2018 has been a watershed year for capital flow into legal markets. Will it be enough, at last, to push legal innovation forward?
It’s an age-old saying: money can’t buy everything. The most common examples include happiness and love. It’s time to add “legal innovation” to this lofty list.
In the past few years, we have seen unprecedented levels of capital flow into the legal space. The partial views of funding activity we see from various sources imply an already high level of energy as well as money invested into legal innovation. Further, those investments (and one would presume, attendant efforts) only appear to be increasing:
And yet the market appears awash in disillusionment. Many established thought leaders and influencers remain skeptical about the actual impact (or lack thereof) of these developments. Pinpoint signals from corporate buyers indicate a glacial pace and highly uneven distribution for meaningful improvements in service experience and value delivered. And the PeopleLaw sector remains woefully underserved, even as legions of practitioners outside the strongholds of Big Law struggle financially. See, e.g., Post 037 (presenting data).
So what gives?
A Roadmap to Innovation Woes: Key Innovation Drivers
In my first post on Legal Evolution, I addressed a few of the structural attributes that make legal a particularly unfavorable ecosystem for innovation. See Post 051 (legal innovation as an extreme sport). That discussion zoomed out for a broader view at the makeup and composition of legal service providers.
Now it’s time to zoom in. This is Part I of a three-part series about systemic barriers to innovation maturity in legal markets. In this series, I’ll pose a new set of hypotheses about the current state of our industry — to explore whether would-be innovators and visionaries have sufficient access to the ingredients that are necessary to make innovation actually happen.
The above graphic lays out the roadmap, along with a brief description of the critical function of each component.
- Part I (062) provides an overview of recent trends in capital investment into legal innovation. While several valuable directories, listings and analyses have already covered this topic from many different angles, the aim of this post is to explore why we are seemingly stuck in the “early days” of legal innovation despite an overarching trend toward expanded access to capital.
- Part II (063) probes a critical problem facing all new offerings in every permutation of legal innovation: the difficulty of identifying and understanding the customer. Part II summarizes the various customer roles in B2B service environments and the common reasons that new offerings fail to achieve problem-solution and product-market fit.
- Part III (064) addresses the people side of the equation for teams and businesses trying to drive change to the status quo in legal markets. Whether the goal is (a) to drive incremental improvements to existing offerings or (b) to develop and bring to market a wholly new service or business model, legal evolution is a team sport that demands differing configurations of specialized skill sets. Part III will summarize the necessary competencies and capabilities, with the goal of evaluating whether it is feasible for most legal businesses – whether incumbent or new entrant – to assemble a winning team.
Posts 062 – 064 are not intended to pose an exhaustive, definitive, or controlling theory of legal innovation. Instead, the goal is to provide a useful framework, by endeavoring to draw attention and focus to factors that can be influenced and changed, once examined and understood, by economic actors in the marketplace. As a counterpoint, I have previously criticized narratives that hinge on personality traits of lawyers, in large part because it is not a tenable proposition to ask a group of millions of adults to change stable aspects of their disposition. See Post 051 (“because lawyers … ” riff).
Here, the hope is to better equip innovators and change agents who find this analysis compelling and to enable them to perform more structured evaluations and make more rigorous decisions. For everyone else, this series invites constructive dialogue.
Regulatory Constraints Affect Capital Flow (in Obvious & Non-Obvious Ways)
Like many other features of the legal industry, the flow of capital investment in this space is littered with idiosyncrasies. The regulatory barriers to non-lawyer ownership has been debated ad nauseum elsewhere by wiser and more knowledgeable minds, but it bears one more mention here. The blindingly obvious implication is that this severely limits the pool of available sources for equity capital into businesses that practice law.
The current regulatory scheme has three less obvious implications on legal innovation as well as the mechanics of how innovation efforts are funded and governed:
1. The Role of Incumbents (Yes, That Means Law Firms and Lawyers)
It secures for incumbents (law firms owned and largely operated by lawyers) a material role in deciding when, where, what and how the entire industry will change. This, of course, is a feature, not a bug: protectionism is intended to establish clear and insurmountable advantages for the artisan guild.
It is true that law firms have resisted change and thus bear full responsibility for the current state of the industry. The fact remains, however, that incumbents must be included in any serious dialogue about legal innovation. Regardless of their performance to date, law firms are both financial sponsors of, and direct participants in, legal innovation.
2. Practice vs. Business of Law
The requirement of lawyer ownership calcifies unhelpful divisions between the “practice of law” (the domain of lawyers, with limited access to capital) and the “business of law” (a set of enabling activities for legal practice, in the domain of… everyone else with varying non-lawyer titles). These divisions extend deep into our collective consciousness and they do serious harm not only to workplace cultures but also the rigor and clarity of our thinking about legal innovation.
This distinction creates an artificially binary model that fails to accurately represent the reality of how legal teams serve clients in the real world. Ultimately, this type of thinking favors incremental improvements to the status quo and R&D based on misguided and antiquated assumptions. It’s akin to exploring a closet with the lights off.
3. Follow the Money
The requirement of lawyer ownership also diverts a great deal of available capital into non-core segments of legal services. This has a dramatic effect on the experience of the end-users and shapes their expectations and appetites. This is, at least in part, why “legal tech” receives a disproportionate share of both capital and attention in the legal innovation dialogue: A lot of money is going into a disproportionately small part of the value chain.
The aforementioned wiser and more knowledgeable minds continue to discuss the desirability and feasibility of changing the regulatory moat around lawyer ownership. In the meantime, this discussion will remain premised on the status quo, in the spirit of focusing on factors that can be influenced by individual market actors.
Who Funds Innovation & Why?
Due to the idiosyncrasies of the legal markets, it is helpful to think about innovation in two simple categories: the typical/conventional financial sponsor vs. atypical sponsors unique to the legal innovation ecosystem.
Traditional Sponsors: PE Firms Are All About That Multiple 💰❌💰
The archetype for the traditional financial sponsor of a new venture is the private equity firm. PE firms (inclusive of angels and venture capital shops) are themselves commercial enterprises. Essentially, they offer specialized expertise in the strategic deployment of capital for wealth creation. To put it as simply as possible, PE firms invest capital to buy part or full ownership of companies, apply their expertise to make those companies more valuable, and then sell those companies (hopefully at a higher price point than at purchase).
PE firms attract capital from investors (typically institutional or ultra-high net worth) with investment theses that communicate a unique viewpoint about market opportunities; they retain investors through sustained performance in generating high returns. The below chart is an extremely simplified and theoretical comparison of PE returns against the S&P 500. See “Does Private Equity Really Beat the Stock Market?,” Wall Street Journal, Feb. 13, 2018. There are many caveats about the difficulties inherent in comparing apples to oranges but suffice to say that the ROI expectations are high.
Of course, the ultimate returns to investors are abstractions in that they aggregate the outcome of the PE firm’s many activities, both successes and failures alike. To put this into more concrete context, it is helpful to think about private equity investments at the company level (again, a simplified, theoretical exercise).
- Holding times. On average, PE firms hold portfolio companies for about 6.5 years, although early-stage venture capital investments will have longer holding periods (sometimes much longer).
- Returns/exit multiples. Target multiples are more difficult to generalize than holding times. Venture capitalist Fred Wilson of Union Squares Ventures is famous for saying often that he looks for one investment that “will return the whole fund.” This is a different way of indicating that VCs usually make many high-risk investments with the expectation that most will fail, with a few wins that will make the losses look minuscule. Still, it’s probably a safe and meaningful rule of thumb to say early stage VCs will seek something in the neighborhood of 10x returns while mid-stage investors will be looking for a 3x to 5x range.
Funding innovation is both a means to effectuate and a happy byproduct of the PE firm’s raison d’être: generating returns for investors. As we will see, things are not so simple in legal markets.
Simply put, most legal startups require a long bake for a relatively small pie. In addition, the vast majority of legal startups are point solutions targeting niche markets that are far too small to ever reach the size & scale needed to attract traditional venture capital interest — at least in part due to the highly fragmented composition of the legal services market, as well as the added layer of geographic silos imposed by jurisdictional differences, see Post 051 (legal markets are especially balkanized and opaque).
Big Law Both Funds AND Manages Innovation (And It Sometimes Works 😲)
The innovation theater that often happens (inadvertently or otherwise) across the law firm landscape is more analogous to the recent explosion in corporate innovation. With technology driving a faster pace of change and startups eating into every major sector, mature businesses of all shapes and sizes have embraced the mantra: “what got you here won’t get you there.” This has fueled mystique around the “intrapreneur”, a rash of innovation “labs” housed within staid and stable companies, and the rush to co-opt startup-style innovation and strategy tools, all with mixed results. (Enjoy a moment of relief and schadenfreude: innovation theater was not created by the legal industry.)
As always, there are lessons to be gained from the mistakes of others, even those outside our own domain. Drawing from the hard-earned lessons of corporate innovation programs outside of legal, two reliable litmus tests emerge to gauge the innovation maturity of established firms:
- Why? Clearly articulated strategic objectives for innovation investments, tied to financial KPIs that measure the impact on the core business or progress toward profitable exit
- How? Process and governance around build, buy or partner decisions
A few bright spots exist
Yes, many law firms engage in some level of innovation pantomime for hype and awards, simply to keep up with the Joneses. (Award submissions in 2018 that tout a successful migration from Office 2007 to Office 365 would fall into this category.) And other law firms often get in over their heads in innovation endeavors that are beyond their core capabilities (more on this in Post 064).
But a few law firms do think and act with the recognition that they are future-proofing their businesses against emerging threats. Allen & Overy is a good example of an outlier firm displaying both indicators of innovation maturity. In 2016, A&O partnered with Deloitte to bring to market MarginMatrix, an “IT solution for compliance with the mandatory variation margin rules that now apply to the USD500 trillion OTC [over-the-counter] derivatives market,” now deployed for 8 global investment banks with over 20,000 negotiations completed. See Allen & Overy Annual Results Factsheet for Fiscal Year 2017.
MarginMatrix shows interesting signs of innovation maturity in that it is hyper-focused in product design and target market. The solution design also displays a high degree of customer-orientation, around which coalesces (a) complementary technology components (expert system, workflow, document automation) and (b) a managed services play that leverages (presumably) lower-cost staffing from Deloitte’s deep bench.
Most importantly, however, MarginMatrix makes strategic sense for A&O. OTC derivatives are important to global investment banks (a key market segment for the firm) because the customization flexibility of off-exchange products provides banks with highly sophisticated means to hedge risk. A&O also has comparative advantage to produce and maintain the high-value content that drives MarginMatrix: the legal analysis of multi-jurisdictional regulatory requirements imposed on OTC derivatives.
In the below visualization of potential strategic objectives for innovation investments, MarginMatrix fits comfortably into the “add new offerings box,” which enables the firm to anchor existing key accounts with a tranche of work offering relative revenue predictability.
The notion of packaging expert knowledge into a productized subscription model is not a new idea. Many firms continue to flirt with this idea, and mapping some of those efforts to the above strategy matrix gives some sense of the variation in motivating drivers for innovation investments.
- Littler invested heavily in new offerings spinning up a myriad of branded solutions and toolkits (e.g. LittlerGPS, among others) indicating greater focus on grabbing downmarket share with productized solutions. In 2015, Littler also entered a joint venture with Neota Logic to launch ComplianceHR, which layers Neota’s expert systems technology onto the firm’s knowledge stores into an enablement product mapped to specific and high-volume HR and employee relations workflows. See Press Release.
- Cadwalder Cabinet has evolved into a slightly different strategic play: extending its existing product into a new market segment. See “Regulators Become Cadwalader Clients as Tech Investment Begins to Pay Off,” The American Lawyer, June 18, 2018.
- Reed Smith recently launched GravityStack, a spin-off subsidiary group that will design, test and license technology solutions to legal clients. See “Reed Smith Enters the Legal Technology Market With GravityStack Subsidiary,” LegalTechNews, April 24, 2018.
Apart from these examples, countless firms are now engaged in serious efforts to integrate process, technology and legal operations to both manage costs and improve service delivery. But a sustained product/solutions focus to spin up new offerings to the market remains more the exception than the rule.
The wide variety of motivations for incumbents to invest in innovation explain, at least in part, why it is difficult to generalize about legal innovation. Some of the variation can be explained by the extreme fragmentation of the marketplace and the resulting dispersion in market position and thus strategic opportunities available to each player. The fact remains, however, that rigorous attempts to measure and compare innovation investments, maturity or performance will need to consider these differences.
Capital for Legal Innovation: Current State & Emerging Trends
A survey of the current market landscape as well as recent developments/dialogue suggests there are four key trends to watch in the next 3-5 year timeframe.
- Liquidity events suggest sorting/matching behavior by market participants
- Platform + bolt-on strategy by serial acquirers and mature scale-ups
- Smart money eyeing legal, to the tune of $500m+
- Capital gets creative: working around the regulatory moat
1. Liquidity Events: Not Necessarily a Silicon Valley-Style Bonanza
2018 has already seen a number of deals that have raised many questions (and inspired many hot takes). The below graphic picks out a small selection of headliners. Given that financial terms are rarely disclosed, the LegalZoom secondary investment attracted a lot of attention by virtue of deal size and resulting valuation. See, e.g., “LegalZoom Gains $2B Evaluation in Funding Round,” Bloomberg, July 31, 2018.
Liquidity events have a generally pleasing air of a positive development; some of that may be due to the glorified stories of founder exits vaguely reminiscent of the trailer for “The Social Network.” Certainly, liquidity events usually involve some people coming into a large lump sum of money. Without raining on anyone’s parade, it bears mentioning that the overall texture of recent liquidity events in legal markets indicates that a few different forces may be in play:
- The Avvo, BAL and Riverview Law deals give indications of a strategic sorting in which major players with strategic goals acquire specific assets; in contrast, the Lawyers On Demand and LegalZoom deals feel more like capital churn/injections that will lengthen the runway for these companies to prove out an independent scale/growth strategy that may still be in the works while providing liquidity back to the early stage investors.
- Traditional PE exit strategies favor strategic acquirers and IPOs over financial sponsors, who tend to be more sophisticated and able to negotiate a lower purchase price. Those dynamics may or may not hold in legal markets; the available data is too scant to speculate.
- The exits by BCLP and DLA Piper raise an interesting question about the optimal role of most law firms in the midwifery and nurturing of new ventures. For reasons we will cover in upcoming installments, law firms have unique assets that make it a fertile environment for experimentation and testing — whether they are well positioned to hold their equity positions to a late exit remains to be seen.
2. Platform + Bolt-On: Next-Level Serial Sorting
The activities of serial acquirers and emerging platforms deserves some mention.
- Unsurprisingly, Thomson Reuters and LexisNexis remain most active acquirers as they supplement internal innovation agendas with strategic M&A. LexisNexis, in particular, has been aggressive in sourcing new product & service innovations through recent acquisitions of Ravel Law, Intelligize, and Lex Machina — all prominently on display at the recent AALL conference. in contrast, Thomson Reuters’ recent launch of WestLaw Edge appears to be powered much more heavily by internal innovation and R&D.
- Epiq, Consilio, and Mitratech are all PE-backed and have access to the capital to continue bolt-on deals to round out their market offerings. Most recently, Mitratech acquired ThinkSmart for an undisclosed sum.
- Relativity may emerge as a likely platform looking for bolt-on acquisitions: the company has invested in Heretik and HealthJoy, signaling financial commitment to extend its platform beyond eDiscovery into contracts and highly regulated data stores.
- Earlier this year, Elevate announced that it had secured a line of credit from Morgan Stanley Expansion Capital to fund its growth. See Press Release. Elevate did disclose that the proceeds would be spread out across strategic acquisitions as well as investments in product and service expansions.
3. “Smart Money” from Silicon Valley Continues to Eye Legal Vertical
Independent research conducted by Six Parsecs indicates that “Smart Money” VCs (the Silicon Valley elite, as identified by CB Insights) have invested in almost 30 legal tech companies in funding rounds totaling over $500m. This list includes some of the most recognizable names in legal tech, including Avvo, Clio, DocuSign, LegalZoom, and Ravel, as well as some newer names to watch like Atrium LTS, Casetext, Ironclad, Judicata, Modria, and SimpleLegal. Famed Valley seed accelerators Y Combinator and 500 Startups have been fairly active as well, funding over 20 startups in rounds totaling almost $180m.
An interesting counterpoint to the “Smart Money” portfolio are the investments made by Ulu Ventures. While Ulu’s legal startup portfolio is small, it includes Lex Machina and Ravel Law, both acquired by LexisNexis. Ulu founder Clint Korver was part of an early cohort of VCs who were early adopters and customers of legal startups as an alternative to incumbent firms (and expressed intense skepticism about the waves of change washing over Big Law); that cohort included Foundry Group founder and ex-Cooley lawyer Jason Mendelson, whose claim to fame included, among other things, hating on startup lawyers. See “These Venture Capitalists Skip Law Firms for Legal Services Startups,” ABA Journal, May 2014. This raises some interesting questions about what legal startups might need more: capital to fund growth or advisors with a keen understanding of the domain.
4. Capital Gets Creative: Workarounds for Regulatory Barrier
While only orthogonal to this discussion, the emergence and growth of litigation finance must be noted. Litigation finance is a rare bird in legal innovation that fits into Marc Andreessen’s “huge, if true” paradigm. According to BTI Consulting, litigation made up nearly 30% of the demand for all outside counsel services in 2018; while a rough proxy, the share of litigation spend in all outside counsel budget still gives an idea of the significant addressable market size for litigation finance. See BTI Practice Outlook 2018 (forecasting market size by practice). Since 2014, litigation funders have raised capital in excess of $3bn. See “Litigation Funders Face Their Hardest Sell: Big Law,” The American Lawyer, June 28, 2018. While still in its early days, litigation finance has the potential to reshape the current landscape for a huge segment of the legal services market, and represents a creative channel for outside capital to influence and ramp up investment into legal data handling and predictive analytics.
Access to Capital: Could Be Better, but Not the Choke Point
Research by Six Parsecs suggests that the total amount of hard capital invested into legal tech, legal services and adjacent spaces is in all likelihood much, much larger than the $998m estimate reported by CB Insights in 2017. Further, is impossible to account for all of the soft investments made by existing players to fund strategic projects, initiatives, feasibility tests, as well as the ongoing payroll of the growing roster of internal innovation teams across the legal space.
The aggregate amount of capital invested in legal isn’t the issue — the more serious problem is the inefficiency in finding and funding the right opportunities. However, emerging trends suggest that access to capital is getting and will get more efficient over time.
Upcoming installments will make the case that inefficient access to markets and talent are much more serious barriers to innovation maturity in legal markets. That said, a rigorous look at capital flows in our industry is still important.
Why? Because there is no better accelerant for #realtalk than the topic of money. Discussion of capital must necessarily address the question of returns. Too often, we across the legal industry use innovation as an emotional lift: workshops and brainstorming sessions usually make us feel better and more hopeful about the future. Where accountability mechanisms are absent, good feelings often provide sufficient returns for these costs.
To culturally co-opt an obnoxious catchphrase of one Ben Shapiro, “money doesn’t care about your feelings.” Looking at the current state of the legal innovation landscape through this unforgiving lens can produce unexpected clarity. For the industry to mature beyond isolated experiments at the edges, we must engage in more rigorous thinking about (i) what innovation experiments actually cost, (ii) what returns they generate, and (iii) how both sides of the equation fare as the endeavor scales. Not all the inputs and outputs of innovation efforts will be quantified in dollars, but much of it can and should be.
The capitalists will enter the U.S. legal mainstream sometime between a few years from now and never. But in the meantime, those on the inside could stand to take a page out of the capitalists’ playbook, starting with the notion that investable ideas must focus on value rather than novelty. Not all new things are better than the status quo, and not all old things are bad enough to be discarded: much like handsome and stupid, innovation is as innovation does.
What’s next? See Legal Innovation Woes, Part II: TBD Markets + MIA Customers (063)
Is legal operations a discipline or a job within a legal department? The market just provided an answer.
Last Friday, David Cambria, the Godfather of legal operations, left his secure post at ADM (#46 on the Fortune 500) to become Global Director of Legal Operations at Baker McKenzie. To be clear, Cambria’s title is not another name for “Chief Operating Officer,” an established role in law firms that focuses on internal cost and efficiency. This is an outward-facing role designed to attract and cement client relationships.
Per the press release:
Cambria will be responsible for ensuring that the strategies for pricing, legal project management, and other commercial activities are closely matched to increasingly sophisticated client needs and expectations. He brings a unique “voice of the client” to the leadership of Baker McKenzie and will work directly with major clients to both help shape delivery of the Firm’s services and to assist clients in addressing the development of their own operations.
It is hard to predict whether this is the beginning of a trend, or a one-and-done experiment. It all depends on whether the desired benefits show up within a reasonable period of time. In this instance, there are only two certainties: (1) Cambria is being compensated for the risk, and (2) the Fortune 500 will take him back if the boulder gets too heavy or the mountain gets to steep.
This is also a valuable learning opportunity for everyone else. This is because David Cambria is both an innovator and opinion leader within the legal operations field. As discussed in the foundational posts on diffusion theory, these attributes, particularly when combined, accelerate adoption.
Cambria’s move threw a wrench into our editorial calendar. Nonetheless, it was too significant to ignore. This post attempts to answer three questions relevant to this important industry milestone.
1. If legal ops is a discipline, where will it get maximum traction?
“Legal operations is a multidisciplinary field where professionals collaborate to design and build systems to manage legal problems.” That was my conclusion back in 2015 as I observed three legal innovators — Connie Brenton at NetApp, John Alber at Bryan Cave, and Andrew Sieja at Relativity — all solving similar types of problems, albeit at different points in the supply chain. See Henderson, “What the Jobs Are,” ABA Journal, Oct. 2015.
A couple of weeks ago, we analyzed the ULX Partners, UnitedLex-DXC, and ElevateNext deals. See Post 053. But in retrospect, one question drove the whole 4,200 word essay: “where will legal operations get maximum traction?” Is it BigLaw, NewLaw, legal departments, or legaltech? Several hundred legal innovators with the technical skills to deliver better-faster-cheaper are very interested in the answer. What they long for is a stable, resource-rich environment where they can build the systems that are already in their heads.
Thus, BigLaw tends to drive innovators nuts, as it struggles to play an essentially perfect hand: (1) longstanding relationships with industry-leading clients; (2) a business that requires very little operating capital yet generates significant cash and profits; (3) an established brand that makes it the safe choice against upstart new entrants. See Post 039 (discussing Innovator’s Dilemma within law firms); Post 053 (discussing psychology that precedes law firm failure); see also MacEwen, TomorrowLand 26 (2017) (discussing the very real possibility that some firms “would rather fail than change”).
NB: This post frames 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, including the hiring of David Cambria by a BigLaw firm. 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; Legal Services and the Consumer Price Index (CPI) (042). In short, these are two distinct problem sets. Improving PeopleLaw is an important topic that we will continue to focus on. Just not today.
There are three contenders to create the new paradigm for organizational clients:
- 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.
Right now, I see no clear winner. Yet, from a human capital perspective, the solution set is the same for all three.
2. Is there is human capital model for legal ops?
Yes. David Cambria and his legal operations colleagues are “legal integrators.”
Below is a graphic first generated by Bill Mooz and I in the fall of 2015. The occasion was a presentation to a group of legal operations professionals in Chicago led by David Cambria. See Creating Legal Integrators (Sept. 2015). David was curious about the curriculum of the Tech Lawyer Accelerator (which Mooz founded) and wanted to understand its connection to legal operations.
The legal integrator model we created contains the DNA of the original partner-associate pyramid. But it has also moved on, reflecting the types of human capital needed to deliver both bespoke one-to-one legal services and one-to-many systematized/productized legal solutions.
Bespoke lawyers remain at the top of the model. But is the top more important than the center? The green center portion is where systems are built to optimize cost, quality, and effort. It is also where expert sourcing decisions get made. This requires a skill set that includes not only substantive legal knowledge but systems thinking, statistics, accounting, finance, and technological literacy. (BTW, there are many allied professionals without law degrees who also thrive in the green zone.)
In this version of the model, I break legal integrators and legal operators into two, with the former excelling at design and strategy and the latter excelling at execution, change management, and continuous improvement. Integrators and operators are yin and yang to each other. Some professionals have these skill sets in exact equal proportion. But that is rare. This is why legal operations is much more a team sport than traditional lawyering.
The rarest legal professional, however, is the bespoke lawyer who understands what is happening in the green and why it is crucial to his or her long-term prosperity. In all likelihood, closing this communication gap will be a substantial part of David Cambria’s new job.
3. What is the law firm strategy that requires the talents of legal integrators?
Several years ago I was hired to give a presentation on the future of the legal profession to an elite AmLaw 25 law firm. The responsibility of shepherding my presentation fell to a small committee of junior partners. Although they claimed that my future-oriented observations were interesting, they really wanted to understand the future of their own firm. They had spent a decade focused on making partner and were now playing catch-up. Well, that was a pretty big change order. Yet, I was happy for the stretch assignment and did my best to deliver.
The key point is that an elite law firm has a choice to make — a choice based on endowments where, for most firms, the dye has already been cast. When a firm has a top of the pyramid strategy, it is focused on transformative events where (a) the outcome really matters and (b) the C-suite executives don’t want to be second guessed. Top of the pyramid can also apply to clients engaged in ongoing complex financial transactions, particularly when legal fees are rolled into the deal and paid for by third parties. A handful of firms fit the top of the pyramid model, and many more would like to be part of this ultra-elite group. To become a top of the pyramid firm, however, you’ll need a time machine.
An alternate strategy is the traverse the pyramid model. Firms that traverse the pyramid can handle large complex projects that include sophisticated bespoke lawyering along with a large volume of operational and commoditized work that is connected to it. It is particularly valuable when the legal work is global in nature. General contracting this work is complex and cumbersome. Thus, clients are willing to play a premium for a law firm to bundle it together. But a premium is not the same as a blank check. Thus, traverse the pyramid firms need to build and maintain sophisticated systems and staffing models.
Baker McKenzie is a credible traverse the pyramid firm, but there are many others. For all of them, the biggest challenge to execution is the large portion of the line partners, and occasionally lawyers in leadership, who struggle to grasp the strategy. Specifically, the core strategic tenet of this model is that work in the operational and commoditized zones can be re-engineered in ways that improve quality and the client experience while also driving down overall production costs. This is a formula for larger and more stable profit margins. It is also why the traverse the pyramid model requires an investment in legal integrators and operators: they can deliver a “whole product solution,” see Post 024 (discussing power of whole product solutions), that is highly defensible and sticky. Once in place, the barriers to entry are (1) brand, (2) geographic footprint, and (3) the large number of client touch points.
However, when line partners are presented with this strategy, they are often drawn to the tip of the small blue triangle because it signifies bespoke legal services at $900 to $1400 an hour. Many seem to be unaware that the operational and commodity work can be done at 30-40% profit margin with very little partner oversight and that, from a business perspective, that is a profoundly good thing. Stated another way, the partners seem to want a model that preserves their ability to sell their own time at a premium price. The traverse the pyramid strategy, however, is designed to build a highly profitable legal services business with a moat around it.
Perhaps partners are stuck in this mindset because, for the last generation or two, compensation structures have rewarded revenue, which is easiest to rack up when partners and pricey associates do all the work. Or it may be the craft satisfaction of personally creating something they believe to be perfect. Regardless, for the Cambria bet to payoff, Cambria needs to overcome this mindset so, when the time comes, he can push more work down the pyramid in ways that delight clients, cement relationships, and improve the firm’s long-term financial prospects.
One of the core insights of the organizational innovation posts, see Posts 015–017, is that, even in law firms, size is correlated with innovation. This is because size brings with it resources, diversity of talent, and more opportunities to run trials, etc. On balance, these benefits tend to outweigh the challenges of implementation within a larger firm, albeit diffusion theory can also help with the latter. See Post 017 (management roles need to switch between initiation and implementation).
It is hard to believe, but large firms are truly capital constrained. See Post 053. However, if all a firm can muster is 1-2% of revenues for innovation efforts, $2.7 billion (Baker McKenzie’s current revenues) yields a lot more than $350 million (the revenue of the firm currently ranked #100 in the AmLaw league tables). This is why David Cambria went to Baker McKenzie — the strategy just might work.
What’s next? See Studying leadership before the big test, Part I (056)
Elite, one-percenter lawyers are an easy group to vilify, especially from afar. Change agents and disruptors alike need to resist the temptation.
Conference season is in full swing, and legal professionals of varying titles are convening in cities all over the world. Some conferences coalesce around themes, but most events target functional roles both new and old. As more and different roles proliferate around the practice and business of law, some spheres collide or merge (law librarians + competitive intelligence, pricing + LPM, etc.)
These days, everyone – managing partners, the law firm C-suite, the general counsel, legal ops, pricing professionals, legal technologists, marketing, marketing technologists – has a conference dedicated to showing them how to navigate the future. Everyone is meeting, learning, networking, and engaging in dialogue in gatherings of every size, shape and flavor.
Everyone, except the working partner.
Failure to appear ⇒ default judgment
The recurring conference call is a feature of modern professional life. Often, one or more people are late, giving rise to this well-worn piece of office humor: A late arrival offers an apology that falls somewhere between perfunctory and profuse. In response, someone jests, “No worries… we assigned you all the work.”
(How funny or good-natured this actually turns out be depends on a number of factors: the relative importance and current status of the project, personal relationships and professional reputations of those involved, and the varying levels of good feelings or ill will that pervade the team.)
A similar social dynamic plays out at conferences about the legal industry. Whether as a function of exclusion or absenteeism, working partners are not in the room where it happens.
Keynote speakers often sprinkle in one or two jokes about lawyerly tendencies for the easy laugh; these jokes tend to be mild and good-natured. Lawyers are incorrigible! 😂
Panel speakers tell stories that feature some fresh tale of folly, along with the heroics required to overcome their challenge. Knowing heads shake and nod as sympathy flutters across the room. Near-strangers find solidarity in genteel mockery. Lawyers are clueless!! 🙄🤦🏻♀️
Attendees gather in small groups to vent their latest frustrations in hushed, conspiratorial tones, seeking advice from old colleagues and new friends alike. These exchanges tend to be more frank and more angsty; pearl-clutching and NSFW language are both featured in equal measure. Lawyers are 😤 insufferable, 😠 arrogant, 😡 out of touch, 🤬 overpaid!!! 💢
There is also solidarity in shared vitriol, but it becomes weaponized, and the metaphorical crosshairs are often fixed on people who aren’t in the room.
No worries… we assigned you all the blame.
So where are the partners?
A key development in recent years has been the waning confidence of law firm leaders. It’s been many years since managing partners received the “lawpocalypse now” memo, and most firm leaders are trying their best to adapt to a changing market. Over the past few years, however, they’ve admitted openly that they are having a much harder time than anticipated, particularly in creating the same awareness among their partners.
In the most recent Law Firms in Transition survey, 69% of managing partners reported not doing more to change service delivery because “partners resist most change efforts”:
This is not necessarily because they are stubborn, arrogant, or incurious. Big Law partners are not exactly oblivious: in fact, most of them are stressed and worried about an increasingly uncertain future.
But most law firm partners are phenomenally busy, and they spend most of their days under an unbelievable amount of pressure. Many of them put in grueling hours on client work and travel. In many firms, even senior partners receive less administrative support than ever. If they attend an event, it is usually an industry affair for networking and business development. They prioritize these tasks because their standing within the firm depends on it, and because that position seems less secure with each passing year.
Most law firm partners are not reading books about the future of law or legal service innovation, because there are people at the firm who are paid to do that. They are not following breaking news about ALSPs, which are growing fast but still comprise less than 1% of the legal services market. They are not following what the Big 4 are doing in high-volume, low-margin areas that have no relation to their own area of practice. Mostly, they are focused on doing what they know.
And they are likely to continue down that path until they hear from the only stakeholder that matters to them: their own clients.
There are many echo chambers, but this one is mine
The last decade has spurred greater interest in dialogue about the future of law. This is, on balance, a good thing: the number and quality of communication channels positively influences the rate of innovations. See Post 008 (explaining the key variables that determine rate of adoption).
In 2018, the legal industry has more communication channels than we did even five years ago. Some are high in quality. I worry, however, that our communication channels are splintering the industry into sharper and more brittle factions.
Let me give some context for my concern. The legal industry has been under enormous pressure since the Great Recession – this we all know. Most professionals working in legal businesses are suffering from change fatigue. The dialogue, in short, is getting a bit more heated and a lot more cynical.
Take the ongoing debate over the word “non-lawyer“: it is complicated because it’s symptomatic of the long-simmering resentment of allied professionals. Professionalization of a new role is a difficult undertaking. Pioneers must build content to standardize language and practices in tandem with a community of practice that will accept and uphold those standards. But the most taxing work, in my view, is the murkier challenge of building legitimacy and market acceptance – and in this instance, that market has been comprised of lawyers.
Legal marketers, project managers, pricing officers, legal technologists, and legal ops professionals all have stories to tell about the bad behavior of lawyers. In these war stories, lawyers almost always fail to recognize the value or respect the legitimacy of other professions. The “non-lawyer” grievance neatly and implicitly captures the indignation and resentment of the marginalized.
Against this backdrop, it makes sense why change agents seek out forums filled with like-minded people who “just get it.” Conferences fit the bill: “something of a ‘high school reunion’ for professionals who have been in the change management game for some time.” Strom, “The Law Firm Disrupted: In Heavyweight Bout, It’s Clients v. Law Firms,” Law.com, May 18, 2018.
At their best, conferences function as important forums for continuing education and professional development – two things that are desperately needed for the legal industry to keep pace with the markets it serves. Apart from content and programming, the social aspect is also important. Professionals, especially those in emerging roles, often need the support of a community of peers and mentors that share similar challenges in similar contexts.
A place to share stories and perspectives is important and valuable, but much less so when the gathered group is homogenous in viewpoint and attitude – and not at all when the talk turns to complaining and commiseration. We are all subject to the temptation of groupthink because it is much more pleasant to hear our own worldview affirmed and to be told that we are fighting the good fight.
It all becomes a bit problematic, however, when we fixate on a common enemy who also happens to be a constituent and stakeholder in the very industry we want to transform. Gentle mockery can devolve very quickly into meanness and schadenfreude when talking about people who are not in the room. Any misperceptions or knowledge gaps we might have about their challenges and constraints will persist, while repetition makes us more confident in what we believe.
Anonymous shade and public diatribes
A couple of years ago, Casey Flaherty wrote a book for corporate counsel called Unless You Ask. It is an excellent and comprehensive guidebook designed to help in-house counsel drive structured dialogue with their firms on how they might create or provide greater value. I have read the entirety and I highly recommend it, but that’s not why I bring it up. I bring it up because the origin story of the book is fairly indicative of the current state of “dialogue” in our industry.
For many years, Altman Weil posed a series of questions to both law firm leaders and Chief Legal Officers:
- How much pressure are corporations really putting on law firms to change the value proposition in legal service delivery?
- How serious are law firms about changing their service delivery model to provide greater value (as opposed to simply cutting costs)?
These questions provided reliable fodder to deride firms. Here is a side-by-side comparison of how each group rated the seriousness of firm efforts to change:
There are two basic points of interest in the chart above. The first is glaring and has been noted widely: there is a material perception gap separating the client and firm viewpoints. In 2018, this gap (based on the average) amounted to two full points on an 11-point scale, meaning law firm leaders consistently graded themselves more generously than clients did over the same period.
The second point of interest is that more clients appear to be growing disenchanted with law firm commitment to change. In 2012, one in ten CLOs rated law firms as “not serious at all”; by 2017, that proportion had grown to one in six. The clients at the very edges of dissatisfaction with the status quo are most likely to articulate pain points and unmet needs and to actively seek new solutions from a wider range of providers. These clients are also likely to self-identify and coalesce into like-minded groups in forums like ACC and CLOC to facilitate knowledge sharing across companies.
Often, it is this vocal minority that make up the early markets: they are the innovators and early adopters who are very often featured in conference keynotes and panels and interviewed and featured by legal publications. Keep this group in mind — they will feature in this discussion again.
In 2015, Altman Weil upped the stakes by asking firm leaders why they weren’t “doing more to change,” and firm leaders responded with stunning candor:
For most pundits, the top two responses provided proof positive that Big Law was doomed to 🧐🧐🧐 their way to certain extinction. Law firms were roundly excoriated.
Over the following year, Casey wrote his book because he understood something worth restating here today: most clients really do not ask. There are a handful of clients who give very good talks at conferences about the change imperative facing us all. Others give extensive interviews explaining the broad challenges of the industry. Most of this group is in the vocal minority.
From time to time, a scathing denunciation of firm behavior by a client might be quoted with attribution, but the veneer of civility ensures that no names are mentioned. In other instances, clients will register their displeasure through some strongly worded but anonymous comments to reporters about things like associate compensation. For the most part, clients continue to give tepid grades to firms in anonymous surveys and scorecards.
But by and large, the majority of clients aren’t holding direct conversations with their relationship partners at their primary firms about what they specifically want. This much has been apparent for years to close readers of the Altman Weil survey: below is another side-by-side view of how CLOs and law firm leaders have answered the question about corporate pressure on law firms to change.
Constructive dialogue must happen at conferences and at your place of work
Let me be clear. The problem isn’t that clients and/or change agents sometimes say unkind things about lawyers behind their backs at conferences. The real issue is that we need to have more tough conversations in our own place of work with our own colleagues, clients, suppliers, and stakeholders.
In two positive examples, constructive dialogue happened in spades at recent conferences:
- “Whose Fault Is It?” at LMA P3 Practice Innovation Conference
- “Transforming the Client-Firm Relationship” at the ACC Legal Ops Conference:
The first was framed as a gladiatorial battle but progressed as a debate, pitting firms against clients to decide who is to blame for the glacial pace of progress in pricing innovation. The second was less controversial in format, with a panel of speakers leading table discussions on real-world scenarios and problems that arise in client-firm relationships. Both of them were designed to feature multiple viewpoints, from law firms as well as law departments. Panelists spoke frankly about their constraints and their frustrations, pushing attendees to consider not only the familiar perspectives of their peers but also the unfamiliar challenges facing their counterparts and stakeholders.
Constructive does not mean pleasant. However polite or well-intended, disingenuous consensus is ultimately not constructive. Difficult dialogue may be stressful but festering resentment is usually toxic. Meaningful change cannot happen with some collision of differing opinions, but candor need not be feared if we work to preserve civility.
With those points in mind, we need to include working partners in the dialogue about legal services innovation. Too many change agents within law firms go around in circles without understanding why partners resist change. Too many pundits dogpile on lawyers for arrogance or avarice without considering context.
It is a competitive disadvantage for any business to believe its customers or competitors are stupid or crazy. Firstly, all people sense antagonism, learn to anticipate it and become more defensive over time. Secondly, the assumption that some stakeholders behave in a way that eludes our understanding makes our own thinking lazy: when we see people as incomprehensible we stop trying to understand them. Lastly and most importantly, it is nearly impossible to change anyone’s mind while dismissing their worldview, thinking lowly of them, and sort-of-semi-secretly wanting to see them punished.
As frustrated as we might be with the pace of change, the industry is making progress — and that progress happens in actual conversations that take place behind closed doors. It might not be visible on Twitter or in headlines, but more clients are asking, new entrants continue to experiment, and law firm leaders are still trying.
Enjoy the conference season. When you get back to the office, though, I hope you will try a bit harder to empathize with the people who weren’t in the room.
What’s next? See The Godfather just lateraled to a law firm (055)
Are you a mid-market firm worried about the cost and risk of innovation? UnitedLex is offering a turn-key solution.
By any objective standards, equity partners working in AmLaw 200 firms are rich. Even firms at the lower end of the profitability scale are filled with 1-percenters ($481,000+ per year). So why, then, do law firm leaders complain about lack of access to capital to finance much needed law firm innovations?
Based on recent news, we can ask the question another way: Why do we need a entity like UnitedLex’s ULX Partners to bear risk for a firm like LeClairRyan (325 lawyers, 25 offices)? See Rozen, “UnitedLex and LeClairRyan Announce Innovative New Law Venture,” Law.com, June 13, 2018.
Many of us struggle to answer this question, at least succinctly, because we start with the assumption that large law firms are unified businesses. But that’s not quite right. Law firms have revenues because partners are out there hustling work, typically by selling a combination of personal expertise and responsiveness. Partners who have built and managed a decent-sized practice know they need IT, office space, associates, support staff, and even marketing, if only to respond to RFPs. Yet, partner books are often an idiosyncratic mash of clients that vary widely by industry, price sensitivity, legal spend, and appetite for change. See Post 048 (clients vary by size and adopter type, making generalizations hard); Post 013 (same).
At a practical level, this means that firm leaders struggle to explain to partners why a meaningful slice of profit needs to finance “innovations” that are (a) relevant to only a subset of clients, and (b) require partners to learn and change. If law firm leaders push the innovation envelope too far, big-producing partners might leave. So here is the answer to our question: Law firms need capital because their own partners are reluctant to pony up, at least in the quantity needed to compete with VC- and PE-backed NewLaw companies.
Despite these challenges, a surprising number of law firms are going down the innovation road–~10-15% of the AmLaw 200. If I were a law firm leader who had successfully sold such a plan to my partners, I would be worried that the P3 professionals (pricing, project management, process improvement) we worked so hard to find and train will get poached by competitors. Cf. Henderson & Zorn, “The Most Prized Lateral Hire of 2015 Wasn’t a Partner,” AmLaw Daily, Feb. 1, 2016 (discussing poaching of four-person P3 team from BLP to Herbert Smith Freehills). Of course, if I failed to sell such a plan, I would be worried that I was presiding over a hotel for lawyers (a two-star hotel at that).
These are very serious challenges to manage. It’s also the problem that ULX Partners is designed to solve.
This post is being written on the last day of the ACC Legal Ops conference in Chicago. During one of the sessions earlier this week, I heard a legal department ops professional advise his peers that “it’s a good idea to engage with the law firms’ price and project management professionals” because “these folks are also doing legal ops, but from the law firm side.” Others in the room agreed. This is evidence that a true sea change is taking hold.
Yet, I have been a regular attendee at these ops conferences, and often the most expert panelists work at NewLaw providers, with UnitedLex and Elevate typically jockeying for the pole position. These companies have the largest and deepest bench of seasoned legal ops professionals. And because these companies are not law firms, lawyers and allied professionals work together as co-equals in terms of status, bonus, and equity. Consistent with Clayton Christiansen’s disruptive innovation, these companies started with rebar (e-discovery) but are now climbing the value ladder toward high-grade steel (strategic work on par with bespoke practitioners).
For many years, CEO Dan Reed has been hinting that UnitedLex is on the path to become something like Accenture, but pointed at the corporate legal services market. To made that a reality, however, UnitedLex has to reconfigure (disrupt or dis-intermediate are too strong a word) the traditional client-law firm relationship. BigLaw has tremendously valuable client relationships. However, much to the disappointment and frustration of the legaltech world, those relationships are almost never used to introduce clients to innovation by third-party companies. See Post 025 (discussing law firms as failed distribution channels for legaltech innovators). Thus, most NewLaw providers focus primarily if not exclusively on legal departments.
Why do we need a legal structure like ULX Partners?
The short answer is that partners need a way to co-venture with highly talented allied professionals without running afoul of Rule 5.4, which prohibits lawyers and nonlawyers from sharing ownership interests in a business that is engaged in the practice of law.
The figures that follow are designed to show how 5.4 shapes, but hardly prevents, how capital finds opportunity in the legal market. We start with Figure 1, which reflects the familiar schema that is in our heads. If we innovate, we are innovating to change this baseline model. By the way, the baseline model is much more powerful than some might realize, as it reflects the status quo. More on that latter. Figure 2 reflects a configuration that is starting to take shape. If you were at the ACC Legal Ops conference or at CLOC, this is likely how you view the legal market.
Figure 3 adds in NewLaw’s current point of entry. Note that NewLaw has lots of lawyers along with allied professionals. Because its core business is legal ops / P3, NewLaw invests a lot in vetting technology, building sophisticated workflows, and measuring with data. Most legal departments and law firms can’t keep up with this level of sophistication. NewLaw, however, can’t engage in the practice of law. So, as a workaround, lawyers — usually in purple but sometimes in green — have to “supervise” them.
Figure 4 shows what Accenture’s legal vertical would look like but for Rule 5.4.
The UnitedLex-LeClairRyan initiative will conduct its business through an entity called ULX Partners, LLC, a Delaware Limited Liability Company with several subunits organized other the laws of Florida, California, Massachusetts, Virginia, and the District of Company. This structure has surely been set up so that no ULX Partner revenue accrues from the practice of law–i.e., no ULX employee will be signing pleadings, making appearance on behalf of clients in court, writing opinion letters, or negotiating with regulators at the FTC, DOJ, or EPA, etc. But absolutely every other activity that occurs within a law firm, including all the pre-work done by associates, staff attorneys, and other professionals before the partner signs off, can potentially be done better, faster, and cheaper inside ULX Partners.
UnitedLex will be the majority owners. LeClairRyan will be a minority shareholder, with ULX Partners set up to take on additional member firms. The law partners will continue to manage client relationships and perform their usual work. In the meantime, ULX Partners can drive lower-cost, higher-margin engagements. To make this as concrete as possible, about 300 employees of LeClairRyan will be “re-badged” as employees of ULX Partners. Instead of issuing paychecks to these folks, LeClairRyan will pay a service fee to ULX. If this workforce gets supercharged through UnitedLex’s superior legal ops capabilities, LeClairRyan will share in the upside as a ULX owner.
Capitalists and regulators
‘If the law firms themselves can’t have outside investors, the market will continue to chip away at every part of a law firm that is not the pure provision of legal advice,’ says Nick Baughan, a managing member of investment banking firm Marks Baughan & Co., with offices in Conshohocken, Pa., and London. ‘Anything that can be provided legally by a third party will be.’
Rose, “Law, the Investment,” ABA Journal, Sept. 2010 (also quoting the late Prof. Larry Ribstein, “The question used to be: ‘Will the ABA change Rule 5.4?’ … The question now is, ‘Who cares?’”). For the last decade or so, Baughan’s firm has been running a large proportion of the major legaltech deals. So if this feels new to you or me, it’s old news to the professional investors tracking the legal sector.
Now that the market has shifted in a way that could really disrupt traditional law practice, it’s possible state bar regulators will interject themselves into these more aggressive NewLaw structures. This has long been a risk factor in NewLaw PPMs.
That said, regulators will have to work very hard to find a public interest rationale in Rule 5.4 or Rule 5.5 (pertaining to the unauthorized practice of law) that will contain NewLaw’s growth. These rules are grounded in a presumption of asymmetric information between lawyers and unsophisticated clients. If knowledge is asymmetric, clients have little choice but to trust lawyers. Thus, under this policy rationale, lawyers as a group must be completely independent. Obviously, this asymmetry does not exist in large corporations with legal departments comprised of former BigLaw lawyers. As a result, protectionist motives dressed up as consumer protection won’t cut it. Ironically, NewLaw will have no trouble finding BigLaw lawyers willing to take their case.
Why would a law firm join ULX Partners?
Well, I can think of five reasons, with higher profits being the least important.
- More Profit. UnitedLex CEO Dan Reed claims that ULX Partners will increase partner profits by 5-15%. See Strom, “Will LeClairRyan’s UnitedLex Deal Be the Accelerant Big Law Innovation Needs?“, June 13, 2018. This is certainly possible, albeit it depends upon the level of internal adoption by the lawyers inside ULX member firms. For this to have been the primary driver of the deal, LeClairRyan partners would have made business judgments based on models of future cash flows and profit margins. This is too much math and too much uncertainty for the typical line partner. I don’t buy it. Profit is, at best, icing on something else.
- Cost of innovation efforts. A credible legal ops team inside a major law firm is going to cost between 1-2% of firm revenues. There is a lot of talk that such teams will productize firm offerings and become freestanding profit centers. A few have, see Post 039 (Chapman and Cutler), and more will. But not in the first year or two. Further, there are indirect, but extremely significant, costs associated with training and change management. Through ULX Partners, UnitedLex bears the start-up costs and associated headaches.
- Risk of slow or uneven adoption. If a firm built its own legal ops team and did everything right, clients may not adopt at the rate and volume needed for a fair return. Last week, I heard a innovation officer at an AmLaw 200 firm say that his firm took the ACC’s Value Challenge seriously, making major investment in people, process, technology, and data. When shown the output, however, many clients continue to just ask for a fee discount. Cf Post 048 (corporate clients still in early adopter stage). Innovation requires clients to (a) think, and (b) think in a different way. Not all clients are ready. ULX Partners off-loads this risk to UnitedLex.
- Risk of innovation failure. A firm could expend money on its own legal ops team only to get its talent poached. Alternatively, the firm leadership could underinvest in change management, resulting in faulty execution and plummeting firm morale. “For god sakes, can’t we just sell time?”
- Focus on the practice of law. Partners excel at counseling clients, dispensing legal advice, advocating, negotiating, and developing clever solutions to knotty problems. In the past, they have been paid well for this work. If keeping it requires them to bundle in NewLaw features, they would be most grateful for low-cost, non-compulsory solutions that leave them in control of their own practice. Cf. Post 040 (describing Flaherty’s “Lawyer Theory of Value”). Most partners want to reserve their white space for things related to the practice of law. Let UnitedLex worry about everything else.
These are five very compelling reasons to ink a deal with UnitedLex. But will other firms follow suit? And if so, when? The answer to these questions is complicated.
Why did LeClairRyan go first?
LeClairRyan is not your typical AmLaw200 firm. It was founded in the mid-1980s by Gary LeClair, who specializes in venture capital businesses, and Dennis Ryan, a now-retired tax lawyer. So it is a “young” AmLaw 200 firm. Gary stepped down as chairman in 2015. But during his tenure, he was one of the most visionary and innovative law firm leaders I have ever met. He is also a person of exceptional discipline and character who attracts a large client following. Thus, Gary always had the respect of his partners even if only a few had the time and patience to digest the full sweep of his futuristic thinking.
One of the consequences of a decade or two of give-and-take with Gary is that LeClairRyan partners understand the shifting economics of modern practice, at least compared to other AmLaw 200 lawyers. Under LeClair, the firm did a large deal with UnitedLex around the firm’s e-discovery practice. See Cassens Weiss, “LeClairRyan opens ‘legal solutions center’ in collaboration with tech company,” ABA Journal, Nov. 1, 2013. The current CEO of LeClairRyan is Erik Gustafson, a litigator who formerly served as head of the firm’s litigation practice. For the five reasons listed above, plus a longstanding relationship of trust with UnitedLex, Erik and the firm’s executive committee were able to make business decision on par with a corporate client in a highly competitive sink-or-swim business environment.
What firms will go next?
I suspect and hope that UnitedLex gets a few other takers in the relative near term. (They will get a lot of meeting with law firms, primarily to shake them down for competitive intelligence. David Perla has an obscene term to describe this ritual. Fill in the blank: grin ____ .)
The most receptive firms would be in the NLJ 100 to 300 range with a diverse range of practices (i.e., not specialized). These firms would also need an innovative-visionary-realistic leadership team and partners who want to stay middle-market for reasons related to clients and culture. Suffice it to say, this is not a long list. If, three or four years from now, ULX member firms get their promised 5-15% return and praise from clients regarding service delivery, UnitedLex may get the early majority to tip, see Post 004, setting off rapid adoption in the rest of the social system. Dan Reed and his senior leadership team will be declared geniuses who changed everything. And they will deserve it.
However, this could play out in a different way. The most lucid account of BigLaw’s possible futures can be found in TomorrowLand by Bruce MacEwen. First among the eight competing scenarios for how the market might evolve is Chapter I, “Nothing to see here, folks; move along.” Its core point is that all noise from the blogosphere and legal press may be nothing more than Chicken Little. Through the passage of time, BigLaw proves itself endurable. If Chapter I is right, doing nothing is the wisest strategy.
Chapter II is titled, “Lawyer Psychology and the Partnership Structure Win.” In this scenario, law firms also do nothing. The difference is that “outside forces impose urgent requirements that [firms] change, but they simply cannot bring themselves to do so. This scenario, in short, is populated by firms that would rather fail than change” (p. 26).
This is a funny line. But I have spent enough time around large firm lawyers to understand how this would play out. In fact, it’s a short walk to failure:
- Should we build out our own innovation team? “No, there is too much upfront expense and risk.”
- Should we do a deal with UnitedLex? “No, there is too much brand risk.”
- Can we at least merge with another firm so we can get some economies of scale to grapple with innovation? Cf. Post 016 (size associated with greater organizational innovation). “No, we need to protect our unique firm culture.”
- Well, more of our clients are clamoring for the type of solutions offered by NewLaw and our innovative peer firms. What should we do? Partner 1: “I don’t care because I’m retiring.” Partner 2: “I don’t care because I’m lateraling to a more innovative firm.” Partner 3: “I knew this would happen.”
Perhaps this is what game theory would predict. I think the ranks of the NLJ 350 are going to get thinned out, either through planned mergers, rescue mergers, or run-on-the-bank implosions. But lawyers with their own books of business will never miss a meal.
The UnitedLex-DXC Deal
It is important to remember that UnitedLex is maneuvering on several fronts. In addition to its current point of entry (Figure 3) and ULX Partners (Figure 5), it recently launched a deal with DXC, a large information technology and professionals service firm. See SenGupta, “In-house legal teams take the lead on speed and spending,” FT, Dec. 11, 2017; Orum Hernández, “UnitedLex to Support Bulk of DXC Technology’s In-House Department,” Corp. Counsel, Dec. 5, 2017.
DXC is the product of a merger between Computer Sciences Corporation (CSC) and the Enterprise Services business of Hewlett Packard Enterprise (HPE). The new company has roughly $26 billion in annual revenues, which will eventually place it in the top quarter of the Fortune 500.
In the post-merger company, a portion of the lawyers and staff from CSC and HPE legal departments were re-badged as UnitedLex employees (and others were laid off). According to the press release, UnitedLex now “deploys more than 250 senior attorneys, contract and commercial professionals, engineers, and other experts in support of DXC around the globe.” Interestingly, AdvanceLaw is another part of this deal, handling the selection and management of DXC’s panel of outside law firms. See Sprouls, “Welcome to Legal 2.0,” Modern Counsel, Dec. 13, 2017. UnitedLex projects a 30% cost savings along with greater price certainty. Other anticipated benefits include a bump in quality and transparency.
Figure 6 shows the UnitedLex-DXC configuration, which is yet another Rule 5.4 workaround.
DXC’s general counsel, Bill Deckelman, believes that the sourcing and management system they have put together is “Legal 2.0.”
Last week, I attended a plenary at the ACC Legal Ops meeting that included Deckelman along with the GCs of Walmart, Medtronics, and Chicago Public Media (who had previously worked at Motorola Mobility). After Deckelman explained the new platform with UnitedLex, one of the GCs expressed tremendous skepticism that any cost saving would be worth the risk. Her point was that lawyerly judgment requires business context, and that context is made more attenuated through such aggressive outsourcing. (The other two GCs are building out a mix Figure 2 and Figure 3 models, so they listened with interest.)
What the skeptical GC did not grasp, however, is that DXC is a professional services firm whose core business is the sale and execution of outsourced solutions. DXC has decided to eat its own cooking. Further, although most GC’s are anxious to protect and preserve their headcount — because headcount equates with status and power in most corporate environments — operational legal work is not core to any business with the exception of insurance. The last 20 years have been characterized by an in-sourcing binge of legal work. See Post 003 (graphing growth). The next 20 will be focused on outsourcing to NewLaw or innovative AmLaw200 firms. Either way, UnitedLex wins. See Figure 5 (ULX Partners); Figure 6 (UnitedLex-DXC). The timing, however, may still be an irritant to Dan Reed and many others.
Still a very slow bake
Folks, I am going to make a point grounded in diffusion theory. But this puts everything into full perspective and is arguably the most important point in a very long post. Sorry, it had to come last.
For a moment, consider the Figure 1 baseline model.
Each one of the lawyers in purple and green has a view on how things are going and what needs to be changed. In a corporation, the legal budget (in-house and outside counsel) runs around .3% of revenues with variations by industry. See Henderson & Parker, “Your Firm’s Place in the Legal Market,” American Lawyer, Dec. 2015. Is that too much money? Well, are we talking a relatively simple thin-margin business (e.g., transportation or retail), or a complex business involving IP and extensive regulation (telecom)? A lawyer content with the status quo can spin a story of risk best managed by a big in-house team and/or elite outside counsel. How many CEOs or CFOs can see through the law-is-a-black-art handwaving? Probably not many, though their ranks are growing as they compare notes while socializing.
Granted, agency costs are not the full story. Quite a bit of change is driven by the desires and preferences of innovator/early adopter lawyers (on both the client and law firm sides). It’s just that actual client urgency, and thus law firm urgency, is far from a given. It is also distributed unevenly and somewhat randomly.
Now, consider the UnitedLex configurations (Figures 3, 5, 6) in light of the perceived innovation attributes of the Rogers rate of adoption model in Post 008 (five factors explain 49-87% of rate of adoption). See also Post 011 (slow versus fast innovations).
- Relative Advantage. It really depends on the intensity of pressure placed on legal departments. Exogenous forces can help, as Pangea3 and Axiom were dramatically aided by the 2008 financial crisis. See Post 032 (Pangea3); Post 036 (Axiom). Pressure is steadily increasing — Richard Susskind’s “more-for-less” challenge — but not necessarily on the timetable of VC and PE investors.
- Cultural Compatibility. NewLaw scores low on compatibility, albeit crossover at CLOC and ACC are slowly changing that. UnitedLex and others need to continue the basic blocking and tackling. Theses are the “efforts of change agents,” which is an important rate-of-adoption factor. See Post 008 (reviewing full model, including change agents); Post 020 (going deep on change agents).
- Complexity. Very complex. UnitedLex is not offering a smartphone app. This slows adoption.
- Trialability. Not really. A trial on low stakes work is dismissed as not a real test. The really transformative stuff requires a commitment + effort + time. The client must believe in reason, data, and the experience of other industries. This slows adoption.
- Observability. Really hard to do. I have done site visits and web/conference demos and have been impressed. But that still takes a lot of effort for potential clients. Client testimonials can help here, but are they from opinion leaders? See Post 020 (opinion leaders needed to tip early majority). DXC and LeClairRyan don’t fit that bill, as they are innovator/early adopters. Cf. Post 052 (discussing need of right types of reference clients for pragmatist mainstream market). Higher PPP by itself won’t do it, as the causal relation will be contested.
In summary, ULX Partners (and the UnitedLex-DXC model) appears to be, at best, a slow innovation. See Post 011 (fast versus slow innovations). UnitedLex is competing against in-house legal ops and more innovative law firms, see Figure 2, which are (a) more culturally compatible and (b) require less complex changes in how the work gets done. For some clients, in the short to medium-term at least, these factors may weigh heavier than lower cost and higher quality. Remember these adoption decisions are made by groups of lawyers. All day long, collective adoption decisions impede the diffusion of valuable innovations. See Post 008 (basic model); Post 048 (comparing individual and corporate markets based on type of adoption decision). This is why leadership is so crucial — to serve as a counterweight to paralysis-by-analysis so common among lawyers.
Lawyers might confuse slow change with no change. But they are different. Further, to benefit from slow change, you might need to act very soon in relatively significant ways lest the door of opportunity permanently close. One can’t put off change for a decade and then, when the heat gets unbearable, change overnight.
Appendix on ElevateNext
ElevateNext appears to be a cross between the two UnitedLex models. Basically, most of the legal department functions, including outside counsel management, are being moved to ElevateNext, a law firm that will be very tightly integrated with Elevate Services. The client in this case is Univar, a global chemical company currently ranked #349 in the Fortune 500.
Under this configuration, those practicing law in ElevateNext have best-in-class process, technology, and staffing options. This effort is being engineered by Univar GC Jeff Carr, who is famous in in-house circles for his ACES model and his excellent track record at FMC Technologies, see, e.g., Davis, “Playing with ACES,” ABA Journal, Oct. 7, 2009. In fact, this opportunity got Jeff to un-retire. Thus, ElevateNext will be highly incentivized to optimize their use of Elevate legal ops functions. Also, when Univar needs the specialized expertise of a law firm, the firm will enter into an ACR with Univar, but ElevateNext lawyers (i.e., another law firm) will, in most cases, manage them. (By the way, the DNA here descends from Mark Cohen and Clearspire.)
The analysis on the UnitedLex models applies wholesale to ElevateNext. Jeff Carr is a thought leader, but he is not an opinion leader that triggers the early majority to follow. Instead, they watch with interest, as happened with the ACC Value Challenge. All of this will take longer than reason or self-interest would suggest.
What’s next? See BigLaw partners aren’t dumb: they are just not in the room (054)
Innovative products and services feel magical to the user. To create that feeling, however, innovation teams must grind through lots (and lots) of work. Fortunately, we have a playbook.
The core insight embedded in Rogers Diffusion Curve is that the adoption of new ideas occurs in a specific order through a social system comprised of five distinct segments. See Post 004 (introducing diffusion curve); Post 007 (explaining adopter types). Rogers’ research eventually found its way to Silicon Valley and got relabeled the Technology Adoption Life Cycle. See Posts 024–026. Along the way, technology marketer and consultant Geoffrey Moore added a key modification: a material gap, or “chasm”, between early adopters and the early majority. If a company can “cross the chasm”, commercial success becomes inevitable, as sales then occur largely through a social process of one peer imitating another.
To boil it down, Rogers proves out the science, while Moore provides the playbook. This one-two punch dramatically increases the odds of successful innovation adoption. But let’s keep it real: This is a lot more work–and deeper thinking–than law firms are used to.
One of Moore’s most useful adaptations to Diffusion Theory is the use of buyer personas to correspond with each adopter type. Moore’s book Crossing the Chasm is peppered with many detailed narratives about the trials and tribulations new product teams encounter in their efforts to sell to each persona/adopter type. The persona approach is a profoundly powerful way to design a product or service offering that the target end-user finds irresistible.
Below is a summary of how to apply Moore’s buyer personas to the legal market.
1. The Early Markets, Where Things Often Go Swimmingly
In his discussions, Moore provides a practical description of a functional job each adopter type tends to perform in the diffusion process. This post draws heavily on Chapters 2 and 3 of Crossing the Chasm, but with particular emphasis on Early Adopters and the Early Majority.
Innovators / “Techies”
Techies often embrace the nuts and bolts of how stuff actually works. Over time, Techies tend to amass a wealth of technical knowledge through self-initiated and self-sustained study.
In its earliest days, an innovation needs social proof to validate not only its novelty but its objective superiority. Moore describes Techies as “the gatekeepers for any new technology… the ones everyone else deems competent to do the early evaluation” (p. 39).
Of all five adopter types, Techies have perhaps the most straightforward and unambiguous job: to curate and assess new technologies or methodologies and endorse those with true technical superiority over currently available alternatives.
Early Adopters / “Visionaries”
Visionaries have both the imagination to see the world as it could be rather than as it is and the ambition to try to make those possibilities the new reality. Curious and ambitious, they gravitate toward high-impact, high-visibility roles within organizations. Along the way, Visionaries often gain access to significant discretionary budgets earmarked loosely for “strategic initiatives.”
The innovation function of the Visionary is easily described but exceedingly difficult to perform. Visionaries match emerging technologies or new ideas with systemic opportunities to drastically reshape existing markets. In other words, they identify business opportunities for a strategic leap forward. This requires not only an already rare combination of innate traits (curiosity, risk tolerance, openness to new ideas) but also an asset acquired over some years of experience: deep domain expertise in a specific industry.
“Huge, if true”
In the parlance of renowned venture capitalist Marc Andreesen, the most ambitious and canny Visionaries find and bet on ideas that will be “huge, if true.” Their work looks and feels nebulous because it is.
Moore’s critical insight here is that Visionaries balance risk against reward: they must perceive reasonable potential for significant breakthroughs to justify the risks attendant in sponsoring new ideas. To the uninitiated, Visionaries are regularly seen signing irresponsibly large checks to sponsor the development of murky endeavors that are often nothing more than a doodle on a whiteboard. The gift of vision enables this group to see the possibility of what Moore calls “order-of-magnitude” returns in the competitive positioning of their business (p. 44).
Given the stakes, Visionaries present as the least price-sensitive adopter type, and money is usually not the type of capital that is top of mind for them. Rather, they tend to hold their reputations and political capital at a higher premium. As a buyer group for new products or services, Visionaries like to structure deals into pilot projects, replete with milestones and other signifiers of measurable progress. The perception of smooth progress toward tangible “wins” is critical for Visionaries to maintain not only their social status but also their professional standing.
Techies + Visionaries Make Unlikely 💖 Pairings That Make Perfect Sense
At first blush, Techies and Visionaries tend to look and sound quite different, and the collision of their two worlds often take casual observers by surprise. Many Techies are self-proclaimed nerds who dig deep into their chosen area of interest. Visionaries tend to be well-connected individuals who travel far and wide, always in search of a new idea that will spark their next “initiative.”
But the natural affinity between these two types is quite easy to understand when viewed through the lens of shared values. Both groups seek new things, though for purposes that are quite different in both behavior and motivation.
Techies and Visionaries each provide an invaluable service by performing key jobs that advance the goals of the other. Techies willingly volunteer their time, effort, and expertise to curate and test new offerings, but they often lack the social and professional standing to make things happen. Visionaries are big thinkers who share the Techies’ future-orientation, but with the upwardly mobile executive’s knack for imposing their goals onto the agendas and budgets of a well-resourced organization.
Thus, Techies and Visionaries tend to form symbiotic relationships that provide mutual benefit and fulfillment. Perhaps because of this unusual affinity, innovations that target Techies and Visionaries in the correct sequence are able to build impressive traction in early markets.
2. Into the Chasm, Where Things Get Dicey
When Bill first introduced the five adopter types, he had this advice to offer: “If you want your innovation to be adopted, don’t waste time trying to convert the early majority, late majority, or laggards. You only have one audience that matters – early adopters.” Post 007.
This is excellent advice. The work of taking innovations off the paper, out of the lab and into the real world requires the successful penetration of early markets. In these early days, Visionaries are crucial to the innovation effort because they perform critical jobs for which they are uniquely equipped.
But why do so many innovation initiatives stall in the chasm, even with the support of the Early Adopter?
This is a critical question for our industry. See Post 051 (positing that the true bottleneck in legal innovation is a commercialization gap). The latest Altman Weil survey of law firm leaders reports that 38.3% of firms are actively engaged in creating special projects to test innovative ideas or methods – down from 50.4% in 2017. While the decline is concentrated in smaller firms, the dip in experimentation suggests that the chasm threatens to dampen the overall pace of innovation in legal markets.
If you hope to scale innovation beyond experiments in the lab, understanding the psychographic (the “why”) and functional (the “how”) dynamics around the chasm is a must. An examination of the often fraught relationship between the Early Adopters and the Early Majority who bookend the chasm is particularly instructive.
Simply put, the chasm exists because the buying criteria and performance expectations of these two groups are so dramatically different. These very differences form the crux of why Early Adopters make poor reference clients for the Early Majority.
The perpetual tension between Visionary Early Adopters and the Pragmatist Early Majority stems from many dispositional differences, but there is one factor that we must always keep in mind. Despite the best of intentions and the best of efforts, the Visionaries’ bets do not always pay off. The hoped-for “order of magnitude” returns fail to materialize, and the new idea, product or service is found insufficient to catapult the innovation sponsor ahead of the competition.
In these unfortunate instances, it is often a Pragmatist, not the Visionary, who sounds a quiet death knell for the innovation experiment.
3. Pragmatists Hold the Keys to the Mainstream Markets
When David Cambria, the Director of Global Legal Operations at ADM, and Jeff Carr, the General Counsel of Univar, talk of “massive passive resistance,” or MPR, they are describing the attitudes of mainstream markets.
No single person or segment among the Early Majority, Late Majority, or Laggards holds nearly as much influence or prestige as the Techies or Visionaries who comprise the early markets. All the same, the mainstream markets derive massive power from massive numbers – and their passivity actually makes them more intractable. They are hard to understand because they are not as vocal or as distinctive as the early markets, and markets that are not well understood are hard to penetrate. Unfortunately, the failure to understand 85% of the target audience usually portends a slow but certain death for any new process, product or service.
Techies and Visionaries are united in their continual quest for new things, but mainstream markets are equally unified in the opposite direction. The vast majority of B2B buyers do not care for novelty. Rather, mainstream markets generally seek proven, complete solutions to known problems. Lack of clarity on either side of the problem-solution equation usually translates to substantial costs to educate the market. Within each organization, change agents also must contend with the costly battle against legacy infrastructure and cultural antibodies reinforcing the status quo.
Early Majority / “Pragmatists”
Pragmatists tend to gravitate toward roles of responsibility and stewardship in sizable corporations and in professional communities. Hence, Pragmatists are often the de facto keepers of the core company budget as well as industry standards and best practices.
According to Moore, the “Fortune 2000 IT community, as a group, is led by people who are largely pragmatist in orientation” (p 55). We can easily envision how this type would dominate positions of authority across legal functions of the same companies, and the description fits reasonably well for practice group or industry group leadership roles across NLJ 500 law firms.
An Advanced Exercise in Empathy
As a buyer group, Pragmatists are practical, stringent and value-conscious for entirely rational and comprehensible reasons. Early markets opt into their innovation roles, but Pragmatists have their responsibilities thrust upon them. Pragmatists are the ones usually held internally accountable for building, integrating, testing, debugging, and maintaining a new reality but at realistic levels of cost and effort – all while supporting their entire organization as it is nudged and prodded through all the unpleasantness of learning a new way to work.
For the would-be entrepreneur or intrapreneur, the skeptical demands of Pragmatists throw cold water on all the dreams nurtured by early market success. For that reason alone, an “extended exercise in commercial empathy” for this group’s point of view can feel very taxing. We often find it easier to vilify Pragmatists as unimaginative, plodding, and ornery – for the simple reason that they stand towering like an impassable mountain range between us and all our innovation dreams.
(For an illuminating glimpse at the world through the viewpoint of a Pragmatist, set aside some time to at least skim through the narrative vignettes in “What is Code?” – an award-winning 38,000-word showpiece on Bloomberg Businessweek.)
Innovations Start Life As Hypotheses, and Hypotheses Need Testing
Visionaries craft many scenarios about what the future might look like, but it is the Pragmatists who ultimately decide what the future actually will be. Pragmatists derive this considerable power not from glamorous positioning and self-promotion, but rather from the distinctly unglamorous work of safeguarding their organizations against catastrophic system failures and irresponsible budget leakages.
Along the way, Pragmatists provide an invaluable service not only to their own organizations but also to the innovation teams who listen with the intent to understand. Visionaries deal in the murky realm of intuition and hunches, but Pragmatists are the keepers of cold hard truth. And cold hard truth is what we need when we tackle one thorny question after another to validate the Visionary’s plausible theories:
- Are we addressing a business problem that matters?
- Does this problem matter to a market of sufficient size?
- Have we built a complete product that solves enough of the problem?
- Does our offering solve the problem more effectively than any other available option?
- Can we deliver sufficient business value to justify not only our asking price but the total cost of adoption and use?
- Does our offering actually work reliably and for real users in the real world?
Asking and answering these questions in an evidence-based manner demands extraordinary emotional discipline. The interest of early markets, no matter how exciting, is necessary but insufficient proof. The true test of market viability is forged through the exacting requirements of Pragmatists.
Prior to crossing the chasm, the Pragmatist’s buying requirements present material barriers to further diffusion:
- insistence on a whole product solution
- reliance on peer references from other Pragmatists
- penchant for backing the market-leading solution
- attention to practical deployment levers (e.g. infrastructure compatibility)
However, the innovation teams able to meet these demands find themselves well positioned to capture market share quickly. And the innovations that survive these trials are often imbued with an invaluable attribute of mainstream success: scalability. Lastly, because Pragmatist are fiercely loyal once won, the innovation team can expect to enjoy a highly defensible competitive position.
4. Even In A World of No, There Are Lessons To Be Had
The Late Majority and Laggards do not feature as prominently in our narrative. Legal innovation is not yet mature enough to grapple seriously with the market extension opportunities offered by these adopter types, who are generally resistant to trying new things.
Still, we append a few remarks. Despite the best efforts of innovation teams to convert each of the adopter types in the prescribed order, the messy and chaotic nature of legal markets all but guarantees that we will encounter all adopter types in our quest for market entry.
Late Majority / “Conservatives”
Risk aversion, price sensitivity, and tendency to follow rather than lead are the identifying characteristics of Conservatives. Whereas Pragmatists seek demonstrable gain in a defensible cost-benefit analysis, Conservatives in legal ecosystems are more likely seek minimal pain in their individual buyer and user experiences. This has the benefit of forcing us to focus on convenience factors such as ease of purchase and use as well as performance reliability.
Conservative buyers reward innovation teams for attention to human factors, optimized product design, and streamlined sales operations. However, none of this matters without the requisite social proof and peer pressure from Pragmatists and other Conservatives. For this reason, premature focus on these factors generally bodes ill for innovation teams, particularly in B2B markets. Making something more usable before verifying that it is actually useful to a sufficient number of paying customers is usually an expensive exercise.
Laggards / “Skeptics”
Skeptics are as likely as not to avoid adoption to the bitter end. As hostile as Skeptics may be to any innovation endeavor, engaging them in good faith whenever they are encountered can deliver at least one important benefit.
Skeptics tend to draw attention to specific gaps between product promises and actual performance. (This rarely feels beneficial or benign to innovation teams grappling with concept models and prototype.) Still, innovation teams who are open to engaging with this challenging segment gain precious opportunities to achieve greater user understanding, client empathy & client orientation. Particularly if the spotlighted performance gaps lead to specific insights about customer failures – e.g. critical breakdowns in business processes or the user journey – we can gain a much deeper understanding of the customer’s work context, business problems and use constraints.
5. Innovation Is Really Hard
All of this is much easier said than done. It is an inordinate amount of work and most of it cannot be done sitting at a desk. If we intend to put a dent in the universe, we cannot expect to coddle our creations in a pristine but sterile lab. Instead, we have to venture out into the messy and chaotic world that we hope to change.
Effectuating meaningful change is also hard because it demands, early and often, productive collisions with many people who will disagree with us. That work involves lots (and lots and lots) of dismissal, criticism and outright rejection.
To survive this bruising onslaught, innovators and change agents need to develop not only relevant expertise and skill sets but also habits of mind. Chief among these is a habit of thinking deeply and constructively about the viewpoint of the customer.
Much like a fledgling magician without an audience, an innovator without a customer is just another person with a quirky hobby.
Legal innovators yearn for a big payday. The obstacle course in their way? A messy, fragmented, and chaotic legal market.
Why is the legal industry so slow to change? This question gets asked all the time – particularly during conference season – but it gets more than its fair share of airtime year-round. It is ever-present in the blogosphere and hotly debated on Law Twitter at least once a week.
However, the most frequently given answers are largely unsatisfying and the ensuing discussion often recursive. If the legal industry is on tape delay, the change conversation may be stuck in a Delos-worthy loop.
Legal innovation stands at a critical juncture. With mounting momentum comes heightened scrutiny, and though we may be on the cusp of significant breakthroughs, we also stand on the precipice of an industry-wide chasm. It’s time to acknowledge that we are working within an environment of extraordinary complexity and inefficiency, where innovation offerings are at clear and overwhelming risk of faring poorly.
(Market) Context Matters More Than (Lawyer) Character
One popular fallback is a narrative that I’ll call “because lawyers.” Because lawyers are skeptical, because lawyers are conservative, and the list goes on (and on and on). The “because lawyers” train of thought goes something like this: because lawyers are different, the legal industry must also be different, and what has worked to advance positive change in other industries will not apply here. I disagree.
How “Because Lawyers” Fails the Industry
The “because lawyers” narrative can offer insights of value to would-be change agents, but I tend to think it suffers from two limitations that are closely related:
- Firstly, it is better at explaining failures than explaining successes (and there have been some successes). This suggests that the “because lawyers” narrative lacks explanatory power: designing around lawyerly tendencies is likely a necessary but insufficient condition to driving systemic change.
- Secondly, “because lawyers” is an intrinsically blame-based narrative, built on hypotheses about highly stable aspects of lawyer disposition and personality. This is especially problematic where it invites proactive defensiveness from lawyers and engenders cumulative resentment in change agents. These two consequences conspire to erode rather than promote collective psychological safety. Cf. Laura Delizonna, “High-Performing Teams Need Psychological Safety. Here is How to Create It,” Harv Bus Rev (Aug. 24, 2017).
Instead, I think we (legal innovators and change agents) would reap greater benefit from thinking and talking more specifically about target markets. For example, which buyers have underserved needs that they are willing to pay to address now? And what, precisely, are those needs?
Buyers Rarely Beat the Proverbial Path to Your Door
Developing new products and services is hard – in any industry. Even when there is a proven customer base with clearly articulated and well-understood needs, incremental improvements do not readily and reliably translate into profit. Disruptive products and services are another order of magnitude difficult: they occur because of discovery of a whole new set of needs not yet known or understood by anyone (we want 1000+ songs on demand at all times); or because of a wholly new configuration of value creation and delivery that substantially displaces the current solution (we want to order every book and eventually every product under the sun and have it delivered tomorrow).
In either context – incremental improvement or true disruption – would-be innovators must proactively define a reachable target market. Because new things take time to refine and scale, the survival of new ideas often depends on identifying and addressing the correct market first.
This implies a deep understanding of buyers and markets:
- how buyers currently organize and identify themselves into groups;
- how each group might differently perceive their needs and potential options to fulfill those needs; and
- how they prefer to buy and consume products and services that present a solution.
This is especially tricky because markets for new things are fluid and sometimes cut across existing or obvious demographic segments. Indeed, as this publication has well established, receptiveness to new things – in any context – are more dependent on psychographic attributes than demographic ones. See Post 007 (covering the basics of adopter types).
Ideas Need Market Feedback to Become Real
In the legal industry or anywhere else, ideas are rarely in short supply. Ideas are necessary but insufficient for meaningful progress – what we need are effective and reliable means to validate and refine ideas into tangible products and services that will survive contact with reality. This almost always requires the participation of potential buyers.
Unfortunately, optimal buyers in early markets do not always self-identify or congregate conveniently in a physical marketplace that innovators can visit to announce or demonstrate their idea. Instead, as the graphic above suggests [click to enlarge] the innovation team has to think creatively and undertake all manner of legwork outside the lab, to discover or pull together niche markets or sub-segments who will provide feedback and stress-test hypotheses about how the new process, product or service should work.
The onus to find the right prospects and convince them to try new things rests with the innovator, entrepreneur or intrapreneur. Yet, how often do we revert to the “because lawyers” narrative to explain away the many promising ideas that have stalled without achieving significant adoption? If a product or service is actually effective in addressing a problem that matters to the customer, the change management burden can be reduced (although perhaps never fully eliminated). Cf. Post 008 (49 to 87% of the rate of adoption typically turns on just five product attributes–relative advantage, simplicity, cultural compatibility, trialability, observability).
Unfortunately, “going to market” has become shorthand for any number of sticky problems and nebulous questions to work through. When we use that phrase, we need to acknowledge the enormous time, effort and difficulty that lies ahead.
As an industry, we are not yet mature in our collective ability to define and size new markets for innovative offerings. In simpler terms, our most critical gap isn’t ideation and it probably isn’t change management either. We have a commercialization problem, and to improve our industry-wide win rate we need to address the actual choke point.
Legal Innovators Face Extreme Conditions
In a recent discussion, Bill offered this insight: the legal industry isn’t different; rather, it’s extreme. I think this is a superior framing device to drive constructive dialogue and to advance our thinking about legal innovation.
Two distinguishing features of the legal industry’s structure contribute to make it an unusually unfavorable ecosystem for innovation: (1) extraordinarily balkanized and (2) fractally opaque. That sounds highly academic and esoteric, so I explain in plainer English below, with some supporting figures and visuals.
Balkanized and Isolated
Many industries are fragmented (i.e. crowded without a clear or dominant market leader), but legal is something more: extremely fragmented into many smaller units that are mutually hostile or uncooperative. This is true at the establishment level (individual firms) and at the segment level (the categories and subgroups into which firms roughly organize themselves).
The above diagram [click to enlarge] conceptualizes the evolving landscape of legal service providers, along the two-hemisphere model advanced by Heinz and Laumann and Susskind’s bespoke-to-commoditized continuum. See Henderson, What is more important for lawyers: where you go to law school or what you learned? (Part II), Legal Whiteboard (July 19, 2015). The left side of the chart captures the broad categories of incumbents (“the artisan guild”). The middle and right regions capture the broad categories of emergent competitors who seek to leverage new technology or process innovations to offer a different value proposition. This graphic is effective in communicating the increasing complexity of the legal marketplace.
However, it’s important to note that the above depiction of market composition is conceptual and categorical – it is not a scale representation of current market share along any quantitative measure. To add a more quantitative dimension, the below chart [click to enlarge] relies on U.S. Census data to show the composition of the legal services market by establishment size:
While this is an incomplete view of the market and a fairly imprecise mapping of segment to firm size, it still offers added quantitative support to the idea posited first in Post 005 “Six Types of Law Firm Clients” and clarified recently in Post 048 “Confusing Conversations with Clients”: namely, that we talk past each other because we each bring varying perspectives from different work contexts.
Most market composition analyses are based in revenue share. On infrequent occasions, the point is made that the vast majority of firms are solos or small firms (over 90% in the Census data above). But it is an analysis of job share that gives a more accurate sense of our industry as well as the best real-world explanation of why we often talk past each other.
Roughly 1,200 of the largest companies in the legal market account for about a third of all jobs, with small firms and solos splitting the remainder fairly evenly. If a Martian visiting Earth to learn about our legal ecosystem were to randomly select 3 people who work in legal services, the most likely scenario is that he will end up with 3 people who come from dramatically different work contexts and have almost no consistent information to offer. Even if our Martian were to beat the odds and pull together a focus group of 3 individuals who at least work in similarly sized organizations (he has about a 3.7% chance of getting that lucky), it’s also likely they come from firms with different specializations serving different client segments, who are accustomed to completely different workflows, technology environments, and compensation and incentive schemes.
Like any balkanized region comprised of hostile states, the legal market is difficult for outsiders to navigate or understand. For those of us on the inside, we should remember that each of us brings to the table a labyrinthine set of customs and experiences that create significant divisions and critical barriers to cooperation.
Fractally Opaque → Perpetually Lost in Translation
By and large, we remain in our silos and fail to cooperate. The “lone wolf” proclivities of lawyers (so autonomous and so competitive!) have been cited frequently as a primary barrier to open communication and collaboration. However, I think the phenomena is subject to more contextual explanation. Some legal work is intrinsically adverse and nearly all of it is highly confidential in nature. These factors serve to anchor a high baseline of opacity and create communication infrastructures that are designed to impede, rather than promote, the efficient sharing of information.
Despite the efforts of some forward-thinking corporate law departments to drive deeper collaboration across their supply chains, firms within each category tend to engage in vigorous competition, which in turn drives even greater opacity. The intensity of that competition has only increased in recent years as corporate budget pressures and insourcing strategies have depressed demand growth for the “artisan guild.” Subsequently, an open exchange of new ideas or practices within categories is more the exception than the rule, and usually only happens under diligent and hands-on management by a shared client.
In the current state, we also see very little systemic cooperation across segments (e.g. sustained strategic alliances or partnerships across service provider types). The artisan guild tends to regard newcomers with suspicion, and many forward-thinking incumbents are embarking on long-range initiatives to future-proof their businesses against down-market threats. In this, the incumbents engage in completely rational competitive behavior: many new entrants seeking entry points into the corporate buyer ecosystem are essentially positioned to displace corporate legal spend that has historically been held captive by the artisan guild.
In the legal industry, very real differences are present at many different resolutions: across segments, firms, practices, case teams, and individual roles. The resulting translation barriers add opacity to an already complex ecosystem, and that opacity is fractal in nature. In other words, you can take any subpart of the legal industry and it will display structural features that make each part just as opaque as the whole.
Even when we want to, many of us working in legal businesses find it challenging to relate meaningfully to each other. The emergence of new types of businesses and the continuing proliferation of new roles for allied professionals add more dimensions of complexity and friction in communication:
If innovation is a process by which new ideas spread across a social system, see Post 004, then legal innovators and change agents would be well served to recognize that the legal industry is not one single monolithic social system. Rather, it is a complex and complicated network of distinct and disparate subsystems, with almost every organizing principle conspiring to create friction in the diffusion process.
In an illustrative comparison, our close cousins in accounting have a slightly easier time. About 50% of accounting jobs are concentrated in firms of 500 employees or more. The perennial focus in legal press on the fates and fortunes of the richest firms, see, e.g., “The Super Rich Are Getting Richer” in American Lawyer (April 2018), also conspire to give a broad sense that the legal market is exceeding top-heavy. In short, the legal market appears to be a textbook example of the top 1% claiming the lion’s share of clients, revenue and profits, but this turns out to be a distortion of reality. The legal market most likely suffers from a slower pace of innovation because it is not top-heavy enough.
Though an apples to oranges comparison, the Big 4 enjoy much greater advantages of scale and scope relative to even the largest global law firms because they’ve consolidated a much larger portion of market share. Collectively, the Big 4 clocked about $130bn in global revenues in 2017 – more than revenues of the Am Law 200 combined.
Historically, the Big 4 draws roughly 40% of its revenues from the Americas and about 30% from audit. To match the Big 4’s Americas topline, the largest 32 Am Law firms would need to pool their collections. Because each of those 32 firms is organized into its own unique matrixed structure of regions and practice areas, the adoption decision must be made many times over, whether on a collective or authority basis, see Post 008 (type of decision affects rate of adoption). Either way, overall cost and effort required to spread new ideas through law firms are exponentially greater.
Market Inefficiencies → Innovation Inefficiencies
These structural barriers to the spread of new ideas are very real, even for the vast majority of the market conducting business as usual and merely looking for ways to drive incremental improvements to how they work. However, their adverse effects are perhaps felt most keenly by those trying to drive significant change in the industry.
In the aggregate, these structural barriers are experienced as friction in the procurement process and as inefficiencies in the marketplace. What do I mean by inefficiencies? In classic economic theory, an efficient market is one in which asset prices accurately reflect true value. Clearly, the ongoing dialogue around the need for pricing innovation – as well as the anecdotal evidence of high price dispersion for similar services – suggests the legal services market is highly inefficient.
But I also think the current makeup of the legal services market makes it highly inefficient in the literal and colloquial sense of the word: it takes too much time and effort for buyers and sellers of specific services to find each other, and once they meet up it also takes a great deal of time and effort to agree upon a fair rate to exchange money for services. More often than not, buyer and seller arrive at some accord using highly technical methods best described as “eh ¯\_(ツ)_/¯ looks about right.”
Assessment and evaluation of new substitutes implies an even greater burden of time and effort, along with the added element of risk in what is defensibly an environment of exceptionally low tolerance for failure. Moving fast and breaking things is great for startups… until Cambridge Analytica happens. Generally speaking, breaking things is less great for lawyers who are often hired to prevent bad things from happening or to argue over liability for bad things that have happened.
To succeed in this unforgiving ecosystem, innovations must offer an undeniable value proposition that functions as a complete solution to a material customer problem. In the next post, we will revisit the five adopter types with the goal of understanding the specific and unique contributions each type can offer to the would-be change agent seeking to cross the chasm.
What’s next? See A playbook for innovation magic (052)
The legal industry wants more innovation. The missing ingredient is strong leadership.
Several years ago, a good friend threw me to the lions, though that was not his intent.
My friend, who works in legaltech, asked me to show up at the headquarters of a Fortune 100 company to present some prototypes I had developed on giving feedback to law firms. Cost pressures were rolling downhill to the legal department. Thus, in an effort to better manage costs, the senior leadership winnowed their outside law firms to a panel of preferred providers. In theory, the firms were supposed to work cooperatively with each other to deliver world-class quality within a large predefined budget.
From a distance, this all sounded innovative. But up close, implementation was a challenge. The only management tool was an annual rating system that measured law firms on a 1 to 5 scale (1 = poor, 5 = excellent). Because performance was aggregated across dozens of lawyers and dozens of matters, the narrative comments were too general and lacking in context to be helpful. Further, all the quantitative scores were clustered in the 4.8 to 4.9 range, making them useless for making merit-based adjustments. Indeed, if in-house lawyers gave scores any lower, they’d be tacitly admitting a problem with their own oversight.
I had approximately 90 minutes to present my prototype to a room full of BigLaw relationship partners. Basically, my proposal was to have in-house counsel complete a monthly survey tool for each significant matter they were managing (a 10 to 30-minute commitment per lawyer who managed outside counsel). In turn, the results would roll up to a centralized knowledge management system that would generate practice group, firm, and legal department-level reports.
Although the proposed prototype required the in-house lawyers to do all the work to generate the feedback, the law firm partners disliked everything they heard, arguing that the work to review the feedback would be burdensome and counterproductive. One especially vociferous partner remarked, “If there’s a problem, I’d rather have a phone call.” He would not concede that there was any value to timely bucketing specific examples of good and bad behaviors, nor that the resulting data could provide a roadmap to help the client and create a factual basis for higher fees.
As I was getting pummeled by the BigLaw partners, the in-house lawyers looked on in silence. And in hindsight, I really don’t blame them. They, like me, were learning the depth of the opposition to systematic measurement of performance. It would have been a different dynamic if the general counsel, who operated at a level above these lawyers and was not supervising this initiative, had communicated that the company was going to use a feedback system to better manage millions in legal spend and that the purpose of this meeting was not to question the premise, but collaborate on implementation.
At this juncture in my career, I had not witnessed many examples of strong and decisive leadership among lawyers and thus did not appreciate how essential it was to organizational progress. Over the next several years, however, I began to see the pattern.
Who should run the feedback process?
A few years later, in December of 2014, I spent the afternoon with two law firm insiders who were in charge of strategic initiatives at their respective firms. Both believed in the importance of client feedback to not only enhance the quality of service but also deepen relationships with clients and build a path to more meaningful and sustainable growth. Yet, they expressed frustration at its limited value to drive firm-wide or industry-level change.
Here’s why. Imagine a large corporate client that uses 20 outside law firms. In most cases, that means that there are nearly 20 different ways that the client provides feedback. One firm sends the managing partner for an annual dinner with the general counsel. Another sends the relationship partner. A third sends the Chief Value Officer. A fourth has an annual client survey system, albeit only 30% of the in-house lawyers reply. Several other firms use a third-party service, such as Acritas, Wicker Park Group, BTI, or PP&C Consulting. And a surprising number of firms are content with feedback in the form of paid bills and continued work.
Virtually all of these feedback mechanisms are fragmented and lacking in context, making it easy for lawyers to rationalize away negative information. Under the best case scenario, only 20-30% of the total feedback time will result in significantly better performance. That means that 70-80% of feedback has zero ROI. That’s an enormous amount of waste.
Yet, what if clients took control of the feedback process? As my colleagues pointed out, if clients rigorously evaluated their outside counsel, the information would be too direct and specific to be ignored. Then we laughed at our Panglossian idea, “This is never going to happen.”
Sometimes it’s good to be wrong
One of my law firm friends in the December 2014 meeting was John Fernandez, who was at the time was the US Chief Innovation Officer at Dentons (now Global Chief Innovation Officer). One of John’s projects was the launching of NextLaw Ventures and NextLaw Labs, which identified promising new legal technologies for investment and piloting within the firm.
In June of 2015, John fielded an inquiry from a corporate GC who had, over the course of eight years and two different companies, developed a feedback system for managing his outside law firms. The general counsel, Mark Smolik of DHL Supply Chain Americas, was looking for guidance on whether this idea had commercial application. John asked if I wanted to join a meeting with Mark to help vet the opportunity for NextLaw. I said “sure.”
That meeting was very fateful because (a) John and I had already identified that this was a problem worth solving, and (b) Mark Smolik had years worth of data showing that his system worked. Miscommunication and derailments were going down, value per dollar spent was going up, and Mark had more bandwidth to focus on other company priorities.
Borrowing from HR
I think readers will benefit from understanding the origins of Smolik’s system, as it reveals the power of simple ideas and insights.
The first insight occurred to Mark over a decade ago when he was general counsel of Safelite Auto Glass, a national company doing on-site windshield repair. In addition to running the legal function, Mark was also in charge of HR. One day, Mark became a Safelite customer when the windshield on his wife’s car got damaged. While at work, Mark took a call from his wife, who told him that a somewhat frightening looking guy claiming to be with Safelite showed up at the house to repair the damage “I have no idea who this person is. Why should I open the door?” Wanting to reassure his wife, Mark contacted the Columbus service center and asked them to send their best technician to perform the work. “Please tell me his name and at least what he looks like.”
That incident gave Mark an opportunity to experience Safelite through the eyes of the customer. Shortly thereafter, Safelite developed a standard practice of sending a technician profile email to all its mobile customers that included name, photo and credentials of the auto glass technician. Safelite also implemented a client feedback tool to track the quality of each service call. By the time Smolik left Safelite in 2009 (two years after its successful sale to Belron), Safelite was planning a national ad campaign that would make the quality and friendliness of their glass technicians the centerpiece of the company’s branding.
The systematic tracking of the customer-facing personnel at Safelite created a desire in Mark to apply the same logic to the many law firms that he was managing. “If the company is going to spend a few hours each year reviewing the performance of each of its employees, then why aren’t we devoting at least that much attention to the large sums we spend on law firms?”
Thus, Mark applied basic HR principles to his outside counsel, developing performance criteria, applying it to firms, sharing results, and collaborating on a plan for improvement. Mark used this methodology to winnow and consolidate the number of firms he worked with. This reduced his overall communication overhead while increasing the value of each dollar Safelite spent on legal.
Building a company around scorecards
By the spring of 2016, Mark Smolik’s outside counsel scorecarding system became the basis for Qualmet, one of the first companies in NextLaw Ventures investment portfolio.
Along with John Fernandez, the other law firm insider at my December 2014 meeting was Jim Beckett, who at the time was Chief Business Development Officer at Frost Brown Todd.
Beckett started his legal career as a Frost Brown Todd associate before going in-house at RJ Reynolds. A few years later, he moved to the business side, running an RJ Reynolds operating unit in Puerto Rico. Jim came back to the firm partially because it enabled him to raise his family in his hometown of Louisville. But having spent eight years inside a large company, he felt he had a roadmap in his head for how a law firm could grow market share. Jim and the firm’s chairman, John Crockett, had worked together when Jim was an associate and John was a young partner. John wanted to give Jim’s ideas a try.
Jim’s business development strategy was very simple. Spend time with your clients and listen to what’s on their mind. Then make their problems your problems, using all your creative energies to identify, anticipate, and solve what’s happening in their world. This may sound obvious, but many lawyers struggle to get out of their comfort zone and then blame the lack of immediate returns on client resistance.
At his core, Jim is an impatient person who wants to change the industry. Thus, in December of 2014, when we discussed the possibility of the client owning the feedback process, Jim couldn’t get it out of his head. By the time Fernandez and I met with Smolik, Jim was sketching out a business plan. Thus, during the June 2015 meeting, I told Mark, “There is a guy, Jim Beckett, who you’ll want to talk to. He has been on both the buy and sell side and is already fixated on this idea.” John nodded in agreement, “I can’t think of a better guy to run with this.” After several months of additional vetting, Qualmet was formed and Jim was named CEO.
CEO in legaltech may sound glamorous, but in reality it’s just more stress, a pay cut, a chaotic mix of product, marketing, and sales, 6 am flights, bad airport food, and guilt over how your career decision is affecting your family. But if you think this is your big opportunity to make a difference, you’re willing to pay that price.
Disclosure: Through NextLaw Lab, I gave input to Qualmet during its formation, including sitting on its Board. Qualmet also became a client of Lawyer Metrics, where I served as Chief Strategy Officer. When I left Lawyer Metrics in late 2016, and before I started Legal Evolution, I resigned from Qualmet’s Board, as I viewed fiduciary obligations to any legal industry business as incompatible with my role as editor. In addition, I have no financial or investment interest in Qualmet or any legal industry company.
We’re entering the management age for lawyers
Leadership and management are not part of the legal education canon. Yet, that is bound to change as more lawyers stumble forward into these disciplines to cope with the relentless growth in complexity we face on a daily basis. In the meantime, however, we are at risk for misinterpreting the tides of change.
For example, many lawyers and law firms (and initially this professor) are quick to conclude that the goal of scorecards is to save money. Yet, in most cases, the motivation is scarcity of internal bandwidth. An important task done well and efficiently frees up time and mental energy to tackle other strategic priorities. Saving money, or getting more value per dollar spent, is a by-product of a more disciplined approach to one’s job as lawyer-manager.
The first step in this more disciplined approach is formulating the evaluation criteria. Initially at Safelite and DHL, Mark Smolik focused on seven criteria: (1) understands our objectives / expectations, (2) expertise, (3) responsiveness / communications, (4) efficiency / process management, (5) cost / budgeting skill, (6) results delivered / execution, and (7) compatibility with company values. Each criteria, in turn, is defined by a set of specific behaviors.
What managing law firms looks like
For ideas like scorecards, lawyers need examples rather than abstract descriptions. In 2016, I ran some focus groups for what would later become Qualmet. Below are some of the graphics from those sessions (credit: Evan Parker from LawyerMetrix).
These data reflect the performance of actual law firms, including the AmLaw 200 firm of Conroy & Alexander (a pseudonym). The scores for each criterion are averages of in-house lawyers who used the firm. Obviously, between 2011 and 2015, things moved in the right direction. Conroy & Alexander now exceeds expectations on six of seven criteria and has a clear priority on where it needs to improve.
Below is the trendline of Conroy & Alexander’s average annual performance. This is the ROI that flows back to the in-house lawyers who are providing the feedback — they’re expending less time and attention to get better results.
Below is a picture of how the top seven firms are doing. Conroy & Alexander is firm E.
One takeaway is that expertise — which lawyers routinely fall back on to sell themselves, are table stakes. Another takeaway is that no firm really stands out on efficiency / process management. Thus, perhaps this is an area where a firm could seek to differentiate itself over the next one to two years. A third takeaway is that firm F is in trouble. During our focus groups, several leaders of AmLaw 200 firms said they would like this data as a management tool for partners who are all-too-ready to blame the client.
These scorecard graphics above are basic management tools applied to the work of lawyers.
Progress will require leadership
As a profession, have we accepted the premise that working within a well-designed management system would make our work more valuable to clients?
Few of us would debate the general premise, particularly in front of our clients. Yet, we struggle to accept it because, in our own little zones, we fear losing control. As a profession, we need a handful of lawyers in positions of authority who will make the decision for us. They will be subject to a lot of blowback and pleas for special treatments. However, in the long-run they will win our trust and respect. We will view them as leaders.
I came to this conclusion in December of 2017 during a design workshop in Chicago. After more than a year in business, the Qualmet team is coming to grips with a common innovator mistake: they had confused why they loved their product with why a client might buy it. Cf. Post 008 (“[The innovator is] often deeply immersed in the technical workings of the project … [and thus] at grave risk of falling in love with features that are of little practical value to the target end user.”). Fortunately, the Qualmet team includes professionals with expertise in marketing and design thinking. I secured them meeting space at Northwestern Law. In exchange, I got to observe the workshop.
The key goal of the daylong session was to work backwards from the daily lives of legal department professionals. A wide variety of legal professionals–not just general counsel–were invited in for 60- to 90-minute conversations. The Qualmet team wanted to know how they spent their time, their biggest frustrations, what they wanted most out of their jobs, etc. Yet, very rarely were these questions asked directly. Instead, they were asked for their reactions to a series of crude prototypes (the vast majority that had nothing to do with outside counsel scorecards).
For me, the most surprising revelation was that in legal departments with several lawyers, the general counsel spends less than half of his or her time managing the department. Instead, they are focused on being a fully contributing member of a C-suite management team. One GC of a publicly traded company put the percentage at 70%, with less than 15% that touched on anything related to outside counsel. Among the department professionals, the common theme was lack of time and budget to operate at a strategic level.
Indeed, I did not realize it until later, but Qualmet was running the design work shop to test their thesis that scorecards were a tool to put the general counsel into alignment with the CEO, as the performance data could be used to show how decisions regarding outside counsel were being made. The use of quantified performance puts the GC in more of a business place than a “legal place.”
One question to a general counsel that I especially enjoyed was, “Do you want to be a CEO some day?” Reply, “yes.”
Follow-up, “What about your general counsel friends — do they want to be get promoted?” Reply, “Probably. Otherwise, why do this job? Once you become a general counsel, you are more a manager and leader than a practicing lawyer. Thus, you have to develop those skills to excel at your job. Why not embrace the career path?”
We need to talk more about leadership
Leadership in legal departments is different than leadership in law firms. Unlike a law firm leader, a general counsel can make an unpopular but necessary decision and not worry about losing revenue and triggering a proverbial run on the bank. This reality is what is driving the consolidation of law firms into global giants. The hope is that global reach and the support services that a large firm can afford — technology, project management, process improvement, data analytics, etc — will wed the client to the firm.
I would like to see more general counsel collaborate with law firm leaders. Scorecards are just the start. The goal should be to bring out the best in the lawyers and legal professionals they lead and manage.
What’s next? See Confusing conversations about clients (048)
Legal education is in the early stages of remodelling and renovation. Thus, we are living through a period of messiness. Evidence of this is a virtual Symposium at PrawfsBlawg, a forum of law professors for law professors. The symposium is called “The Futures of Legal Education.” The organizer is Dan Rodriguez, dean of Northwestern Law and a legal educator with an excellent track record of leadership. Dan was inspired by an epic five-part series on legal education by Pitt Law Professor Mike Madison at Madisonian (Part I here).
There is no way to summarize or boil down the conversation except to say (1) all the contributors are legal educators, and (2) the desire to do good is pervasive and sincere. Design thinkers might counsel us to try rapid prototyping, but in the legal academy, our go-to move is a symposium. Fortunately, several of the posts reveal real progress at home institutions.
There is not a lot overlap between the readership of Legal Evolution and PrawfBlawg. Thus, I am republishing my contribution here, in part because it explains the paucity of recent Legal Evolution posts (which will soon change), and in part because because my post reflects a Legal Evolution perspective. I hope you enjoy it.
“Every good idea sooner or later degenerates into hard work.”
This quote comes from writer Calvin Trillin, but I first heard it from NYLS Dean Rick Matasar over a decade ago as he shared some realism regarding innovation, in legal education or elsewhere.
I wanted to participate in this forum earlier, but alas, I was stuck doing hard work that followed a good idea. A handful of innovators, including myself, have created a new nonprofit called the Institute for the Future of Legal Practice (IFLP, called “i-flip”). Details online here. I have been matching IFLP law students with summer employers. Unless this gets done well and quickly, the IFLP idea will fail. So writing about the future of legal education had to wait.
I’ve been reading all the symposium posts and wholly appreciate the growing intellectual ferment. Legal education is going to transform itself. I’m confident we’re in the early days of something great.
To help the cause, I would like to share a story about another idea that degenerated into nearly a decade of hard work. The idea came from the initial publication of NALP’s bi-modal distribution, which revealed some very peculiar features about the market for entry-level legal talent. We can argue over how we define legal ability or potential, but there’s little doubt it’s normally distributed. Therefore, as noted by Harvard economist Greg Mankiw, labor markets should not have two distinct modes.
That insight led to the creation of Lawyer Metrics (now LawyerMetrix, owned by AccessLex Institute), an applied research company that, among other things, sought to bring analytics and measurement to legal hiring. Of course, to make the idea work, we needed clients. In the early days, I was very fortunate to be placed in front of the Chair of an AmLaw 50 law firm. To prepare, I circulated a four-page, single-spaced Moneyball memo. I also created a PowerPoint. Because I had sailed through tenure at Indiana on the strength of my empirical work on law firms, I was confident I could impress.
Yet, the meeting did not go well. The Chair was certainly receptive, but she found my approach “too academic,” both orally and in writing. God love her, she was kind enough to tell me so. If I wanted to do business with her firm, it was entirely up to me to close a very large communication gap, as she had other tough business problems to solve. Suffice it to say, you don’t get too many one-hour meetings with law firm chairs. That was beginning of a steady diet of humble pie.
Around that same time, Marjorie Shultz and Sheldon Zedeck used gold-standard IO psychology methods to empirically derive 26 lawyer effectiveness factors. See LSAC Final Report. One of the key takeaways was that academic predictors (LSAT, UGPA, 1st year grades) were correlated with only a handful of the effectiveness factors, with some of the relationships being negative (e.g., UGPA and practical judgment; LSAT and business development). In contrast, a handful of well-validated assessments (e.g., Hogan Personality Inventory, Hogan Development Survey, biodata instruments) had much better correlations with lawyer effectiveness, and all of them were positive.
The Shultz-Zedeck findings strongly supported the business premise for Lawyer Metrics, which I documented in a lengthy 2008 memo. But that is not the point of this story. If I scored myself on the effectiveness factors, I came up short. For Lawyer Metrics to have any chance of surviving, I had to develop skills that were far beyond what tenure required. Acquiring those skills (more specifically, attempting to acquire them) was the hardest and best thing I have ever done. However, on the front end of the “good” idea, I saw none of it coming.
I am not going to risk obliqueness here. The narrative on legal education won’t materially change until one or more markets get moved. And there is an ocean of distance between a good idea to better legal education and one’s ability to plan, finance, and execute that idea in a way that redistributes things that law schools care about (e.g., jobs for students, applications, philanthropic dollars, prestige, etc.). What are the odds of that happening if we approach these challenges in our familiar academic way?
My answer is simple. We don’t. This is because academic dialogue is not what is needed. Instead, we leave the building and visit these legal industry stakeholders in their natural environment. We bring sandwiches. We observe what is happening. And we ask thoughtful and respectful questions, so we can come closer to seeing the world through their eyes. Then we go back home and build prototypes that fit this new world. Then we repeat.
This journey starts very messy. That is more than okay. What I am offering is a friendly admonition that our symposium won’t have an impact unless it degenerates into hard work – work likely beyond our current academic skill set, though hard work can fix that too.
Many thanks to Dan, Mike, the PrawfsBlawg editors, and the many contributors for a thoughtful month of dialogue.
What’s next? See My long history of law firm scorecards (047)
Well, that is not exactly what I used to say when I was a kid. But had I known such a thing existed, that would have been my saying. The truth is, I wanted to be a lawyer as far back as I can remember. Yet, I never knew how much I’d love it until I became one. Then, as the years progressed, it morphed into something even better.
In January of this year, after more than 13 years at Microsoft, including my last role as Assistant GC of Legal Operations and Contracting, I embarked upon a new chapter in my professional life. Much to my delight, I have received countless congratulatory wishes and kind words of praise.
What has surprised me, however, is the number of times people expressed to me their envy. In very honest and genuine conversations, many of my colleagues throughout the industry have expressed to me how jealous they are that I took such a leap. They often added “I’ve been thinking of doing something similar for a while but have not had the courage to do anything about it.” Thus, when Bill suggested that other mid-career professionals would be interested in how I chose to make this move, I agreed to write this post.
I am not writing this post to describe what a great leap this has been and to recommend it to everyone. I have no idea if it was, in fact, a great leap. I’ll only know years from now when I can reflect and assess my success, and judge whether it met my standards. I am writing to explore what it is about the current market that made me think it was in fact ok to take such a risk.
Our mental habit of ‘Playing it Safe’
Lawyers are known to be risk-averse, “play it safe”, “consider everything that can go wrong” kind of people. We are trained that way for 3 years in law school. Then we are rewarded for helping our clients think about all the bad things that could happen and try to help them avoid those things from happening or mitigate the damage if they do happen.
But when the universe starts sending signs and hints, and tangible viable opportunities appear, I suggest that it is time to listen. In my case, I listened with one ear while my inner lawyer was saying, “keep doing what you’re doing” and “that’s crazy – look away!” I have always seized opportunities when they arose in the context of my regular career path. I also didn’t shy away from challenges. But like many lawyers, I am not one to seek out great risks. Yet, the cumulative signs and hints were too compelling to ignore.
The legal industry is going through an intense period of unprecedented change. To really be a part of that exciting journey, I had to decide what role I wanted to play. That was obvious for me… I wanted to be a game-changer. I wanted to not only provoke spicy conversations about the practice of law, but I also wanted to help change the delivery of legal services.
So how was being in one of the world’s most innovative companies not enough of a platform to impact such change? Here is the inconvenient truth: Impacting broad-scale change is hard anywhere. Further, the bigger the entity (law firm or in-house department), the bigger and heavier the boulder we have to push up on the hill. Everyone’s journey is different. But for legal professionals, I think something is happening across the industry that is causing us to re-think our careers and our goals.
The satisfaction of sharing knowledge and know-how
After more than 13 wonderful years at Microsoft, I felt that I had reached a point of achievement that was very satisfying. Yet, the interest from others in what I had accomplished began to send signals that I could not ignore. At first, it was flattering to be called for advice and insights. I was called by very prestigious companies and law firms wanting to know how I had carried out what I saw as quite obvious and necessary. Every conversation was energizing, promising and just plain exciting. I found myself getting great satisfaction in helping other people think through their problems. After enough of these conversations, I had to admit they were becoming a highlight of my day or week.
At the same time, something else was brewing. Legal tech was exploding. I had very quickly become quite capable of filtering out the “vaporware” (techie speak for software that provides little actual value in solving business problems). There was a lot of focus in the legal industry on legal technology and how it was changing the legal profession. Unfortunately, writings about robolawyers, blockchain and automation are outpacing the ability of most readers to absorb this new information.
Although new innovations can be very energizing, new technology also creates a bewildering array of complex choices for buyers who are generally not well-versed in technology. Lawyers certainly fall into this group. What is real? What is useful? What will be here five years from now? All of those questions began racing through my mind. I wanted to be the one that companies and law firms would turn to for answers.
I was also getting some subtle, and not so subtle, hints from experienced, well-respected industry leaders. They were telling me there was more I could offer and that my biggest challenge would be picking amongst the many opportunities coming my way. Although these conversations boosted my confidence, I still convinced myself they were just saying those things to be nice.
Taking the leap
Then one day it happened – a revelation – like that proverbial light bulb going off in my head. I realized it was time for a change.
The light bulb was one particular conversation that solidified the comments that I had stored in the back of my mind for the previous many months. A group of lawyers from an in-house legal department were sitting in my office taking notes on the ideas I was suggesting. And then they asked if I could recommend a consultant to help them. Of course, I could and would send them a few trusted names.
“Wait a minute!”, I said to myself, “I can do this. … I should do this.”
Meanwhile as that light bulb went off and shone so brightly, I was having conversations with a small but powerful start-up called LawGeex. They were offering advanced AI-based automation for the review of contract terms. I was VERY familiar with reviewing contracts and had been desperately exploring solutions for the contracting work I was overseeing in my job at Microsoft. I was impressed with their approach to content marketing, the founders’ philosophy on building a company, the reputation it had so quickly gained in the industry and of course their advanced technology. Candidly, I had always felt like I missed out on that start-up adventure that others had always spoken so fondly about. It sounded thrilling: fast-paced, high-energy, all-in, purposeful. I really wanted that experience. Contracts + AI + start-up. Could there be a better fit for me?!
So, I decided to be really frisky. I wanted to try both – start my own law firm & consultancy (more on that below) and be a part of a start-up. I was fortunate that LawGeex saw the potential of having me on part-time basis and engaged me as their Chief Legal Strategist, while still allowing me the time and space I needed to develop my own new business, InnoLegal Services PLLC.
InnoLegal Services, Inc.
You may be wondering, “So what is InnoLegal Services? A consultancy? A law firm?” Well, it’s both. Let me explain.
I am a strong believer that law firms today can’t just practice law and hand off artifacts, output and advice without also providing a more holistic solution on the real needs of the business that the lawyers are trying to support. Every law firm should also be a consultancy. Lawyers need to provide sound legal advice, coupled with operational insights about HOW the engagement runs.
The HOW covers a variety of aspects of the practice of law that were often ignored or happened organically. For example, why should a corporate client have to ask a firm to tell them how many litigation matters are pending with that firm? Or how many contracts have been negotiated? Or how long either has taken? There should be basic sets of data insights that are always being provided. Beyond that, the law firm should work with its clients to figure out the best ways for taking in work assignments and returning deliverables. There should be feedback loops created, and collaboration technology used (not that Outlook isn’t amazing, but it is not intended to be a workflow system, though that is what lawyers use it for). The list goes on.
You see, operating as a law firm, I can deliver all sorts of other professional services under that umbrella. But the reverse is not true. So, why limit myself to a consultancy, if I can also be in the position to provide legal advice on the HOW? Yes, that’s right. There is an element of legal advice that is part of the HOW. Helping a legal department figure out what legal risks it can reasonably take in its contracts, will inform their corporate policy, which then informs the process for contract review. So, the practice of law and consultancy are actually very clearly connected. At least that’s my theory!
One engagement at a time
Even as opportunities presented themselves with large prestigious firms, I learned how painfully slow any change in those big institutions would be (not for lack of interest, but because of the difficulty of implementing broad scale change). Thus, I decided to start simple.
I am very excited about the idea of experimenting with the mix of technology, law, and process and thus helping law departments and law firms engage more effectively, one engagement at a time. Equally exciting is my role as Chief Legal Strategist for LawGeex. In that role, I work with all aspects of the company and product. I also get to consider interesting business models and operational scalability, all while applying my years of experience in contract negotiations, team-building and providing solutions. Come to think of it, I am also applying many of these new skills to my own business.
I suppose I am Chief Legal Strategist of two start-ups: LawGeex and InnoLegal Services. I’m not sure it can get more exciting than that!
What’s next? See Legal Academics Grappling with the Future of Legal Ed (046)