Great things don’t just happen. People make them happen. So who is actually working on legal innovation (and why haven’t they fixed everything already)?
Innovation is a strange word. At least, it tends to affect people strangely, particularly in the legal industry.
Of late, eye-rolling 🙄 and face-palming 🤦🏻 are gaining traction as the response du jour. Despite the growing levels of skepticism in and around the echo chambers and the pockets of battle-weary veterans, the word “innovation” still has some ✨ magic and mystique. Clients declare publicly that they expect firms to do better, and firms give every assurance that they are trying. We are inundated daily with press releases: new startups, new initiatives, new partnerships. Eyes might roll, but the innovation award shows (there are so many 🏅🏆🥇 of them!) must go on.
All of that sound and fury doesn’t come for free. It takes a great deal of work, by real people in real businesses. This talent pool, which is limited, should not be taken for granted.
Part I (062) of this series delved into the price tag of legal innovation in the current state of play, borne by both investors and incumbents who fund innovation efforts. Part II (063) took a role-based view of legal markets and the various inefficiencies innovation teams’ access to buyers and users. Part III takes a closer look at the talent required to make innovation actually happen, as well as some of the structural barriers that legal innovation teams face in accessing that talent.
Over the past year, Legal Evolution has devoted many posts to specific examples of change agents and their efforts in various segments of the market. Today’s post takes a slightly different approach. The intent is not to place the spotlight on the individual people doing the pick-and-shovel, block-and-tackle work of legal innovation.
Rather, the aim is to take a structural and functional view of human capital by analyzing its various component parts: (a) the skills, knowledge and experiences that people need to perform at a high level as well as (b) the organizational capabilities, processes and systems required to acquire, develop and retain the right talent as well as deploy them in correctly configured teams to work on the right problems.
This is What a First-Rate Innovation Team Does
Given the extremely fragmented and messy structure of the industry, see Post 051 (key graphic), a navigable discussion on talent will require some table-setting and some structure to guide our thinking.
A. Innovation Is a Team Sport that Requires Specialized Skills
A good starting point for this discussion is to ask, what is the universe of specialized knowledge and skills required to make innovation actually happen? A quick detour to design thinking theory will be helpful here. Popularized by both IDEO and the Stanford d.school, the below visual encapsulates the mental model at the heart of design thinking — the overlap between desirability, feasibility, and viability.
When all cylinders are firing, innovation teams might hit the sweet spot for a game-changing idea, but such occurrences are rare. The more consistent value of design thinking discipline is that testing for the above three elements helps to de-risk innovation investments. For instance, ideas that fail to meet desirability standards can and should be eliminated immediately: if there is no clear pathway to enough customers paying customers who care, even the best idea will die on the vine.
Each element can be expressed as a set of questions to be researched, answered and validated.
1. Desirability — Customer Needs
Desirability is about ensuring that the innovation team is working on a solution with verifiable market demand. In that sense, desirability is all about understanding the intended customer (both buyers and users). A thorough effort to validate desirability helps innovation teams sidestep over-investment of finite resources into ideas that sound good but actually aren’t (e.g., a thousand hours spent on an app nobody wants).
In IDEO’s parlance, desirability asks whether the contemplated idea “makes sense to people and makes sense for people.” This framing is useful in a general sense, but for legal innovation team it is helpful add one more note: validation tests for desirability should always be pinned very tightly to a clearly defined market segment. In that sense, the desirability axis in design thinking maps very neatly to the problem-solution fit (PSF) framework from Lean Startup. See Post 063 (summarizing problem-solution and product-market fit tests requiring efficient access to users and buyers).
For startups burning down finite cash reserves, this focus is likely to be imposed on them. But for incumbents such as law firms, maintaining focus and clarity on the intended target market is critical: when incumbents pivot away from their established customer base to an unplanned effort to acquire new clients or enter a new market, they simultaneously lose a significant comparative advantage (superior access to buyers/users) and may face drastically different economics for both R&D and GTM (go-to-market).
2. Feasibility — Tech Advances
Feasibility is about designing a realistic solution, one that the innovation team can reasonably expect to deliver that will work reliably in real-world conditions for actual users. This also requires continuing focus on customer understanding, but strategic feasibility assessments will consider user needs in tandem with the innovation team’s core capabilities.
Particularly within the high-tech sector, the feasibility axis tends to set ambitious and fast-moving targets for innovation teams. In effect, this establishes a very large solution space in which innovation teams can explore: in IDEO’s iteration, feasibility asks “what is functionally feasible in the foreseeable future?”
Although this broad standard makes sense for technology companies with the core capabilities to push existing tech beyond current limits, legal innovation teams need to exercise more discipline. This is because most legal service providers like law firms and law departments lack the investment appetite required to build and maintain full-stack technology teams internally (although there are always a few exceptions to every rule). Further, very few teams field the kind of best-in-class technical talent required to push the boundaries of existing technological feasibility. Instead, within the legal vertical, feasibility means stitching together existing technologies into fluid and cohesive solutions.
In addition to feasibility on the innovator’s side of the house, legal innovation teams should also take into consideration the total cost of consumption and execution risks for the customer, including the time, effort, and client-side resources required for implementation. Feasibility concerns feed directly into design choices: the key is to build something that will work in the real world. For that reason, ecosystem factors absolutely matter (like compatibility, interoperability, data/content availability). For example, how will the proposed solution interact with legacy infrastructure and the enterprise environment? Effective validation for feasibility helps innovation teams eliminate unrealistic pathways more quickly and to allocate finite resources to the most promising pathways to a workable solution.
Lastly, legal innovation teams — particularly those embedded within incumbent organizations — should assess feasibility within the context of the organization’s existing strengths, capabilities and assets. Inevitably, innovation and improvement efforts will end up stretching an organization’s operational strengths. However, if the contemplated solution offers very little opportunity to leverage the organization’s current assets and capabilities, it is usually a sign that the innovation team may have designed a very promising solution that would be better built and taken to market by someone else.
3. Viability — Business Value
Viability is about ensuring that the innovation effort fits comfortably with the company’s broader competitive strategy. This requires that the team establish and maintain a very clear understanding of broader market conditions and the company’s current competitive position. The crux of the viability asks whether the proposed solution aligns with and advances the company’s business goals.
Validating for viability means testing for alignment: with concurrent strategic objectives, existing market-facing activities from branding to sales and service delivery, and forward-facing plans for how the company intends to compete and win in specific markets. IDEO’s articulation of the viability axis asks whether the contemplated innovation is “likely to become part of a sustainable business model.” Testing for viability highlights the non-negotiable need for executive sponsorship of innovation initiatives.
Without strong executive sponsorship, innovation teams often lack (a) line of sight into the high-level strategic thinking that guides the company’s decision-making and (b) direct and unfettered access to customers (both buyers and users), where existing relationships and channels are usually managed by teams much closer to existing P&L. Both factors appear to be more serious barriers for incumbent organizations, where innovation teams and Skunkworks initiatives must compete for resources with existing revenue streams (and much more influential political forces designed to protect the status quo).
However, even product teams in small and relatively young startups can suffer from lack of direct and clear leadership. Whenever the founder and/or chief executive steps away from direct oversight of product decisions, R&D teams can miss the mark in several ways. Ideas for new features and isolated product/service improvements don’t always generate sufficient business value for the company. Potential solutions that were viable for innovation team to prototype may carry hidden costs when inconsistent user skills are introduced, and attractive unit economics may not always scale due to customer-side variations.
B. Innovation in Action: Fact-finding, Decision-making and Execution
Design thinking provides a tractable and accessible framework for the substantive thinking that should inform innovation investments, but we need to think more practically and tangibly about how these questions translate into concrete activities that drive results. There are many existing frameworks that preach one approach or another, but today’s discussion opts for an inventory of required activities and skills (what’s needed to get the job done) rather than a prescriptive methodology (how to get it done):
Fact-finding. Much of the design thinking framework above directly pushes for rigorous and wide-ranging efforts to validate desirability/feasibility hypotheses through fact-finding work. The primary purpose of market and user research in innovation activities is to facilitate insight generation; in turn, this enables evidence-based choices in very early decisions like market selection, opportunity spotting and assessments, and ideation/prototyping toward problem-solution fit.
Decision-making. In many cases, the core innovation team may not own decision rights over strategic factors like innovation investments, market selection, or product positioning and pricing. Even so, effective innovation efforts require that the best-informed individuals participate meaningfully in the decision-making process. For that reason, high-performing innovation teams will be proactive in articulating decision points and shaping clear options for executive decision-makers. This is critical to facilitate validation of the viability axis, and enabling competencies in specialized communication (e.g., documentation of findings and executive briefing) are nice-to-haves.
Execution. The concrete skills required for execution vary greatly across specific types of innovation plays. See Post 063 (categorizing 5 broad types of innovation plays in current legal market). For startups and new entrants, execution encompasses the build-out and deployment of entire business functions (e.g. marketing, sales, accounting) in the correct sequence to support rapid growth. Achieving product-market fit for a new offering usually demands experimentation with product/service definition as well as revenue model & pricing design; these jobs demand skills in strategic marketing and sales as well as some level of financial and business analysis. For incumbents seeking incremental gains in existing business lines or developing new services, general management and operational skills will be important as well as exceptional communication skills to (i) manage stakeholder engagement, (ii) drive cross-functional collaboration, (iii) navigate interdependencies that tend to crop up in highly matrixed organizations.
The Current State of Play: A Talent Diagnostic
Regarding the current state of play, we can ask two broad questions that reveal a lot:
- Do (most) legal innovation teams have access to individuals with the necessary skills, knowledge and experience?
- Do (most) legal organizations have the necessary capabilities, processes and systems in place to attract, retain, develop and deploy innovation talent?
The answer to both questions circa 2018 is no. That is your competition: under-resourced and under-skilled. To rise above the competition, the following is a pretty solid talent checklist for your own innovation team:
- Who are the individuals that comprise these teams now? Are they the right people?
- What are the “necessary” skills, knowledge and experience for our specific innovation agenda? Do we have (enough of) the right skills, knowledge and experience?
- How are these teams organized and deployed? Are they working on the right problems?
- Are these teams sufficiently supported, funded and guided?
- To the extent there are gaps in the current state, why do they exist?
A. We Need Candor to Counterbalance the Hype (#RealTalk!)
Each of the above questions merit thoughtful consideration, but they usually get short shrift in most organizations (both in and outside of the legal industry).
Why? These are difficult questions that make most people feel…. 😟 uncomfortable. The primary source of discomfort, of course, is the sneaking suspicion 😒 that the answers will be bad. Completely rational fears 😨 follow: admitting that the current state and our rate of progress are both sub-optimal might make us look bad (e.g. ineffectual, unqualified, inadequate). The discomfort alone feels bad and demoralizing. All of this is a reasonable emotional response to a challenging situation.
What is more important is how we decide to act in response to that discomfort. Too often, organizations practice diligent avoidance of these fundamental questions. But confronting these anxieties is part and parcel of the organizational resilience required to push meaningful progress forward. The process of doing so demands tolerance of friction and a willingness to criticize each other, even at the expense of (temporarily) hurt feelings. This type of culture is difficult to build and maintain anywhere, but it is especially rare in the legal industry.
Within incumbent organizations, cultural norms as well as internal politics and individual incentives push change agents to choose an easier way out. That easier way, however, demands that we contribute to the hype machine, and in lieu of the emotional discomfort of candor, we take on the emotional labor of managing organizational fragility.
Often, we find valid reasons to put a positive spin on both the pace of change and the magnitude of impact wrought by incremental changes to the status quo. Positive reinforcement and collective affirmation have their place in leading organizational change, but consistent preference for good feelings over real results comes at the expense of honest assessments about where we stand and how far we have to go. The byproducts are law firm marketing overreach, underpinned by the lawyer theory of value and reinforced by the law department goat rodeo. (H/T to the great Casey Flaherty for his entire body of work dissecting the negative impacts and root causes of the current reality distortion field in legal innovation; these links represent only a tiny selection, but they are all highly relevant, endlessly educational and reliably amusing.)
B. The Market-wide Challenge: Serious & Widespread Skill Gap
Obviously, the high-level diagnostic is bad. Most legal innovation teams suffer from inefficient access to talent with the necessary skills, knowledge and experience, and most legal organizations struggle to attract, retain, develop and deploy innovation talent effectively. Structurally, there are at least three critical market-wide challenges that conspire to create significant inefficiencies in the talent market: (1) overall market scarcity; (2) rapid shift toward ineffective specialization; (3) insufficient focus on core industry-wide problems.
Simply put, legal innovation is suffering from a serious skill gap. As harsh as it sounds, high-caliber professionals with the necessary specialized business and technical skills are in short supply. The recent explosion in demand for innovation talent (e.g., the number of law firms and law departments jumping on the innovation bandwagon) exacerbates the scarcity problem. The resulting supply-demand imbalance is made even worse by the rapid proliferation of new and highly specialized roles in the legal vertical.
Generally speaking, specialization should be a positive development. Specialization is a common labor market response to rising complexity, and it often signals increasing sophistication. In some cases, these newly created roles represent broader participation of allied professionals and the introduction of more and different competencies into the legal vertical. But many signals suggest that the current trend toward specialization is not all to the good.
In an illustrative example, I share below a sample inventory of required skills to provide data-driven decision support for an Am Law 100 firm.
This skills inventory above features three distinct but closely related points of interest. The first is that this particular combination of skills are purpose-built for a very specific objective: the provision of strategic decision support and execution enablement to drive profitable growth in an Am Law 100 firm. The second is the sheer number and variety of skills required to accomplish that objective. The third is that not all of the listed skills are new, even to the legal vertical. (All three features are signals, albeit subtle ones, that most of us in legal are doing it wrong.)
C. Strategy First, Innovation Second (Otherwise, Shiny Things ⇒ Emotional Labor ⇒ Arrested Development)
I am often asked by law firm and law department leaders on how they should get started with data analytics, and I know that most of them are expecting a much simpler and shorter answer than I can give. My usual response is to respond with a question of my own: what are the three most important strategic objectives they seek to accomplish in the next two to four years? In most cases, this brings the conversation to a screeching halt. Sometimes it’s because the organization’s mid-term strategy hasn’t been clearly articulated, but almost everyone is surprised that this is relevant in any way to the original question about how to implement data analytics.
Without a clear strategy that is being followed with discipline, we are perennially distracted by shiny things. We gravitate toward whatever skill, role or technology is being touted as the new hotness and then search out use cases that are only vaguely relevant. This is almost always a recipe for disaster and a certain pathway toward ineffective specialization. Why? Because high-caliber talent in newly emerging domains like data analytics is expensive (as well they should be). The investment in that type of talent can only pay off when applied with laser sharp focus on a clearly articulated problem that matters.
In most cases, effective responses to complex problems require creative thinking about how to combine old and new competencies to improve holistic system performance of the organization. And yet most incumbent players add more complexity when establishing new roles. Excessive variation in titles and unnecessary separation of new teams from core business functions only serve to exacerbate diseconomies of scale by escalating coordination costs and imposing untenable communication overhead.
Environments that already tend toward the highly bureaucratic and matrixed only become worse. A second-order effect of this inefficient specialization is the hidden explosion in a different type of emotional labor required to navigate bad systems.
Consider a (very) partial list of recent developments in Big Law: pricing functions residing separately from service delivery teams or existing at odds with the core finance function; the ongoing fuzziness across marketing, communications/PR, business development and account management teams; knowledge management teams that reside in some no man’s land between the library, practice support teams, and the core IT function; “data science” teams straddling a gray area between practice-specific analytics and enhanced BI for the business side. It’s almost unsurprising that equity partners are known to sigh at the mounting overhead and ask in a bewildered tone what all of these people do all day. In turn, “all of these people” remain at risk for growing disillusionment and accumulating lawyer aversion.
The pull toward ineffective specialization applies fractally to the market as it does to individual organizations. Our industry is full of duplicated efforts by countless innovation teams in separate organizations that are too leanly staffed and under-resourced to accomplish their stated objectives on their own, leaving the industry stuck in a perpetual state of arrested development. In many cases, these teams fail to validate the desirability of their solutions and end up expending significant time and effort on the fringes: minor problems in non-core areas of the industry. This is a shame, because the industry suffers from a handful of fundamental problems that demand a coordinated and inter-organizational response.
Access to Talent: Likely a Slow Burn to Improve, But a Few Potential Pathways
The below graphic identifies three distinct dimensions (law, tech and business) from which legal innovation teams must draw talent, along with a conceptual and relative rating of current-state access for incumbents and new entrants. Whatever the situational context, innovation teams in the legal vertical are likely to require some mix of skills, knowledge and experience across these three dimensions. This construct helps break down some of the existing inefficiencies in the talent market and to envision some possible responses.
A careful examination reveals several clear takeaways:
1. Recovering Lawyers Play Prominent Roles
Not every innovation effort or project will require best-in-class legal talent, but many will require some contribution from lawyers. Particularly in more ambitious innovation plays to shift traditional one-to-one service delivery models to a one-to-many solution approach, heavier touches from high-caliber practitioners will be critical. See Susskind, The End of Lawyers? (2010) (introducing one-to-one and one-to-many terminology). In any whole-product substitution or significant time/labor displacement plays, innovation teams will need to secure subject-matter expertise from experienced practitioners to fully understand customer needs and solution requirements. In effect, products and solutions for lawyers benefit from lawyer input, particularly in validation and design phases. That said, the build and go-to-market work will most likely require partnership with co-founders, advisors or strategic partners who bring necessary business and technical competencies to de-risk investment.
- The upmarket trajectory of ALSPs is a representative example of the opportunity for high-caliber lawyers to lead legal innovation. The most prominent ALSPs are led by highly pedigreed lawyers with experience in the upper echelons of the Am Law 100: Axiom Executive Chairman Mark Harris hails from Davis Polk; in his previous life, Alex Hamilton of Radiant Law co-Chaired the global Technology Transactions Group at Latham. The unbundling, disaggregation and reassembly of increasingly sophisticated tranches of work is a challenge tailor-made for ex-practitioners with depth of experience in both legal buy and service delivery in relevant practice areas.
- Shift of legal tech toward practice-specific solutions is another opportunity for ex-practitioners to lead the market in spotting innovation opportunities and designing products or platforms that are superior to current market alternatives. Transaction management platform Doxly is led by Hayley Altman, formerly a corporate and securities lawyer and partner at Ice Miller. Former Gibson Dunn litigator Alma Asay founded litigation management platform Allegory and served as its CEO until its acquisition by Integreon.
2. Increased Mobility Across Segments and Functional Roles
The uptick in talent mobility is likely to manifest as a continuation of the Big Law diaspora, but recent years have seen more diverse cross-pollination across market segments and individual roles.
- Law firms and law departments swap business talent. The recent move by David Cambria from ADM to Baker McKenzie is a headliner example, but there are several prominent example of switch-hitters in the opposite direction. Before he joined Shell to manage global sourcing and legal operations, Vince Cordo served as the head of pricing at Reed Smith. Rebecca Benavides, the Director of Legal Business at Microsoft, was previously the Director of Legal Project Management at Norton Rose Fulbright. Before she was Google’s Director of Legal Operations, Mary O’Carroll reported to the COO of Orrick, where she managed large-scale projects to improve profitability.
- Lawyers as product evangelists. Lucy Bassli is another example of a recent high-profile move out of the in-house function. Formerly an associate general counsel overseeing contracts for Microsoft, Bassli now serves as the Chief Legal Strategist for LawGeex.
3. Agency Model for Specialized Talent
The shortage of high-caliber business and technology talent is not likely to find a quick fix. The most critical drag here is the non-negotiable need for a threshold level of content understanding and domain knowledge: to drive meaningful advances in the way legal work is done, innovation teams must establish a baseline comprehension of the business context around that legal need.
- Build versus Buy. As Josh Kubicki taught me when he was my boss at Seyfarth, new competencies might be expensive to buy but they are incredibly time-consuming to build. Upskilling existing talent is an imperative, but one that can be accelerated only so far. The current supply-demand mismatch demands a market-level solution, and recent developments suggest that an agency model might fit the bill. (He’s doing this now, at Bold Duck Studio, which offers a range of packaged services to facilitate innovation activities.)
- Innovation as a service. Jason Moyse at LawMade and Ryan McClead of Sente Advisors are two more examples of business and technology professionals who are looking to leverage their respective market-scarce competencies to facilitate innovation processes for a broader swath of the legal market. Nicole Bradick‘s Theory and Principle is another example of specialized technical skill set on offer: an outsourced legal tech product development capability.
4. Still, We Need Systemic Investment in Human Capital
The above-cited examples suggest emerging trends with the potential to improve matching efficiency between innovation talent and innovation needs. That said, the extent of the supply-demand gap demands an industry-wide response. There is a clear need to step up systemic investment in professional development for business and technology staff and to explore cross-organizational forums that can accelerate the pace of knowledge sharing and collaborative innovation.
Casey Flaherty often says good lawyers aren’t scarce, good systems are. Similarly, I don’t think that innovation talent is intrinsically scarce, but we definitely lack systems in the industry to identify and develop high-potential talent. And we certainly need better systems to match the talent that does exist with the right opportunities.
What’s next? See Our journey to Big (067)
Legal markets are chaotic. For innovators, that chaos can be a pit or a ladder – depending on how quickly they can find a market to serve.
2018 has been a watershed year for capital flow into legal markets. Will it be enough, at last, to push legal innovation forward?
It’s an age-old saying: money can’t buy everything. The most common examples include happiness and love. It’s time to add “legal innovation” to this lofty list.
In the past few years, we have seen unprecedented levels of capital flow into the legal space. The partial views of funding activity we see from various sources imply an already high level of energy as well as money invested into legal innovation. Further, those investments (and one would presume, attendant efforts) only appear to be increasing:
And yet the market appears awash in disillusionment. Many established thought leaders and influencers remain skeptical about the actual impact (or lack thereof) of these developments. Pinpoint signals from corporate buyers indicate a glacial pace and highly uneven distribution for meaningful improvements in service experience and value delivered. And the PeopleLaw sector remains woefully underserved, even as legions of practitioners outside the strongholds of Big Law struggle financially. See, e.g., Post 037 (presenting data).
So what gives?
A Roadmap to Innovation Woes: Key Innovation Drivers
In my first post on Legal Evolution, I addressed a few of the structural attributes that make legal a particularly unfavorable ecosystem for innovation. See Post 051 (legal innovation as an extreme sport). That discussion zoomed out for a broader view at the makeup and composition of legal service providers.
Now it’s time to zoom in. This is Part I of a three-part series about systemic barriers to innovation maturity in legal markets. In this series, I’ll pose a new set of hypotheses about the current state of our industry — to explore whether would-be innovators and visionaries have sufficient access to the ingredients that are necessary to make innovation actually happen.
The above graphic lays out the roadmap, along with a brief description of the critical function of each component.
- Part I (062) provides an overview of recent trends in capital investment into legal innovation. While several valuable directories, listings and analyses have already covered this topic from many different angles, the aim of this post is to explore why we are seemingly stuck in the “early days” of legal innovation despite an overarching trend toward expanded access to capital.
- Part II (063) probes a critical problem facing all new offerings in every permutation of legal innovation: the difficulty of identifying and understanding the customer. Part II summarizes the various customer roles in B2B service environments and the common reasons that new offerings fail to achieve problem-solution and product-market fit.
- Part III (066) addresses the people side of the equation for teams and businesses trying to drive change to the status quo in legal markets. Whether the goal is (a) to drive incremental improvements to existing offerings or (b) to develop and bring to market a wholly new service or business model, legal evolution is a team sport that demands differing configurations of specialized skill sets. Part III will summarize the necessary competencies and capabilities, with the goal of evaluating whether it is feasible for most legal businesses – whether incumbent or new entrant – to assemble a winning team.
Posts 062 – 064 are not intended to pose an exhaustive, definitive, or controlling theory of legal innovation. Instead, the goal is to provide a useful framework, by endeavoring to draw attention and focus to factors that can be influenced and changed, once examined and understood, by economic actors in the marketplace. As a counterpoint, I have previously criticized narratives that hinge on personality traits of lawyers, in large part because it is not a tenable proposition to ask a group of millions of adults to change stable aspects of their disposition. See Post 051 (“because lawyers … ” riff).
Here, the hope is to better equip innovators and change agents who find this analysis compelling and to enable them to perform more structured evaluations and make more rigorous decisions. For everyone else, this series invites constructive dialogue.
Regulatory Constraints Affect Capital Flow (in Obvious & Non-Obvious Ways)
Like many other features of the legal industry, the flow of capital investment in this space is littered with idiosyncrasies. The regulatory barriers to non-lawyer ownership has been debated ad nauseum elsewhere by wiser and more knowledgeable minds, but it bears one more mention here. The blindingly obvious implication is that this severely limits the pool of available sources for equity capital into businesses that practice law.
The current regulatory scheme has three less obvious implications on legal innovation as well as the mechanics of how innovation efforts are funded and governed:
1. The Role of Incumbents (Yes, That Means Law Firms and Lawyers)
It secures for incumbents (law firms owned and largely operated by lawyers) a material role in deciding when, where, what and how the entire industry will change. This, of course, is a feature, not a bug: protectionism is intended to establish clear and insurmountable advantages for the artisan guild.
It is true that law firms have resisted change and thus bear full responsibility for the current state of the industry. The fact remains, however, that incumbents must be included in any serious dialogue about legal innovation. Regardless of their performance to date, law firms are both financial sponsors of, and direct participants in, legal innovation.
2. Practice vs. Business of Law
The requirement of lawyer ownership calcifies unhelpful divisions between the “practice of law” (the domain of lawyers, with limited access to capital) and the “business of law” (a set of enabling activities for legal practice, in the domain of… everyone else with varying non-lawyer titles). These divisions extend deep into our collective consciousness and they do serious harm not only to workplace cultures but also the rigor and clarity of our thinking about legal innovation.
This distinction creates an artificially binary model that fails to accurately represent the reality of how legal teams serve clients in the real world. Ultimately, this type of thinking favors incremental improvements to the status quo and R&D based on misguided and antiquated assumptions. It’s akin to exploring a closet with the lights off.
3. Follow the Money
The requirement of lawyer ownership also diverts a great deal of available capital into non-core segments of legal services. This has a dramatic effect on the experience of the end-users and shapes their expectations and appetites. This is, at least in part, why “legal tech” receives a disproportionate share of both capital and attention in the legal innovation dialogue: A lot of money is going into a disproportionately small part of the value chain.
The aforementioned wiser and more knowledgeable minds continue to discuss the desirability and feasibility of changing the regulatory moat around lawyer ownership. In the meantime, this discussion will remain premised on the status quo, in the spirit of focusing on factors that can be influenced by individual market actors.
Who Funds Innovation & Why?
Due to the idiosyncrasies of the legal markets, it is helpful to think about innovation in two simple categories: the typical/conventional financial sponsor vs. atypical sponsors unique to the legal innovation ecosystem.
Traditional Sponsors: PE Firms Are All About That Multiple 💰❌💰
The archetype for the traditional financial sponsor of a new venture is the private equity firm. PE firms (inclusive of angels and venture capital shops) are themselves commercial enterprises. Essentially, they offer specialized expertise in the strategic deployment of capital for wealth creation. To put it as simply as possible, PE firms invest capital to buy part or full ownership of companies, apply their expertise to make those companies more valuable, and then sell those companies (hopefully at a higher price point than at purchase).
PE firms attract capital from investors (typically institutional or ultra-high net worth) with investment theses that communicate a unique viewpoint about market opportunities; they retain investors through sustained performance in generating high returns. The below chart is an extremely simplified and theoretical comparison of PE returns against the S&P 500. See “Does Private Equity Really Beat the Stock Market?,” Wall Street Journal, Feb. 13, 2018. There are many caveats about the difficulties inherent in comparing apples to oranges but suffice to say that the ROI expectations are high.
Of course, the ultimate returns to investors are abstractions in that they aggregate the outcome of the PE firm’s many activities, both successes and failures alike. To put this into more concrete context, it is helpful to think about private equity investments at the company level (again, a simplified, theoretical exercise).
- Holding times. On average, PE firms hold portfolio companies for about 6.5 years, although early-stage venture capital investments will have longer holding periods (sometimes much longer).
- Returns/exit multiples. Target multiples are more difficult to generalize than holding times. Venture capitalist Fred Wilson of Union Squares Ventures is famous for saying often that he looks for one investment that “will return the whole fund.” This is a different way of indicating that VCs usually make many high-risk investments with the expectation that most will fail, with a few wins that will make the losses look minuscule. Still, it’s probably a safe and meaningful rule of thumb to say early stage VCs will seek something in the neighborhood of 10x returns while mid-stage investors will be looking for a 3x to 5x range.
Funding innovation is both a means to effectuate and a happy byproduct of the PE firm’s raison d’être: generating returns for investors. As we will see, things are not so simple in legal markets.
Simply put, most legal startups require a long bake for a relatively small pie. In addition, the vast majority of legal startups are point solutions targeting niche markets that are far too small to ever reach the size & scale needed to attract traditional venture capital interest — at least in part due to the highly fragmented composition of the legal services market, as well as the added layer of geographic silos imposed by jurisdictional differences, see Post 051 (legal markets are especially balkanized and opaque).
Big Law Both Funds AND Manages Innovation (And It Sometimes Works 😲)
The innovation theater that often happens (inadvertently or otherwise) across the law firm landscape is more analogous to the recent explosion in corporate innovation. With technology driving a faster pace of change and startups eating into every major sector, mature businesses of all shapes and sizes have embraced the mantra: “what got you here won’t get you there.” This has fueled mystique around the “intrapreneur”, a rash of innovation “labs” housed within staid and stable companies, and the rush to co-opt startup-style innovation and strategy tools, all with mixed results. (Enjoy a moment of relief and schadenfreude: innovation theater was not created by the legal industry.)
As always, there are lessons to be gained from the mistakes of others, even those outside our own domain. Drawing from the hard-earned lessons of corporate innovation programs outside of legal, two reliable litmus tests emerge to gauge the innovation maturity of established firms:
- Why? Clearly articulated strategic objectives for innovation investments, tied to financial KPIs that measure the impact on the core business or progress toward profitable exit
- How? Process and governance around build, buy or partner decisions
A few bright spots exist
Yes, many law firms engage in some level of innovation pantomime for hype and awards, simply to keep up with the Joneses. (Award submissions in 2018 that tout a successful migration from Office 2007 to Office 365 would fall into this category.) And other law firms often get in over their heads in innovation endeavors that are beyond their core capabilities (more on this in Post 064).
But a few law firms do think and act with the recognition that they are future-proofing their businesses against emerging threats. Allen & Overy is a good example of an outlier firm displaying both indicators of innovation maturity. In 2016, A&O partnered with Deloitte to bring to market MarginMatrix, an “IT solution for compliance with the mandatory variation margin rules that now apply to the USD500 trillion OTC [over-the-counter] derivatives market,” now deployed for 8 global investment banks with over 20,000 negotiations completed. See Allen & Overy Annual Results Factsheet for Fiscal Year 2017.
MarginMatrix shows interesting signs of innovation maturity in that it is hyper-focused in product design and target market. The solution design also displays a high degree of customer-orientation, around which coalesces (a) complementary technology components (expert system, workflow, document automation) and (b) a managed services play that leverages (presumably) lower-cost staffing from Deloitte’s deep bench.
Most importantly, however, MarginMatrix makes strategic sense for A&O. OTC derivatives are important to global investment banks (a key market segment for the firm) because the customization flexibility of off-exchange products provides banks with highly sophisticated means to hedge risk. A&O also has comparative advantage to produce and maintain the high-value content that drives MarginMatrix: the legal analysis of multi-jurisdictional regulatory requirements imposed on OTC derivatives.
In the below visualization of potential strategic objectives for innovation investments, MarginMatrix fits comfortably into the “add new offerings box,” which enables the firm to anchor existing key accounts with a tranche of work offering relative revenue predictability.
The notion of packaging expert knowledge into a productized subscription model is not a new idea. Many firms continue to flirt with this idea, and mapping some of those efforts to the above strategy matrix gives some sense of the variation in motivating drivers for innovation investments.
- Littler invested heavily in new offerings spinning up a myriad of branded solutions and toolkits (e.g. LittlerGPS, among others) indicating greater focus on grabbing downmarket share with productized solutions. In 2015, Littler also entered a joint venture with Neota Logic to launch ComplianceHR, which layers Neota’s expert systems technology onto the firm’s knowledge stores into an enablement product mapped to specific and high-volume HR and employee relations workflows. See Press Release.
- Cadwalder Cabinet has evolved into a slightly different strategic play: extending its existing product into a new market segment. See “Regulators Become Cadwalader Clients as Tech Investment Begins to Pay Off,” The American Lawyer, June 18, 2018.
- Reed Smith recently launched GravityStack, a spin-off subsidiary group that will design, test and license technology solutions to legal clients. See “Reed Smith Enters the Legal Technology Market With GravityStack Subsidiary,” LegalTechNews, April 24, 2018.
Apart from these examples, countless firms are now engaged in serious efforts to integrate process, technology and legal operations to both manage costs and improve service delivery. But a sustained product/solutions focus to spin up new offerings to the market remains more the exception than the rule.
The wide variety of motivations for incumbents to invest in innovation explain, at least in part, why it is difficult to generalize about legal innovation. Some of the variation can be explained by the extreme fragmentation of the marketplace and the resulting dispersion in market position and thus strategic opportunities available to each player. The fact remains, however, that rigorous attempts to measure and compare innovation investments, maturity or performance will need to consider these differences.
Capital for Legal Innovation: Current State & Emerging Trends
A survey of the current market landscape as well as recent developments/dialogue suggests there are four key trends to watch in the next 3-5 year timeframe.
- Liquidity events suggest sorting/matching behavior by market participants
- Platform + bolt-on strategy by serial acquirers and mature scale-ups
- Smart money eyeing legal, to the tune of $500m+
- Capital gets creative: working around the regulatory moat
1. Liquidity Events: Not Necessarily a Silicon Valley-Style Bonanza
2018 has already seen a number of deals that have raised many questions (and inspired many hot takes). The below graphic picks out a small selection of headliners. Given that financial terms are rarely disclosed, the LegalZoom secondary investment attracted a lot of attention by virtue of deal size and resulting valuation. See, e.g., “LegalZoom Gains $2B Evaluation in Funding Round,” Bloomberg, July 31, 2018.
Liquidity events have a generally pleasing air of a positive development; some of that may be due to the glorified stories of founder exits vaguely reminiscent of the trailer for “The Social Network.” Certainly, liquidity events usually involve some people coming into a large lump sum of money. Without raining on anyone’s parade, it bears mentioning that the overall texture of recent liquidity events in legal markets indicates that a few different forces may be in play:
- The Avvo, BAL and Riverview Law deals give indications of a strategic sorting in which major players with strategic goals acquire specific assets; in contrast, the Lawyers On Demand and LegalZoom deals feel more like capital churn/injections that will lengthen the runway for these companies to prove out an independent scale/growth strategy that may still be in the works while providing liquidity back to the early stage investors.
- Traditional PE exit strategies favor strategic acquirers and IPOs over financial sponsors, who tend to be more sophisticated and able to negotiate a lower purchase price. Those dynamics may or may not hold in legal markets; the available data is too scant to speculate.
- The exits by BCLP and DLA Piper raise an interesting question about the optimal role of most law firms in the midwifery and nurturing of new ventures. For reasons we will cover in upcoming installments, law firms have unique assets that make it a fertile environment for experimentation and testing — whether they are well positioned to hold their equity positions to a late exit remains to be seen.
2. Platform + Bolt-On: Next-Level Serial Sorting
The activities of serial acquirers and emerging platforms deserves some mention.
- Unsurprisingly, Thomson Reuters and LexisNexis remain most active acquirers as they supplement internal innovation agendas with strategic M&A. LexisNexis, in particular, has been aggressive in sourcing new product & service innovations through recent acquisitions of Ravel Law, Intelligize, and Lex Machina — all prominently on display at the recent AALL conference. in contrast, Thomson Reuters’ recent launch of WestLaw Edge appears to be powered much more heavily by internal innovation and R&D.
- Epiq, Consilio, and Mitratech are all PE-backed and have access to the capital to continue bolt-on deals to round out their market offerings. Most recently, Mitratech acquired ThinkSmart for an undisclosed sum.
- Relativity may emerge as a likely platform looking for bolt-on acquisitions: the company has invested in Heretik and HealthJoy, signaling financial commitment to extend its platform beyond eDiscovery into contracts and highly regulated data stores.
- Earlier this year, Elevate announced that it had secured a line of credit from Morgan Stanley Expansion Capital to fund its growth. See Press Release. Elevate did disclose that the proceeds would be spread out across strategic acquisitions as well as investments in product and service expansions.
3. “Smart Money” from Silicon Valley Continues to Eye Legal Vertical
Independent research conducted by Six Parsecs indicates that “Smart Money” VCs (the Silicon Valley elite, as identified by CB Insights) have invested in almost 30 legal tech companies in funding rounds totaling over $500m. This list includes some of the most recognizable names in legal tech, including Avvo, Clio, DocuSign, LegalZoom, and Ravel, as well as some newer names to watch like Atrium LTS, Casetext, Ironclad, Judicata, Modria, and SimpleLegal. Famed Valley seed accelerators Y Combinator and 500 Startups have been fairly active as well, funding over 20 startups in rounds totaling almost $180m.
An interesting counterpoint to the “Smart Money” portfolio are the investments made by Ulu Ventures. While Ulu’s legal startup portfolio is small, it includes Lex Machina and Ravel Law, both acquired by LexisNexis. Ulu founder Clint Korver was part of an early cohort of VCs who were early adopters and customers of legal startups as an alternative to incumbent firms (and expressed intense skepticism about the waves of change washing over Big Law); that cohort included Foundry Group founder and ex-Cooley lawyer Jason Mendelson, whose claim to fame included, among other things, hating on startup lawyers. See “These Venture Capitalists Skip Law Firms for Legal Services Startups,” ABA Journal, May 2014. This raises some interesting questions about what legal startups might need more: capital to fund growth or advisors with a keen understanding of the domain.
4. Capital Gets Creative: Workarounds for Regulatory Barrier
While only orthogonal to this discussion, the emergence and growth of litigation finance must be noted. Litigation finance is a rare bird in legal innovation that fits into Marc Andreessen’s “huge, if true” paradigm. According to BTI Consulting, litigation made up nearly 30% of the demand for all outside counsel services in 2018; while a rough proxy, the share of litigation spend in all outside counsel budget still gives an idea of the significant addressable market size for litigation finance. See BTI Practice Outlook 2018 (forecasting market size by practice). Since 2014, litigation funders have raised capital in excess of $3bn. See “Litigation Funders Face Their Hardest Sell: Big Law,” The American Lawyer, June 28, 2018. While still in its early days, litigation finance has the potential to reshape the current landscape for a huge segment of the legal services market, and represents a creative channel for outside capital to influence and ramp up investment into legal data handling and predictive analytics.
Access to Capital: Could Be Better, but Not the Choke Point
Research by Six Parsecs suggests that the total amount of hard capital invested into legal tech, legal services and adjacent spaces is in all likelihood much, much larger than the $998m estimate reported by CB Insights in 2017. Further, is impossible to account for all of the soft investments made by existing players to fund strategic projects, initiatives, feasibility tests, as well as the ongoing payroll of the growing roster of internal innovation teams across the legal space.
The aggregate amount of capital invested in legal isn’t the issue — the more serious problem is the inefficiency in finding and funding the right opportunities. However, emerging trends suggest that access to capital is getting and will get more efficient over time.
Upcoming installments will make the case that inefficient access to markets and talent are much more serious barriers to innovation maturity in legal markets. That said, a rigorous look at capital flows in our industry is still important.
Why? Because there is no better accelerant for #realtalk than the topic of money. Discussion of capital must necessarily address the question of returns. Too often, we across the legal industry use innovation as an emotional lift: workshops and brainstorming sessions usually make us feel better and more hopeful about the future. Where accountability mechanisms are absent, good feelings often provide sufficient returns for these costs.
To culturally co-opt an obnoxious catchphrase of one Ben Shapiro, “money doesn’t care about your feelings.” Looking at the current state of the legal innovation landscape through this unforgiving lens can produce unexpected clarity. For the industry to mature beyond isolated experiments at the edges, we must engage in more rigorous thinking about (i) what innovation experiments actually cost, (ii) what returns they generate, and (iii) how both sides of the equation fare as the endeavor scales. Not all the inputs and outputs of innovation efforts will be quantified in dollars, but much of it can and should be.
The capitalists will enter the U.S. legal mainstream sometime between a few years from now and never. But in the meantime, those on the inside could stand to take a page out of the capitalists’ playbook, starting with the notion that investable ideas must focus on value rather than novelty. Not all new things are better than the status quo, and not all old things are bad enough to be discarded: much like handsome and stupid, innovation is as innovation does.
What’s next? See Legal Innovation Woes, Part II: TBD Markets + MIA Customers (063)
Elite, one-percenter lawyers are an easy group to vilify, especially from afar. Change agents and disruptors alike need to resist the temptation.
Conference season is in full swing, and legal professionals of varying titles are convening in cities all over the world. Some conferences coalesce around themes, but most events target functional roles both new and old. As more and different roles proliferate around the practice and business of law, some spheres collide or merge (law librarians + competitive intelligence, pricing + LPM, etc.)
These days, everyone – managing partners, the law firm C-suite, the general counsel, legal ops, pricing professionals, legal technologists, marketing, marketing technologists – has a conference dedicated to showing them how to navigate the future. Everyone is meeting, learning, networking, and engaging in dialogue in gatherings of every size, shape and flavor.
Everyone, except the working partner.
Failure to appear ⇒ default judgment
The recurring conference call is a feature of modern professional life. Often, one or more people are late, giving rise to this well-worn piece of office humor: A late arrival offers an apology that falls somewhere between perfunctory and profuse. In response, someone jests, “No worries… we assigned you all the work.”
(How funny or good-natured this actually turns out be depends on a number of factors: the relative importance and current status of the project, personal relationships and professional reputations of those involved, and the varying levels of good feelings or ill will that pervade the team.)
A similar social dynamic plays out at conferences about the legal industry. Whether as a function of exclusion or absenteeism, working partners are not in the room where it happens.
Keynote speakers often sprinkle in one or two jokes about lawyerly tendencies for the easy laugh; these jokes tend to be mild and good-natured. Lawyers are incorrigible! 😂
Panel speakers tell stories that feature some fresh tale of folly, along with the heroics required to overcome their challenge. Knowing heads shake and nod as sympathy flutters across the room. Near-strangers find solidarity in genteel mockery. Lawyers are clueless!! 🙄🤦🏻♀️
Attendees gather in small groups to vent their latest frustrations in hushed, conspiratorial tones, seeking advice from old colleagues and new friends alike. These exchanges tend to be more frank and more angsty; pearl-clutching and NSFW language are both featured in equal measure. Lawyers are 😤 insufferable, 😠 arrogant, 😡 out of touch, 🤬 overpaid!!! 💢
There is also solidarity in shared vitriol, but it becomes weaponized, and the metaphorical crosshairs are often fixed on people who aren’t in the room.
No worries… we assigned you all the blame.
So where are the partners?
A key development in recent years has been the waning confidence of law firm leaders. It’s been many years since managing partners received the “lawpocalypse now” memo, and most firm leaders are trying their best to adapt to a changing market. Over the past few years, however, they’ve admitted openly that they are having a much harder time than anticipated, particularly in creating the same awareness among their partners.
In the most recent Law Firms in Transition survey, 69% of managing partners reported not doing more to change service delivery because “partners resist most change efforts”:
This is not necessarily because they are stubborn, arrogant, or incurious. Big Law partners are not exactly oblivious: in fact, most of them are stressed and worried about an increasingly uncertain future.
But most law firm partners are phenomenally busy, and they spend most of their days under an unbelievable amount of pressure. Many of them put in grueling hours on client work and travel. In many firms, even senior partners receive less administrative support than ever. If they attend an event, it is usually an industry affair for networking and business development. They prioritize these tasks because their standing within the firm depends on it, and because that position seems less secure with each passing year.
Most law firm partners are not reading books about the future of law or legal service innovation, because there are people at the firm who are paid to do that. They are not following breaking news about ALSPs, which are growing fast but still comprise less than 1% of the legal services market. They are not following what the Big 4 are doing in high-volume, low-margin areas that have no relation to their own area of practice. Mostly, they are focused on doing what they know.
And they are likely to continue down that path until they hear from the only stakeholder that matters to them: their own clients.
There are many echo chambers, but this one is mine
The last decade has spurred greater interest in dialogue about the future of law. This is, on balance, a good thing: the number and quality of communication channels positively influences the rate of innovations. See Post 008 (explaining the key variables that determine rate of adoption).
In 2018, the legal industry has more communication channels than we did even five years ago. Some are high in quality. I worry, however, that our communication channels are splintering the industry into sharper and more brittle factions.
Let me give some context for my concern. The legal industry has been under enormous pressure since the Great Recession – this we all know. Most professionals working in legal businesses are suffering from change fatigue. The dialogue, in short, is getting a bit more heated and a lot more cynical.
Take the ongoing debate over the word “non-lawyer“: it is complicated because it’s symptomatic of the long-simmering resentment of allied professionals. Professionalization of a new role is a difficult undertaking. Pioneers must build content to standardize language and practices in tandem with a community of practice that will accept and uphold those standards. But the most taxing work, in my view, is the murkier challenge of building legitimacy and market acceptance – and in this instance, that market has been comprised of lawyers.
Legal marketers, project managers, pricing officers, legal technologists, and legal ops professionals all have stories to tell about the bad behavior of lawyers. In these war stories, lawyers almost always fail to recognize the value or respect the legitimacy of other professions. The “non-lawyer” grievance neatly and implicitly captures the indignation and resentment of the marginalized.
Against this backdrop, it makes sense why change agents seek out forums filled with like-minded people who “just get it.” Conferences fit the bill: “something of a ‘high school reunion’ for professionals who have been in the change management game for some time.” Strom, “The Law Firm Disrupted: In Heavyweight Bout, It’s Clients v. Law Firms,” Law.com, May 18, 2018.
At their best, conferences function as important forums for continuing education and professional development – two things that are desperately needed for the legal industry to keep pace with the markets it serves. Apart from content and programming, the social aspect is also important. Professionals, especially those in emerging roles, often need the support of a community of peers and mentors that share similar challenges in similar contexts.
A place to share stories and perspectives is important and valuable, but much less so when the gathered group is homogenous in viewpoint and attitude – and not at all when the talk turns to complaining and commiseration. We are all subject to the temptation of groupthink because it is much more pleasant to hear our own worldview affirmed and to be told that we are fighting the good fight.
It all becomes a bit problematic, however, when we fixate on a common enemy who also happens to be a constituent and stakeholder in the very industry we want to transform. Gentle mockery can devolve very quickly into meanness and schadenfreude when talking about people who are not in the room. Any misperceptions or knowledge gaps we might have about their challenges and constraints will persist, while repetition makes us more confident in what we believe.
Anonymous shade and public diatribes
A couple of years ago, Casey Flaherty wrote a book for corporate counsel called Unless You Ask. It is an excellent and comprehensive guidebook designed to help in-house counsel drive structured dialogue with their firms on how they might create or provide greater value. I have read the entirety and I highly recommend it, but that’s not why I bring it up. I bring it up because the origin story of the book is fairly indicative of the current state of “dialogue” in our industry.
For many years, Altman Weil posed a series of questions to both law firm leaders and Chief Legal Officers:
- How much pressure are corporations really putting on law firms to change the value proposition in legal service delivery?
- How serious are law firms about changing their service delivery model to provide greater value (as opposed to simply cutting costs)?
These questions provided reliable fodder to deride firms. Here is a side-by-side comparison of how each group rated the seriousness of firm efforts to change:
There are two basic points of interest in the chart above. The first is glaring and has been noted widely: there is a material perception gap separating the client and firm viewpoints. In 2018, this gap (based on the average) amounted to two full points on an 11-point scale, meaning law firm leaders consistently graded themselves more generously than clients did over the same period.
The second point of interest is that more clients appear to be growing disenchanted with law firm commitment to change. In 2012, one in ten CLOs rated law firms as “not serious at all”; by 2017, that proportion had grown to one in six. The clients at the very edges of dissatisfaction with the status quo are most likely to articulate pain points and unmet needs and to actively seek new solutions from a wider range of providers. These clients are also likely to self-identify and coalesce into like-minded groups in forums like ACC and CLOC to facilitate knowledge sharing across companies.
Often, it is this vocal minority that make up the early markets: they are the innovators and early adopters who are very often featured in conference keynotes and panels and interviewed and featured by legal publications. Keep this group in mind — they will feature in this discussion again.
In 2015, Altman Weil upped the stakes by asking firm leaders why they weren’t “doing more to change,” and firm leaders responded with stunning candor:
For most pundits, the top two responses provided proof positive that Big Law was doomed to 🧐🧐🧐 their way to certain extinction. Law firms were roundly excoriated.
Over the following year, Casey wrote his book because he understood something worth restating here today: most clients really do not ask. There are a handful of clients who give very good talks at conferences about the change imperative facing us all. Others give extensive interviews explaining the broad challenges of the industry. Most of this group is in the vocal minority.
From time to time, a scathing denunciation of firm behavior by a client might be quoted with attribution, but the veneer of civility ensures that no names are mentioned. In other instances, clients will register their displeasure through some strongly worded but anonymous comments to reporters about things like associate compensation. For the most part, clients continue to give tepid grades to firms in anonymous surveys and scorecards.
But by and large, the majority of clients aren’t holding direct conversations with their relationship partners at their primary firms about what they specifically want. This much has been apparent for years to close readers of the Altman Weil survey: below is another side-by-side view of how CLOs and law firm leaders have answered the question about corporate pressure on law firms to change.
Constructive dialogue must happen at conferences and at your place of work
Let me be clear. The problem isn’t that clients and/or change agents sometimes say unkind things about lawyers behind their backs at conferences. The real issue is that we need to have more tough conversations in our own place of work with our own colleagues, clients, suppliers, and stakeholders.
In two positive examples, constructive dialogue happened in spades at recent conferences:
- “Whose Fault Is It?” at LMA P3 Practice Innovation Conference
- “Transforming the Client-Firm Relationship” at the ACC Legal Ops Conference:
The first was framed as a gladiatorial battle but progressed as a debate, pitting firms against clients to decide who is to blame for the glacial pace of progress in pricing innovation. The second was less controversial in format, with a panel of speakers leading table discussions on real-world scenarios and problems that arise in client-firm relationships. Both of them were designed to feature multiple viewpoints, from law firms as well as law departments. Panelists spoke frankly about their constraints and their frustrations, pushing attendees to consider not only the familiar perspectives of their peers but also the unfamiliar challenges facing their counterparts and stakeholders.
Constructive does not mean pleasant. However polite or well-intended, disingenuous consensus is ultimately not constructive. Difficult dialogue may be stressful but festering resentment is usually toxic. Meaningful change cannot happen with some collision of differing opinions, but candor need not be feared if we work to preserve civility.
With those points in mind, we need to include working partners in the dialogue about legal services innovation. Too many change agents within law firms go around in circles without understanding why partners resist change. Too many pundits dogpile on lawyers for arrogance or avarice without considering context.
It is a competitive disadvantage for any business to believe its customers or competitors are stupid or crazy. Firstly, all people sense antagonism, learn to anticipate it and become more defensive over time. Secondly, the assumption that some stakeholders behave in a way that eludes our understanding makes our own thinking lazy: when we see people as incomprehensible we stop trying to understand them. Lastly and most importantly, it is nearly impossible to change anyone’s mind while dismissing their worldview, thinking lowly of them, and sort-of-semi-secretly wanting to see them punished.
As frustrated as we might be with the pace of change, the industry is making progress — and that progress happens in actual conversations that take place behind closed doors. It might not be visible on Twitter or in headlines, but more clients are asking, new entrants continue to experiment, and law firm leaders are still trying.
Enjoy the conference season. When you get back to the office, though, I hope you will try a bit harder to empathize with the people who weren’t in the room.
What’s next? See The Godfather just lateraled to a law firm (055)
Innovative products and services feel magical to the user. To create that feeling, however, innovation teams must grind through lots (and lots) of work. Fortunately, we have a playbook.
The core insight embedded in Rogers Diffusion Curve is that the adoption of new ideas occurs in a specific order through a social system comprised of five distinct segments. See Post 004 (introducing diffusion curve); Post 007 (explaining adopter types). Rogers’ research eventually found its way to Silicon Valley and got relabeled the Technology Adoption Life Cycle. See Posts 024–026. Along the way, technology marketer and consultant Geoffrey Moore added a key modification: a material gap, or “chasm”, between early adopters and the early majority. If a company can “cross the chasm”, commercial success becomes inevitable, as sales then occur largely through a social process of one peer imitating another.
To boil it down, Rogers proves out the science, while Moore provides the playbook. This one-two punch dramatically increases the odds of successful innovation adoption. But let’s keep it real: This is a lot more work–and deeper thinking–than law firms are used to.
One of Moore’s most useful adaptations to Diffusion Theory is the use of buyer personas to correspond with each adopter type. Moore’s book Crossing the Chasm is peppered with many detailed narratives about the trials and tribulations new product teams encounter in their efforts to sell to each persona/adopter type. The persona approach is a profoundly powerful way to design a product or service offering that the target end-user finds irresistible.
Below is a summary of how to apply Moore’s buyer personas to the legal market.
1. The Early Markets, Where Things Often Go Swimmingly
In his discussions, Moore provides a practical description of a functional job each adopter type tends to perform in the diffusion process. This post draws heavily on Chapters 2 and 3 of Crossing the Chasm, but with particular emphasis on Early Adopters and the Early Majority.
Innovators / “Techies”
Techies often embrace the nuts and bolts of how stuff actually works. Over time, Techies tend to amass a wealth of technical knowledge through self-initiated and self-sustained study.
In its earliest days, an innovation needs social proof to validate not only its novelty but its objective superiority. Moore describes Techies as “the gatekeepers for any new technology… the ones everyone else deems competent to do the early evaluation” (p. 39).
Of all five adopter types, Techies have perhaps the most straightforward and unambiguous job: to curate and assess new technologies or methodologies and endorse those with true technical superiority over currently available alternatives.
Early Adopters / “Visionaries”
Visionaries have both the imagination to see the world as it could be rather than as it is and the ambition to try to make those possibilities the new reality. Curious and ambitious, they gravitate toward high-impact, high-visibility roles within organizations. Along the way, Visionaries often gain access to significant discretionary budgets earmarked loosely for “strategic initiatives.”
The innovation function of the Visionary is easily described but exceedingly difficult to perform. Visionaries match emerging technologies or new ideas with systemic opportunities to drastically reshape existing markets. In other words, they identify business opportunities for a strategic leap forward. This requires not only an already rare combination of innate traits (curiosity, risk tolerance, openness to new ideas) but also an asset acquired over some years of experience: deep domain expertise in a specific industry.
“Huge, if true”
In the parlance of renowned venture capitalist Marc Andreesen, the most ambitious and canny Visionaries find and bet on ideas that will be “huge, if true.” Their work looks and feels nebulous because it is.
Moore’s critical insight here is that Visionaries balance risk against reward: they must perceive reasonable potential for significant breakthroughs to justify the risks attendant in sponsoring new ideas. To the uninitiated, Visionaries are regularly seen signing irresponsibly large checks to sponsor the development of murky endeavors that are often nothing more than a doodle on a whiteboard. The gift of vision enables this group to see the possibility of what Moore calls “order-of-magnitude” returns in the competitive positioning of their business (p. 44).
Given the stakes, Visionaries present as the least price-sensitive adopter type, and money is usually not the type of capital that is top of mind for them. Rather, they tend to hold their reputations and political capital at a higher premium. As a buyer group for new products or services, Visionaries like to structure deals into pilot projects, replete with milestones and other signifiers of measurable progress. The perception of smooth progress toward tangible “wins” is critical for Visionaries to maintain not only their social status but also their professional standing.
Techies + Visionaries Make Unlikely 💖 Pairings That Make Perfect Sense
At first blush, Techies and Visionaries tend to look and sound quite different, and the collision of their two worlds often take casual observers by surprise. Many Techies are self-proclaimed nerds who dig deep into their chosen area of interest. Visionaries tend to be well-connected individuals who travel far and wide, always in search of a new idea that will spark their next “initiative.”
But the natural affinity between these two types is quite easy to understand when viewed through the lens of shared values. Both groups seek new things, though for purposes that are quite different in both behavior and motivation.
Techies and Visionaries each provide an invaluable service by performing key jobs that advance the goals of the other. Techies willingly volunteer their time, effort, and expertise to curate and test new offerings, but they often lack the social and professional standing to make things happen. Visionaries are big thinkers who share the Techies’ future-orientation, but with the upwardly mobile executive’s knack for imposing their goals onto the agendas and budgets of a well-resourced organization.
Thus, Techies and Visionaries tend to form symbiotic relationships that provide mutual benefit and fulfillment. Perhaps because of this unusual affinity, innovations that target Techies and Visionaries in the correct sequence are able to build impressive traction in early markets.
2. Into the Chasm, Where Things Get Dicey
When Bill first introduced the five adopter types, he had this advice to offer: “If you want your innovation to be adopted, don’t waste time trying to convert the early majority, late majority, or laggards. You only have one audience that matters – early adopters.” Post 007.
This is excellent advice. The work of taking innovations off the paper, out of the lab and into the real world requires the successful penetration of early markets. In these early days, Visionaries are crucial to the innovation effort because they perform critical jobs for which they are uniquely equipped.
But why do so many innovation initiatives stall in the chasm, even with the support of the Early Adopter?
This is a critical question for our industry. See Post 051 (positing that the true bottleneck in legal innovation is a commercialization gap). The latest Altman Weil survey of law firm leaders reports that 38.3% of firms are actively engaged in creating special projects to test innovative ideas or methods – down from 50.4% in 2017. While the decline is concentrated in smaller firms, the dip in experimentation suggests that the chasm threatens to dampen the overall pace of innovation in legal markets.
If you hope to scale innovation beyond experiments in the lab, understanding the psychographic (the “why”) and functional (the “how”) dynamics around the chasm is a must. An examination of the often fraught relationship between the Early Adopters and the Early Majority who bookend the chasm is particularly instructive.
Simply put, the chasm exists because the buying criteria and performance expectations of these two groups are so dramatically different. These very differences form the crux of why Early Adopters make poor reference clients for the Early Majority.
The perpetual tension between Visionary Early Adopters and the Pragmatist Early Majority stems from many dispositional differences, but there is one factor that we must always keep in mind. Despite the best of intentions and the best of efforts, the Visionaries’ bets do not always pay off. The hoped-for “order of magnitude” returns fail to materialize, and the new idea, product or service is found insufficient to catapult the innovation sponsor ahead of the competition.
In these unfortunate instances, it is often a Pragmatist, not the Visionary, who sounds a quiet death knell for the innovation experiment.
3. Pragmatists Hold the Keys to the Mainstream Markets
When David Cambria, the Director of Global Legal Operations at ADM, and Jeff Carr, the General Counsel of Univar, talk of “massive passive resistance,” or MPR, they are describing the attitudes of mainstream markets.
No single person or segment among the Early Majority, Late Majority, or Laggards holds nearly as much influence or prestige as the Techies or Visionaries who comprise the early markets. All the same, the mainstream markets derive massive power from massive numbers – and their passivity actually makes them more intractable. They are hard to understand because they are not as vocal or as distinctive as the early markets, and markets that are not well understood are hard to penetrate. Unfortunately, the failure to understand 85% of the target audience usually portends a slow but certain death for any new process, product or service.
Techies and Visionaries are united in their continual quest for new things, but mainstream markets are equally unified in the opposite direction. The vast majority of B2B buyers do not care for novelty. Rather, mainstream markets generally seek proven, complete solutions to known problems. Lack of clarity on either side of the problem-solution equation usually translates to substantial costs to educate the market. Within each organization, change agents also must contend with the costly battle against legacy infrastructure and cultural antibodies reinforcing the status quo.
Early Majority / “Pragmatists”
Pragmatists tend to gravitate toward roles of responsibility and stewardship in sizable corporations and in professional communities. Hence, Pragmatists are often the de facto keepers of the core company budget as well as industry standards and best practices.
According to Moore, the “Fortune 2000 IT community, as a group, is led by people who are largely pragmatist in orientation” (p 55). We can easily envision how this type would dominate positions of authority across legal functions of the same companies, and the description fits reasonably well for practice group or industry group leadership roles across NLJ 500 law firms.
An Advanced Exercise in Empathy
As a buyer group, Pragmatists are practical, stringent and value-conscious for entirely rational and comprehensible reasons. Early markets opt into their innovation roles, but Pragmatists have their responsibilities thrust upon them. Pragmatists are the ones usually held internally accountable for building, integrating, testing, debugging, and maintaining a new reality but at realistic levels of cost and effort – all while supporting their entire organization as it is nudged and prodded through all the unpleasantness of learning a new way to work.
For the would-be entrepreneur or intrapreneur, the skeptical demands of Pragmatists throw cold water on all the dreams nurtured by early market success. For that reason alone, an “extended exercise in commercial empathy” for this group’s point of view can feel very taxing. We often find it easier to vilify Pragmatists as unimaginative, plodding, and ornery – for the simple reason that they stand towering like an impassable mountain range between us and all our innovation dreams.
(For an illuminating glimpse at the world through the viewpoint of a Pragmatist, set aside some time to at least skim through the narrative vignettes in “What is Code?” – an award-winning 38,000-word showpiece on Bloomberg Businessweek.)
Innovations Start Life As Hypotheses, and Hypotheses Need Testing
Visionaries craft many scenarios about what the future might look like, but it is the Pragmatists who ultimately decide what the future actually will be. Pragmatists derive this considerable power not from glamorous positioning and self-promotion, but rather from the distinctly unglamorous work of safeguarding their organizations against catastrophic system failures and irresponsible budget leakages.
Along the way, Pragmatists provide an invaluable service not only to their own organizations but also to the innovation teams who listen with the intent to understand. Visionaries deal in the murky realm of intuition and hunches, but Pragmatists are the keepers of cold hard truth. And cold hard truth is what we need when we tackle one thorny question after another to validate the Visionary’s plausible theories:
- Are we addressing a business problem that matters?
- Does this problem matter to a market of sufficient size?
- Have we built a complete product that solves enough of the problem?
- Does our offering solve the problem more effectively than any other available option?
- Can we deliver sufficient business value to justify not only our asking price but the total cost of adoption and use?
- Does our offering actually work reliably and for real users in the real world?
Asking and answering these questions in an evidence-based manner demands extraordinary emotional discipline. The interest of early markets, no matter how exciting, is necessary but insufficient proof. The true test of market viability is forged through the exacting requirements of Pragmatists.
Prior to crossing the chasm, the Pragmatist’s buying requirements present material barriers to further diffusion:
- insistence on a whole product solution
- reliance on peer references from other Pragmatists
- penchant for backing the market-leading solution
- attention to practical deployment levers (e.g. infrastructure compatibility)
However, the innovation teams able to meet these demands find themselves well positioned to capture market share quickly. And the innovations that survive these trials are often imbued with an invaluable attribute of mainstream success: scalability. Lastly, because Pragmatist are fiercely loyal once won, the innovation team can expect to enjoy a highly defensible competitive position.
4. Even In A World of No, There Are Lessons To Be Had
The Late Majority and Laggards do not feature as prominently in our narrative. Legal innovation is not yet mature enough to grapple seriously with the market extension opportunities offered by these adopter types, who are generally resistant to trying new things.
Still, we append a few remarks. Despite the best efforts of innovation teams to convert each of the adopter types in the prescribed order, the messy and chaotic nature of legal markets all but guarantees that we will encounter all adopter types in our quest for market entry.
Late Majority / “Conservatives”
Risk aversion, price sensitivity, and tendency to follow rather than lead are the identifying characteristics of Conservatives. Whereas Pragmatists seek demonstrable gain in a defensible cost-benefit analysis, Conservatives in legal ecosystems are more likely seek minimal pain in their individual buyer and user experiences. This has the benefit of forcing us to focus on convenience factors such as ease of purchase and use as well as performance reliability.
Conservative buyers reward innovation teams for attention to human factors, optimized product design, and streamlined sales operations. However, none of this matters without the requisite social proof and peer pressure from Pragmatists and other Conservatives. For this reason, premature focus on these factors generally bodes ill for innovation teams, particularly in B2B markets. Making something more usable before verifying that it is actually useful to a sufficient number of paying customers is usually an expensive exercise.
Laggards / “Skeptics”
Skeptics are as likely as not to avoid adoption to the bitter end. As hostile as Skeptics may be to any innovation endeavor, engaging them in good faith whenever they are encountered can deliver at least one important benefit.
Skeptics tend to draw attention to specific gaps between product promises and actual performance. (This rarely feels beneficial or benign to innovation teams grappling with concept models and prototype.) Still, innovation teams who are open to engaging with this challenging segment gain precious opportunities to achieve greater user understanding, client empathy & client orientation. Particularly if the spotlighted performance gaps lead to specific insights about customer failures – e.g. critical breakdowns in business processes or the user journey – we can gain a much deeper understanding of the customer’s work context, business problems and use constraints.
5. Innovation Is Really Hard
All of this is much easier said than done. It is an inordinate amount of work and most of it cannot be done sitting at a desk. If we intend to put a dent in the universe, we cannot expect to coddle our creations in a pristine but sterile lab. Instead, we have to venture out into the messy and chaotic world that we hope to change.
Effectuating meaningful change is also hard because it demands, early and often, productive collisions with many people who will disagree with us. That work involves lots (and lots and lots) of dismissal, criticism and outright rejection.
To survive this bruising onslaught, innovators and change agents need to develop not only relevant expertise and skill sets but also habits of mind. Chief among these is a habit of thinking deeply and constructively about the viewpoint of the customer.
Much like a fledgling magician without an audience, an innovator without a customer is just another person with a quirky hobby.
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)