Disruptive Innovation and the Legal Services Market: Are Upsets on the Horizon?

DISRUPTIVE INNOVATION IN THE LEGAL SERVICES MARKET: Is real change coming to the business of law, or will the status quo reign? Shannon Spangler Shannon L. Spangler, PC

DISRUPTIVE INNOVATION IN THE LEGAL SERVICES INDUSTRY 1

I. INTRODUCTION

Academics, consultants, and lawyers warn that disruptive innovation has come to

the practice of law. Some predict the end of Big Law (as we know it today) by the next

decade.1 Others suggest that the small generalist firm will soon go the way of the dinosaur

even though by head count these lawyers may make up 50% or more of law firm

lawyers.2

Through what lenses should lawyers examine and evaluate the predictions of the

threats to Big Law and Small Law? Is there an innovation imperative in the legal services

industry? What drives this imperative, and what changes are afoot? Are there adaptive

strategies that law firms at any point along the spectrum can use to remain relevant, to join

the next-generation of legal service providers?

II. THE INNOVATION IMPERATIVE3 IN THE LEGAL INDUSTRY

A. Economic Turmoil Hits the Profession

Few industries were left unscathed by the 2008 recession, and law is no exception.

Some see the recession as a (or the) catalyst for the changes now taking place and/or

anticipated in the legal services industry. According to some, it shifted the demand curve

1 See Scheiber, Noam, The Last Days of Big Law, The New Republic, July 21, 2013, found at

http://www.newrepublic.com/article/113941/big-law-firms-trouble-when-money-dries (last visited October 1, 2013). 2 By head count, in 2008 the largest 300 US firms made up approximately 15% of the law firm market. Where Lawyers Work in the U.S., Legal Finance Journal (2008), found at www.legalfinancejournal.com (last visited October 2, 2013). 3Mazzone, E., The Innovation Imperative: Adapt or Die? American Bar Association, Law Practice Management, Vol. 39, No. 4, July-Aug 2013, found at http://americanbar.org/publications/law_practice_magazine/2013/july-august/web-2-0.html (last visited September 21, 2013).

http://www.newrepublic.com/article/113941/big-law-firms-trouble-when-money-drieshttp://www.legalfinancejournal.com/http://americanbar.org/publications/law_practice_magazine/2013/july-august/web-2-0.html

DISRUPTIVE INNOVATION IN THE LEGAL SERVICES INDUSTRY 2

for Big Law services . . . permanently down.4 The recession also may have fueled the trend

of increased regulation, which has made operating any business more expensive and

complex. Together, this has resulted in organizations reducing internal legal staff and their

outside legal counsel expenditures. At the same time, the regulatory climate imposes the

need for sophisticated legal support.5

Reduced demand from client corporations has contributed to an overcapacity

problem in Big Law and the legal services industry generally.6 Big Law responded in

several ways, in varying combinations some, for example, with reductions in force, and

others by trying to create profit centers through lower margin, higher volume work. Still

others continued to increase their hourly rates year over year.

Although demand may be down in terms of hours and dollars, clients are asking for

more productivity (and results) from their lawyers -- for less. Efficiency, however, is

antithetical to the law firm business model, which is based on charging clients for time

spent, rather than on results or other measures of value.7 As a consequence, large

corporations are starting to find alternatives to the traditional law firm for at least some of

their legal work.8 Of course, many smaller businesses and individuals find legal services

unaffordable altogether, and simply do without, or turn to internet self-help resources,

such as Legal Zoom, Rocket Lawyer, NOLO and the like.

4 Mazzone at 2. 5 Susskind, R., Tomorrows Lawyers: An Introduction to Your Future, Oxford University Press, Oxford, UK, 2013, Kindle Edition at 3-5. 6 Scheiber at 2, 11.

7 See Mazzone at 2; Roster, M., Time to Blow Up the Billable Hour Formula, ABA Legal Rebels, found at

http://www.abajournal.com/legalrebels/article/time_to_blow_up_the_formula (last visited October 2, 2013) at 1. 8 See, e.g., Zahorsky, R. and Henderson, W., Whos eating law firms lunch? ABA Journal, October 1, 2013,

found at http://www.abajournal.com/magazine/article/whos_eating_law_firms_lunch/ , last visited June 19, 2014.

http://www.abajournal.com/legalrebels/article/time_to_blow_up_the_formulahttp://www.abajournal.com/magazine/article/whos_eating_law_firms_lunch/

DISRUPTIVE INNOVATION IN THE LEGAL SERVICES INDUSTRY 3

B. The Power Balance Shifts

In addition to the financial pressures the recession imposed on both sides of the

attorney-client relationship, increasing transparency enabled by advances in information

technology and ever more sophisticated uses of Big Data gives corporate clients the

information they need to more effectively wield their bargaining power. Law firms can no

longer take a black box approach to service, and clients now have abundant data allowing

comparisons among providers.9 Legal services have been demystified, and legal service

consumers are more knowledgeable, sophisticated and connected than ever before.10

Technology and the resulting transparency have fueled the growth of alternative

sources of legal services, and there appears to be a growing acceptance of less traditional

approaches. Many of these alternatives are more efficient and less costly than those

offered by traditional law firms, and often of higher quality for the particular task at hand.11

C. Identifying Barriers to Change

Those who both recognize and urge change in the legal services industry point to

some common lawyer idiosyncrasies that may get in the way of innovation.

The legal profession depends on tradition and precedent. We assume that the

structure of the legal industry will continue as it has been for many years, forgetting that

some constructs that seem to be part of the law firm fabric like the billable hour are

relatively new inventions. Lawyers tend to be suspicious of new things that others create.

If disruption or discontinuity is whats ahead, how will lawyers adapt?

9Christensen, C., Wang, D., and van Bever, D., Consulting on the Cusp of Disruption, Harvard Business Review, Oct. 2013, found at http://hbr.org/2013/10/consulting-on-the-cusp-of-disruption/ (last visited June 19, 2014) at 4 (hereinafter, Christensen (Oct. 2013). 10

See Mazzone at 2; see also Press, Aric, The Future of Law as Seen From Silicon Valley, Recorder, March 11, 2013. 11

See, e.g., Zahorsky; Christensen (Oct. 2013) at 5.

http://hbr.org/2013/10/consulting-on-the-cusp-of-disruption/

DISRUPTIVE INNOVATION IN THE LEGAL SERVICES INDUSTRY 4

Lawyers are not known for their collaboration skills, despite a growing body of

research that underscores the need for collaboration to foster innovation, and the value of

collective knowledge. Traditional law firms fail to retain women and minorities, thus

excluding more than half the population from participation. However, research suggests

that the highest performing groups are those with the most women.12

Law firms, as partnerships, do not invest in new ways of doing business or

delivering service. They are focused on the here and now, and they are adverse to

returning profits to the firm.

Many who promote change in the legal services industry barely acknowledge some

of the constraints in law practice that require consideration in crafting the future of law.

These include licensing requirements, privilege and confidentiality, and other ethical

duties. New business models or approaches to legal service delivery must respect and

accommodate these constraints.

D. Insights from Other Professional Services Providers

Much of the current debate about the future of the traditional law firm applies with

equal force to other types of professional services firms.

Other professional services are seeing the same changes as law firms, and for many

of the same reasons. Democratization of knowledge is a factor, which brings transparency,

12

See Sparkman, R., Dont Bury Big Law Just Yet, The American Lawyer, AmLaw Daily, 7/24/2013, found at http://www.americanlawyer.com/PubArticleALD.jsp?id=1202612266779&kw=Don%27t%20Bury%20Big%20Law%20Just%20Yet&et=editorial&bu=The%20American%20Lawyer&cn=20130725&src=EMC-Email&pt=Am%20Law%20Daily (last visited September 21, 2013); see generally, Woolley, A., Chabris, C., Pentland, A., Hashmi, N., and Malone, T., Evidence for a Collective Intelligence Factor in the Performance of Human Groups, Science, October 29, 2010; see also Johnson, C., Group IQ: What makes one team of people smarter than another? A new field of research finds surprising answers, Boston Globe, December 19, 2010, found at http://www.boston.com/bostonglobe/ideas/articles/2010/12/19/group_iq/?page=1 (last visited October 2, 2013) at 3.

DISRUPTIVE INNOVATION IN THE LEGAL SERVICES