Want to innovate? Break the law firm business model

by Jordan Furlong

 

“Innovation destroys hours.”

 

Those three words, written by Neota Logic founder Michael Mills in a 2014 blog post, summarize the fundamental challenge that every law firm faces today. They reflect two market realities that are inherently incompatible with each other.

 

  1. Virtually every recent innovation in the legal services market — from automation to process improvement to multi-sourcing — has operated to reduce the amount of time and effort required to produce and deliver legal services.

 

  1. Virtually every law firm in the legal market prices its work, bills its clients, compensates its lawyers, and rewards its shareholders on the basis of the amount of time and effort required to produce and deliver legal services.

 

This fact has to constitute the starting point for all our inquiries into “why law firms don’t innovate.” When a law firm engages in any of the most common types of innovation, it reduces its inventory and lowers its lawyers’ revenue.  It’s no wonder innovation is anathema within most law firms: it’s antithetical to the law firm’s foundational business premise. You might as well ask a ship to innovate by drilling holes in its hull.

 

Don’t make the mistake, therefore, of blaming lawyers for the lack of law firm innovation. Sure, lawyers are change-resistant and conservative and all the rest — but so are most people, to a greater or lesser extent. Since almost any worthwhile innovation in a law firm will destroy hours and therefore reduce lawyers’ stock in trade, lawyers will understandably fight those innovations. It’s an entirely rational response, and we shouldn’t demonize lawyers for it.

 

The true barrier to law firm innovation is the firm’s ironclad insistence on measuring value — both external to the client and internal within the firm — on the basis of lawyers’ time and effort.

 

Law firms maintain a direct, causal connection between the time and effort lawyers expend to deliver a service and:

 

(a) the money clients pay to receive that service, and

(b) the money lawyers receive as compensation for their services.

 

But there is no fundamental economic reason why either of these should be the case. These aspects of your business can and should be largely independent of each other.

 

(a) Clients need not be charged on the basis of lawyers’ time and effort. They can be charged on the basis of successfully accomplishing a task within previously agreed parameters for a previously agreed price (with both parameters and price established according to competitive market realities). Indeed, clients have been telling firms this for the last ten years: they don’t care how much time and effort was required to generate their legal services. All they care about is the result they received and the experience they enjoyed (or endured) to receive it.

 

(b) Lawyers need not be compensated on the basis of the time and effort they expended to deliver a service. They can (also) be compensated according to clients landed, business generated, relationships maintained, solutions identified, teams managed, projects led, juniors mentored, and a host of other criteria. Should we really be surprised that law firms that incentivize maximum lawyer time and effort are filled with overworked male lawyers disproportionately prone to depression and substance abuse?

 

Law firms don’t seem to understand that their costs of production and their revenue from clients are not supposed to be causally connected.

 

If you want to successfully introduce innovations into your law firm, therefore, you first need to recognize that these innovations pose an existential threat to the way the law firm does business. So your real challenge — the challenge every law firm faces, whether it wants to innovate or not — is to change the way the law firm does business. Break the causal relationship between the amount of time and effort required to render a client service and (a) the price clients are charged for those services, and (b) the rewards provided to lawyers who helped deliver those services.

 

That’s not going to be easy, obviously. In fact, it might seem like I’m just substituting one insurmountable challenge for another. But here’s the difference: You have zero chance of stopping innovation from destroying lawyer hours. But you have a non-zero chance of changing the way law firms charge their clients and compensate their lawyers.

 

There are two paths out of this mess for law firms. One path is impossible to follow. The other is merely extremely difficult. You’re going to choose one of them eventually.  Eventually might as well start today.

 

Jordan Furlong is a consultant, author, and legal market analyst who forecasts the impact of changing market conditions on lawyers and law firms. He has given dozens of presentations to legal audiences in the US, Canada, Europe and Australia over the past several years. A member of the Advisory Board of the ABA’s Center for Innovation, Jordan is the author of Law Is A Buyer’s Market: Building a Client-First Law Firm, and writes regularly about the changing legal market at law21.ca.

Predicting the Future of Legal Services

By Dean Andrew Perlman, Chair, ABA Center for Innovation

To get this blog started, I’m delighted to share some of my reflections on the future of legal services.  These posts were originally part of an online symposium on Prawfsblawg focused on two books: Richard Susskind & Daniel Susskind, The Future of the Professions: How Technology Will Transform the Work of Human Experts and Gillian Hadfield, Rules for a Flat World: Why Humans Invented Law and How to Reinvent it for a Complex Global Economy.

The reflections contain three parts.  The first part (below) describes the Susskinds’ prediction that technology will drive dramatic changes to the delivery of legal services.  I conclude that, although the Susskinds’ predictions are probably close to the mark, the changes may be more uneven than the Susskinds acknowledge.  The second part discusses how law schools should respond to the rapidly evolving legal marketplace and suggests curricular changes that will put law school graduates in a better position to thrive in the 21st century.  The final part discusses how the regulatory framework for legal services will need to evolve in light of the rapidly changing legal marketplace.

A Disclosure 

My views on the future of legal services have been informed by Richard Susskind’s earlier books and my own work on projects where “futures” discussions have been front and center.  For example, I served as the vice chair of the ABA Commission on the Future of Legal Services, which produced a report describing many “legal futures” issues in great detail. And I have been serving as the chair of the governing council of the ABA Center for Innovation.  Before becoming a law school dean, I was fortunate to serve as Suffolk Law’s inaugural director of our Institute on Legal Innovation and Technology and the related concentration in the area.

These experiences lead me to believe that we are going to see more significant changes over the next couple of decades than we have seen over the last twenty years (and those recent changes already have been considerable).  That’s a long way of disclosing that I read the Susskinds’ book expecting to find myself largely in agreement with their predictions, and I wasn’t disappointed.

The Essence of the Susskinds’ Forecast

The Susskinds’ predictions turn in no small part on an important narrative about how people have developed and shared their expertise during different periods of human history.  Namely, we have seen an evolution from strictly oral communications, to written work, to modern printing, and (most recently) to a digital age where knowledge is acquired and shared with great ease (pp. 147-53).

The Susskinds observe that, before the current digital age, information was difficult to obtain, giving professionals an important role and advantage.  People could not easily find the information they needed about a topic, such as medicine, law, or accounting, so the public had little choice but to consult experts (e.g., doctors, lawyers, accountants, etc.) to answer even routine questions.

The Internet is now leveling that playing field, making the dissemination of expert knowledge considerably easier.  (This online symposium is an example.)  When combined with technological advances that have facilitated the automated delivery of that knowledge and related services – think the Mayo Clinic or WebMD (for medicine), LegalZoom (for legal services), TurboTax (for accounting), and Khan Academy (for education) – the Susskinds argue that we are beginning to see Clayton Christenson-like changes to the professions (though the Susskinds prefer to avoid the language of “disruption”).  (pp. 109-10).  The Internet is not only making it easier for non-experts to gain access to the information they need; it is driving a gradual expansion of automation from low-cost, routine professional services to more bespoke services, especially as artificial intelligence (AI) becomes more sophisticated (e.g., IBM Watson’s applications to the healthcare and legal industries).

The Susskinds do not argue that human-based bespoke services will necessarily disappear (pp. 192, 199), but they contend that we will see a continued transformation of how professional services are delivered and related changes to the basic skillset that future professionals will need.  In a nutshell, they conclude that professionals will have to partner with the “machines” rather than try to beat them.

This is a greatly simplified account of a nuanced and well-researched book, but for those of you who have not read it, this is the gist of it.

My experience has been that some lawyers either do not agree with this forecast or have not given the subject a great deal of thought, so in the remainder of this post, I’m going to explain why I believe that we need to take the Susskinds’ forecasts seriously.

Is the Prediction Right?

The quotable baseball manager Yogi Berra once said that “[i]t’s tough to make predictions, especially about the future.”  Tough, indeed, but not impossible. Richard Susskind’s predictions about the future of legal services have been prescient for decades. Although Richard hasn’t always been on the mark, he’s been right often enough that his ideas deserve careful attention.

One of the primary reasons that I’m convinced that the Susskinds’ forecasts are reasonably accurate is that the predicted future is already taking shape.  As with just about any prediction, the odds of getting it right improve considerably with additional data.  Take, for example, a prediction that autonomous cars are going to transform transportation within our lifetimes.  Twenty years ago, that prediction would have been quite speculative because the technology needed for such a development was not yet available.  But given the technology that now exists, we can predict with a much higher degree of confidence that driverless cars will become ubiquitous and transformative within a couple of decades or so, perhaps considerably sooner.

The analogy between self-driving cars and legal services innovation is not perfect, but it is instructive.  Like predictions about the coming ubiquity of self-driving cars, predictions about the likely transformation of professional services are drawn from existing data and technology, not a speculative forecast about future capabilities.

Consider some recent developments in the legal industry.  In the context of dispute resolution, online platforms (online dispute resolution, or ODR), led by Modria, now resolve approximately as many disputes as the entire U.S. court system combined.  The technology is now moving into courthouses.  Court-annexed ODR platforms are emerging, and more are likely to appear in the near future.  Even when disputes are resolved in courts using traditional procedures, technology is changing the landscape.  When I started practicing 20 years ago, discovery required associates (and paralegals) to engage in page-by-page reviews of paper documents; today, technology-driven ediscovery is performed by outside vendors.  And technology is informing how lawyers do their work.  For example, companies like Lex Machina (now owned by LexisNexis) and Premonition are using data analytics to give lawyers valuable insights about opposing counsel, courts, etc. to craft better arguments and assess the value of cases.  One company offers to scan your opponent’s briefs and suggest possible cases to cite in response.

In the context of transactions, LegalZoom now automates the creation of a wide range of basic legal documents and has served millions of consumers.  Numerous other companies and organizations offer similar services, either directly to the public or for law firms, legal departmentscourts, and legal services organizations.  Due diligence and contract management are often outsourced to legal process outsourcers (LPOs), as are a range of other services.

Law firms and in-house legal departments are responding to these changes in various ways.  In addition to making greater use of document automation, they are using expert system tools, creating legal project management departments, hiring legal solutions architects to design new ways of delivering legal services, and establishing research and development departments (e.g., Dentons’ NextLaw LabsDavis Wright Tremaine’s De NovoSeyfarth Shaw’sSeyfarth Lean, and Littler Mendelson’s Service Solutions).  Law firms are also diversifying their revenue sources by creating ancillary businesses, such as e-discovery services or data analytics.  In-house counsel are placing a greater emphasis on legal operations (e.g., the Corporate Legal Operations Consortium (CLOC)), and they are making greater use of LPOs and unconventional lawyer-staffing solutions that include new technology solutions as well.

Bar associations are responding too.  The ABA recently issued a report on these developments and has established a Center for Innovation (which is hosting this blog).  State bar associations are examining futures issues, and other associations around the world are engaging in similar efforts (e.g., the U.K.’s Law Society and the Canadian Bar Association).

This is all just a sampling.  New legal tech and innovation startups are appearing everywhere and delivering a growing range of services.  Venture capitalists are taking notice as well and increasing their investments into innovative solutions for the legal industry.

At the same time, the available tools are getting more sophisticated, especially as AI itself becomes more capable.  There are increasing efforts to apply AI to law (e.g., ROSS), a development that fits nicely into the Susskinds’ predictions that the changes already underway will continue to transform legal services, even at the most sophisticated levels of the industry.

A Caveat: “The future is already here — it’s just not very evenly distributed.”

This quote is often attributed to author William Gibson, and it offers a pretty good summary of what is happening with professional services.  Innovations are transforming those services, but the changes are (and likely will continue to be) uneven.

To be sure, the Susskinds concede this point.  They believe that there will not be a “big-bang revolution.”  Rather they predict “incremental transformation,” or a “staggered series of steps and bounds.”  Nevertheless, the Susskinds conclude that “the eventual impact will be radical and pervasive.” (p. 231)

Here is where I may part ways just a bit from the Susskinds.  I agree that technology-driven changes to the delivery of professional services will take the form of “incremental transformation,” but I think that the extent and especially the timing of the changes are likely to vary much more than the Susskinds imply.  The transformational changes that they predict will vary from one profession to the next (and vary among professional practice areas) by considerable periods of time, perhaps decades.  Some practice areas within some professions, including the legal profession, are sufficiently bespoke that the AI necessary to replicate the services or substantially transform how they are delivered is still entirely speculative (much like self-driving cars were twenty years ago).  That’s not to say that transformational changes will not eventually emerge in these resistant fields; it is just that the technology necessary to bring about those changes does not yet exist and may not for quite a bit more time.

This is a variant of the objection that the Susskinds confront in their book: “this may be true of everyone else’s practice area, but not mine.” (p. 232) My objection is a little bit different.  I’m not suggesting that any particular profession (or practice area within a profession) is immune from these changes.  I’m arguing that the changes are likely to be more uneven and difficult to predict in terms of scope and timing than the Susskinds suggest.  In other words, nobody is immune from the changes, but some are likely to be more resistant than others.

Consider a recent McKinsey report (related New York Times story here), which concludes that automation of industries (including the professions) will vary depending on technical feasibility, the cost of developing and deploying the solutions, labor market dynamics, economic benefits, and regulatory and social acceptance.  Assuming these factors are the right ones (and they seem right to me), the pace of change is likely to vary depending on the industry and the specialty.  Indeed, the report suggests that the “professions” themselves have among the lowest automation potential of the types of employment surveyed.  (See Exhibit E4.)  Although I think that claim may underestimate the automation potential in many parts of the legal profession, the point is that the extent and timing of the transformation of professional services is not easy to predict.  The report explains that “[o]ur scenarios suggest that half of today’s work activities could be automated by 2055, but this could happen up to 20 years earlier or later depending on the various factors, in addition to other wider economic conditions.”  That’s quite a broad window, and it reflects the uncertainties that necessarily exist when venturing predictions across industries, professions, and specialties.

To be clear, I’m not suggesting that the Susskinds’ forecast is wrong.  I’m just a bit less confident in the general applicability of their forecast than I am about (say) predicting the coming ubiquity of self-driving cars.

Assuming you’re convinced (as I am) that the Susskinds’ vision of the future is roughly close to the mark, what should we do about it?  In my next two posts, I’ll explore what this all means for legal education and legal services regulation.

Introducing the ABA Center for Innovation Blog

By Dean Andrew Perlman, Chair, ABA Center for Innovation

As the chair of the ABA Center for Innovation, I am delighted to announce the launch of the Center’s new blog.  This blog will offer a place for the Center’s council members, staff, special advisors, and other guests to share their thoughts on the changing nature of legal services delivery.  If you have content that you would like to contribute, please contact the Center’s managing director, Janet Jackson.  With appropriate permission, you are welcome to republish content that has appeared elsewhere.

We hope you will enjoy reading this blog and sharing your thoughts with us.