Incumbent utilities struggle to adapt to a new marketplace of consumer choice and clean energy. Are law firms on the same path?
Part of being a good lawyer is pattern recognition. We see patterns in case law, patterns in legal procedure, patterns in client relations, and patterns in our dealings with other lawyers.
After 12 years of working for energy industry clients, particularly in the renewable energy vertical, I have witnessed the transformation of the power sector through the rapid and widespread deployment of distributed solar power systems. As a result of this experience, I see a pattern among legacy utility companies that applies to the traditional law firm. Specifically, both have incredibly strong hands to play to reinvent their businesses in responses to changing consumer (or client) demand; yet, both struggle to see and act upon the opportunity.
In this post, I’ll discuss some of the key changes that are currently transforming the energy industry. I’ll then use this framework to make my case that law is on track for a similar disruption.
Solar power in the energy sector
I have been a lawyer for over 20 years, with experience practicing in both Brazil and the United States. In 2008, I obtained my LLM from UCLA Law with a concentration in Energy Transactions and Environmental Law. Thereafter, I have focused my practice almost exclusively on clients in the energy sector, albeit in a variety of roles, including as an associate and counsel in US and South American law firms, a consultant at the intersection of law, business, and energy, and most recently as head of legal for Santa Fe Natural Gas, a high-growth company that buys, sells, and manages the scheduling and logistics of natural gas and hydrocarbons in the US and Mexico.
During my 12 years in the energy sector, the biggest (and fastest) change has been the widespread deployment of distributed solar power systems. Since 2010, solar capacity has increased at an annual average rate of 49% per year. As shown in the chart below, there is now enough solar capacity to power 15.7 million homes.
This remarkable growth in distributed solar power systems was not due solely to technological innovation and cost reductions in solar panel manufacturing. Instead, solar power really took off when innovative players in the market—such as SolarCity, Vivint, SunPower, Sunrun, OneRoof, and others—started offering financing solutions to unlock the opportunity for homeowners and companies to do solar without a large upfront capital investment. See, e.g., Eric Wesoff, “Financial Innovation Has Given Residential Solar Much to be Thankful for This Year,” Green Tech Media, Nov. 25, 2013.
The influx of distributed solar power fundamentally altered the energy supply chain by allowing residential, commercial, and industrial power consumers an opportunity to sell and re-inject excess solar-generated energy back to the grid, a concept called “net metering.” In turn, this set the stage for profound changes in the way power is produced, stored and used across power grids with an ever-increasing number of solar providers offering innovative solutions that reduced friction on both the buy and sell sides of the market.
As the transformation of the energy sector continues to gather momentum, it’s important to keep in mind that business model innovation is proving to be a much more disruptive force than tech innovation.
To illustrate, in the distributed power generation space, several “syndicates” have formed to improve the cost and reliability of energy delivery, including solar companies teaming up with storage and device makers to create bundled solutions. As a result, the lines between power delivery, in-home services, and energy efficiency have increasingly blurred. The idea behind these partnerships is to nudge consumers into buying services differently, often resulting in lower consumption levels, lower costs, and a better overall customer experience.
Distributed power generation essentially breached utility companies’ economic moats, thus creating a significant disruptive threat to utilities’ business models and financial health. As a result, legacy utility companies have had to decide whether they want to fight to maintain the status quo, see, e.g,step out of their comfort zones and compete in the new “prosumer” energy environment.
Many incumbent utilities believe that distributed generation is pushing them toward an eventual “death spiral”. Specifically, as more customers opt for distributed systems, utilities’ costs to maintain and operate the grid are spread across a smaller demand base, thus causing an increase in customer rates and a greater incentive for remaining customers to “cut the cord.” See, e.g., Seth Blumsack, “Why rooftop solar is disruptive to utilities—and the grid,” The Conversation, Mar. 24, 2015 (analyzing the economics of grid infrastructure).
Although there is uncertainty over the best way to pay for the upkeep and modernization of the grid, a strong argument can be made that it should not come at the expense of pushing out less expensive and more environmentally sustainable alternatives.
Yet, one point worth emphasizing is that incumbent utilities tend to focus on what they are losing and ignore the fact that they possess enormous competitive advantages, such as strong balance sheets and existing customer relationships, that smaller newcomers lack. Some incumbents see the opportunity and have, in turn, embraced distributed generation through investments in rooftop solar, distributed generation financing, and self-generation technology. See, e.g., Gavriella Keyles, “Why some utilities are embracing distributed power,” GreenBiz, Oct. 11, 2016 (discussing examples of New York and California). Likewise, some incumbents are also offering competitively priced clean energy options to their captive customers. See, e.g., Isak Kvam, “What Midwestern Electric Utilities Are Saying About Clean Energy,” Renewables First, Mar. 18, 2019.
If your longtime service provider embraces new business models that better leverage emerging technology—and in the process, deliver more value—the business relationship is likely to deepen and become more enduring. If this insight applies to utilities, it certainly applies to law firms.
What about legal services?
Business model innovations, unlike products and services, typically travel well from industry to industry. And business model changes such as those in the energy sector are particularly important in the fast-moving world we live in today, as businesses and entire sectors need to constantly challenge/reframe practices and assumptions in order to highlight the limitations and constraints of a current model.
Law firms, much like utility companies over the last 10-15 years, are divided on whether inevitable disruptions, including changing consumers’ buying habits and demands, represent threats or opportunities. Although some are choosing to maintain the status quo, others are starting to embrace the innovations of the new entrants and think more broadly on value creation. See, e.g., Dan Packel, “Big Law Branches Out: Firm Subsidiaries Want a Piece of the $10B ALSP Market,” Law.com, June 25, 2020; Bob Ambrogi, “Wilson Sonsini’s Tech Subsidiary, SixFifty, Releases First Product, For Calif. Privacy Compliance,” LawSites, May 22, 2019.
That said, one thing is certain: law firms have started facing competition as they’ve never had to deal with before, ranging from the Big 4 firms, Alternative Legal Service Providers (ALSPs), distributed-model law firms, and other types of providers that don’t even exist yet and who will innovate largely on entirely new business models.
Like the incumbent utilities, law firms have enormous natural advantages: large and diversified client bases, established brands, strong cash flows, deep substantive expertise, etc. Yet, also like incumbent utilities, law firms are hobbled by several decades of success under a business model that provided the equivalent of a guaranteed return on labor without any improvements in cost, quality, or client experience. The result is a mindset that makes it very difficult for law firm lawyers to see and appreciate how different business models could deliver greater value to existing customers.
Decentralization and disaggregation
The original design of our power system was highly centralized, with one utility that owned and managed the entire power system, from generation, to transmission, to distribution. Over time, however, it has evolved to one involving more distributed generation and more players offering innovative products, services, and most importantly, increased customer empowerment and value in the form of savings, greater transparency, or an overall better and more positive customer experience.
Similarly, for many decades, corporate law firms were local or regional businesses that handled the legal needs of corporate clients in their local or regional areas. The uniformity of the business models throughout the profession reduced the likelihood of clients switching firms. In turn, the locking in of clients permitted a business model with very high office overhead and operating expenses as well as governance, partnership, and compensation structures that favored the lawyer-owners.
As the legal services market has decentralized away from traditional law firms, we have entered a period of significant disaggregation that is moving work to the legal-sector version of distributed power. I see this happening in two ways: (1) legal departments unbundling and managing various pieces of work so that each task is performed by the best resource available for the job – i.e., ALSPs, tech, in-house lawyers, legal operations consultants, compliance & commercial contracting solutions, outside counsel (including highly specialized boutique firms); and (2) the rise of distributed-model law firms such as FisherBroyles and Scale LLP.
Regarding the distributed-model law firms, clients increasingly have the opportunity to access specialized legal expertise without it being bundled together with expensive office overhead or associates whose value is difficult to discern. In effect, the distributed-model law firms are inching the market away from the traditional client-law firm relationship to one that resembles a network, an ecosystem, or, my favorite, a grid.
My sense is that the distributed-model and flexible lawyering law firms (or future variations of the model that are yet to be created), enabled by technology, will be well-positioned in terms of governance, resilience (including during economic downturns), coordination, and multi-disciplinary collaboration to serve customers’ future needs.
Irrespective of industry, the shift from centralized models are forcing incumbents—for the first time in their existence—to figure out how to compete and, better yet, collaborate with other market players.
Some incumbents adapt
As noted above, while some incumbent utilities are stuck in their old models and mindset, a subset of progressive companies have embraced the opportunity to use new technologies and business models to compete head-to-head with the new entrants.
Likewise, in the legal sector, we are beginning to see a differentiation between law firms that are standing still versus those that are looking at turning all of these new potential sources of competition into products, services, and revenue. Indeed, it is now commonplace to read announcements of major international law firm launching legal operations or managed legal services consulting divisions (e.g., Norton Rose), legal tech incubator or development program (e.g., Slaughter and May, PWC Legal, Mishcon de Reya), a productization effort (e.g., Littler), an on-demand lawyer offering (e.g., Honigman), or some form of partnership with other market participants (e.g., Ogletree Deakins and Legalmation).
I see this as a positive development and a sign that law firms are at least experimenting in the creation of new revenue streams beyond traditional legal advisory and, ultimately, seeking to find their place in the future of the legal industry.
Like utility companies, large firms have a stronghold on value chains and corporate end customers. That, coupled with historically restrictive regulations for new entrants and outside investment, makes it difficult to displace or gain market share from incumbents in the legal vertical. Having said that, similar to the syndicates that enabled the rapid growth of solar power, I often advocate for options in which multiple players in the market can come together to create new business models based on collaboration. In addition to breaking down silos, breakthrough business models have the added benefit of reducing the risk of financially ruinous competition.
Although these approaches are outside the comfort zone of most incumbent law firms, they are well within the reach of any law firm that is willing to assume ordinary business risk, as law firms are already building upon their superior competitive advantage.
To adapt to a decentralized and disaggregated business environment, incumbent utilities had to drastically change their business models and business practices in order to meet customer expectations. One of the most fundamental decisions for utilities was whether they should become a consumer-centric business or stick to managing the generation, transportation, and distribution of power as a commodity supplier.
I believe we are in the same phase now with law firms. At least at the enterprise level (where I live), in-house legal departments have more options than ever to (re)think through the entire “job to be done” and shift away from the legacy artisan model of 1-to-1 direct service.
Technical legal expertise is not enough. Corporate customers have business problems, not legal problems, and don’t need 40-page memos. Rather, they need 5 bullet points summarizing critical issues accompanied by practical, hands-on solutions and recommendations. Attorneys (internal and external) now need to be intimately familiar with the operating systems of the businesses they support.
In the energy sector, providers began to re-evaluate the way they engaged their customer segments. Utilities needed to provide customers with easily digestible, personalized energy information that enabled them to make smart decisions about their energy usage, rate selection, and the like. It became all about deeply understanding users’ data, operations, and consumption behaviors.
Like utility companies, law firms should focus on demonstrating customer knowledge and understanding at every corner. Identify key touchpoints and moments where inserting personalized insights will improve the customer experience.
The transformation of the legal ecosystem (including regulatory reform) is inevitable and urgent. However, certain segments of the legal sector still cling to a mental map formed in a different time that no longer exists or is quickly fading away. These segments need to wake up to the possible existential challenge posed by disruptions at the legal grid™ edge – the place where new market entrants and more innovative existing players are threatening to render traditional systems and business models obsolete.
As consumers in a digital age, we have been conditioned to expect efficient, seamless, and customized interactions with our service providers. Legal service providers, in particular, are uniquely positioned to leverage valuable customer data, knowledge assets, and the close, personal relationship built with customers over time.
As such, law would benefit immensely by broadening its mindset to gain some of the advantages that other sectors have enjoyed. Applying a reframe that has already proved itself in another industry greatly enhances the prospects of hitting on something that makes business sense and is more likely to be future-proof. But there’s no avoiding that this overarching effort requires taking risks, experimentation, outside-the-box thinking, a willingness to differentiate from the pack, challenging longstanding core beliefs and assumptions, and a genuinely entrepreneurial approach to the production and delivery of legal services.