2018 has been a watershed year for capital flow into legal markets. Will it be enough, at last, to push legal innovation forward?
It’s an age-old saying: money can’t buy everything. The most common examples include happiness and love. It’s time to add “legal innovation” to this lofty list.
In the past few years, we have seen unprecedented levels of capital flow into the legal space. The partial views of funding activity we see from various sources imply an already high level of energy as well as money invested into legal innovation. Further, those investments (and one would presume, attendant efforts) only appear to be increasing:
And yet the market appears awash in disillusionment. Many established thought leaders and influencers remain skeptical about the actual impact (or lack thereof) of these developments. Pinpoint signals from corporate buyers indicate a glacial pace and highly uneven distribution for meaningful improvements in service experience and value delivered. And the PeopleLaw sector remains woefully underserved, even as legions of practitioners outside the strongholds of Big Law struggle financially. See, e.g., Post 037 (presenting data).
So what gives?
A Roadmap to Innovation Woes: Key Innovation Drivers
In my first post on Legal Evolution, I addressed a few of the structural attributes that make legal a particularly unfavorable ecosystem for innovation. See Post 051 (legal innovation as an extreme sport). That discussion zoomed out for a broader view at the makeup and composition of legal service providers.
Now it’s time to zoom in. This is Part I of a three-part series about systemic barriers to innovation maturity in legal markets. In this series, I’ll pose a new set of hypotheses about the current state of our industry — to explore whether would-be innovators and visionaries have sufficient access to the ingredients that are necessary to make innovation actually happen.
The above graphic lays out the roadmap, along with a brief description of the critical function of each component.
- Part I (062) provides an overview of recent trends in capital investment into legal innovation. While several valuable directories, listings and analyses have already covered this topic from many different angles, the aim of this post is to explore why we are seemingly stuck in the “early days” of legal innovation despite an overarching trend toward expanded access to capital.
- Part II (063) probes a critical problem facing all new offerings in every permutation of legal innovation: the difficulty of identifying and understanding the customer. Part II summarizes the various customer roles in B2B service environments and the common reasons that new offerings fail to achieve problem-solution and product-market fit.
- Part III (066) addresses the people side of the equation for teams and businesses trying to drive change to the status quo in legal markets. Whether the goal is (a) to drive incremental improvements to existing offerings or (b) to develop and bring to market a wholly new service or business model, legal evolution is a team sport that demands differing configurations of specialized skill sets. Part III will summarize the necessary competencies and capabilities, with the goal of evaluating whether it is feasible for most legal businesses – whether incumbent or new entrant – to assemble a winning team.
Posts 062 – 064 are not intended to pose an exhaustive, definitive, or controlling theory of legal innovation. Instead, the goal is to provide a useful framework, by endeavoring to draw attention and focus to factors that can be influenced and changed, once examined and understood, by economic actors in the marketplace. As a counterpoint, I have previously criticized narratives that hinge on personality traits of lawyers, in large part because it is not a tenable proposition to ask a group of millions of adults to change stable aspects of their disposition. See Post 051 (“because lawyers … ” riff).
Here, the hope is to better equip innovators and change agents who find this analysis compelling and to enable them to perform more structured evaluations and make more rigorous decisions. For everyone else, this series invites constructive dialogue.
Regulatory Constraints Affect Capital Flow (in Obvious & Non-Obvious Ways)
Like many other features of the legal industry, the flow of capital investment in this space is littered with idiosyncrasies. The regulatory barriers to non-lawyer ownership has been debated ad nauseum elsewhere by wiser and more knowledgeable minds, but it bears one more mention here. The blindingly obvious implication is that this severely limits the pool of available sources for equity capital into businesses that practice law.
The current regulatory scheme has three less obvious implications on legal innovation as well as the mechanics of how innovation efforts are funded and governed:
1. The Role of Incumbents (Yes, That Means Law Firms and Lawyers)
It secures for incumbents (law firms owned and largely operated by lawyers) a material role in deciding when, where, what and how the entire industry will change. This, of course, is a feature, not a bug: protectionism is intended to establish clear and insurmountable advantages for the artisan guild.
It is true that law firms have resisted change and thus bear full responsibility for the current state of the industry. The fact remains, however, that incumbents must be included in any serious dialogue about legal innovation. Regardless of their performance to date, law firms are both financial sponsors of, and direct participants in, legal innovation.
2. Practice vs. Business of Law
The requirement of lawyer ownership calcifies unhelpful divisions between the “practice of law” (the domain of lawyers, with limited access to capital) and the “business of law” (a set of enabling activities for legal practice, in the domain of… everyone else with varying non-lawyer titles). These divisions extend deep into our collective consciousness and they do serious harm not only to workplace cultures but also the rigor and clarity of our thinking about legal innovation.
This distinction creates an artificially binary model that fails to accurately represent the reality of how legal teams serve clients in the real world. Ultimately, this type of thinking favors incremental improvements to the status quo and R&D based on misguided and antiquated assumptions. It’s akin to exploring a closet with the lights off.
3. Follow the Money
The requirement of lawyer ownership also diverts a great deal of available capital into non-core segments of legal services. This has a dramatic effect on the experience of the end-users and shapes their expectations and appetites. This is, at least in part, why “legal tech” receives a disproportionate share of both capital and attention in the legal innovation dialogue: A lot of money is going into a disproportionately small part of the value chain.
The aforementioned wiser and more knowledgeable minds continue to discuss the desirability and feasibility of changing the regulatory moat around lawyer ownership. In the meantime, this discussion will remain premised on the status quo, in the spirit of focusing on factors that can be influenced by individual market actors.
Who Funds Innovation & Why?
Due to the idiosyncrasies of the legal markets, it is helpful to think about innovation in two simple categories: the typical/conventional financial sponsor vs. atypical sponsors unique to the legal innovation ecosystem.
Traditional Sponsors: PE Firms Are All About That Multiple 💰❌💰
The archetype for the traditional financial sponsor of a new venture is the private equity firm. PE firms (inclusive of angels and venture capital shops) are themselves commercial enterprises. Essentially, they offer specialized expertise in the strategic deployment of capital for wealth creation. To put it as simply as possible, PE firms invest capital to buy part or full ownership of companies, apply their expertise to make those companies more valuable, and then sell those companies (hopefully at a higher price point than at purchase).
PE firms attract capital from investors (typically institutional or ultra-high net worth) with investment theses that communicate a unique viewpoint about market opportunities; they retain investors through sustained performance in generating high returns. The below chart is an extremely simplified and theoretical comparison of PE returns against the S&P 500. See “Does Private Equity Really Beat the Stock Market?,” Wall Street Journal, Feb. 13, 2018. There are many caveats about the difficulties inherent in comparing apples to oranges but suffice to say that the ROI expectations are high.
Of course, the ultimate returns to investors are abstractions in that they aggregate the outcome of the PE firm’s many activities, both successes and failures alike. To put this into more concrete context, it is helpful to think about private equity investments at the company level (again, a simplified, theoretical exercise).
- Holding times. On average, PE firms hold portfolio companies for about 6.5 years, although early-stage venture capital investments will have longer holding periods (sometimes much longer).
- Returns/exit multiples. Target multiples are more difficult to generalize than holding times. Venture capitalist Fred Wilson of Union Squares Ventures is famous for saying often that he looks for one investment that “will return the whole fund.” This is a different way of indicating that VCs usually make many high-risk investments with the expectation that most will fail, with a few wins that will make the losses look minuscule. Still, it’s probably a safe and meaningful rule of thumb to say early stage VCs will seek something in the neighborhood of 10x returns while mid-stage investors will be looking for a 3x to 5x range.
Funding innovation is both a means to effectuate and a happy byproduct of the PE firm’s raison d’être: generating returns for investors. As we will see, things are not so simple in legal markets.
Simply put, most legal startups require a long bake for a relatively small pie. In addition, the vast majority of legal startups are point solutions targeting niche markets that are far too small to ever reach the size & scale needed to attract traditional venture capital interest — at least in part due to the highly fragmented composition of the legal services market, as well as the added layer of geographic silos imposed by jurisdictional differences, see Post 051 (legal markets are especially balkanized and opaque).
Big Law Both Funds AND Manages Innovation (And It Sometimes Works 😲)
The innovation theater that often happens (inadvertently or otherwise) across the law firm landscape is more analogous to the recent explosion in corporate innovation. With technology driving a faster pace of change and startups eating into every major sector, mature businesses of all shapes and sizes have embraced the mantra: “what got you here won’t get you there.” This has fueled mystique around the “intrapreneur”, a rash of innovation “labs” housed within staid and stable companies, and the rush to co-opt startup-style innovation and strategy tools, all with mixed results. (Enjoy a moment of relief and schadenfreude: innovation theater was not created by the legal industry.)
As always, there are lessons to be gained from the mistakes of others, even those outside our own domain. Drawing from the hard-earned lessons of corporate innovation programs outside of legal, two reliable litmus tests emerge to gauge the innovation maturity of established firms:
- Why? Clearly articulated strategic objectives for innovation investments, tied to financial KPIs that measure the impact on the core business or progress toward profitable exit
- How? Process and governance around build, buy or partner decisions
A few bright spots exist
Yes, many law firms engage in some level of innovation pantomime for hype and awards, simply to keep up with the Joneses. (Award submissions in 2018 that tout a successful migration from Office 2007 to Office 365 would fall into this category.) And other law firms often get in over their heads in innovation endeavors that are beyond their core capabilities (more on this in Post 064).
But a few law firms do think and act with the recognition that they are future-proofing their businesses against emerging threats. Allen & Overy is a good example of an outlier firm displaying both indicators of innovation maturity. In 2016, A&O partnered with Deloitte to bring to market MarginMatrix, an “IT solution for compliance with the mandatory variation margin rules that now apply to the USD500 trillion OTC [over-the-counter] derivatives market,” now deployed for 8 global investment banks with over 20,000 negotiations completed. See Allen & Overy Annual Results Factsheet for Fiscal Year 2017.
MarginMatrix shows interesting signs of innovation maturity in that it is hyper-focused in product design and target market. The solution design also displays a high degree of customer-orientation, around which coalesces (a) complementary technology components (expert system, workflow, document automation) and (b) a managed services play that leverages (presumably) lower-cost staffing from Deloitte’s deep bench.
Most importantly, however, MarginMatrix makes strategic sense for A&O. OTC derivatives are important to global investment banks (a key market segment for the firm) because the customization flexibility of off-exchange products provides banks with highly sophisticated means to hedge risk. A&O also has comparative advantage to produce and maintain the high-value content that drives MarginMatrix: the legal analysis of multi-jurisdictional regulatory requirements imposed on OTC derivatives.
In the below visualization of potential strategic objectives for innovation investments, MarginMatrix fits comfortably into the “add new offerings box,” which enables the firm to anchor existing key accounts with a tranche of work offering relative revenue predictability.
The notion of packaging expert knowledge into a productized subscription model is not a new idea. Many firms continue to flirt with this idea, and mapping some of those efforts to the above strategy matrix gives some sense of the variation in motivating drivers for innovation investments.
- Littler invested heavily in new offerings spinning up a myriad of branded solutions and toolkits (e.g. LittlerGPS, among others) indicating greater focus on grabbing downmarket share with productized solutions. In 2015, Littler also entered a joint venture with Neota Logic to launch ComplianceHR, which layers Neota’s expert systems technology onto the firm’s knowledge stores into an enablement product mapped to specific and high-volume HR and employee relations workflows. See Press Release.
- Cadwalder Cabinet has evolved into a slightly different strategic play: extending its existing product into a new market segment. See “Regulators Become Cadwalader Clients as Tech Investment Begins to Pay Off,” The American Lawyer, June 18, 2018.
- Reed Smith recently launched GravityStack, a spin-off subsidiary group that will design, test and license technology solutions to legal clients. See “Reed Smith Enters the Legal Technology Market With GravityStack Subsidiary,” LegalTechNews, April 24, 2018.
Apart from these examples, countless firms are now engaged in serious efforts to integrate process, technology and legal operations to both manage costs and improve service delivery. But a sustained product/solutions focus to spin up new offerings to the market remains more the exception than the rule.
The wide variety of motivations for incumbents to invest in innovation explain, at least in part, why it is difficult to generalize about legal innovation. Some of the variation can be explained by the extreme fragmentation of the marketplace and the resulting dispersion in market position and thus strategic opportunities available to each player. The fact remains, however, that rigorous attempts to measure and compare innovation investments, maturity or performance will need to consider these differences.
Capital for Legal Innovation: Current State & Emerging Trends
A survey of the current market landscape as well as recent developments/dialogue suggests there are four key trends to watch in the next 3-5 year timeframe.
- Liquidity events suggest sorting/matching behavior by market participants
- Platform + bolt-on strategy by serial acquirers and mature scale-ups
- Smart money eyeing legal, to the tune of $500m+
- Capital gets creative: working around the regulatory moat
1. Liquidity Events: Not Necessarily a Silicon Valley-Style Bonanza
2018 has already seen a number of deals that have raised many questions (and inspired many hot takes). The below graphic picks out a small selection of headliners. Given that financial terms are rarely disclosed, the LegalZoom secondary investment attracted a lot of attention by virtue of deal size and resulting valuation. See, e.g., “LegalZoom Gains $2B Evaluation in Funding Round,” Bloomberg, July 31, 2018.
Liquidity events have a generally pleasing air of a positive development; some of that may be due to the glorified stories of founder exits vaguely reminiscent of the trailer for “The Social Network.” Certainly, liquidity events usually involve some people coming into a large lump sum of money. Without raining on anyone’s parade, it bears mentioning that the overall texture of recent liquidity events in legal markets indicates that a few different forces may be in play:
- The Avvo, BAL and Riverview Law deals give indications of a strategic sorting in which major players with strategic goals acquire specific assets; in contrast, the Lawyers On Demand and LegalZoom deals feel more like capital churn/injections that will lengthen the runway for these companies to prove out an independent scale/growth strategy that may still be in the works while providing liquidity back to the early stage investors.
- Traditional PE exit strategies favor strategic acquirers and IPOs over financial sponsors, who tend to be more sophisticated and able to negotiate a lower purchase price. Those dynamics may or may not hold in legal markets; the available data is too scant to speculate.
- The exits by BCLP and DLA Piper raise an interesting question about the optimal role of most law firms in the midwifery and nurturing of new ventures. For reasons we will cover in upcoming installments, law firms have unique assets that make it a fertile environment for experimentation and testing — whether they are well positioned to hold their equity positions to a late exit remains to be seen.
2. Platform + Bolt-On: Next-Level Serial Sorting
The activities of serial acquirers and emerging platforms deserves some mention.
- Unsurprisingly, Thomson Reuters and LexisNexis remain most active acquirers as they supplement internal innovation agendas with strategic M&A. LexisNexis, in particular, has been aggressive in sourcing new product & service innovations through recent acquisitions of Ravel Law, Intelligize, and Lex Machina — all prominently on display at the recent AALL conference. in contrast, Thomson Reuters’ recent launch of WestLaw Edge appears to be powered much more heavily by internal innovation and R&D.
- Epiq, Consilio, and Mitratech are all PE-backed and have access to the capital to continue bolt-on deals to round out their market offerings. Most recently, Mitratech acquired ThinkSmart for an undisclosed sum.
- Relativity may emerge as a likely platform looking for bolt-on acquisitions: the company has invested in Heretik and HealthJoy, signaling financial commitment to extend its platform beyond eDiscovery into contracts and highly regulated data stores.
- Earlier this year, Elevate announced that it had secured a line of credit from Morgan Stanley Expansion Capital to fund its growth. See Press Release. Elevate did disclose that the proceeds would be spread out across strategic acquisitions as well as investments in product and service expansions.
3. “Smart Money” from Silicon Valley Continues to Eye Legal Vertical
Independent research conducted by Six Parsecs indicates that “Smart Money” VCs (the Silicon Valley elite, as identified by CB Insights) have invested in almost 30 legal tech companies in funding rounds totaling over $500m. This list includes some of the most recognizable names in legal tech, including Avvo, Clio, DocuSign, LegalZoom, and Ravel, as well as some newer names to watch like Atrium LTS, Casetext, Ironclad, Judicata, Modria, and SimpleLegal. Famed Valley seed accelerators Y Combinator and 500 Startups have been fairly active as well, funding over 20 startups in rounds totaling almost $180m.
An interesting counterpoint to the “Smart Money” portfolio are the investments made by Ulu Ventures. While Ulu’s legal startup portfolio is small, it includes Lex Machina and Ravel Law, both acquired by LexisNexis. Ulu founder Clint Korver was part of an early cohort of VCs who were early adopters and customers of legal startups as an alternative to incumbent firms (and expressed intense skepticism about the waves of change washing over Big Law); that cohort included Foundry Group founder and ex-Cooley lawyer Jason Mendelson, whose claim to fame included, among other things, hating on startup lawyers. See “These Venture Capitalists Skip Law Firms for Legal Services Startups,” ABA Journal, May 2014. This raises some interesting questions about what legal startups might need more: capital to fund growth or advisors with a keen understanding of the domain.
4. Capital Gets Creative: Workarounds for Regulatory Barrier
While only orthogonal to this discussion, the emergence and growth of litigation finance must be noted. Litigation finance is a rare bird in legal innovation that fits into Marc Andreessen’s “huge, if true” paradigm. According to BTI Consulting, litigation made up nearly 30% of the demand for all outside counsel services in 2018; while a rough proxy, the share of litigation spend in all outside counsel budget still gives an idea of the significant addressable market size for litigation finance. See BTI Practice Outlook 2018 (forecasting market size by practice). Since 2014, litigation funders have raised capital in excess of $3bn. See “Litigation Funders Face Their Hardest Sell: Big Law,” The American Lawyer, June 28, 2018. While still in its early days, litigation finance has the potential to reshape the current landscape for a huge segment of the legal services market, and represents a creative channel for outside capital to influence and ramp up investment into legal data handling and predictive analytics.
Access to Capital: Could Be Better, but Not the Choke Point
Research by Six Parsecs suggests that the total amount of hard capital invested into legal tech, legal services and adjacent spaces is in all likelihood much, much larger than the $998m estimate reported by CB Insights in 2017. Further, is impossible to account for all of the soft investments made by existing players to fund strategic projects, initiatives, feasibility tests, as well as the ongoing payroll of the growing roster of internal innovation teams across the legal space.
The aggregate amount of capital invested in legal isn’t the issue — the more serious problem is the inefficiency in finding and funding the right opportunities. However, emerging trends suggest that access to capital is getting and will get more efficient over time.
Upcoming installments will make the case that inefficient access to markets and talent are much more serious barriers to innovation maturity in legal markets. That said, a rigorous look at capital flows in our industry is still important.
Why? Because there is no better accelerant for #realtalk than the topic of money. Discussion of capital must necessarily address the question of returns. Too often, we across the legal industry use innovation as an emotional lift: workshops and brainstorming sessions usually make us feel better and more hopeful about the future. Where accountability mechanisms are absent, good feelings often provide sufficient returns for these costs.
To culturally co-opt an obnoxious catchphrase of one Ben Shapiro, “money doesn’t care about your feelings.” Looking at the current state of the legal innovation landscape through this unforgiving lens can produce unexpected clarity. For the industry to mature beyond isolated experiments at the edges, we must engage in more rigorous thinking about (i) what innovation experiments actually cost, (ii) what returns they generate, and (iii) how both sides of the equation fare as the endeavor scales. Not all the inputs and outputs of innovation efforts will be quantified in dollars, but much of it can and should be.
The capitalists will enter the U.S. legal mainstream sometime between a few years from now and never. But in the meantime, those on the inside could stand to take a page out of the capitalists’ playbook, starting with the notion that investable ideas must focus on value rather than novelty. Not all new things are better than the status quo, and not all old things are bad enough to be discarded: much like handsome and stupid, innovation is as innovation does.
What’s next? See Legal Innovation Woes, Part II: TBD Markets + MIA Customers (063)
The Difficult Problem Framework is a simple tool that requires continuous learning and objectivity. Part II of a two-part series.
The framework above was developed to solve very difficult problems related to organizational change, particularly those now facing the legal field. I realize the framework looks laughably simple. That said, it’s harder to apply than you might think.
Part I (056) summarized my Deliberative Leadership course at Indiana Law, which gave me the opportunity to learn about and reflect on these topics. In Part II, I explain Difficult Problem Framework (DPF), starting first with the basic mechanics of how it works and then providing examples drawn from Deliberative Leadership and other materials.
One caveat: Initially, this post will seem more focused on decision-making than leadership. The goal, however, is effective leadership that has a chance at solving difficult problems. As you will see, the leadership part is already within our grasp. Effectiveness, however, requires more of a set-up.
Box 1: accurate assessments and root causes
Box 1 is the space where someone — a leader / innovator / change agent — seeks to understand a difficult problem and identify its root causes. Thus, Box 1 is primarily about fact-gathering and reasoning. To do it right, we observe the problem, locate relevant data and research, ask questions, listen, reflect over a period of days/weeks/months/years, write out our analysis in a clear and ordered way, and remain on the lookout for disconfirming evidence that reveals faulty assumptions or conclusions. In this respect, feedback loops are especially valuable. Cf. Chris Arygris, “Teaching Smart People How to Learn,” Harv. Bus. Rev., May-June 1991 (discussing double-loop learning).
Box 1 has two potential failure points. First, our assessment of the present is inaccurate due to insufficient fact-gathering, faulty unstated assumptions, lack of rigor, or something else (1A failure). Second, after constructing what we believe is an accurate analysis, we never leave Box 1, as we believe the hard part, or important part, is done (1B failure).
Readers may laugh when I say that Box 1 activities are similar to writing a peer-reviewed academic article. As we all know, however, academic journals are filled with symposia articles on problems that remain unsolved. Obviously, something is missing. That’s a 1B failure, the most common type for those of us in the academic crowd.
In contrast, practicing lawyers band together into firms that place a heavy emphasis on revenue generation. This leaves little time to read, reflect, and understand difficult problems that are one or more steps removed from the immediate demands of client work. Despite being liberated from timesheets, in-house lawyers are not much better. In both contexts, daily responsibilities thwart deep systems thinking. This dynamic keeps the entire profession stuck in a rut of 1A failure, as we are trying to solve our most systemic problems with after-hours resources.
The image below captures our dilemma (H/T Casey Flaherty).
Box 2: change strategy
Box 2 is about effective change strategy. Here, the operant conditioning of law school gets in the way, as we spend most of our time learning how to construct arguments that could prevail in a court of law. If we do it well, our reward is law review membership and a high-paying job. Yet, it’s also a problem-solving approach based purely on legal authority. That’s a big limitation.
Even if a client’s life or business problem might turn on question of law, most clients can’t afford to engage the wheels of justice. And even they can, few leave the courthouse feeling good about the experience. Thus, lawyers with large practices eventually build out a toolbox of nonlegal skills. In fact, Shultz & Zedeck documented 26 different tools. See “Identification, Development, and Validation of Predictors for Successful Lawyering,” LSAC Final Report, Sept. 2008.
If we move on to organizational problems — e.g., law firms, law schools, legal departments, court systems or regulators struggling to adapt to changing time — and we are paying any attention at all, we soon observe that stakeholders are seldom won over by reasoned arguments. In fact, they may not even show up for the meeting. If they do, their head may be elsewhere. For those who show up and listen, they’ll likely want to modify our ideas with some of their own. Suffice it to say, no one leaves these meetings with a quorum for change.
Several years ago, I learned this lesson the hard way, as I was part of a team building and selling evidence-based tools to lawyers. See Post 004 (discussing Lawyer Metrics); Post 016 (same). Straightforward presentation of data, even when connected to bottomline results, is not effective to win over a group of well-credentialed professionals. Cf. Daniel Kahneman, Thinking, Fast & Slow 227-29 (2011) (discussing hostility to algorithms, particularly when they demystify professional judgement). These experiences eventually drove me to diffusion theory and the insight that innovation adoption occurs through a social system where innovators and early adopters go first. When these two groups benefit, the rest of the social system follows. See Post 004 (presenting theory); Post 007 (providing detail).
Diffusion theory, however, is but one of many theories and frameworks that can improve our odds of desirable change. I’ll give a few examples below, many of which are not only connected with leadership, but also meaning, purpose and fairness. But for now, the core point is that Box 2 requires us to continuously learn new ideas and reflect on how they might connect to our difficult problems. This is no less time-consuming than the Box 1 analysis.
Difficult problems and decisionmaking
To summarize: We can only solve a difficult problem if we can accurately assess its root causes. This requires a major investment of time and resources to get right (Box 1). Thereafter, we need to formulate an effective change strategy that goes well beyond explaining/publishing our analysis (Box 2). The purpose of the DPF is to keep these two activities separate and analytically distinct.
Correct root causes + right change strategy = chance at success
Going a bit deeper, solving difficult problems is a thinking person’s game where the biggest risk factors are (a) self-deception that causes us to underinvest in learning, fact-gathering and reflection, and (b) bias and distortion in how we evaluate information. Through work ethic and mental training, we can mitigate these risk factors, but never completely. On this score, I’d recommend four “applied” resources: Charlie Munger, 24 Cause of Human Misjudgment (1995) (75-minute audio); Daniel Kahneman, Thinking, Fast & Slow (2011); Randall Kiser, How Leading Lawyers Think (2011); Ray Dalio, Principles: Life and Work (2017).
Let’s now move from the abstract to the concrete.
Box 1: what are my assumptions?
The example below is based on an assignment in Week 1 of my Deliberative Leadership class.
Imagine you are an executive at General Motors in 1984. For reasons of cost and quality, the company has been losing marketshare to the Japanese. You’ve given this a lot of thought and concluded that the root cause of GM’s woes is an old, expensive and undisciplined workforce protected by overly generous union contracts. Until that gets solved, the company cannot effectively compete with companies like Toyota, GM’s most formidable Japanese competitor.
This problem set is based on New United Motor Manufacturing, Inc. (NUMMI), which was a joint venture between GM and Toyota launched in the mid-1980s at an old GM auto plant in Fremont, California. Basically, this came about because Toyota was making great inroads in the U.S. market. To preempt a protectionist backlash, Toyota needed a plan to shift some of its production to the U.S. and learn how to adapted to U.S. workers. For GM, it was an opportunity to learn Toyota’s lean production methods, which combined world-class quality with world-class efficiency. This story is expertly told in a 1-hour podcast produced by This American Life. See NUMMI 2015, episode 561 (July 17, 2015).
The first part of the episode details the problems that existed at the GM Fremont plant prior to its closure in 1983 — pretty much non-stop drinking, drug use, absenteeism, and antagonism toward management. According to Bruce Lee, who ran the western region for the UAW, “It was considered the worst workforce in the automobile industry in the United States. And it was a reputation that was well earned. Everything was a fight. They spent more time on grievances and on things like that than they did on producing cars. They had strikes all the time. It was just chaos constantly.”
In negotiating the re-opening of the Fremont for the NUMMI joint-venture, the UAW demanded that GM and Toyota rehire a substantial portion of the old Fremont facility workforce (it would turn out to be 85%). Remarkably, Toyota was willing to go along. According to NPR automotive correspondent, Frank Langfitt, ” Toyota execs believed their system would turn bad workers into good ones.”
The rest of the episode tells the story of how, under the Toyota production system, the Fremont facility went on produce world-class quality on par with the rest of the Toyota system. What changed everything was the inclusion of workers in a team-based process of continuous improvement. For the first time on their careers, these old, tired workers were asked for their ideas on how the cars could be made better and more efficiently.
NUMMI is a vivid example of a 1A failure. The root cause of the problem was not the people; it was the system. For me, this lesson hit close to home because during the early 1980s, I was a college student living in Cleveland, Ohio. Pretty much the entire region blamed the workers and union for the decline of the industry.
The lessons of NUMMI are supported by others materials assigned during Weeks 1 and 2, such as Batman, This American Life, Episode 544 (Jan. 9, 2015) (expectations in our head have a profound effect on the physical and social world); Viktor Frankl, Why Believe in Others, Ted.com (video) (Jewish-Austrian neurologist who survived Nazi concentration camp and wrote Man’s Search for Meaning exhorting group of Americans to elevate their expectations of others and thus enable them to reach their full potential); Carl F. Braun, Management and Leadership (1948) (leader of C.F. Braun & Co., an international engineering and construction company, outlining the principles of human respect, dignity, and collaboration that underlie the company’s financial and technical success).
As these excerpts suggest, perhaps the root causes of organizational and institutional malaise are not exclusively gaps in logic or analytical rigor. Rather, a major root cause could be lack of clarity around purpose and, until that gets resolved, worry over status, hierarchy, and security.
Box 2: the missing link
I’ll admit that it wasn’t until that fourth year of Deliberative Leadership that I realized that there was a second box. The turning point was this spring when Alli Gerkman, Director of Educating Tomorrow’s Lawyers, visited by class. One of her selected readings was an article on an internal study by Google’s People Analytics group, dubbed Project Aristotle, that attempted to identify the attributes of high performing teams. See Charles Duhigg, “What Google Learned From Its Quest to Build the Perfect Team,” N.Y. Times Magazine, Feb. 25, 2016.
Google had long observed wide variations in team performance. If it could isolate the factors consistently associated with high performance, perhaps they could be scaled across the entire organization. Yet there were many false starts. In particular, Project Aristotle invested a lot of time and resources looking at how team compositions based on personality, skills or background affected team performance. “No matter how researchers arranged the data,” wrote Duhigg, “it was almost impossible to find patterns — or any evidence that the composition of a team made any difference.”
Eventually this led the Aristotle team to the social science on group norms. One line of this research suggested that norms within groups may produce a “collective IQ” that is distinct from the intelligence of any single team member. This hypothesis proved to be the missing link in Google’s research.
So, what is the cultural factor that explains high-performing teams at Google? Psychological safety.
“Google’s data indicated that psychological safety, more than anything else, was critical to making a team work.”
According to Professor Amy Edmondson of Harvard Business School, who conducted much of the group norm research relied upon by Project Aristotle, psychological safety is a ‘‘shared belief held by members of a team that the team is safe for interpersonal risk-taking. … [and] a sense of confidence that the team will not embarrass, reject or punish someone for speaking up.” Edmundson, “Psychological Safety and Learning Behavior in Work Teams”, 44 Admin. Sci. Quarterly 350-383 (Dec. 1999). From the outside, a psychologically safe group might appear free-flowing and chaotic. Yet, because of group norms, the members are very good at allocating airtime equally and truly listening to one another.
This past spring, I gave two talks on leadership, one to group of young lawyers and another to a group of students from several law schools. In both talks, I explained the Google research, presented the definition of psychological safety, and asked audience members to anonymously complete a notecard that said whether their workplace or law school was psychologically safe (“yes”, “no”, “something in between”). I then collected passed along the basket of notecards, letting each person draw a random card. Finally, I polled the results by having audience members raise their hands. In both cases, less than 1/3 reported feeling psychologically safe. That’s a problem.
Connecting it together
For all four years of Deliberative Leadership, I have assigned a well-known article on authentic leadership. See Bill George, et al., “Discovering Your Authentic Leadership,” Harv. Bus. Rev. (Feb. 2007). It’s an attractive thesis — that the most effective leaders “demonstrate a passion for their purpose, practice their values consistently, and lead with their hearts as well as their heads.” Yet, the Google article got me to think that perhaps the authentic leader’s effectiveness flows from the group norms they foster, especially psychological safety.
One of the repeat readings in my class (picked by more than one guest lawyer) is True North: Discover Your Authentic Leadership, which is basically the book version of the HBR article. It’s primary author is Bill George, former CEO of Medtronics who now teaches at Harvard Business School. True North was picked again this year, in close proximity to Alli’s article. Thus, I took the opportunity to to better understand the book’s methodology.
Below is a graph from True North that, the authors claim, fits the pattern of many of the 125 leaders in the study.
Often, according to the authors, authentic leaders are forged during a period of extreme hardship. Through the “crucible,” leaders finally develop the courage and confidence to live by their own values. Perhaps one way to establish a psychologically safe workplace is for the boss to explain difficult decisions in the context of their own learning, including painful failures and setbacks. I’ve had my own crucible moments in life. At age 55, I can say that crucibles really do burn away our allegiance to things that are stupid and really don’t matter.
In terms of Box 2 change strategy, the Google research and Bill George’s authentic leadership are connected together with the work of Chris Arygris, the late, great HBS professor who focused on organizational behavior, organizational learning, and change management. In a 1991 article in the Harvard Business Review that was later republished as a HBR Classic, see “Teaching Smart People How to Learn,” Arygris discusses his work with elite management consultants. The primary theme is engrained defensive reasoning that keeps very smart professionals from learning why many of their engagements continually fall short of desired results for them and their clients. Arygris reports many heroic efforts to change this dynamic that all end in failure.
Arygris then relates the story of a CEO of a large organizational-development firm who was so disgusted with the pattern that instead of preparing for an upcoming meeting, he decided to script out the failure in advance. He divided his work into two columns. On the right side, he wrote out the likely dialogue that would take place. On the left side, he wrote the thoughts and feelings that he would likely have during the meeting “but that he wouldn’t express for fear they would derail the discussion.” Then, instead of having the meeting, he used the time to analyze the scenario with his direct reports.
What happened next was an honest dialogue in which the CEO became privy to the honest but unspoken views of his entire team. Then they could finally hear him with a new set of ears. Finally, real progress could occur.
Below is a stylized version of Aygris’s recommended approach, which I use in my Deliberative Leadership class:
This is a potentially useful Box 2 tool. Do you have the courage to give it a try?
As legal organizations and institutions struggle mightily to adapt to rapidly changing times, there is renewed and growing interest in the topic of leadership. I am confident great things are going to happen as a result.
What’s next? See Legal Services Landscape Report (058)
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)
On Wednesday, November 29 from 6 to 8 pm at Northwestern Law, student teams in my “How Innovation Diffuses in the Legal Industry” give their capstone presentations. Topics include Everett Rogers’ rate of adoption model (see Post 008), the role of change agents (see Post 020), and crossing the chasm (see Posts 024, 025, 026).
If you want to attend and learn, please email me. We have a small class in a big room, and interest from mid-career professionals will energize these terrific students.
What’s next? See Can Intrapreneurship Solve the Innovator’s Dilemma? Law Firm Examples (039)
Week 3 of my “How Innovation Diffuses in the Legal Industry” class focused on the crucial role of consultative sales and established distribution channels in the diffusion of innovation. The success was entirely due to our guest lecturers from Thomson Reuters, pictured above.
The value of this class, however, will not make sense without first providing some real-world context. So let’s start there, circling back to diffusion theory and how Borstein, Thorkildsen, and Stroka are, in fact, “change agents” as defined in Post 020.
For the Week 2 wrap-up, see Post 032.
February 2014: Meet-up of legal start-up entrepreneurs
One comment I never forgot came from David Perla [Week 2 guest lecturer], who scoffed at the notion that Thomson Reuters, Lexis, Wolters-Kluwer and other serial acquirers were not a significant part of the innovation ecosystem. Perla stated emphatically that some of the smartest business people in the legal industry worked inside Thomson Reuters. “They definitely have some brilliant people that understand how business works; how people make decisions; how to lever off brands and established customer bases to build up dominant businesses.”
Perla, who was long gone from Thomson Reuters by then, was warning the audience not to get arrogant, overestimating our own creativity and underestimating the acquirers’. As the co-founder and active operator of a legal industry start-up, see Post 004, I had, by February 2014, consumed enough humble pie to not want any additional helpings. I didn’t understand Perla’s observations at a deep level, but I stored them away in my mind for possible future use.
March 2016: Chicago Legal Innovation & Technology Meetup
Fast forward to the spring of 2016, where Dan Linna, Dan Katz and others are running another iteration of the Chicago Legal Innovation & Technology Meetup (this one in the shadow of the ABA TECHSHOW). I’m on a panel with Joe Borstein, who is running sales for Thomson Reuters legal managed services unit (formerly known as Pangea3). I remember saying to myself, “This Borstein has better intel on the legal start-up market than anyone I’ve ever met. And where in the world did he come up with these slides? They’re gold.” In addition to being funny, Joe also had a knack for simplifying the complex. People liked listening to him.
July 2017: Chicago/Milwaukee Regional Meeting of CLOC
Fast forward again to July of 2017. I’m attending the Chicago/Milwaukee regional meeting of CLOC. Paul Stroka, Director of Legal Solutions at Thomson Reuters, was paying for lunch and arranged for some educational programming, including an overview of emerging legal technology from his colleague, Rebecca Thorkildsen.
Two things stuck in my mind from that meeting:
- Paul Stroka had a wonderful light touch, doing whatever he could to facilitate a higher-value meeting for CLOC members, never once engaging in anything that felt like a sale pitch.
- Paul’s colleague, Rebecca Thorkildsen, was the single most knowledgeable person on legal technology that I had ever met, providing useful framework after useful framework for understanding the bewildering arraying of technology that was now coming into the marketplace.
And then the lightbulb goes off — “This is what Perla was talking about. These are extremely knowledgeable professionals who are growing business units at Thomson Reuters.” Thus, before the meeting ended, I asked Paul and Rebecca to come to my “How Innovation Diffuses in the Legal Industry” class at Northwestern Law in the fall, and, if possible, include Joe Borstein.
Consultative Sales — what it is and when and why it works
In the anecdotes shared above, the common theme is consultative sales. Borstein, Stroka, and Thorkildsen are subject matter experts who are sincerely focused on listening, educating, building relationships, and problem solving. This is a relatively expensive “long-game” approach. Yet, its underwriter is Thomson Reuters, a legal information giant that deeply understands the economics of sales and distribution through decades of selling books, practice guides, and online subscription services.
To boil it all down, consultative sales works best when (a) prospective clients are struggling to understand their own business challenges, often due to significant or rapid industry changes, and (b) your products provide the best solutions to a reasonable subset of those challenges. Although your educational and problem solving efforts will sometimes point prospective clients toward another vendor, they are sure to come back to you when they need your specific product. Moreover, they will refer you and your product/service to their industry peers.
It should be obvious that this wonderful long-view approach is unavailable to fledgling legal start-ups who need sales and reference clients before they run out of cash. In many respects, today’s legal industry is similar to the automotive industry circa 1905: There are hundreds of small car builders who rightly believe that cars are the future — it’s just not going to be their car. This is because the industry inevitably must consolidate into a smaller number of dominant companies that can simultaneously focus on both quality and cost while building a sales and distribution network that can handle the complexities of warranties, service, parts, and repairs, etc.
As Thomson Reuters knows as well as Ford or General Motors or Chrysler did back in the day, in addition to projecting stability to your client base because of your size and client base, there are tremendous economies of scale to selling. That is why Thomson Reuters can afford to field an A-team of seasoned lawyers (Borstein and Stroka) and MBA consultants (Thorkildsen) to educate the market.
Example of educating the client
I specifically asked the Thomson Reuters crew to walk the class through materials they use when interacting with prospective clients. Below are three key slides presented by Rebecca that beautifully illustrate the value and power of consultative sales, particularly in a crowded and confusing marketplace like legal circa 2017. Note the three slides below have a contract/transaction focus. The next section touches on litigation.
Here’s the basic set-up: Imagine you are a legal operations professional working in the legal department of a large global company. The goal of the company is to grow and prosper economically — and for 365 days a year, that requires the company to form and execute contracts. Obviously, because of the scale of the business, those contracts become an enormous management challenge.
In 98% of all cases, the legal department lacks the time (and often business training) to understand their challenges within a broader system framework. Note how Slide 1 divides the world into legal and business drivers (left side) and provides an lifecycle framework for overall contract management (right side).
The purpose of Slide 1 is to help the client identify, organize, and ultimately prioritize their internal pain points. The legal professionals, after all, want to impose order on their massive workload and feel like they are delivering consistent value and quality to their business unit. It is a good sign when a prospective client asks for your slide deck, as it means you’ve connected with a real problem.
Again, if you are a legal department operations professional, you are constantly being pitched by a bewildering array of technology vendors. Invariably they ask themselves, “What do all these company do? And how do they relate to one another?” Slide 2 places the vendors into categories based on functions and features. With this one slide, you know where to focus your time.
What is remarkable about Slide 2 is that Thomson Reuters products are mixed in with competitors but not in a way that makes them identifiable. Let the customer react and talk and, over time, a large number of good fits will be revealed.
Slide 3 uses a similar approach. However, now it’s organized in a way that maps onto the department’s legal functions and workflow.
If Rebecca Thorkildsen spent an hour or two with you, sharing company materials and helping connect your problems to potential solutions, most professionals will reciprocate by buying from Thorkildsen’s company when the need and product(s) are a strong match. Why? Because the problems never end and they want access to her expertise in the future. That’s the Thomson Reuters’ long game.
The careers of two ex-litigators tell an important story
While Thorkildsen has a tremendous command of legal technology, particularly in the contracting space, Joe Borstein and Paul Stroka shared some personal experiences from their time as lawyers that were (a) useful in understanding the arc of the broader legal market, and (b) the personality and mindset of someone who is likely to be good at consultative sales.
Borstein told the story of cutting his teeth as a litigation associate at a major law firm where he was put in charge of managing a team of several dozen professionals on a massive document review for a bet-the-company case. Although the work was generating tens of millions of fees for the firm each year for several consecutive years, the process was highly inefficient and plagued with quality control issues. “From the inside, it was obvious that the system was broken. Friends of mine at other firms were drafting business plans for new ventures. There was no way the status quo was going to last.”
Then came 2008, which had a massive effect on the client-law firm relationship. If you recall from Post 032 (featuring Pangea3 co-founder David Perla), the financial crisis was Pangea3’s breakout moment. By the time Borstein joined in early 2011, the company had a marquee list of large corporate clients. Although the entire sales team had, by then, written off law firm customers as a “hopeless cause,” Borstein persuaded Perla to let him try. “I was convinced there had to be people who had my experience — who were worried about quality, meeting deadlines, and damaging the firm’s reputation. Further, it wasn’t the right kind of work for brilliant people from great law schools.”
Much to the surprise of his peers, Borstein’s approach ended up cracking the code for law firms. “It’s still a tougher sale,” said Borstein, “but law firms are now an established part of our client base, and it’s growing.”
Like Borstein, Paul Stroka’s experience inside BigLaw made him skeptical of the business. “As an entry-level associate benefiting from the salary wars of the mid-2000s, I couldn’t understand why my salary kept going up even though I didn’t know anything useful yet.” As he switched firms and focused on labor & employment litigation, he was troubled that success as a partner looked like having a base of clients who got sued a lot with cases that lasted a long time. “Litigation is usually a miserable experience for clients on both a cost and emotional level,” recalled Stroka. In his ninth year of practice, Stroka concluded that “I needed to be in a place where I was working to make some of those problems go away.”
At the time, Pangea3 didn’t have an open sales position. But Borstein was impressed by the persistence of a Chicago litigator who keep messaging him on LinkedIn and requesting a meeting. Eventually Borstein flew Stroka to New York City to see if opportunity might be knocking. “It is very hard to find people who are good at this job,” said Borstein. “We make rain by listening to problems and finding good fits. Paul has that very rare skill set.” Interestingly, Stroka commented that he has become a much better problem solver since joining Thomson Reuters, because that has become the primary focus of his job.
I pressed Borstein on the rainmaking point. He explained that outstanding BigLaw rainmakers use this same problem solving sales approach. However, they are constrained because the clients end up wanting them to also do the work. “In these big cases, the big-producing partners are pulling all-nighters with the associates. Law is the only business where the salesperson actually has to do the work. That is an enormous constraint of their model.”
An “ugly” but important slide
My original impressions of Borstein, Stroka, and Thorkildsen were strongly reinforced by their visit to my class. They have a tremendous grasp of the market, owing in part to their lengthy legal industry work experience, but more importantly because of the time they devote to visiting clients, reviewing data, reading industry press, and connecting with others in the industry. This enables them to produce work product that dramatically simplifies a very complex and rapidly changing industry.
A good example is Slide 4 below, which Borstein described as “ugly but profound.”
Slide 4’s key takeaway is that the historical bi-lateral relationship between law firm and client is now being supplanted by a collaboration among multiple parties. Obviously, Thomson Reuters has positioned itself as a technology and alternative legal service provider (ALSP), see Post 010 (discussing the rise of managed services), but that doesn’t make the graphic any less useful for understanding industry change. And note, Thomson Reuters senior leadership likely saw this more than a decade ago.
There are legions of high-IQ people in law, but the vast majority of them are very busy trying to hit this year’s revenue targets, leaving precious little white space for fact-gathering and reflection. This dynamic gives a company like Thomson Reuters an enormous advantage in seeing and understanding the big picture.
Borstein and Stroka commented that what has happened in the litigation realm over the last decade — with, for example, predictive coding, legal process outsourcing, and the rise of managed services — is about to happen in the transactional realm. That’s too big a topic to cover here. If you want the same education, invite them in for talk.
Thorskildsen is a lawyer, right?
It’s time to wrap this post up and connect it to diffusion theory.
Rebecca Thorkildsen is often asked where she went to law school. She replies, “I didn’t go to law school. I have an MBA.” Fortunately, when that question gets asks, it is usually because Thorkildsen has impressed someone with her command of complex, law-related materials or her excellent, organized communication style. During class, Borstein observed that it shouldn’t matter whether a professional working with lawyers has a law degree, “but often it still does.”
Thorkildsen explained that after graduating from business school in 1995, she joined Arthur Andersen as a consultant. “One of my first assignments was to help implement an email system inside a law firm. The next assignment was with a corporate legal department. In the consulting world, that can quickly turn you into an industry specialist.” Thorkildsen subsequently joined Baker Robbins, a technology consulting firm focused on legal clients, which became part of Thomson Reuters in 2000.
The connection to diffusion theory
As noted in foundational posts 020 (on change agents and opinion leaders) and 024 (crossing the chasm), consultative salespeople are often the key change agents within an industry. In most cases, two personal attributes are threshold requirements for effectiveness: (a) cultural similarity with clients (referred to as homophily) and (b) credibility in the eyes of clients. The observations and experience shared by the Thomson Reuters team certainly corroborate the theory.
Yet, this insight has deeper significance for the legal industry. Specifically, it suggests that crucial non-legal innovations related to legal productivity, such as data, process, and technology, will tend to diffuse faster when the communication channels are lawyer-to-lawyer, even when the underlying content is entirely non-legal. Some might call this snobbery or prejudice, but according to diffusion theory, it’s just a recurring feature of any social system, including law.
Finally, below is a diagram from Post 020 that ticks off the factors that enable a change agent to be more effective at accelerating innovation adoption. Isn’t it obvious that the consultative salespeople at Thomson Reuter hit them all?
For additional analysis for these seven factors, see Post 020.
What’s next? See Mark Chandler Speech from January 2007 (035)
As the above syllabus excerpt suggests, there is now a law school course on how innovation diffuses in the legal industry. This new ground is being tilled at Northwestern Pritzker School of Law, where I am visiting this fall. It is one of the few courses at Northwestern Law that enrolls both JD and Masters of Science in Law (MSL) students. This enrollment is ideal, as the diverse educational backgrounds and professional experiences of the MSL students are a terrific complement to the 2L and 3L students who have already internalized a surprisingly large amount of legal culture.
The class started last Monday (10/16) and runs for eight classes. As diffusion theory is part of an applied research tradition, see Post 004, we spent exactly one class on the underlying theory and the legal industry before moving to examples.
The examples are supplied by legal innovator and early adopter guest lecturers. For Week 2 (10/23), we had the pleasure of hosting David Perla, co-founder and former co-CEO of Pangea3, and Ian Nelson, who was part of the original US sales team of Practical Law Company (PLC) and more recently co-founder of Hotshot, a tremendously innovative e-learning company focused on legal professional development.
NewLaw and legaltech start-ups are now widely covered by the legal press. But that was hardly the case during the booming mid-2000s when all the focus was on soaring BigLaw profits and salaries. I wanted to start our guest speaker series with David and Ian because during this hey day period, both quit top-of-the-food-chain jobs to pursue obscure and speculative business opportunities (David in 2004 and Ian in 2006). At the time, the future we are now living in was far from obvious. Yet, when their respective companies sold to Thomson Reuters a few years later at valuations and multiples on-par with highly successful Silicon Valley start-ups, it became clear that NewLaw and legaltech were sectors with enormous opportunity for the innovative and ambitious.
Over the years, I have heard several renditions of Pangea3 founder stories. But Monday’s edition provided a new twist, as David focused on the preeminent importance of professional relationships and how, in hindsight, the long game is the only game that really matters.
David went through a long litany of examples of how a decade’s worth of professional contacts accumulated since law school (by both he and Pangea3 co-founder Sanjay Kamlani) were crucial to opening doors or indirectly supporting the fledgling start-up. From getting free access to 1,200 Indian lawyer resumes from Monster.com so the duo could stand-up a work team in India over the course of a few days (David had just quit the GC position at Monster to launch Pangea3); to several months of office space at Katten Muchin so Pangea3 could signal a midtown Manhattan address (David was a former Katten associate); to an initial investment by a prominent Indian-American lawyer who had credibility in both US and India venture capital and legal circles, thus greasing the skids for everything that followed (this came through Sanjay’s tenure at PWC and OfficeTiger, a first-generation business process outsourcer in India), each story illustrated the tremendous importance of relationships. Cf. Post 020 (discussing crucial role played by “weak-tie” relationships in the diffusion of innovation).
The most surprising and powerful story was David’s family connection to the head of litigation of a major global bank. The family friend took David’s call, but said at the outset, “I am happy to help you in any way I can through mentoring and coaching, etc., but I’m never going to send any documents to India.” David replied, “I understand. Is it okay if I check in with you every six months?” The head of litigation said “Sure.” David foreshadowed that this connection would turn out to be key to the ultimate success of Pangea3.
In the meantime, David and his colleagues were trying to crack the code of the large global banks. One of their prospective customers broke the disappointing news that “we innovate in our trading strategies, but not in operations or sourcing. For that stuff, we’re a second mover. So if you want us to hire you, go get [list of global banks] as one of your customers. Then we can talk.”
Fast forward a couple of years, the big break for Pangea3 was the turmoil in the financial services market in the fall of 2008 and the resulting global recession. David fields a call from one of his board members, who buoys his spirits, “Doubledown on sales; recessions are good for outsourcing.” Shortly thereafter, David takes a call from the family friend / head of litigation at the major global bank. “David, the General Counsel just informed us that our budget has been cut by 25%. I know I said never, but never just happened. Can you be here this week for a meeting?”
That meeting resulted in Pangea3 landing its largest and highest-profile client, which in turn sped up the sales cycle for several other large banks waiting to go second. David acknowledged that he did not have the benefit of diffusion theory when he was building Pangea3. Yet, on both the investor and customer side, he could see how certain key early adopters had the effect of making a wide array of disparate pieces fall into place. David specifically referred to these people as “influencers.” Cf. Post 020 (discussing how “opinion leaders” within a social system are “able to informally influence other individuals’ attitudes or overt behavior in a desired way with relative frequency”).
I first met Ian Nelson in the fall of 2008 at a legal innovation conference–in hindsight, the first of its kind–organized by USC law professor and economist Gillian Hadfield. By 2008, Ian had been working at PLC for two years, initially in content creation but then transitioning to a lead role in sales. Although PLC had already become a dominant force in the UK, the US was a bigger market governed by different law. Thus, for all practical purposes, Ian had joined a US-based start-up.
There are two reasons why the PLC model is highly relevant to anyone interested in legal innovation. First, Thomson Reuters’ acquisition of PLC in 2013 remains the high-water mark for financial success among legal industry entrepreneurs. See “Thomson Reuters buys Practical Law Company,” Telegraph, Jan. 23, 2013 (reporting the size of the deal between £200 and £300 million, all of it achieved without outside investment). Second, there remains a wide array of activities currently performed non-expertly by law firms and legal departments that could be turned into highly successful businesses by carefully applying the core logic of the PLC model. In fact, this logic is very much at work at Ian’s current company, Hotshot. Thus, let’s briefly review the PLC model.
Practical Law began life in 1990 as a trade journal focused on the UK legal market. Some of the most popular features were practice tips that pulled together and explained the technical aspects of new and emerging methods of finance. This is not surprising because PLC’s two founders, Robert Dow and Chris Millerchip, began their careers as associates at Slaughter and May, a leading Magic Circle firm specializing in M&A and sophisticated corporate finance. Quipped Millerchip, “We created the thing that we wanted when we were practicing.” Ross Todd, “Web Practice Tools for Transactional Lawyers,” Legaltech News, Jan. 23, 2009.
With the growth of the web, PLC’s offerings became simultaneously better and easy to access via an online subscription model. Relatively quickly, firms were being placed in a competitive disadvantage if they lacked access to PLC work product, which included document templates, standard clauses, practice guides, and deal checklists. In theory, firms could create this content on their own. Yet, the ability to scale across the entire corporate bar enabled PLC to deliver higher quality work product at a much lower per-unit cost. In effect, PLC had become a privately run shared service relied upon by the vast majority of top UK law firms. The economics of a shared services model make it virtually impossible to dislodge a well-run first mover — and PLC fit that description to a tee. Cf. Thiel, Zero to One 97-98 (2014) (“[M]oving first is a tactic, not a goal. … It’s much better to be the last mover—that is, to make the last great development in a specific market”).
During his guest lecture, Ian recounted his early days as a NYC corporate associate when he first encountered some of the quality gaps later filled by PLC and now being targeted by Hotshot. The first instance occurred within a few days of hiring when Ian was dispatched to a far-flung city for due diligence on a “reverse triangular merger.” The supervising partner instructed Ian to review a large volume of contracts and flag anything that “looked weird.”
Despite his law review credentials, Ian had no idea what a reverse triangular merger was, much less the definition of weird. Thus, for the next 48 hours, Ian was thrown into a silent panic, fearing that his legal ineptitude would should be exposed to the world. Yet, what he soon discovered was that neither the partner (and apparently the client) cared about the inefficiency of the process, as Ian’s overinclusive approach to copying “weird” provisions for further study at the firm’s headquarters was all being billed by the hour. Had Ian had access to Hotshot, he would have had on-demand videos and practice guides enabling him to get the answers that the supervising partner lacked the time or interest to provide.
A second formative incident occurred a couple of years later when Ian headed to London to work on-site at a UK firm that was co-counsel on a major transaction. During a tour of the office, Ian was shown the cafeteria, the copy room, and the work area for the PSLs. Ian asked, “What’s a PSL?” He was flabbergasted to learn that in the UK it was common practice to have “Professional Support Lawyers” who were responsible for, among other things, organizing and cataloguing the firm’s work product so the very best precedent could be quickly located for use on future client matters. Ian subsequently returned to the US and lobbied his firm for the creation of a similar role, as it would replace the then-common practice of firm-wide emails soliciting documents that could be used as a starting point for current client matters. Upon hearing these ideas, however, the partners shrugged with indifference.
Six years into corporate law practice, these were some of the formative experiences that caused Ian to respond to a job ad for PLC — experiences that really struck a chord with the students. At my request, Ian did a deep dive into Hotshot. However, Hotshot as a business and product offering warrants its own future post.
What diffusion theory insights did we learn?
As I reflect on Week 2, three themes stand out.
- There is no innovation without execution. It’s easy to discuss innovation as something conceptual, but until the early adopter end-user receives full value, innovators are just trafficking in ideas. Although this terrain is covered in LE’s “Crossing the Chasm” and “Hype Cycle” series, see, e.g., Posts 024–025, it was made more vivid by Perla’s description of solving funding and operational challenges while also hunting down the early adopter customers. Standing up a quality-first operation in India (the putative innovation) is extraordinarily complex, time consuming and costly. Although Pangea3 was able to hit its ambitious sales targets relatively early, the time span between a signed deal, doing the work, and getting paid — particularly when large corporate clients string out vendors for 45 to 90 days — resulted in a “near death” experience for Pangea3. Suffice it to say, there is enormous risk in translating an idea into an innovation that warrants diffusion. Innovator-leaders like David and Sanjay who can skillfully coordinate the technical talents of others are very rare and very valuable.
- There are usually several social systems that matter; not just one. As I listened to David and Ian, it became obvious that several social systems were interacting with one another. For example, David describes how inroads with the New York global banks had little to no impact with legal departments at large US tech companies. In fact, it was an investment by famed Silicon Valley VC firm Sequoia Capital (on less favorable terms that other VC shops, though the discount was worth it) that opened doors with tech companies on the west coast and, in turn, reverberated throughout India, signaling to young Indian lawyers that Pangea3 was the firm to join. In Ian’s case, the early adopters at Hotshot were all Silicon Valley-based law firms who saw real advantages to having better-trained associates who could actually understand and do the math in venture capital deals. A credible roster of west coast-based AmLaw 200 firms were eventually enough to open doors on the east coast and in the midwest where the deal flow was more traditional M&A. Cf. Post 004 (“Rogers’ core insight … is that the diffusion of innovation is a process that occurs through a social system“).
- Relative advantage, cultural compatibility, and trialability really matter. Apparently, for a large global bank, the difference between “never” and “this week” is a 25% budget cut. Thus, drawing upon the Post 008 rate of adoption model, Pangea3’s big break turned on a sudden shift in the “relative advantage” of legal process outsourcing. Likewise, regarding cultural compatibility, both David and Ian emphasized how their status as former BigLaw corporate lawyers, including knowledge of cultural norms related to speech, dress, and credentials, opened both minds and doors. Finally, Ian gave examples of how trialability was key to making sales for PLC and Hotshot, while David discussed how small projects resulted in growing sales, including a mandate from a major client that Pangea3 would be used by all outside counsel for all large-scale document reviews. Apparently, nothing is more convincing than tasting the soup. If it tastes good, your early adopter customers will set off a chain reaction (within a firm or legal department, or among peer firms or legal departments) that will do the work of an army of salespeople. Cf. Post 025 (Geoffrey Moore noting that word-of-mouth marketing is essential to crossing the chasm).
Week 3 of How Innovation Diffuses in the Legal Industry features three highly accomplished Thomson Reuter professionals:
- Joe Borstein, Global Director of TR’s Managed Legal Services (formerly Pangea3) and Innovation Columnist at Above the Law
- Rebecca Thorkildsen, Global Director of Legal Solutions (a person with an amazingly broad and deep grasp of the rapidly expanding legal ecosystem)
- Paul Stroka, Director of Legal Solutions (a very capable corporate lawyer who has a deep understanding of consultative sales — i.e., selling as a second-order effect of customer problem solving — which is the core skill of a change agent)
I’ll do my best to pass along what we learn.
What’s next? See The 2017 Forum on Legal Evolution (033)