrative legal work does seek a lower price, but only after the trust barrier has been cleared. It is cleared when a combination of experience in the specific sub-field can be demonstrated and combined with the sense that similarly situated clients would use this lawyer for this purpose. Because there’s no efficient way to signal that you have done the work before — even if you have — the budding elite lawyer can’t close the trust circuit. When and if that trust circuit can be closed at scale, there are a few hundred billion dollars just itching to be disrupted.
2. Legal innovators need to make trust a key part of their plans
Henderson and Churi tell us, in one of several different analytical frames applied to trust, that trust comes in three main flavors: Personal, Government, and Business (p. 43). Personal trust is natural: we trust family and friends because we know them and in some way our fortunes are tied to theirs. Government trust arises through regulation, and business trust is created through consistent performance, reputation and brands.
Expanding beyond personal trust is essential to economic growth, because personal trust doesn’t scale to the societal level, and gains from trade increase with increased specialization. Few people are going to be related to a knee surgeon or just the right sort of regulatory lawyer when the need arises. Since we can’t rely much on personal trust, a successful economy must have plenty of government and business trust.
But what about the rather large market for corporate legal services? Big Law is nothing if it’s not impersonal, but nearly every general counsel will tell you that they hire the lawyer, not the firm. This is an oversimplification, but it’s often true. Lawyers do better when they are specifically, personally trusted. And some lawyers indeed are specialists in being personally trusted. We call them rainmakers. They’re the ones who get all the money.
Here I think law’s innovation moment is caught up in a problem of trust. The new world of disciplined legal procurement can be seen as a battle between different ways of doing trust.
Until fairly recently, most corporate legal work ran on personal trust. (It’s noteworthy in this context that this was the last vestige of personal, even family, relationships directing large flows of corporate money . . . to the same lawyers that wrote the, ahem, ethics policy.) Now rainmakers are fighting to keep their clients with a formula heavy on personal trust, but the apostles of legal procurement discipline want to change the criteria. Pitch meetings of the last decade have regularly featured one rainmaker trying to work his time-worn interpersonal angle into a meeting agenda that has nothing to do with relationships. A pitch team of younger partners (and one associate!) struggles to get through the slide deck without offending the most expensive suit in the room. To many clients, the effect has been a little disorienting.
Yet the old guard often wins, particularly with the most valuable matters. The new guard, both within the client and within the law firm, all too often has no trust strategy, focusing instead on capabilities, process, service features, team composition, pricing and the like. These things all matter a good deal, but they only matter after the question of trust has been conclusively answered to the CEO and sometimes the board. The most valuable matter is normally a “one-shot deal” — there are no do-overs. Groups making these kinds of decisions operate on consensus, so innovation is very difficult to pitch. Groups implicitly bound to consensus don’t take chances and they don’t much care about your slide deck. If it goes badly, they will be explaining themselves to some other group of humans. As a result, their decision will prominently rely on personal trust.
The key point for legal innovators is that trust is a distinct thing. It has a price (and a cost), and it needs to have a clear place in every business plan and pitch strategy. Some questions worth asking include:
- At what level of sensitivity are clients likely to trust us with this offering?
- Can we survive a group-consensus decision, which strongly tends to send the work up-market and to more conventional providers?
- What are the indicia of trust relied upon by our competitors?
- How can we answer all trust-rooted objections from prospective clients?
- And, hardest of all for our crowd, how can we provide answers that have nothing much to do with data or evidence?
Because big (and profitable) decisions are always emotional decisions at bottom, you need to speak to head and heart.
3. Trust must increase as specialization increases
Trust is necessary for any kind of commercial trade to occur, and the more we trade the more we tend to specialize. Deep specialists have to be trusted at a gut level, since we simply don’t (and won’t) understand what they do. There’s a reason airline pilots still wear the oldest of old-school uniforms.
The biggest law firms are a baroque realization of this long-term economic trend: hundreds of deep and complex specializations that simply can’t be explained to the family at Thanksgiving. In terms of competitive strategy, this creates narrow competencies that repel innovators, competitors and other miscreants that could soil the plush carpet. It also means that trust lives at two levels in a big firm: a big umbrella brand helps decision-makers to explain their decisions to others, and lawyer-level trust that really is about competency in a narrow specialty.
Two observations for legal innovators. First, since the trend to greater specialization will only increase, the innovator’s trust strategy will need to account for the decreasing ability of clients to even fathom what is going on in the work being performed. As work becomes more technical, the presence of a calming human voice generally becomes even more important. This is not an argument against automation and scale, but it is an argument in favor of having a strategy to manage the human dimension of the buying decision.
Second, an aspect of BigLaw’s (so far very effective) defensive position is the ability to connect specialties to one another. The Nobel Laureate Ronald Coase characterized the firm as a tool to reduce information costs by placing certain functions under one roof. We might observe that trust is a sort of information, with its own costs. We can also observe that clients bear the cost of establishing trust in the service provider, and reducing the client’s cost of establishing trust has its own value too. Big, valuable matters tend to interlace expertise across many specialties, so innovators looking to attack the most lucrative BigLaw bulwark will need to have trust strategies at two levels: something to deal with the umbrella brand, and something to deal with trust at the level of arcane specialties beyond the client’s understanding.
I have really only scratched the surface of The Trust Revolution‘s analysis. I read the book closely because over two decades in the legal market, I have seen time and again that trust is an invisible innovation killer. Henderson and Churi have done good work in naming trust as a thing with a price and a purpose, and playing out the many ways in which we need to see trust clearly and then use it as a tool for creating progress.