Diffusion Theory

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When lawyers come together to discuss the future — in law firms, law schools, bar associations, etc — the conversation inevitably turns to clients.  Although this is a wonderful and redeeming impulse, it almost always results in confusing and unsatisfying dialogue that goes nowhere. Why does this happen? Because lawyers focus on their detailed knowledge of trees and lack awareness and humility regarding the full breadth of the forest.

The tool pictured above is a 2×2 matrix of the US legal market. Its purpose is to decode lawyer over-generalizations about clients.

  • The horizontal axis is client type (a typology presented in Post 005).  Clients range from individuals (Type 1) to Fortune 100 clients with large legal departments (Type 6).
  • The vertical axis is adopter type based on the Rogers Diffusion Curve (presented in Post 007). Roughly 1/6 of the market falls into the innovator/early adopter categories.

The colored rectangular area reflects the universe of legal clients.  Orange denotes one-to-one consultative legal services (aka traditional legal services); dark blue signals that at least some one-to-many legal solutions are taking hold.  See Susskind, The End of Lawyers? (2010) (introducing one-to-one and one-to-many terminology). The light blue border represents clients who have innovation awareness — i.e., they know such innovations exist and are evaluating adoption. See Post 008 (discussing time gap between “knowledge awareness” and “adoption decision”). I have done my best to make each area unit roughly equivalent in dollars and adopter-type percentage.

In the above graphic, the vast majority of the US legal market is orange. This means most legal problems get solved by clients consulting with lawyers and lawyers fashioning a custom solution. This is the methodology we teach in law school.  It is also the paradigm for Model Rules of Professional Conduct.

Blue will grow, Orange will shrink

Regardless of the current breakdown, the dark blue is destined to grow and the orange is destined to shrink.  There is nothing controversial about this statement. See Post 001 (discussing legal productivity problem for individual and organizational clients).

What’s uncertain, however, is the pace of change.  If you’re running a law school or law firm, or investing in NewLaw or legaltech, your success or failure depends upon your timing.  This is pure business risk, which drives lawyers nuts. Fortunately, diffusion theory provides some insight.

Type 1-3 clients (left side)

More than 50% of the dark blue is clustered in the top-left of the graphic (the personal services portion of market).  Also, there is a vertical line that delineate Type 1-3 clients from Types 4-6. Clients to the left of the line (individuals, business owners, and companies with a solo GC) have relatively simple adoption decisions — one person decides based upon personal factors. See Post 008 (discussing how rate of adoption varies by decision type).

For Type 1 and 2 clients, the most prominent example of a one-to-many solution is LegalZoom.  Many customers became aware of LegalZoom through mass advertising on NPR, commercials during Shark Tank and Law & Order, or internet banner ads. In fact, since January, I have come across 33 different LegalZoom banner ads (Google has me pegged). Lawyers and law professors may snicker at the lack of perfection in a LegalZoom form, but there is zero doubt this company understands lifetime customer value better than anyone else in the legal market. LegalZoom’s influence is growing like an oak.

The solo and small firm bar has other sources of one-to-many solutions, including sophisticated document management and automation systems. In most cases, the goal is to enable high-volume practice. Indeed, legaltech started over 30 years ago when solo and small firm lawyers sought out better ways to solve the legal problems of ordinary people.

Side note: Although legaltech has been a tremendous help to the clients of solo and small firms, the biggest bottleneck to access to justice is a labor-intensive adversarial system. See, e.g., Post 042 (cost of litigation outpacing amounts in controversy); Post 037 (PeopleLaw sector is unraveling). We need a redesign of how we resolve disputes.

Finally, why is there no dark blue underneath Type 3 clients (i.e., companies with one in-house lawyer)? Type 3 clients generally have problems too complex for a kiosk service like LegalZoom, yet their budgets are relatively small and their numbers too few to create a scalable market. As a result, Type 3 clients are destined to wait the longest for one-to-many solutions.

Type 4-6 clients (right side)

On the right side of the graphic is a second dark blue cluster. This is mostly Type 5 and 6 clients investing in legal operations.  If you attended the 2018 CLOC Institute in Las Vegas last month, you witnessed a stunning number of companies offering one-to-many legal solutions. The conference had nearly 2,300 attendees, with more than 2/3 drawn from the vendor side.

Remarkably, despite this impressive showing, we remain in the early days of legal department innovation. During the opening session, CLOC’s CEO Connie Brenton acknowledged that 1/3 of the Fortune 500 was present, leaving 2/3 as future members. Further, a substantial subset of corporate legal department attendees were there to learn how to do the basics of data, process, and technology.  A handful of companies have emerged as legal ops innovators, such as Cisco, Adobe, HP, NetApp, Google, ADM, and DCX, with substantial horsepower coming from leading NewLaw vendors like Elevate and UnitedLex. We are barely scratching the surface of future change. The potential is staggering.

That said, Type 4-6 clients are heavily constrained by the adoption decision process.  Unlike Type 1-3 clients, where one person makes the buy decision, legal departments have to be much more deliberate. In theory, the general counsel presides over the budget and has the authority to spend it.  Yet, GCs have many items on their plate. Therefore, decisions regarding legal department systems are often delegated to a lieutenant. Because systems are not part of a lawyer’s formal training, the lieutenant has to climb a learning curve. Once an adoption decision is made, successful implementation will likely require major investments in change management. Cf. Post 008 (discussing prevalence of “massive passive resistant (MPR)” in corporate legal departments); Post 047 (emphasizing need for strong leadership to successfully implement law firm scorecards). This can strain the relationship between the deputy and GC.

It is indisputably true that there is growing pressure on legal departments to do more with less. This is why CLOC membership has doubled year-over-year since 2015.  Yet, because of decision-making and implementation challenges, the pace of transformative change remains uncertain.

Confusing conversations — an illustration

Let’s imagine we attend a law school alumni event and the dean asks for advice on how to prepare students for the future practice of law.  The graphic below reflects some of the perspectives in the room. All of them are based on experiences with clients.

Lawyer A has a very optimistic story to tell, as he has implemented sophisticated workflow, project management, and document automation solutions to more efficiently and profitably serve his PeopleLaw clientele.  This describes the practice of my former student, Jordan Couch, who practices at Palace Law in the Seattle-Tacoma metro area.  Go Jordan!

Lawyer B serves an older and more affluent PeopleLaw-small business clientele.  She plays attention to legaltech developments but, as yet, does not feel a need to substantially change her practice.

Lawyer C is older than A and B and practices in the corporate middle market.  He has little idea what Jordan is talking about and assures the dean and the faculty that law remains a noble profession.

Several lawyers from Law Firm D are at the gathering, including a young partner enthused about her use of AI to better serve an innovative and cost-sensitive client. “Through tech, we’ll spend less time on scut work and more time practicing at the top of our license.” An older partner from Law Firm D thinks this is errant nonsense.  His clients are overwhelmingly late majority. He knows nothing about diffusion theory and seldom reads books. Finally, Law Firm D’s beleaguered managing partner is also an alum. He is struggling to navigate the disparate views of his partners. He tells the dean to prepare students “for a lifetime of change,” though he provides no specifics.

Finally, the richest lawyers in attendance work at Law Firm E, a white shoe NYC firm focused on financial services. None of the lawyers from Law Firm E have ever heard of CLOC. Some junior associates, however, are intrigued by the idea of automating all work that keeps them at the office past 2 am.

Creating T-shaped legal professionals

Law faculty attending the alumni event have a wonderful opportunity to hear what they want to hear.  That is unfortunate.

When it comes to dark blue one-to-many versus orange one-to-one, legal education needs to see the forest from the trees.  This means embracing the concept of T-shaped legal professions.  See Post 043 (discussing the Institute for the Future of Law Practice).  When the content and quality of one’s legal education enables a law grad to pack dramatically more value into an hour of work, everyone wins — clients, law schools, alumni, the organized bar, and broader society.  Our job is to survey, evaluate, recommend, and adapt, not to wait around for the guidance of lawyers immersed in practice.

I hope my decoding tool helps the cause.

What’s next? See Legal Evolution graphics, Year 1 (049)

When David Cambria sat down with Eric Elfman to discuss his willingness to try Onit software, he stated that if ADM in-house lawyers were required to engage “in a single unnatural act,” the implementation would fail.

Cambria elaborates, “Why are we all so comfortable with Word, Excel, and Outlook? Because these tools don’t have an opinion about how we do our work. Enterprise software, however, always has an opinion.”

Hardened by 25 years of work experience in consulting and legal operations, David communicated his need for workflow tools that did not require his lawyers to change. Further, he needed significant productivity gains and a steady stream of clean, reliable data to better manage the department. A high bar for success.  Yet, according to David, Onit managed to deliver.

Cambria, Global Director of Legal Operations at ADM, recounts this story during Week 6 of “How Innovation Diffuses in the Legal Industry.”  Eric Elfman, Founder & CEO of Onit, was also present, giving his own entertaining version of a project that went on to win a 2017 ACC Value Challenge Award.

By inviting Cambria and Elfman to class, I hoped students would get a glimpse into the type of buyer-supplier relationship that enables a legaltech company to successfully “cross the chasm.” See Posts 024–026 (discussing chasm framework, its connection to diffusion theory, and its applicability to the legal industry).

For a summary of Week 2 guest lectures (Pangea3, Practical Law Company, Hotshot), see Post 032. For week 3 (consultative sales at Thomson Reuters), see Post 034. For Week 4 (a deep dive into Axiom), see Post 036. For Week 5 (law firm examples of intrapreneurship), see Post 039.

Crossing the Chasm

I knew I hit pay dirt when Elfman came to class with a dog-eared copy of Crossing the Chasm.  Naturally, I had to ask, “Have you ever crossed the chasm?”  With an enormous grin, Eric replies, “Twice.”

The first time was with Datacert, an e-billing company Eric founded in 1998 with $1,000 of his own money.  The timing and concept were right, as Elfman quickly landed five Fortune 500 clients, making it relatively easy to attract investor money to build out the product and scale. When Eric left the Datacert in 2008, it was valued at $60 million. In 2014, Wolters Kluwer acquired Datacert for $290 million, merging it with TyMetrix to create what is now known as Wolters Kluwer ELM Solutions.  (The acronym “ELM” stands for enterprise legal management.)

The second crossing was with Onit, a business process automation company Elfman founded in 2010. This time, Eric put $1 million of his own money followed by four rounds of outside investment (a mix of debt and equity) totaling $16.4 million.  Eric stated that the company crossed the chasm approximately a year ago when operating income could more than cover ongoing R&D and sales efforts.  “That is not to say we won’t raise more money,” added Elfman. “Simplicity is extremely expensive to create. You also need to have high quality products when customers want to buy them.”

Onit’s core product is configurable software that can be deployed relatively cheaply and pointed at a wide range of legal department needs.  Established applications include legal spend management, matter management, contract management, legal holds, legal service requests, NDAs, and virtually any type of work flow involving knowledge workers.

Onits’ major competitors are enterprise software providers that serve corporate legal departments. However, most competitor offerings are built around a single problem. This means that legal departments tend to have several enterprise systems that can’t talk to each other very well. As discussed in more detail below, legal departments are perennially underwhelmed with their enterprise software incumbents (my observation, not Elfman’s).

Onit currently has 105 employees in the US, UK and India, and $10 million in annual revenue. According to Elfman, for the last three years, the company has been growing at a 50% annual rate.

Corporate legal departments as a target niche market

As I listen to Cambria and Elfman share their experiences, I am surprised by how well the narrative fits the crossing-the-chasm framework.

To refresh readers’ understanding, a company starts life with a generic product that likely impresses technology enthusiasts but lacks the features needed for broad mainstream adoption. Thus, to cross the chasm and achieve commercial success, a company must (a) target a niche market that could benefit from the innovation, (b) identify its biggest pain points, and (c) work backwards to build a “whole product solution” that becomes the “the only reasonable buying proposition” for the target market customer.  Moore, Crossing the Chasm (1st ed. 1991) at p. 110; see also Post 024 (summarizing basic framework).

This is Moore’s “big fish, small pond” strategy, which is designed to create focus on the narrow set of clients and conserve the bandwidth of key personnel.  See Post 025. If executed properly, the post-chasm company has successful commercial relationships with “pragmatist” mainstream customers. This sets off a word-of-mouth campaign that dramatically reduces the cost of sales. Further, once inside the mainstream market, the company is well-positioned to develop and sell future products and services.

In short, crossing the chasm is a one-time event that changes everything for the better. See graphic below:

Well, what is Onit’s target niche market (or small pond)?  Here I get an important lesson in framing.

Virtually all legaltech companies target a discrete problem or complex task that exists within a legal department. These problems or tasks include e-billing, matter management, document management, e-discovery, contract analytics, etc.  When evaluating this market structure, the natural capitalist impulse is to integrate these disparate systems into a single enterprise solution, thus achieving economies of scope and scale. Indeed, this is the logic behind many legaltech acquisitions, including the Datacert-Tymetrix tie-up. Framed in this way (which is the way most legal insiders see legaltech), the small pond is one or two significant problems or tasks inside a legal department.

But that is not Onit’s strategy.  Onit is a business process automation company where legal departments are viewed as a small but influential beachhead that can provide access to rest of the corporation. Thus, the addressable market is not all corporate legal departments (which might be $3-5 billion), but corporate knowledge workers struggling to collaborate effectively within and across business units (probably 100x bigger). Framed in this manner, the small pond is legal department operations.

Few tech entrepreneurs would be anxious to have legal as their initial target market. The field is highly technical; the clientele are demanding; and the financial upside is limited. But Elfman sees things differently.  “The lawyers are the laggards. They are the Department of No. If we can win them over, the rest of the corporation is a lot easier.”

I am inclined to take Elfman seriously because he and his team are obsessively focused on delivering a whole product solution. To fully grasp what this means, we need to understand Onit as compared to its primary competition.

Compared to what?

In Crossing the Chasm, Geoffrey Moore makes the point that prospective clients are unwilling to strain their attention span to hear your pitch. Thus, a product needs to be positioned against what is familiar and established, thus enabling target clients to quickly categorize your product.  Yet, to generate curiosity and interest, the product also needs to be different in a way that delivers a substantial benefit. See pp. 159-61.

As previously noted, Onit’s primary competitors are enterprise software companies that offer solutions to one or more legal department needs, such as e-billing, matter management, contract automation, or data analytics. In my travels to various industry events involving legal technology, I often hear the refrain, “Everybody hates their e-billing vendor.”  The same tends to be true for document and matter management. To date, no company has emerged as the obvious first choice.

Most of these companies got their foothold many years ago when legal departments were growing rapidly and general counsel and their lieutenants felt vulnerable regarding the lack of basic systems and controls. For example, without enormous manual effort, the department could not answer basic questions related to outside counsel spending; or the department couldn’t generate a useful status report on pending litigation; or lawyers struggled to locate prior work product. In each case, there was an enterprise software solution or platform designed to make that problem go away.

Indeed, Elfman tells the story of how he got the idea for Datacert. After completing his MBA at Rice in 1995, he went to work for a litigation consulting firm that specialized in forensic accounting.  While working on an engagement for Exxon, Eric asked the head of litigation about the size of his total annual spend. The AGC responded, “I’m not sure.  Somewhere between $200 and $400 million.”

Elfman describes this exchange as “the moment that changed my life.”  The business opportunity was large and obvious: use technology to apply basic accounting discipline to corporate legal spending.

Datacert and Elfman were extremely successful making sales to a lot of large corporations. Eventually, Datacert would land 130 companies in the Fortune 500, including #1, #2, #3, and #5.  Yet, Datacert also became part of the large cadre of enterprise software companies that legal departments complain about (this observation is based on my own industry knowledge, not any comments made by Elfman regarding his former company).

Root cause

As I listen to David Cambria and Eric Elfman discuss their collaboration, a deeper understanding of the problem comes into focus.

As David points out, when enterprise software is pointed at a specific problem, it develops a strong opinion about how the work should be done. Invariably, that opinion adds steps to the workflow, often without delivering any immediate or tangible returns to the worker trying to do their job. Naturally, people being people, they find ways of minimizing their interaction with the system. Thus, the resulting incomplete and uneven usage undermines the value of the enterprise solution. It also limits — possibly to zero — the amount of usable data the system produces.

In theory, management can fix this problem by mandating usage.  They can fire people. They can reduce or withhold bonuses.  Political capital, however, is limited.  Few bosses want the troops grumbling about how a six-figure software mistake is hindering their ability to do their jobs. So the natural equilibrium becomes enterprise software that is half used. This is usually a modest improvement over the prior state of affairs, but well short of expectations when the licensing agreement was signed.

This recurring cycle explains why David Cambria has such disdain for business solutions that require unnatural acts. Likewise, this is why Eric Elfman was ready to leave Datacert after ten years at CEO.  This was a game he could not win.

What problem is Onit trying to solve?

Eric Elfman left Datacert in 2008.  Two years later, he started Onit with Eric Smith, Datacert’s longtime CTO.  Yet it wasn’t until 2011 that Elfman and Smith came up with the core idea for Onit, which is “collaborative process automation for knowledge workers.”

Not very intuitive, right?

To Geoffrey Moore’s point, it is very difficult to understand an innovation without one or two familiar reference points. This is particularly true with something as abstract as software. Thus, the graphic below proved to be enormously useful to the class.

On the left side (in green) is enterprise software, which attempts to solve problems through top-down controls.  Although these solutions tend to be complex (requiring IT support) and expensive (big up-front fees and implementation), they hold out the promise of permanently eradicating a serious problem. The implicit assumption is that workers will use the system as designed — an assumption that, experience shows, is often unjustified and unrealistic.

On the right side (in orange) are Enterprise 2.0 tools (like Slack, Zoom, or Yammer). Individual users and work teams like these tools because they increase the velocity of employee communication.  Corporations are happy to support Enterprise 2.0 tools because they are cheap and low risk. But they also don’t produce any structured data that senior managers need to assess and improve organizational performance.

Despite billions of dollars spent on enterprise software and the hype and popularity of Enterprise 2.0, Elfman observes that “virtually all knowledge work and processes are executed outside of these systems.” Instead, in most organizations, workers try to do everything with familiar Microsoft tools:

  • Email is the intake and “collaboration” platform, within and across business units
  • Word documents are the “forms” solution
  • Excel is used for tracking and reporting
  • Sharepoint is used as a document repository

Virtually all legal operations professionals will acknowledge that these tools are breaking down as solutions. They are just not fit for purpose.

Onit (in blue) is trying to fill in the middle ground between Enterprise (green) and Enterprise 2.0 (orange). The key innovation of Onit is that it enables a business process owner to work backwards from how people work (people-centric) rather than backwards from an acute organizational pain point (problem-centric) and thereafter expecting workers to get onboard.

“Bring the work to the people”

When Cambria signed on with Onit, he had a vision to “bring the work to the people.” Where are the people in ADM’s legal department? Probably somewhere near a device where they read their email.

Onit is behind a wide range of automated workflows at ADM, including: (1) matter intake and routing, (2) early case assessments, (3) liability reserves, (4) invoice review and approvals, (5) settlement authority requests, (6) recording of matter disposition, and (7) on-demand NDAs. Yet, for most ADM lawyers, Onit is barely visible:  it’s all point-and-click tasks and hyperlinks embedded inside emails — highly natural acts for lawyers. Cf. Post 040 (per “lawyer theory of value,” lawyers have a strong preference to be left alone to do legal work).

Cambria or a member of his staff are usually the “business process owner” for each of these processes.  Onit is simple and flexible enough for them to do a fair amount of programming on their own — no need to involve corporate or department IT. This is ideal because the legal ops team is close enough to the work to gauge what the workforce is willing to accept. And If they are wrong, adjustments can be made cheaply and quickly.

Nudges and the Onit backend

One way that Cambria drives the broader agenda of the department is to include “nudges” in the Onit workflow.  A nudge makes it modestly more difficult for lawyers to override an established playbook solution. For example, if an ADM in-house lawyer wants to retain a law firm that is not on ADM’s preferred panel list (ADM winnowed 700 law firms down to a preferred provider list of 20, see “How ADM Cut Its Outside Counsel Rosters By 680 Law Firms,” Law360, June 8, 2016), a text box appears that requires a written explanation.  Because this choice requires additional work and invites scrutiny from the boss, it is chosen less often.  Explains Cambria, “I’m always mixing the peas in with the mashed potatoes.”

Although Onit is largely invisible to a substantial portion of the ADM legal department, the Onit applications demo-ed in class — i.e., the backend where David and his staff configure workflows and dashboards — is surprising clean and simple.

David shows us the main dashboard he uses monitor the legal department (16 tiles of information).  He also shows one of the dashboards he built for Cam Findlay, ADM’s general counsel, which provides real-time information likely of interest and value to the C-suite.  Some of the tiles use Tableau to display the information graphically (other data visualization programs can be used).  All of these graphics are generated from data captured by Onit workflow systems.  The data are high quality because Cambria has ruthlessly reduced the number of unnatural acts required by his lawyers.

Diffusion theory wrap-up

Eric Elfman readily admits that Onit targeted Cambria as an early adopter and opinion leader.  Cf. Post 020 (discussing the crucial role of opinion leaders in accelerating innovation adoption).  Eric comments, “David got a whole lot of software for very little money. But we wanted him as a reference client.  And frankly, it’s been worth it.”

Cambria was drawn to Onit because it offered him the possibility of improving the performance of ADM’s legal department without requiring this lawyers to learn new technology or do data entry. This is the novel perspective of a true “visionary” customer as defined in Crossing the Chasm.

These are interesting anecdotes. However, if we want deep learning from this case study, it is important to tie what we see back to the empirically validated principles of diffusion theory.

As discussed in foundational posts 008 and 011, innovation adoption — whether it happens at all, and if so, at what rate — is primarily a function of five innovation attributes. See graphic to right.

In addition, software for managing complexity requires us to evaluate these attributes from two perspectives:

  1. Managers making the purchase decision. These are folks with a serious business problem and a limited amount of time and technical expertise, at least with software.
  2. Workers asked to use a new software solution. These are busy professionals who just want to get their work done.

Arguably, legal departments have historically made the mistake of focusing too much on (1) and underestimating (2). This explains their perennial disappointment with enterprise software.

The table below scores Onit from both perspectives using the simple scoring system developed in Post 011 (fast versus slow innovations):

  • Positive numbers (+1  to +3) speed up the adoption rate
  • Negative numbers (-1 to -3) slow it down
  • Mild effect = -1 or 1; moderately strong = -2 or 2; very strong = -3 or 3
  • No effect on rate of adoption = 0
Factor affecting adoption rate Manager Worker Adoption Analysis
Relative advantage 2 3 Managers get complete, high quality data, albeit after a learning curve. Workers are not asked to perform unnatural acts; minimal change management.
Compatibility -1 3 Managers are business process owners and have to learn cloud software related to workflow; new but surmountable. Workers get to stay within email and Internet browsers; basically this is change that feels like the status quo.
Lack of Complexity -1 3 Managers have to climb a learning curve, but its mostly cloud-based drag-and-drop tools. IT support is minimal. Workers carry on business as usual.
Trialability 2 2 Managers can get started at a low cost (e.g., just one Onit application) and build it out as needed. Worker feedback enables quick and inexpensive changes in process.
Observability 2 -2 Managers can see the high quality data pile up.  For workers, there is a limited ability to observe fellow knowledge workers being more productive. This factor is hard to change. It is also why we laugh at Dilbert cartoons.
Totals +4 +9

The key insight of this analysis is that Onit is likely to enjoy rapid adoption with workers, largely because it places so few demands on them.  Although managers don’t have it so good — they actually have to learn a new technology — it’s likely worth it.  As the ADM example shows, worker adoption occurs in a low friction way; also, senior personnel in the legal department can finally see, measure, and manage essential business processes. From a big picture perspective, this is a potential home run.

During class, Eric Elfman observed that technology start-ups are essentially “a series of experiments until something works or you run out of money.”  According to Cambria, Onit works well.  That is very good news for Elfman and Onit.

What’s next?  See Legal Services and the Consumer Price Index (042)

If a successful large law firm faced an Innovator’s Dilemma, what would it look like?

On the one hand, the firm has a wonderful set of endowments: (1) longstanding and lucrative relationships with industry-leading clients; (2) a business that requires very little operating capital yet generates significant cash and profits; and (3) an established brand that makes it the safe choice against upstart new entrants.  On the other hand, when the traditional service offerings hit a plateau that is likely permanent, the firm struggles to use its superior endowments to reinvent itself in a way that locks in another generation of prosperity. The graphic above depicts the problem.

Many law firm leaders understand the innovator’s dilemma and worry about the timing and execution of reinvention. Thus, at numerous firms, there are internal innovators, or “intrapreneurs,” who are running carefully vetted projects designed to deliver tangible benefits to their firms. In its idealized form, this strategy raises awareness through small wins, which, in turn, create buy-in and momentum for more ambitious change.

We were fortunate to have three law firm intrapreneurs as guest lecturers during Week 5 of “How Innovation Diffuses in the Legal Industry“:

For a summary of Week 2 guest lectures (Pangea3, Practical Law Company, Hotshot), see Post 032. For week 3 (consultative sales at Thomson Reuters), see Post 034. For Week 4 (a deep dive into Axiom), see Post 036.

To set reader expectations, there was a lot to cover in this class. With three great guests, we ran out of time to probe each story with equal depth.  Also, for the purposes of publication, I need to disentangle the principles and lessons of intrapreneurship from the organizations where our guests have worked. The risk is that a discussion of context will be construed as criticism, and criticism was far from the spirit of our discussion.

To resolve this tension, I use the two problem statements below to meld together common themes. After that are specific highlights of each speaker’s remarks.

Problem statement from within the law firm

When we apply innovator’s dilemma and intrapreneurship concepts to law firms, the underlying subtext is that highly educated and successful partners are, as a group, ill-equipped to adapt to a changing legal market.  Assuming this problem statement is true — and I believe it is — why would it be true?

The problem is certainly not lack of creativity.  Within their substantive specialties, lawyers routinely come up with ingenious solutions.  Rather, the challenge is a confluence of experience, perspective, and incentives that create a powerful mental frame that is very difficult for long-time insiders to overcome.

Specifically, for several generations, lawyers in corporate law firms have carried on their craft within a simple business model that required very little time or attention to maintain. In most cases, if lawyers just focused intensively on their clients’ problems, the economic results got progressively better. This was (and is) powerful operant conditioning. As a result, for many law firm partners, the macro-trends of the legal industry are abstractions that carry very little weight.  The only market that matters is the tiny slice each particular partner serves.

Unfortunately, in very few instances are clients speaking with one voice.  In fact, voices vary by adopter type. See Post 013 (providing examples of two major corporate clients expressing completely opposite views on the need for change). Innovator and early adopter clients are drawn to new ways of legal problem-solving, though they’re in the minority.  Similarly, some early majority clients are pushed toward innovation because they can no longer afford solutions provided by traditional law firms, see Posts 032 and 036 (2008 recession led to surge in adoption for Pangea3 and Axiom).  But a sizable portion of the legal market is content with brand firms billing by the hour. If “my clients” feel differently next year or the year after, we can deal with it then.  This narrow client-centric approach is strongly reinforced by most law firm compensation systems.

The above description explains the paradox of the highly successful law firm unable to play its superior hand.  Thus, the innovator’s dilemma is a real strategy dilemma for virtually all large law firms.

Problem statement from the client side

Although clients don’t speak with one voice, the environment they are operating within is becoming more complex, global, and regulated.  This, in turn, is changing the structure of the corporate legal services market — i.e., the macro-level trends that many partners wave away as irrelevant to their practice.

Arguably, the biggest change is growth of corporate legal departments.  For at least the last 20 years, corporate clients have adapted by growing their in-house legal departments and insourcing more repetitive or lower-stakes work that formerly went to law firms. See Post 003 (showing 1997 to 2016 employment trends for lawyers working in government, in-house, and private law firms).

With more and more legal departments becoming the equivalent of large law firms embedded inside corporations, we’ve witnessed the rise of the legal operations movement (CLOC and ACC Legal Ops) and the rise of the “Type 6” client. See Post 005 (presenting a typology of law firm clients).

Legal operations as a profession and field is coming into being because many large corporate clients need more sophisticated methods and systems for managing legal cost and legal risk.  The ascendency of this role is strong evidence that the business-as-usual law firm billable hour model is on a slow but permanent decline, at least for operational “run-the-company” work that accounts for the majority of the corporate legal services market. See Post 034 (discussing trend through the lens of Axiom); Post 010 (discussing trend through the lens of the managed services industry).

The graphic below depicts the market transformation.

In general, legal complexity increases with economic growth.  For about 100 years, we’ve coped with this problem through division of labor and specialization.  This approach created the large law firm. In more recent decades, as the growth-complexity line has steepened, law firms reaped higher profits.

Yet, we have reached a point where division of labor and specialization are no longer a match for the geometric growth of legal complexity. Although clients and law firms experience this pressure as a cost problem, the root cause is lack of productivity gains.  See Post 001 (discussing systemic problems created by lagging legal productivity). To meet this productivity imperative, the legal industry is starting to migrate to new methods of legal problem-solving that are based on data, process, and technology. Indeed, these pressures are why NewLaw exists, financed in large part by venture capitalists and private equity.

NB: All the analysis and charts above frame a structural problem from the perspective of organizational clients. For this group of clients, the problem of lagging productivity is leading to market-based responses, albeit slowly. For individual clients in the PeopleLaw sector (roughly one-quarter of the legal market and shrinking), lagging legal productivity manifests itself through self-representation or people failing to seek any type of legal-based solution. See The Decline of the PeopleLaw Sector 037. In short, these are two distinct problem sets.

So the question is very simple: for large corporate clients, who is going to create the new paradigm? There are three contenders:

  • Legal departments through more legal operations and in-sourcing;
  • Law firms by skillfully playing their superior hand; or
  • NewLaw, which has data, process, and technology as its core competency but has the challenge of being new and unfamiliar.

The answer is likely to be some combination of all three. Yet, it is also likely that many law firms will fall victim to the innovator’s dilemma and be among the losers.

The challenge for law firms is that the business opportunities of a structural market shift require partners to make business judgments about macro-trends at the same time they are under pressure to acquire, bill, and collect hundreds of thousands of dollars or more in legal fees for the current fiscal year.  Unfortunately, this problem can’t be fixed by changing a comp system to reward a long-term focus, as those with a short-term focus are free to leave and take their clients with them.

Kubicki: Intrapreneurship inside a law firm

Among my three guest lecturers, Josh Kubicki has given the most thought to intrapreneurship as an applied discipline. See, e.g., Kubicki, The Intrapreneur’s Dilemma, Medium, Aug. 20, 2014.  During his guest lecture, Josh asked us to envision a simple corporate pyramid that consists of the CEO (at the top), the C-Suite (layer 2), vice-presidents (layer 3), directors (layer 4), managers (layer 5), and line workers (base of the pyramid). “Obviously, we know who’s in charge.”

“Law Firms,” noted Josh, “are much flatter.” He then picked up a grease marker to draw a stylized law firm org chart.

At the top of the pyramid, which may not be a pyramid at all, are partners who are also owners. Although partners are not the CEO, they do tend to act as CEOs of their own practice, particularly if they keep a lot of other lawyers busy.  However, increasing performance and enterprise value of the firm require collaboration across the partner / owner / CEO class.

To do this well, the law firm intrapreneur has to find ways to break down the partitions between partners — the blue lines above — without engendering fear or resistance.  Further, the intrapreneur has to do it with little or no formal authority.  “No matter what your title is, the intrapreneur is part of the professional staff paid for by revenue-generating lawyers.  So the only tool you have is your ability to make someone’s life better in a relatively simple and low-cost way.”

This reality is why Josh relies heavily on design thinking in all his change initiatives.  Josh drew the diagram below, which he called “the trifecta.”

Innovations start as an idea in an innovator’s head.  Once we move to implementation within an organization, however, we move into people’s daily experience — busy people whose job it is to serve others. Even if an innovation will, in theory, make the organization better off, implementation will fail if individual stakeholders have a negative experience that makes their job harder. Thus, successful innovation (Phase I Initiation + Phase II Implementation, see Post 015) is actually a series of properly designed sub-innovations.

A successful sub-innovation requires making the complex very simple, culturally compatible, and highly advantageous to the end-user, ideally with a very fast return-on-investment. Cf. Post 008 (presenting the key factors in Rogers rate of adoption model). If the coordinated sub-innovations all result in a good individual experience, the larger innovation has a chance of being successful. Seen through Josh’s eyes, the effectiveness of the law firm intraprenuer is less about individual brilliance than empathy, listening skills, patience, and budget, as doing this type of work “is very labor intensive.”

The intrapreneur’s intellectual gift is that, for a variety of reasons, they are not stuck inside the frame of the traditional model, often because of some prior life experience that gives them an outsider’s view. (For one of Kubicki’s transformative life experiences, which he discussed in class, read his Intrapreneur’s Dilemma.)  Yet, Josh was emphatic that humility is the single most important attribute for intrapreneur effectiveness. “If something works, congratulate the adopter for their insight and move on.”

Josh described some of the wins of his team but it would be counterproductive to publish them on the web, as Josh believes the credit goes to the entire Seyfarth Shaw organization.

Eric Wood: making partner as a technology innovator

One of the reasons I am carefully chronicling my class is that I want to create a contemporaneous record of how the legal profession navigated the shift from a world of lawyer specialization to one based on multidisciplinary collaboration.  I am confident that Eric Wood’s story is going to be replicated by hundreds of young lawyers who begin their careers at law firms. Yet, Eric was the first to blaze this trail.

Eric is the Practice Innovations and Technology Partner at Chapman and Cutler.  The key word here is partner.  Eric is a 2008 graduate of the University of Chicago Law School.  After a stint at Cleary Gottlieb in NYC doing capital markets work, Eric moved back to Chicago and joined Chapman as a banking and financial services associate.  However, several years ago, Eric quit doing client billable work and instead focused all of his attention on technology-based initiatives.  During this time, his formal title remained associate. And earlier this year, he was promoted to partner.

Practice Innovations and Technology Partner is a new role within a law firm. During his portion of the class, Eric described his work as primarily “R&D” that fell into three major buckets:

  1. Writing code to build legal expert systems and automate the drafting of documentation for a wide range of legal matters.  Often this includes the design of web interfaces so the systems are relatively intuitive for the lawyers, clients, and other personnel who use them.
  2. Designing new technology products and managing their development, release, and maintenance. Often this involves finding ways to scale innovations across multiple practice groups, including via the development of new staffing models.
  3. Other knowledge management and technology projects, such as building transactional metadata databases and data visualizations, evaluating vendor products, and researching technological developments that might affect transactional practice (e.g., blockchains and crypto currencies).

Eric has no formal training in a technical field.  His undergraduate training is in political science and environmental studies.  Instead, he attributes the initial development of his technical abilities in computer coding and database structures to a desire to impress his friends with fantasy basketball data visualizations. That hobby required a lot of scraping of data from websites followed by computational analysis.

Yet, Eric’s work in the legal field enabled him to see cross-over applications. Prior to law school, as an AmeriCorps volunteer with Wyoming Legal Services, he helped build web content to reach the agency’s far-flung clientele. “We had to scale seven lawyers for the entire state, and it was obvious that only technology could do that.”  Likewise, many late nights as a NYC transactional associate gave Eric many ideas for how to automate unpleasant, time-consuming grunt work.

In 2013, as Eric continued to improve his technical skills, he decided it was time to find a outlet in the legaltech world.  However, during this time period, the firm’s Chief Executive Partner, Tim Mohan, began bringing in outside speakers to explain how the traditional practice of law was on the brink of a major shift.  So Eric requested a meeting with Mohan to explain some of this ideas.

Mohan immediately embraced what he heard and Eric stopped doing billable. Now do the math — taking Eric off the billable track is roughly a million-dollar decision ($500/hour x 2,000 per year).  Yet, what is the price of failing to reinvent?

Relatively quickly, the decision proved to be a wise one.  For example, one of Eric’s projects was the automation of closing document sets for finance transactions.  The market no longer pays full price for the organization, indexing, and tabbing of the full deal documentation, yet this work still needs to be done and delivered to the client in a polished, professional, and timely manner.  “What used to take weeks now takes a minute.”  At roughly $500 in staff time (with wide variations based on the size and complexity of the deal) x 3,000 closings per year, this single project is saving the firm roughly $1.5 million in labor that can be allocated to other value-add projects. And that is just one example.

With the encouragement of the firm’s leadership, Eric regularly gives internal demos that have generated significant curiosity and broad buy-in among partners.  Eric notes that these internal sales were often predicated on the quality advantages of technology — of increasing transparency of changes to complex forms and reducing opportunities for error. Yet, the economics are also very attractive.  Chapman and Cutler is a highly specialized financial services firms that does approximately 40% of its work on a fixed-fee basis.  In this context, technology and process enable the firm to continue to charge less than many rival firms while protecting or improving its margins. This is exactly how innovation is supposed to function.

In addition to Eric, other transactional lawyers at Chapman have begun to invest in technical skills, with several automating significant portions of their practice. Part of this transition is made possible by an accounting system that treats “productive” hours related to firm innovation the same as client billable work. Eric gave the example of one  associate who has logged hundreds of productive hours over the past few years working on projects with Eric and his team. In short, Chapman is building more internal capacity.

This is a remarkable story. But can it be replicated by other other law firms?

I think the answer is “not easily.”  First, a firm needs someone like Eric Wood who possesses both deep legal domain knowledge and strong technical skills. Second, the stars have to align so that a leader like Tim Mohan can enable such a person to focus full-time on innovation and execution. In competitive markets, half-time efforts seldom win.  Third, it undoubtedly helped that Chapman and Cutler is a “small” large firm (~230 lawyers) that is focused on a single industry. This makes it culturally and logistically easier to implement change.

Beckett’s business mindset

As noted in Legal Evolution’s foundational posts, innovation is strongly influenced by connections between different social systems. Being on the edge of two or three systems is more valuable than being in the center of one. This is because multiple perspectives enable a person to transcend the dominant local frame and see problems with fresh eyes.

In addition to knowledge of law, all of our guest lecturers possessed a second or third frame for viewing the world. However, the most pronounced example was Jim Beckett, who acquired his legal frame after working five years in sales and distribution in the food industry, helping to grow market share for companies like Frito-Lay and Haagen Dazs.  During this time, Jim was following the advice of his father, who was impressed with Jim’s people skills and aptitude for business. Ironically, Jim’s father was a lawyer, working in-house at KFC.

Then, several years into Jim’s business career, his father had second thoughts.  “Jim,” his father said, “Law doesn’t have enough people who truly understand how businesses work.  If you get a law degree, you’ll go a long way.”  So, as an older student, Jim returned to Indiana University to go to law school.

Jim shared that law school was very difficult for him because the level of abstraction was so far removed from the practical problem-solving he was used to. It wasn’t until he was a law firm associate that we was able to meld the two perspectives.

The business frame, however, remained the dominant perspective.  For example, Jim discussed how he got his first in-house job at Brown & Williamson (a large tobacco company that later become part of RJ Reynolds). “I was the only lawyer they interviewed who could discuss the business issues that were at the core of the company’s legal work.” Further, rather than pursue upward mobility in the legal department, Jim asked to move to the business side, eventually running an RJ Reynolds operating unit in Puerto Rico.

Jim’s multiple perspectives in law and business was one of the reasons that John Crockett, chairman of Frost Brown Todd, recruited Jim to return to Louisville to run business development for the firm. Roughly 10 years earlier, Jim and John had worked together at the firm as billing lawyers. Jim was hired despite his warning that long-term success was going to require significant change, which would make some of Jim’s efforts controversial.

While the firm implemented many client-centric initiatives, Jim eventually became convinced that he could do more good by helping clients focus their purchasing power. Thus, in the summer of 2016, Jim left Frost Brown Todd to become the CEO of Qualmet, a technology company that provides legal departments with a scorecarding methodology that collects, organizes, analyzes, and shares feedback with their outside service providers.

During his lecture, Jim spoke with passion about what happens when lawyers get in full alignment with clients. “All lawyers want to do a great job. Unfortunately, very few are getting the information they need to take their practice to the next level.”  Jim believes that structured metrics and dialogue will enable clients and law firms to smoothly transition into the world of data, process, and technology.  Jim see this as not as a question of “how”, but “when.” Today’s CEOs expect their GCs, CLOs and in-house teams to drive business value that aligns with their respective company goals and objectives. Jim wants to bridge the “value” gap and sees 360 performance management as a critical piece to accelerate alignment. “Value creation is no commodity,” Jim observed, “So all stakeholders will benefit when performance is properly measured.”

Qualmet’s scorecarding methodology is closely related to Dan Currell’s post on the necessity of active outside counsel management. Convergence alone can’t deliver the desired results. See Post 031.  Thus, scorecarding will be the topic of a future post.

What’s next?  See “The Lawyer Theory of Value” by Casey Flaherty (040)

On Wednesday, November 29 from 6 to 8 pm at Northwestern Law, student teams in my “How Innovation Diffuses in the Legal Industry” give their capstone presentations. Topics include Everett Rogers’ rate of adoption model (see Post 008), the role of change agents (see Post 020), and crossing the chasm (see Posts 024, 025, 026).

If you want to attend and learn, please email me. We have a small class in a big room, and interest from mid-career professionals will energize these terrific students.

What’s next? See Can Intrapreneurship Solve the Innovator’s Dilemma? Law Firm Examples (039)

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

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

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

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

Tom Finke’s story

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

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

Used cars

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

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

“It’s hard to escape law”

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

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

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

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

The early days of Axiom Chicago

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

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

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

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

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

Axiom’s evolving business model

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

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

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

An example: The Kraft/Mondelez spinoff

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

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

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

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

Where things are going

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

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

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

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

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

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

A changing talent market

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

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

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

An focus on technology

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

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

Diffusion theory takeaways

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

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

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

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

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

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

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

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

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

Week 3 of my “How Innovation Diffuses in the Legal Industry” class focused on the crucial role of consultative sales and established distribution channels in the diffusion of innovation.  The success was entirely due to our guest lecturers from Thomson Reuters, pictured above.

The value of this class, however, will not make sense without first providing some real-world context. So let’s start there, circling back to diffusion theory and how Borstein, Thorkildsen, and Stroka are, in fact, “change agents” as defined in Post 020.

For the Week 2 wrap-up, see Post 032.

 February 2014: Meet-up of legal start-up entrepreneurs

At a meetup of legal start-up entrepreneurs convened in the shadow of ALM’s 2014 LegalTech show, David Perla, Josh Kubicki, and Rob Saccone dispensed advice to the standing-room only crowd.

One comment I never forgot came from David Perla [Week 2 guest lecturer], who scoffed at the notion that Thomson Reuters, Lexis, Wolters-Kluwer and other serial acquirers were not a significant part of the innovation ecosystem. Perla stated emphatically that some of the smartest business people in the legal industry worked inside Thomson Reuters. “They definitely have some brilliant people that understand how business works; how people make decisions; how to lever off brands and established customer bases to build up dominant businesses.”

Perla, who was long gone from Thomson Reuters by then, was warning the audience not to get arrogant, overestimating our own creativity and underestimating the acquirers’.  As the co-founder and active operator of a legal industry start-up, see Post 004, I had, by February 2014, consumed enough humble pie to not want any additional helpings.  I didn’t understand Perla’s observations at a deep level, but I stored them away in my mind for possible future use.

March 2016: Chicago Legal Innovation & Technology Meetup

Fast forward to the spring of 2016, where Dan Linna, Dan Katz and others are running another iteration of the Chicago Legal Innovation & Technology Meetup (this one in the shadow of the ABA TECHSHOW).  I’m on a panel with Joe Borstein, who is running sales for Thomson Reuters legal managed services unit (formerly known as Pangea3).  I remember saying to myself, “This Borstein has better intel on the legal start-up market than anyone I’ve ever met. And where in the world did he come up with these slides? They’re gold.”  In addition to being funny, Joe also had a knack for simplifying the complex. People liked listening to him.

July 2017: Chicago/Milwaukee Regional Meeting of CLOC

Fast forward again to July of 2017. I’m attending the Chicago/Milwaukee regional meeting of CLOC. Paul Stroka, Director of Legal Solutions at Thomson Reuters, was paying for lunch and arranged for some educational programming, including an overview of emerging legal technology from his colleague, Rebecca Thorkildsen.

Two things stuck in my mind from that meeting:

  1. Paul Stroka had a wonderful light touch, doing whatever he could to facilitate a higher-value meeting for CLOC members, never once engaging in anything that felt like a sale pitch.
  2. Paul’s colleague, Rebecca Thorkildsen, was the single most knowledgeable person on legal technology that I had ever met, providing useful framework after useful framework for understanding the bewildering arraying of technology that was now coming into the marketplace.

And then the lightbulb goes off — “This is what Perla was talking about. These are extremely knowledgeable professionals who are growing business units at Thomson Reuters.”  Thus, before the meeting ended, I asked Paul and Rebecca to come to my “How Innovation Diffuses in the Legal Industry” class at Northwestern Law in the fall, and, if possible, include Joe Borstein.

Consultative Sales — what it is and when and why it works

In the anecdotes shared above, the common theme is consultative sales.  Borstein, Stroka, and Thorkildsen are subject matter experts who are sincerely focused on listening, educating, building relationships, and problem solving.  This is a relatively expensive “long-game” approach. Yet, its underwriter is Thomson Reuters, a legal information giant that deeply understands the economics of sales and distribution through decades of selling books, practice guides, and online subscription services.

To boil it all down, consultative sales works best when (a) prospective clients are struggling to understand their own business challenges, often due to significant or rapid industry changes, and (b) your products provide the best solutions to a reasonable subset of those challenges.  Although your educational and problem solving efforts will sometimes point prospective clients toward another vendor, they are sure to come back to you when they need your specific product. Moreover, they will refer you and your product/service to their industry peers.

It should be obvious that this wonderful long-view approach is unavailable to fledgling legal start-ups who need sales and reference clients before they run out of cash.  In many respects, today’s legal industry is similar to the automotive industry circa 1905:  There are hundreds of small car builders who rightly believe that cars are the future — it’s just not going to be their car.  This is because the industry inevitably must consolidate into a smaller number of dominant companies that can simultaneously focus on both quality and cost while building a sales and distribution network that can handle the complexities of warranties, service, parts, and repairs, etc.

As Thomson Reuters knows as well as Ford or General Motors or Chrysler did back in the day, in addition to projecting stability to your client base because of your size and client base, there are tremendous economies of scale to selling.  That is why Thomson Reuters can afford to field an A-team of seasoned lawyers (Borstein and Stroka) and MBA consultants (Thorkildsen) to educate the market.

Example of educating the client

I specifically asked the Thomson Reuters crew to walk the class through materials they use when interacting with prospective clients.  Below are three key slides presented by Rebecca that beautifully illustrate the value and power of consultative sales, particularly in a crowded and confusing marketplace like legal circa 2017.  Note the three slides below have a contract/transaction focus. The next section touches on litigation.

Here’s the basic set-up: Imagine you are a legal operations professional working in the legal department of a large global company.  The goal of the company is to grow and prosper economically — and for 365 days a year, that requires the company to form and execute contracts.  Obviously, because of the scale of the business, those contracts become an enormous management challenge.

In 98% of all cases, the legal department lacks the time (and often business training) to understand their challenges within a broader system framework.  Note how Slide 1 divides the world into legal and business drivers (left side) and provides an lifecycle framework for overall contract management (right side).

The purpose of Slide 1 is to help the client identify, organize, and ultimately prioritize their internal pain points.  The legal professionals, after all, want to impose order on their massive workload and feel like they are delivering consistent value and quality to their business unit.  It is a good sign when a prospective client asks for your slide deck, as it means you’ve connected with a real problem.

Again, if you are a legal department operations professional, you are constantly being pitched by a bewildering array of technology vendors. Invariably they ask themselves, “What do all these company do?  And how do they relate to one another?”  Slide 2 places the vendors into categories based on functions and features.  With this one slide, you know where to focus your time.

What is remarkable about Slide 2 is that Thomson Reuters products are mixed in with competitors but not in a way that makes them identifiable.  Let the customer react and talk and, over time, a large number of good fits will be revealed.

Slide 3 uses a similar approach.  However, now it’s organized in a way that maps onto the department’s legal functions and workflow.

If Rebecca Thorkildsen spent an hour or two with you, sharing company materials and helping connect your problems to potential solutions, most professionals will reciprocate by buying from Thorkildsen’s company when the need and product(s) are a strong match.  Why? Because the problems never end and they want access to her expertise in the future. That’s the Thomson Reuters’ long game.

The careers of two ex-litigators tell an important story

While Thorkildsen has a tremendous command of legal technology, particularly in the contracting space, Joe Borstein and Paul Stroka shared some personal experiences from their time as lawyers that were (a) useful in understanding the arc of the broader legal market, and (b) the personality and mindset of someone who is likely to be good at consultative sales.

Borstein told the story of cutting his teeth as a litigation associate at a major law firm where he was put in charge of managing a team of several dozen professionals on a massive document review for a bet-the-company case.  Although the work was generating tens of millions of fees for the firm each year for several consecutive years, the process was highly inefficient and plagued with quality control issues. “From the inside, it was obvious that the system was broken.  Friends of mine at other firms were drafting business plans for new ventures. There was no way the status quo was going to last.”

Then came 2008, which had a massive effect on the client-law firm relationship.  If you recall from Post 032 (featuring Pangea3 co-founder David Perla), the financial crisis was Pangea3’s breakout moment. By the time Borstein joined in early 2011, the company had a marquee list of large corporate clients.  Although the entire sales team had, by then, written off law firm customers as a “hopeless cause,”  Borstein persuaded Perla to let him try.  “I was convinced there had to be people who had my experience — who were worried about quality, meeting deadlines, and damaging the firm’s reputation.  Further, it wasn’t the right kind of work for brilliant people from great law schools.”

Much to the surprise of his peers, Borstein’s approach ended up cracking the code for law firms.  “It’s still a tougher sale,” said Borstein, “but law firms are now an established part of our client base, and it’s growing.”

Like Borstein, Paul Stroka’s experience inside BigLaw made him skeptical of the business. “As an entry-level associate benefiting from the salary wars of the mid-2000s, I couldn’t understand why my salary kept going up even though I didn’t know anything useful yet.”  As he switched firms and focused on labor & employment litigation, he was troubled that success as a partner looked like having a base of clients who got sued a lot with cases that lasted a long time. “Litigation is usually a miserable experience for clients on both a cost and emotional level,” recalled Stroka. In his ninth year of practice, Stroka concluded that “I needed to be in a place where I was working to make some of those problems go away.”

At the time, Pangea3 didn’t have an open sales position. But Borstein was impressed by the persistence of a Chicago litigator who keep messaging him on LinkedIn and requesting a meeting.  Eventually Borstein flew Stroka to New York City to see if opportunity might be knocking. “It is very hard to find people who are good at this job,” said Borstein. “We make rain by listening to problems and finding good fits.  Paul has that very rare skill set.” Interestingly, Stroka commented that he has become a much better problem solver since joining Thomson Reuters, because that has become the primary focus of his job.

I pressed Borstein on the rainmaking point. He explained that outstanding BigLaw rainmakers use this same problem solving sales approach. However, they are constrained because the clients end up wanting them to also do the work. “In these big cases, the big-producing partners are pulling all-nighters with the associates. Law is the only business where the salesperson actually has to do the work. That is an enormous constraint of their model.”

An “ugly” but important slide

My original impressions of Borstein, Stroka, and Thorkildsen were strongly reinforced by their visit to my class. They have a tremendous grasp of the market, owing in part to their lengthy legal industry work experience, but more importantly because of the time they devote to visiting clients, reviewing data, reading industry press, and connecting with others in the industry.  This enables them to produce work product that dramatically simplifies a very complex and rapidly changing industry.

A good example is Slide 4 below, which Borstein described as “ugly but profound.”

Slide 4’s key takeaway is that the historical bi-lateral relationship between law firm and client is now being supplanted by a collaboration among multiple parties.  Obviously, Thomson Reuters has positioned itself as a technology and alternative legal service provider (ALSP), see Post 010 (discussing the rise of managed services), but that doesn’t make the graphic any less useful for understanding industry change. And note, Thomson Reuters senior leadership likely saw this more than a decade ago.

There are legions of high-IQ people in law, but the vast majority of them are very busy trying to hit this year’s revenue targets, leaving precious little white space for fact-gathering and reflection. This dynamic gives a company like Thomson Reuters an enormous advantage in seeing and understanding the big picture.

Borstein and Stroka commented that what has happened in the litigation realm over the last decade — with, for example, predictive coding, legal process outsourcing, and the rise of managed services — is about to happen in the transactional realm.  That’s too big a topic to cover here. If you want the same education, invite them in for talk.

Thorskildsen is a lawyer, right?

It’s time to wrap this post up and connect it to diffusion theory.

Rebecca Thorkildsen is often asked where she went to law school.  She replies, “I didn’t go to law school.  I have an MBA.” Fortunately, when that question gets asks, it is usually because Thorkildsen has impressed someone with her command of complex, law-related materials or her excellent, organized communication style.  During class, Borstein observed that it shouldn’t matter whether a professional working with lawyers has a law degree, “but often it still does.”

Thorkildsen explained that after graduating from business school in 1995, she joined Arthur Andersen as a consultant. “One of my first assignments was to help implement an email system inside a law firm. The next assignment was with a corporate legal department.  In the consulting world, that can quickly turn you into an industry specialist.”  Thorkildsen subsequently joined Baker Robbins, a technology consulting firm focused on legal clients, which became part of Thomson Reuters in 2000.

The connection to diffusion theory

As noted in foundational posts 020 (on change agents and opinion leaders) and 024 (crossing the chasm), consultative salespeople are often the key change agents within an industry.  In most cases, two personal attributes are threshold requirements for effectiveness: (a) cultural similarity with clients (referred to as homophily) and (b) credibility in the eyes of clients.  The observations and experience shared by the Thomson Reuters team certainly corroborate the theory.

Yet, this insight has deeper significance for the legal industry.  Specifically, it suggests that crucial non-legal innovations related to legal productivity, such as data, process, and technology, will tend to diffuse faster when the communication channels are lawyer-to-lawyer, even when the underlying content is entirely non-legal. Some might call this snobbery or prejudice, but according to diffusion theory, it’s just a recurring feature of any social system, including law.

Finally, below is a diagram from Post 020 that ticks off the factors that enable a change agent to be more effective at accelerating innovation adoption. Isn’t it obvious that the consultative salespeople at Thomson Reuter hit them all?

For additional analysis for these seven factors, see Post 020.

What’s next?  See Mark Chandler Speech from January 2007 (035)

As the above syllabus excerpt suggests, there is now a law school course on how innovation diffuses in the legal industry.  This new ground is being tilled at Northwestern Pritzker School of Law, where I am visiting this fall.  It is one of the few courses at Northwestern Law that enrolls both JD and Masters of Science in Law (MSL) students.  This enrollment is ideal, as the diverse educational backgrounds and professional experiences of the MSL students are a terrific complement to the 2L and 3L students who have already internalized a surprisingly large amount of legal culture.

The class started last Monday (10/16) and runs for eight classes.  As diffusion theory is part of an applied research tradition, see Post 004, we spent exactly one class on the underlying theory and the legal industry before moving to examples.

The examples are supplied by legal innovator and early adopter guest lecturers.  For Week 2 (10/23), we had the pleasure of hosting David Perla, co-founder and former co-CEO of Pangea3, and Ian Nelson, who was part of the original US sales team of Practical Law Company (PLC) and more recently co-founder of Hotshot, a tremendously innovative e-learning company focused on legal professional development.

NewLaw and legaltech start-ups are now widely covered by the legal press. But that was hardly the case during the booming mid-2000s when all the focus was on soaring BigLaw profits and salaries.  I wanted to start our guest speaker series with David and Ian because during this hey day period, both quit top-of-the-food-chain jobs to pursue obscure and speculative business opportunities (David in 2004 and Ian in 2006).  At the time, the future we are now living in was far from obvious.  Yet, when their respective companies sold to Thomson Reuters a few years later at valuations and multiples on-par with highly successful Silicon Valley start-ups, it became clear that NewLaw and legaltech were sectors with enormous opportunity for the innovative and ambitious.

Perla’s story

Over the years, I have heard several renditions of Pangea3 founder stories.  But Monday’s edition provided a new twist, as David focused on the preeminent importance of professional relationships and how, in hindsight, the long game is the only game that really matters.

David went through a long litany of examples of how a decade’s worth of professional contacts accumulated since law school (by both he and Pangea3 co-founder Sanjay Kamlani) were crucial to opening doors or indirectly supporting the fledgling start-up.  From getting free access to 1,200 Indian lawyer resumes from Monster.com so the duo could stand-up a work team in India over the course of a few days (David had just quit the GC position at Monster to launch Pangea3); to several months of office space at Katten Muchin so Pangea3 could signal a midtown Manhattan address (David was a former Katten associate); to an initial investment by a prominent Indian-American lawyer who had credibility in both US and India venture capital and legal circles, thus greasing the skids for everything that followed (this came through Sanjay’s tenure at PWC and OfficeTiger, a first-generation business process outsourcer in India), each story illustrated the tremendous importance of relationships. Cf. Post 020 (discussing crucial role played by “weak-tie” relationships in the diffusion of innovation).

The most surprising and powerful story was David’s family connection to the head of litigation of a major global bank.  The family friend took David’s call, but said at the outset,  “I am happy to help you in any way I can through mentoring and coaching, etc., but I’m never going to send any documents to India.”  David replied, “I understand.  Is it okay if I check in with you every six months?” The head of litigation said “Sure.”  David foreshadowed that this connection would turn out to be key to the ultimate success of Pangea3.

In the meantime, David and his colleagues were trying to crack the code of the large global banks.  One of their prospective customers broke the disappointing news that “we innovate in our trading strategies, but not in operations or sourcing. For that stuff, we’re a second mover. So if you want us to hire you, go get [list of global banks] as one of your customers. Then we can talk.”

Fast forward a couple of years, the big break for Pangea3 was the turmoil in the financial services market in the fall of 2008 and the resulting global recession.  David fields a call from one of his board members, who buoys his spirits, “Doubledown on sales; recessions are good for outsourcing.”  Shortly thereafter, David takes a call from the family friend / head of litigation at the major global bank. “David, the General Counsel just informed us that our budget has been cut by 25%. I know I said never, but never just happened.  Can you be here this week for a meeting?”

That meeting resulted in Pangea3 landing its largest and highest-profile client, which in turn sped up the sales cycle for several other large banks waiting to go second. David acknowledged that he did not have the benefit of diffusion theory when he was building Pangea3.  Yet, on both the investor and customer side, he could see how certain key early adopters had the effect of making a wide array of disparate pieces fall into place.  David specifically referred to these people as “influencers.”  Cf. Post 020 (discussing how “opinion leaders” within a social system are “able to informally influence other individuals’ attitudes or overt behavior in a desired way with relative frequency”).

Nelson’s story

I first met Ian Nelson in the fall of 2008 at a legal innovation conference–in hindsight, the first of its kind–organized by USC law professor and economist Gillian Hadfield. By 2008, Ian had been working at PLC for two years, initially in content creation but then transitioning to a lead role in sales.  Although PLC had already become a dominant force in the UK, the US was a bigger market governed by different law.  Thus, for all practical purposes, Ian had joined a US-based start-up.

There are two reasons why the PLC model is highly relevant to anyone interested in legal innovation.  First, Thomson Reuters’ acquisition of PLC in 2013 remains the high-water mark for financial success among legal industry entrepreneurs.  See “Thomson Reuters buys Practical Law Company,” Telegraph, Jan. 23, 2013 (reporting the size of the deal between £200 and £300 million, all of it achieved without outside investment). Second, there remains a wide array of activities currently performed non-expertly by law firms and legal departments that could be turned into highly successful businesses by carefully applying the core logic of the PLC model. In fact, this logic is very much at work at Ian’s current company, Hotshot. Thus, let’s briefly review the PLC model.

Practical Law began life in 1990 as a trade journal focused on the UK legal market. Some of the most popular features were practice tips that pulled together and explained the technical aspects of new and emerging methods of finance.  This is not surprising because PLC’s two founders, Robert Dow and Chris Millerchip, began their careers as associates at Slaughter and May, a leading Magic Circle firm specializing in M&A and sophisticated corporate finance.  Quipped Millerchip, “We created the thing that we wanted when we were practicing.” Ross Todd, “Web Practice Tools for Transactional Lawyers,” Legaltech News, Jan. 23, 2009.

With the growth of the web, PLC’s offerings became simultaneously better and easy to access via an online subscription model.  Relatively quickly, firms were being placed in a competitive disadvantage if they lacked access to PLC work product, which included document templates, standard clauses, practice guides, and deal checklists. In theory, firms could create this content on their own.  Yet, the ability to scale across the entire corporate bar enabled PLC to deliver higher quality work product at a much lower per-unit cost. In effect, PLC had become a privately run shared service relied upon by the vast majority of top UK law firms. The economics of a shared services model make it virtually impossible to dislodge a well-run first mover — and PLC fit that description to a tee. Cf. Thiel, Zero to One 97-98 (2014) (“[M]oving first is a tactic, not a goal. …  It’s much better to be the last mover—that is, to make the last great development in a specific market”).

During his guest lecture, Ian recounted his early days as a NYC corporate associate when he first encountered some of the quality gaps later filled by PLC and now being targeted by Hotshot.  The first instance occurred within a few days of hiring when Ian was dispatched to a far-flung city for due diligence on a “reverse triangular merger.”  The supervising partner instructed Ian to review a large volume of contracts and flag anything that “looked weird.”

Despite his law review credentials, Ian had no idea what a reverse triangular merger was, much less the definition of weird. Thus, for the next 48 hours, Ian was thrown into a silent panic, fearing that his legal ineptitude would should be exposed to the world. Yet, what he soon discovered was that neither the partner (and apparently the client) cared about the inefficiency of the process, as Ian’s overinclusive approach to copying “weird” provisions for further study at the firm’s headquarters was all being billed by the hour. Had Ian had access to Hotshot, he would have had on-demand videos and practice guides enabling him to get the answers that the supervising partner lacked the time or interest to provide.

A second formative incident occurred a couple of years later when Ian headed to London to work on-site at a UK firm that was co-counsel on a major transaction. During a tour of the office, Ian was shown the cafeteria, the copy room, and the work area for the PSLs.  Ian asked, “What’s a PSL?”  He was flabbergasted to learn that in the UK it was common practice to have “Professional Support Lawyers” who were responsible for, among other things, organizing and cataloguing the firm’s work product so the very best precedent could be quickly located for use on future client matters.  Ian subsequently returned to the US and lobbied his firm for the creation of a similar role, as it would replace the then-common practice of firm-wide emails soliciting documents that could be used as a starting point for current client matters. Upon hearing these ideas, however, the partners shrugged with indifference.

Six years into corporate law practice, these were some of the formative experiences that caused Ian to respond to a job ad for PLC — experiences that really struck a chord with the students. At my request, Ian did a deep dive into Hotshot. However, Hotshot as a business and product offering warrants its own future post.

What diffusion theory insights did we learn?

As I reflect on Week 2, three themes stand out.

  1. There is no innovation without execution. It’s easy to discuss innovation as something conceptual, but until the early adopter end-user receives full value, innovators are just trafficking in ideas.  Although this terrain is covered in LE’s “Crossing the Chasm” and “Hype Cycle” series, see, e.g., Posts 024–025, it was made more vivid by Perla’s description of solving funding and operational challenges while also hunting down the early adopter customers. Standing up a quality-first operation in India (the putative innovation) is extraordinarily complex, time consuming and costly. Although Pangea3 was able to hit its ambitious sales targets relatively early, the time span between a signed deal, doing the work, and getting paid — particularly when large corporate clients string out vendors for 45 to 90 days — resulted in a “near death” experience for Pangea3. Suffice it to say, there is enormous risk in translating an idea into an innovation that warrants diffusion. Innovator-leaders like David and Sanjay who can skillfully coordinate the technical talents of others are very rare and very valuable.
  2. There are usually several social systems that matter; not just one.  As I listened to David and Ian, it became obvious that several social systems were interacting with one another.  For example, David describes how inroads with the New York global banks had little to no impact with legal departments at large US tech companies.  In fact, it was an investment by famed Silicon Valley VC firm Sequoia Capital (on less favorable terms that other VC shops, though the discount was worth it) that opened doors with tech companies on the west coast and, in turn, reverberated throughout India, signaling to young Indian lawyers that Pangea3 was the firm to join.  In Ian’s case, the early adopters at Hotshot were all Silicon Valley-based law firms who saw real advantages to having better-trained associates who could actually understand and do the math in venture capital deals.  A credible roster of west coast-based AmLaw 200 firms were eventually enough to open doors on the east coast and in the midwest where the deal flow was more traditional M&A.  Cf. Post 004 (“Rogers’ core insight … is that the diffusion of innovation is a process that occurs through a social system“).
  3. Relative advantage, cultural compatibility, and trialability really matter.  Apparently, for a large global bank, the difference between “never” and “this week” is a 25% budget cut.  Thus, drawing upon the Post 008 rate of adoption model, Pangea3’s big break turned on a sudden shift in the “relative advantage” of legal process outsourcing. Likewise, regarding cultural compatibility, both David and Ian emphasized how their status as former BigLaw corporate lawyers, including knowledge of cultural norms related to speech, dress, and credentials, opened both minds and doors.  Finally, Ian gave examples of how trialability was key to making sales for PLC and Hotshot, while David discussed how small projects resulted in growing sales, including a mandate from a major client that Pangea3 would be used by all outside counsel for all large-scale document reviews.  Apparently, nothing is more convincing than tasting the soup.  If it tastes good, your early adopter customers will set off a chain reaction (within a firm or legal department, or among peer firms or legal departments) that will do the work of an army of salespeople. Cf. Post 025 (Geoffrey Moore noting that word-of-mouth marketing is essential to crossing the chasm).

Week 3 of How Innovation Diffuses in the Legal Industry features three highly accomplished Thomson Reuter professionals:

  • Joe Borstein, Global Director of TR’s Managed Legal Services (formerly Pangea3) and Innovation Columnist at Above the Law
  • Rebecca Thorkildsen, Global Director of Legal Solutions (a person with an amazingly broad and deep grasp of the rapidly expanding legal ecosystem)
  • Paul Stroka, Director of Legal Solutions (a very capable corporate lawyer who has a deep understanding of consultative sales — i.e., selling as a second-order effect of customer problem solving — which is the core skill of a change agent)

I’ll do my best to pass along what we learn.

What’s next?  See The 2017 Forum on Legal Evolution (033)

Do academics and practitioners believe they have much to learn from each other?  If we look for evidence of meaningful exchange — shared conferences, the prevalence of journals that appeal to both groups, or just the quantity and quality of listening that occurs when both are in the same room — the answer appears to be “not much.”  Why is that?

Part of the reason likely turns on status.  The academy and practice have different reward systems, with little reserved for plowing the middle ground. Yet, what happens when two groups of smart people working on the same problem set effectively tune each other out, not necessarily out of disrespect, but just so they can finish what they perceive as their real work?

This post (026) offers some insight into this question. Post 026 also completes a three-part series on “Crossing the Chasm” and the “Hype Cycle” (two well-known practitioner frameworks) and is the final post in Legal Evolution’s foundational series on diffusion theory (something likely perceived as academic).

Posts 024-026 are the final installment of Legal Evolution’s foundational series on diffusion theory. Readers seeking to influence innovation within the legal industry will be more successful if they obtain and apply this background knowledge. Care has been taken to make this information non-technical and accessible.

In Part I (024), I wrote that it is important to understand Crossing the Chasm “from the perspective of Moore and his audience — i.e., as practical business advice being dispensed to entrepreneurs.” Now it’s useful to explore the full origin of these ideas.

Origins of Crossing the Chasm

During the 1980s, Geoffrey Moore was a partner at Regis McKenna, Inc., a Silicon Valley marketing firm. In the 15 years prior to Moore’s arrival, the firm’s legendary founder, Regis McKenna, had provided counsel to an extraordinary roster of technology start-ups that went on to become industry giants (e.g., Apple, Compaq, Intel, Lotus, Microsoft, National Semiconductor, Silicon Graphics, and 3COM).

According to the account given by Moore in Crossing the Chasm, the dominant business framework relied upon by the Silicon Valley start-up crowd was the Technology Adoption Life Cycle (see top graphic above).  Although there’s no reason to doubt Moore when it comes to Silicon Valley terminology, the Technology Adoption Life Cycle is, in fact, the Rogers Diffusion Curve (see second graphic above).

Although Everett Rogers is not cited anywhere in the first edition of Crossing the Chasm (or in the third edition published in 2013), Moore apparently had some vague knowledge of the model’s origins.  In the first chapter, Moore writes, “People are usually amused to learn that the original research that gave rise to this model was done on the adoption of new strains of seed potatoes among American farmers.”  (The underlying research involved mostly corn farmers, see Rogers’ 1958 article.) Moore continues, “Despite these agrarian roots … the model has thoroughly transplanted itself into the soil of Silicon Valley” (p. 11).

Ironically, the core thesis of Moore’s book is that the Technology Adoption Life Cycle model (aka the Rogers Diffusion Curve) contains a serious flaw.  Moore writes, “The basic flaw in the [Technology Adoption Life Cycle] model … is that it implies a smooth and continuous progression across segments over the life of a product, where experience teaches us the opposite” (p. 56).  Hence, Moore’s insertion of the chasm to create the “The Revised Technology Adoption Life Cycle” model.  See figure below.

In making this change, Moore was not the slightest bit burdened by the decades of empirical research that backed up the original model. We know this to be true from the acknowledgements at the beginning of the first edition of Crossing the Chasm.  Moore, who has a PhD in English Literature, writes:

Prior to the world of high-tech, I was in English professor. One of the things I learned during this more scholarly period of my life was the importance of evidence and the necessity to document its sources. It chagrins me to have to say, therefore, that there are no documents or summary of evidence anywhere in the book that follows. Although I routinely cite numerous examples, I have no studies to back them up, no corroborating witnesses, nothing. [p. xv]

If Moore has no awareness of the original source material, how was Rogers’ work transmitted to Silicon Valley? In fact, the most likely route is a textbook example of Rogers own theory in action.

In 1975, Everett Rogers joined the faculty of Stanford University, where he stayed for approximately a decade. During this time, Roger became interested in how the distinctive high-tech culture shaped the region’s business and academic norms.  Thus, Silicon Valley got incorporated into Rogers’ research. See, e.g., Rogers & Larsen, Silicon Valley Fever: The Growth of the High-Technology Culture (1984); Rogers, The High Technology of Silicon Valley (1985).

What seems likely is that the basics of diffusion theory, including the diffusion curve, were shared with some of Rogers’ research subjects and other professional acquaintances.  In turn, some — likely the innovators and early adopters —  applied Rogers’ ideas to the problems of high-tech marketing.  Because the diffusion curve proved to be quite useful, it was shared throughout Silicon Valley’s “social system” as the Technology Adoption Life Cycle, a title that fit its purpose.

Several years later, Moore, reflecting upon his experience and desiring to communicate a strategy that (a) his clients could understand, and (b) would cause them to avoid financial ruin, came upon the chasm as a better description of his clients’ core dilemma.  Ironically, this adaption of Rogers’ own ideas is what diffusion researchers call “re-invention.”  See Diffusion of Innovations 180 (5th ed. 2013) (defining re-invention as “the degree to which an innovation is changed or modified by a user in the process of its adoption or implementation”).

Eventually Moore’s re-invention came to Roger’s attention. In the fifth edition of Diffusion of Innovations, Rogers writes:

The five adopter categories … are ideal types, conceptions based on observations of reality that are designed to make comparisons possible. … Pronounced breaks in the innovativeness continuum do not occur between each of the five categories, although some scholars claim that a discontinuity exists between the innovators and early adopters versus the early majority, late majority, and laggards (Moore, 1991). Past research shows no support for this claim of a “chasm” between certain adopter categories. On the contrary, innovativeness, if measured properly, is a continuous variable and there are no sharp breaks or discontinuities between adjacent adopter categories[.] (p. 282).

As an academic, I understand that the chasm is not supported by data.  Yet, as someone who spent several years in a data analytics start-up company, I know there is a second question worth asking–is there benefit in having the team believe there is a chasm so, in an effort to avoid it, we adopt a laser-like focus on endusers very different than us?  The answer, of course, is yes. See Parts I-II (024–025).

Theory and Practice

As I describe the origins of the Technology Adoption Life Cycle and the chasm framework, I hope it is obvious that I am not passing judgment on Geoffrey Moore or his Silicon Valley peers. In fact, the opposite is true.

Crossing the Chasm has sold 300,000+ copies because it addresses an important problem — generating sufficient sales before start-up funds are exhausted — in a lucid, non-technical way that is loaded with industry context.  It is noteworthy that solving important problems in a simple, culturally compatible way is the precise advice that flows from Roger’s empirical work. See Post 008 (listing high relative advantage, low complexity, and cultural compatibility as key factors in rate of adoption). In fact, the guidance provided by Crossing the Chasm is remarkably consistent with Diffusion of Innovations.  This is a testament to Moore’s powers of observation and his effectiveness as a business counselor.

Yet, does Moore’s example prove that practitioners have little to learn from academics? Or, stated another way, that the most valuable lessons have to be learned in the trenches and communicated as business lore? I am skeptical of this claim, particularly as it applies to lawyers.  If the slow pace of innovation is now threatening the viability of our organizations and the legal profession as a whole, we don’t have time to sort out whose “more practical” ideas to follow or, for that matter, whether any of them really work.  Instead, we need to seek out valid, reliable data.

The attenuated connection between Rogers (a university academic specializing in applied research) and Moore (a marketing practitioner) illustrates a tension experienced by those of us “in the field” doing either applied research or working as change agents.  Applied research is generally not esteemed by university colleagues, primarily because it’s viewed as problem-solving (what practitioners do).  University professors are supposed to create knowledge.  See Post 001.  Yet, among practitioners, the work of applied researchers is often perceived as too academic and a distraction from keeping a paying client happy. As a result, the middle ground tends to be pretty barren.

It’s a long journey from pure university research to innovations that can be packaged and sold to demanding private sector clients at a profit. That journey is made longer, however, because people in different camps are reluctant to invest the time to listen to one another, as it takes effort to overcome communication and cultural gaps. See Post 020 (discussing challenges of change agents).  The great psychologist Amos Tversky once quipped, “The secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.” Michael Lewis, The Undoing Project (2016) (quoting Tversky).

Innovation is advanced when disparate social systems–like Rogers’ and Moore’s respective professional networks–remain connected with one another. Although the information exchanges will tend to be more cognitively taxing than exchanges with peers, the resulting insights justify the effort. See Post 020 (noting that innovation travels through “weak ties” on the social system’s periphery with innovators and early adapters serving as connectors). In the case of Rogers and Moore, the contact was incidental rather than planned. Nonetheless, the power of the underlying ideas was sufficiently great to leave an indelible mark on the high-tech industry.

Nothing left to chance

As this is the last post in Legal Evolution’s foundational series, I’ll reinforce what I hope is an obvious point–in the year 2017, none of this needs to be left to chance. There is a well-developed science of innovation diffusion. As we struggle with the many problems created by lagging legal productivity, see, e.g., Post 006 (discussing  how lagging legal productivity is affecting court systems and the demand for law grads), we can use diffusion theory — and Geoffrey Moore’s brilliant metaphorical conceits — to accelerate the adoption of innovation. Further, we can do it at a lower cost and with significantly less risk.

The price of admission is investing the time to learn a seeming academic theory. Many of your colleagues will think this is a dumb and impractical use of their time, albeit they don’t see the world through the eyes of an innovator or early adopter. As a result, these difficult problems / opportunities fall to people like you.

Back to the Hype Cycle

I’d like to end the foundational series by looking at emerging technology not from the perspective of an entrepreneur trying to turn a technology into a successful business, but as a buyer evaluating a confusing landscape of emerging technology and trying to sort out what is strategic (potentially affects my company’s survival) versus operational (potentially affects my bonus). This is what IBM used to call the FUD factor — the fear, uncertainty, and doubt that surround high-stakes decisions on relatively new and unproven technology.

Managers and executives struggling with the FUD factor have long looked to Gartner’s annual Hype Cycle of emerging technologies.  See Part I (024).  As shown in the figure to the right, the Hype cycle is divided into five stages, which Gartner describe as follows:

  1. Innovation Trigger: A potential technology breakthrough kicks things off. Early proof-of-concept stories and media interest trigger significant publicity. Often no usable products exist and commercial viability is unproven.
  2. Peak of Inflated Expectations: Early publicity produces a number of success stories — often accompanied by scores of failures. Some companies take action; many do not.
  3. Trough of Disillusionment: Interest wanes as experiments and implementations fail to deliver. Producers of the technology shake out or fail. Investments continue only if the surviving providers improve their products to the satisfaction of early adopters.
  4. Slope of Enlightenment: More instances of how the technology can benefit the enterprise start to crystallize and become more widely understood. Second- and third-generation products appear from technology providers. More enterprises fund pilots; conservative companies remain cautious.
  5. Plateau of Productivity: Mainstream adoption starts to take off. Criteria for assessing provider viability are more clearly defined. The technology’s broad market applicability and relevance are clearly paying off.

What makes the Hype Cycle so tricky for law firms is that some of the technology coming online is not operational IT that can be safely put off until stage 5. Rather, it’s “discontinuous innovation” that has the potential to fundamentally change how legal problems are solved–hence the growth in the number of legal start-ups and NewLaw companies who see the opportunity. This suggests that there are real consequences to arriving late to the party.  These dynamics move law firms closer to their clients in terms of needing to continuously innovate. See, e.g., Fragomen to Launch Unique Tech Development Center in Pittsburgh, Corp. Counsel, July 3, 2017 (quoting legal industry expert, “Every company is going to become a tech company in some capacity. That ultimately is going to be true of professional service firms and law firms as well.”). This is a sea change that is steadily gathering force.

This is the end of Legal Evolution’s foundational series on diffusion theory.  I hope you have found it a valuable use of your time.  Going forward, Legal Evolution’s commentary will be much more focused on examples.  To the extent we need theory, we’ll have these foundational posts to refer back to.

Bill Henderson, Editor, Sept 2017

What’s next?  See A Successful Legal Change Management Story (027)

In Part I (024) of this series, I introduced Geoffrey Moore’s Crossing the Chasm framework.  In Part II (025), the goal is to apply it to a contemporary example of a high-tech company selling to legal departments. Part II then finishes the chasm framework and discusses some of the special challenges of applying it to the legal industry.

Posts 024-026 are the final installment of Legal Evolution’s foundational series on diffusion theory. Readers seeking to influence innovation within the legal industry will be more successful if they obtain and apply this background knowledge. Care has been taken to make this information non-technical and accessible.

The pre-chasm challenge

Imagine that we are part of a legaltech start-up that has developed a machine-learning AI capability with the potential to be a best-in-class solution for many time-consuming and important activities inside a large legal department.  We’ve made a few sales to some visionary legal innovators/early-adopter types, but the work has mostly been custom.  As yet, we don’t have a turn-key solution that is scaleable. Further, none of us has focused on the humdrum details of successful implementation.  In fact, we have no reference customers that would satisfy a pragmatist buyer. In short, we are a pre-chasm company.

To keep the team believing in the cause and to avoid running out of cash, we have three short-term objectives:

  1. Dramatically reduce our sales cycle
  2. Limit the amount of customization (ideally to zero)
  3. Obtain a base of satisfied pragmatist clients.

Following Moore’s chasm playbook from Part I (024), these three objectives are only possible by overwhelming a niche market segment with our commitment to their problem set, making our company “the only reasonable buying proposition” (p. 110).

Thus, the task on our plate is to correctly identify the right niche market and, through intense focus, successfully deliver a whole market solution. Otherwise, we are going to fall into the chasm.

Which market niche?

As noted in Part I (024), the only tools we have to cope with our “low data, high risk” environment are imagination and empathy.

We start by developing composite profiles of characters working inside our typical buyer and evaluate as objectively as possible how our product positively and negatively affect each of their lives. If the buyer is a legal department, the cast of characters would likely include the GC, the Director of Legal Ops, line in-house counsel, paralegals and admin staff, CEO and CFO, etc.

If we are like other founders and technical types, we’re likely very self-satisfied regarding the versatility of our technology, claiming it can solve many problems well. That may be true, but what product application is going to have the biggest impact across multiple internal stakeholders? If we can deliver a whole product solution in that specific niche, the resulting word-of-mouth buzz will create the enormous tailwind we need to get to the other side of the chasm.

We identify the starting point by building a matrix of stakeholders and applications and scoring each combination on a 1 to 5 scale. Using Moore’s scoring system,  1  = “not usable” and 5 = “must have.” See Figure 6 to right (numbering continued from Part I (024)).

What are some the applications for machine-learning AI?  Based on what I’ve seen at CLOC, ILTA, the ACC Legal Ops meetings and general networking within the industry, there are many.  Each of the applications in Figure 7 below reflect real use cases currently being pitched to large legal departments. In other words, the fate of numerous pre-chasm companies hangs in the balance. The assigned numbers are based on the composite sketches of how the application would impact the daily lives of specific personnel.  Following Moore’s methodology, we are always looking for “must haves.” Thus, 5’s are highlighted in yellow.

Note that the scores inevitably vary based on the stories we construct, albeit we want to construct the most balanced and plausible story possible.  Indeed, the entire point of the exercise is to prime the right side of our brains so we can see the world through the eyes of prospective customer stakeholders and end users and accurately identify who would most benefit from our product. Once identified, we’ll do everything in our power to adapt it into something they must have.

For example, regarding the first application, M&A due diligence, a corporate acquisition can be a heavy burden on in-house corporate counsel and paralegals. Thus, they might welcome the automation of a large volume of boring scut work.  Yet, how much internal juice do they have?  If, however, the company is a serial acquirer where the typical targets involves complex IP or environmental issues that warrant the extensive use of outside counsel, then the score assigned to the GC, Director of Legal Ops, or the CEO/CFO might reach a 5, particularly if the whole product solution reveals a large quality advantage (i.e., the machine makes fewer mistakes than people; the machine aids corporate integration). This has become Kira System’s value proposition.

Note how the search for “must haves” in the example above has the effect of narrowing the niche market — to serial acquirers with due diligence that is voluminous and legally complex.

The second AI application, outside counsel selection, can also be narrowed.  For example, if legal is a significant cost in a thin-margin business (e.g., insurance, retail, transportation), the GC and CEO/CFO scores might reach the must-have level. This might compensate for the fact that lawyers and staffers who work regularly work with outside counsel aren’t going to like the disruption of changing firms.

Likewise, for the fifth AI application, automated legal review, there are products entering the market that score the legal risks of a proposed contract against desired terms in the company’s playbook, essentially doing the reading and analyzing normally done by lawyers. In most legal departments, this will score a 3 or 4, as it adds no strategic value and the AI machine might make a mistake that will make decision makers look bad. Yet, in complex industries where in-house staff is already at 100% capacity, automated first-level legal review of low-risk, high-volume contracts may be a better long-term solution than more FTEs. Thus, this might become a “must have” for a GC or Director of Legal Ops who needs more lawyer bandwidth focused on high-value company legal work. I know this because Cisco’s legal department is experimenting with this technology in conjunction with Kim Technologies.

The above exercise can be uncomfortable for those of us in the technical crowd who helped build the generic product. We wonder, “why can’t they see what we see?”  Thus, reflexively, we tout data and the technical features of our product, often repeating ourselves. Yet, if we can endure the discomfort of getting inside the head of people very different than us, we’d see how our offering is often a mixed bag when second- and third-order effects are factored in. Cf. Post 020 (reporting “client orientation” and “client empathy” as key attributes of effective change agents).

To boil it down, if this exercise is faithfully performed, we dramatically increase our odds of locating a niche mainstream market where a specific application of our product is a must have. But all-too-often, the temptation is to double-down on sales. “We don’t have time for theories. We don’t have time for books.” Cf. Moore at 68 (“The consequences of being a sales-driven during the chasm are, to put it simply, fatal”).

The above exercise is based on Chapter 4 “Target the Point of Attack” of Geoffrey Moore’s Crossing the Chasm (1st ed. 1991). The original exercise, now more than 25 years old, used a pen-based laptop as the innovative new technology.

How to position (i.e., describe) our product

Buyers have different agendas than sellers, particularly in the mainstream market.  As Moore notes, the lead buyers in the mainstream are pragmatists who want to make a safe choice that will enable them to look good and hit their numbers. Pragmatists also have other things on their plate besides making a purchasing decision.  Thus, to save time and avoid mistakes, the’re going to categorize our product based upon their current frame of reference.

According to Moore, this will be done by placing us within a competitive bracket based upon other vendors and products.  Such categorization takes mental work.  If we leave all of this work to the pragmatist, the comparisons will be too simplistic and unfavorable to us.  Thus, as much as possible, we’ll pre-package a comparison to aid our prospective customers.

Moore calls this “positioning” and offers the following plug-and-play formula to make sure we get it right. Moore instructs the reader to “just fill in the blanks”:

  • For (target customer)
  • Who (statement of need or opportunity)
  • The (product name) is a (product category)
  • That (statement of key benefit–that is, compelling reason to buy)
  • Unlike (primary competitive alternative)
  • Our product (statement of primary differentiation). [pp. 160-61]

How useful is this? Moore offers the following example of Microsoft’s positioning of Windows 3.0 in the early 1990s:

For IBM PC users who want the advantages of a Macintosh-style graphical user interface, Microsoft Windows 3.0 is an industry-standard operating environment that provides the ease of use and consistency of a Mac on a PC-compatible platform. Unlike other attempts to implement this type of interface, Windows 3.0 is now or will very shortly be supported by every major PC application software package. (p. 162, emphasis added)

In a profoundly concise format, this positioning statement give the pragmatist everything he or she needs to make a purchasing decision.

By proper positioning, we boil everything down so we can pass what Moore calls “the elevator test.” Specifically, if our product can’t be easily described in the time it takes to travel from floor to floor in an elevator, then our product will never get the enormous tailwind of a word-of-mouth campaign within the mainstream market. Cf Moore at 159 (“Since we have already established that word of mouth is fundamental to success in high-tech marketing, you must lose [if you can’t pass the elevator test]”). Until we get this distillation right, we’re stuck with an impossibly long sales cycle and the likelihood that our competitors will do our positioning for us.

What our customers say about us

When crossing the chasm, there is (a) the positioning statement we communicate to our target customers before the sale, and (b) what our customers say about us after they’ve experienced our product.  The subtitle of Moore’s book may lull lawyers into believing that Moore is only talking about (a) — how to position the product. Yet, Moore seems no less worried about (b). Moore writes:

In the simplified [whole product] model there are only two categories: (1) what we ship and (2) whatever else the customers need in order to achieve the compelling reason to buy. The latter is the marketing promise made to win the sale. The contract does not require the company to deliver on this promise – but the customer relationship does. Failure to meet this promise in any business-to-business market has extremely serious consequences. As the bulk of the purchases in this marketplace are highly reference-oriented, such failure can only create negative word-of-mouth, causing sales productivity to drop dramatically. (p. 115).

A careful reading of Moore reveals that the “big fish, small pond” strategy is as much about conserving bandwidth and resources by not overpromising as it is finding a market segment with a must-have customer need.

Ironically, as difficult as it is to enter the mainstream market — have a great generic product, pick the right market niche, position the product so it’s easy to buy, and then deliver on the whole product solution — the rules seem to operate in reverse once a company gets to the other side of the chasm.  Moore notes, “the more you spend time with mainstream customers, the more you see how relentlessly they pursue this conspiracy to sustain market leaders” (p. 75). Thus, crossing the chasm is a one-time event that permanently alters the financial fortunes of a company — a game that is very much worth the candle.

Selling and law firms as distribution channels

Returning to our AI-enabled legaltech start-up, what’s our sales plan?

Most of the context of Crossing the Cross is based on enterprise-level technology solutions sold to large corporate clients — that is, the same posture as most legaltech start-ups. Moore lists out several options for making sales along a spectrum of “demand creators” (a direct sales force using consultative sales) to “demand fulfillers” (retail outlets).  The more novel and innovative our product, the more we’ll need a direct salesforce to prime the pump.

The problem is that direct sales is expensive. Moore notes, “To support a single consultative salesperson requires a revenue stream of anywhere from $500,000 to several million dollars [in 1991 dollars], depending upon presales and postsales support provided” (p. 173).  As good as a direct sales team can be at educating prospective customers and creating demand, Moore argues that a direct sales force is probably not viable unless the minimum sales is at least $50,000 — again, in 1991 dollars.

As a more cost-effective alternative, Moore suggests a “selling partnership” with another company that already has a business relationship with the target clientele.  Here, law firms come to mind, either as a bundled offering with the firm’s consultative legal services or as a preferred vendor when the firm cannot get the work without adding an external capability that the client is demanding. Under this approach, law firms could become an invaluable distribution channel.  Although Moore acknowledges that this approach may dramatically cut into pricing power — “he who owns the customer owns the profit margin and the future of the product” — he nonetheless endorses it as a way to reduce risk and avoid the grief of managing a salesforce not fit for purpose (p. 175).

For many a legaltech and NewLaw start-up, this approach sounds good in theory but has seldom worked well in practice.  Perhaps the reason can be found in the must-have value proposition that mainstream pragmatist buyers find most irresistible. According to Moore, this is a product offering that “radically improves productivity on an already well-understood critical success factor” (p. 103).  No disruption; just a quantum improvement in what we already known. Unfortunately, so often the business opportunity of legaltech and NewLaw is reducing the inefficiencies and quality constraints of the traditional practice of law billed by the hour.

I know several start-up founders who wish they could get back the thousands of hours invested in trying to strike a deal with law firms. Whether it’s short term self-interest or the consensus decision making of law firm partnerships, see Post 008, law firms have yet to see the benefits of being a distribution channel for new products or services that could significantly help their clients.  Unfortunately, this is a major bottleneck to innovation diffusion within the legal industry.

What’s next? See “Crossing the Chasm” and the “Hype Cycle”, Part III (026)

The two figures above reflect frameworks that are widely used within the technology industry to grapple with the treacherous nature of high-tech product development.

Figure 1 is the 2017 Hype Cycle, which is published by Gartner, a large international research company that helps CIOs and other IT professionals understand and evaluate emerging technologies. The Hype Cycle has been published every year since 1995, always with the same shape and the same five stages, beginning with the “innovation trigger” and ending with the “plateau of productivity.” The only changes are the technologies and their relative placement on the Hype Cycle.

At the “peak of inflated expectations” for 2017, we see several types of artificial intelligence that are now widely discussed in the legal press, often with headlines that foreshadow the replacement of lawyers by machines. If Gartner is right, such a threat is premature, overblown, or both.

The second figure (Figure 2) looks like a Rogers Diffusion Curve, see Post 004, but with a large gap between the early adopter and early majority segments. The gap is the “chasm” discussed in Geoffrey Moore’s Silicon Valley classic, Crossing the Chasm (1st ed. 1991).  Figure 2 is titled “The Revised Technology Adoption Life Cycle” because Moore added the gap to reflect the crucial transition from early adopters to the early majority. (Prior to Moore’s book, the high-tech community relied heavily upon the unrevised model — i.e., a model identical to the Rogers Diffusion Curve.)

Moore’s core thesis is that most high-tech ventures fall into the chasm and die because they fail to grasp the many moving parts that must be fashioned and coordinated to move from early market to the mainstream market — i.e., to cross the chasm.  Moore’s book provides very detailed prescriptive advice. Once on the other side of the chasm, the company has a much higher probability of ascending the upward-bound S-curve and thus producing a large financial return for company founders and investors.

Moore’s book is essentially a practitioner’s manual, far removed from academic theory or empirical validation.  Yet, it is now in its third edition and has sold more than 300,000 copies.

Posts 024-026 are the final installment of Legal Evolution’s foundational series on diffusion theory. Readers seeking to influence innovation within the legal industry will be more successful if they obtain and apply this background knowledge. Care has been taken to make this information non-technical and accessible.

The Roadmap

This is Part I of a three-part final installment in Legal Evolution’s foundational series on diffusion theory, albeit the topics covered — “Crossing the Chasm” and the “Hype Cycle” — are not part of diffusion theory, at least not directly.  Nonetheless, these two frameworks have long guided decision making in the tech industry; and tech is indisputably where the legal industry is headed. Therefore, those working in legal innovation need to understand how these concepts fit together.

  • Part I (024) summarizes the key features of Geoffrey Moore’s widely used and powerful chasm framework.  It is very important for readers to understand these ideas from the perspective of Moore and his audience — i.e., as practical business advice being dispensed to entrepreneurs. Surely practicing lawyers ought to be sympathetic to this approach.
  • Part II (025) applies Moore’s framework to a real-world example of high-tech companies selling to legal departments.  Part II then finishes the chasm framework and explains the special challenges of applying it to the legal industry.
  • Part III (026) reveals the unusual intellectual origins of Crossing the Chasm and how those origins illustrate several of the key concepts of diffusion theory in ways that are surprising and ironic. Part III also returns to the Gartner’s Hype Cycle as a lens for viewing technologies at the industry rather than the company level.

More so than any other foundational posts, Posts 024-026 speak to the specific challenges of legal start-ups and technology companies. Law firms are discussed, albeit primarily as part of a “distribution channel” that controls valuable client relationships.  For a variety of reasons, most law firms will be reluctant partners. It is unclear whether in the long run that will prove to be a wise strategy.

The Whole Product Solution

An entrepreneur “crosses the chasm” by turning a fledging start-up into a high-growth business built around a new technology. Much to the chagrin of technology inventors, the technology itself is not sufficient to reach this goal. Instead the technology must to become part of a “whole product solution” that anticipates and overcomes a wide range of potential obstacles to adoption.

Building a whole product is less a technical feat than an extended exercise in commercial empathy. Several market competitors may have similar technology.  But according to Moore, the first to build and communicate a whole product solution will be the first to cross the chasm and capture the mainstream market.  See p. 114 (“[W]inning the whole product battle means winning the war”).

Below are two graphics that reflect the whole product solution.

Figure 3 is what Moore refers to as the Whole Product Model.  At the center is the Generic Product, which is “what is shipped in the box and what is covered by the purchasing contract” (p. 111).  However, end users make buying decisions based on the “expected product”, which Moore describes as “the minimum configuration of products and services necessary to have any chance of achieving the buying objective” (Id).  For example, if the generic product is an IBM PC equipped with a Microsoft DOS operating system — a product on the market when Moore was writing the first edition of Crossing the Chasm — Figure 4 is a reasonable depiction of the ancillary products and services that make up the expected product.

A company has crossed the chasm when it has become a market leader in a niche portion of the mainstream market.  Although the foothold is not large, it is the ideal place to develop the “augmented” and “potential” products (the third and fourth rings in Figure 3).  If the expected product was the IBM PC shown in Figure 4, the augmented product might include a customer hotline, advanced training, accessible service centers, and expanded software offerings. Likewise, the potential product might include what we see today — a platform for streaming entertainment and playing complex, interactive games.

The Early Market versus the Mainstream Market

According to Moore, its not the underlying technology that separates winners and losers.  Rather, it is a failure of both entrepreneurs and investors to realize that the market is divided into two parts — an early market, where a promising generic product is sufficient; and a mainstream market, where customers will not buy without overwhelming evidence that they are, in fact, buying the whole product. See Figure 5 below.

Success in the early market comes in the form major sales to visionary clients who see the technology’s breakthrough potential. This market evidence is often sufficient for venture capitalists to provide another round of financing in anticipation of rapid growth. This is because VCs — more so in the days before Moore’s book — bought into the smooth continuous shape of the Technology Adoption Life Cycle (Figure 2 above, but without the chasm).  All-too-often, however, the S-curve adoption never materialized.

The recurring mistake, according to Moore, is that customer expectations are dramatically different in the early versus the mainstream market.  In the early market, “visionary” early adopter customers are drawn to the potential breakthrough implications and have the imaginative capacity to envision the whole product as something real and inevitable.  Yet, visionary buyers are relatively rare. But Moore argues that the problem runs deeper than that — these “visionary” early adopters are unsuitable as reference clients.

Moore refers to the early majority (the leading edge of the mainstream) as “pragmatists” because their buying requirements are so practical and stringent.  “When pragmatists buy, they care about the company they are buying from, the quality of the product they are buying, the infrastructure for supporting products and services and systems interfaces, and the reliability of the service are going to get” (p. 43).  When the company’s sales team points to visionaries, the pragmatists are unimpressed, distrusting the visionary’s risk-taking, flaunting of convention, excessive attention given to early stage technology, and the “overall disruptiveness” they impose on others. See p. 58-59.

If a tech start-up is not aware of the chasm, it runs the risk of being lulled into complacency by a few large sales to visionary clients.  But more problematic is the resulting “catch-22.” As Moore notes, “The only suitable reference for an early majority customer … is another member of the early majority” (p. 21).  This is the problem that Crossing the Chasm is trying to solve.

How does a company cross the chasm?

A company transitions from the early market to the mainstream market — i.e., crosses the chasm — by focusing on a niche market where, by sheer dint of preparation and focus, it becomes “the only reasonable buying proposition” (p. 110).  The narrow focus is necessary to conserve limited resources and increase the odds of delivering a whole product solution.  This “big fish, small pond” strategy enables the start-up to “secure a beachhead in a mainstream market — that is, to create a pragmatist customer base that is referenceable” (p. 68).

Moore provides tremendous guidance on how to find the right niche market.  The difficulty is that a technology start-up only has a few significant clients in the early market, none of whom are representative of the mainstream.  Because better information is time and cost prohibitive, pre-chasm companies operate in a “low data, high risk” environment.  Thus, the only option is to engage the management team’s imaginative faculties to anticipate the needs, preferences, and objections of the various stakeholders employed by your target clientele.  This is the extended exercise in commercial empathy mentioned earlier — and its extremely difficult, particularly for left-brained technical types (lawyers as well as engineers).

In Part II (025), I will illustrate how this is done by applying Moore’s methodology to a contemporary legal industry example.

What’s next?  See “Crossing the Chasm” and the “Hype Cycle”, Part II (025)