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Legal Disruption: Does It Matter?

by Larry Bridgesmith, JD | CEO of Legal Alignment

The past two weeks have been remarkably energizing thanks to several new and older entrepreneur friends (not in age, but longevity). My long time friend and serial entrepreneur Phil Gibbs has formed The Disruption Lab "to provide an outsourced innovation lab for corporations aspiring to achieve extraordinary growth through continuous innovation."

That's where I met my new serial entrepreneurial friends, Peter Marcum and Jay Deragon. It can be said of all of them, "Hail fellows, well met!" Each is a marvel in his own right. Thanks for the great conversations!

The Disruption Lab meets twice monthly to explore and actualize innovation in business. Its members are all extremely accomplished and successful business leaders from most industries and a variety of professional backgrounds.  Their common trait? They are lifelong learners who cannot get enough information, knowledge and wisdom.  That's why they gather and pay to belong. The value of belonging is much greater than the cost of membership.

In a recent meeting, the sharing of information and experiences all focused on the common traits of business disruption (as opposed to incremental improvement). Disruption is innovation that threatens the common business model of the business or industry segment it serves. Think Uber in personal transportation and even automobile ownership (why pay to own when you can pay less to ride?) Think Airbnb in business lodging and vacation rentals.

These are extreme examples of disruptive innovation. Would Uber have been created at Yellow Cab (or even General Motors) or would Airbnb resulted from innovation at Marriott?  Of course not, because they threaten the business models that have worked so well for so long.

Very few disruptive innovations came from within an established business entity. An example of the exception is the creation of the laptop from an IBM "skunk works" team who labored in obscurity and anonymity far removed from the remainder of the IBM computer culture. Why? They radically downsized the desktop industry.

Clayton Christensen first popularized this phenomenon in The Innovators Dilemma: The Revolutionary Book that Will Change the Way You Do Business (2011). (Christensen addressed the disruption of law at the Harvard Law School in 2014.)

At The Disruption Lab we have been exploring the common elements of disruption in any business sector.  Aided by work done by Peter Theil in Zero to One, Chris McChesney , Sean Covey, and Jim Huling, The 4 Disciplines of Execution: Achieving Your Wildly Important Goals and Salim Ismail and Michael S. Malone, Exponential Organizations: Why new organizations are ten times better, faster, and cheaper than yours (and what to do about it), Phil led a dynamic discussion regarding what are the common traits that lead to business disruption.

In short, and after extremely stimulating conversation, it appears that businesses or industry sectors that are ripe for disruption all display these common patterns:

  • Starts with a “job” being done well, which has become complex, difficult to access and expensive
  • As result the market is not well served
  • Disruptors employ an enabling technology
  • Resources utilized are owned by others
  • Disruption is simpler, more convenient and cheaper
  • Current providers ignore or dismiss, and when threatened seriously, seek regulatory protection.

Whether Airbnb, Uber, laptops or any other disruptive product or service, these characteristics in today's digital economy prevail.

Some have grown tired of hearing how the concept of disruption can be applied to the legal industry and argue that it is like comparing apples to oranges.  I beg to differ.

Legal service delivery as an industry fits every common trait of ripeness for disruption to a "T". Not in ten years or after the crop of Baby Boomers currently in charge of the legal industry retire, but now. (I know about Baby Boomers because I are one.)

Isn't it true that the legal industry is:

Complex, expensive and difficult to access?

There is an enormous market served so expensively and with such complexity that it has become inaccessible for 80% to 90% of the population. (See below.) Even lawyers resist retaining other lawyers for their own legal needs because of unpredictable pricing and "black box" problem solving.

Most ethics complaints against lawyers are a variant of "she wouldn't return my call". Clients hate surprises in the handling of their problems. Legal billing has become another example of the adversarial system. Numerous business have thrived by reviewing legal bills and contesting inappropriate charges.

Attorneys are so cautious about billing for time worked due to obvious inefficiencies in providing services that 23% of time is "written off" (or "written down") and never finds its way onto a client invoice. Of the time actually invoiced, 18% is never collected due to client objection or disapproval. Less than 75% of legal time actually worked is ever paid for! What other business can survive with that level of waste?

Lawyers rarely sue to enforce legal billing obligations because of the desire to keep the problem "out of the papers". Lawyers who do sue to collect unpaid bills sometimes find themselves the target of counter suits and unfavorable publicity like that resulting when DLA Piper (then the world's largest law firm) filed suit in 2013 against a client for unpaid legal fees amounting to over $675,000. A $22.5 million counter claim was filed by the client for billing fraud. The resulting litigation disclosed numerous emails among attorneys working for the client which suggested deliberate "churning of the bill" by unnecessary and expensive over billing.  The attorneys involved all left the firm and the suit was quickly and quietly settled. Enormous damage was done and legal services became trusted even less than before.

Under or poorly served market?

In the U.S., numerous surveys and studies reveal that 4 out of every 5 individuals and business entities will "go it alone" rather than have their legal needs met by a lawyer. In the U.K. the ratio is 9 out of 10.

Over 80% of divorce actions are handled without lawyers.  That amounts to an amazing amount of post-divorce issues in child support, visitation and taxation which never have the benefit of legal counsel. The indigent client population in criminal and civil matters cannot be served due to the paucity of legal aid and pro bono services. States like Tennessee have struggled hard to solve the "Access to Justice" issue and despite heroic efforts have moved the needle only slightly.

Some would say there are more lawyers than needed.  That would be true if they were serving the under served.  Instead, they are primarily focused on a shrinking share of the "top tier" legal work and cannot afford to provide services to the poorly served at rates the clients can afford.

Disruptors enabled by technology?

This is the characteristic that is only now showing up on the scene in law in a significant fashion.  E-discovery has been a forecaster of things to come. Previously, the high end review of documents related to litigation was done by lawyers and paralegals at a significant cost to the clients. This manual and expensive legal service has been replaced by the technology of information management which produced far superior results at vastly reduced prices.

As technology continues to be developed to provide other means of support to provide "better, faster, cheaper" legal services, the clients and those providing legal services will innovate the legal workplace.  This innovation is already reducing the cost and increasing the access to legal support by such companies (not law firms) like LexMachina (IP litigation), Clio (small firm finance and case management), NeotaLogic (decision tree legal decision making) and literally hundreds of e-discovery firms which are improving information management (not just litigation support) at an exponential rate.

It is not yet a tsunami, but the surf is retreating in advance of the coming disruption.

Resources utilized are owned by others?

Just as Uber uses independent drivers' own cars and Aribnb uses property owners' unused bedrooms, homes and vacation locations, legal disruption will be achieved by the use of resources not owned by the lawyers (law firms or legal departments).

Few law firms "own" an e-discovery capability.  It is rented by the legal department or law firm and owned by people and companies who don't possess a law degree. E-discovery companies are like Uber drivers who contract their services on a wholesale basis as their time and capacity permit.

With the advent of cloud computing, even skeptical law firms realize that the security in the cloud is better than they can provide for confidential data they are responsible for.  Furthermore, it is far cheaper to use cloud services to store and manage digital data than to own it and maintain it behind an on premises firewall. Servers owned by others are now used by lawyers to host their highly valuable data.

As technology applications by legal start ups continue to augment the service lawyers provide, they will incur less overhead to do what was once done exclusively within the walls of the law firm or legal department.

Now that IBM's Watson has turned its attention to legal services (like it already has done to medicine) the degree to which technology enabling will disrupt the law cannot be fully appreciated.

Simpler, more convenient and cheaper disruption?

Services which are less expensive for both the customer and the provider is the key to disruptive innovation. Uber drivers can drive nicer cars at less out of pocket cost because revenue offsets the expense of automobile ownership. Customers can get personal transportation on demand in a trustworthy and reliable vehicle with indemnified and background checked drivers all enabled by real time technology. Home and vacation property owners can benefit from Airbnb's massive Internet reach and its technology model which provides the property owner with offsetting revenue and the customer with less expensive lodging.

In law, the key to better, faster, cheaper as with the other disruptive models is whether or not services can be delivered more profitably as well. Lawyers are beginning to understand that project management and process improvement methodologies like Lean and Agile can convert better, faster, cheaper into more profitable as well. Without greater control of a legal matter's profitability, being better, faster, and cheaper only leads to bankruptcy.

Having moved from the "cost plus" model of legal billing of the past to "predictable pricing", lawyers and clients will both benefit from better quality at less cost and higher profits only through maximizing the value of efficiency. The race to fixed fee revenue which is being insisted on by most corporate clients, requires lawyers to adopt the methods of project management and process improvement just like their corporate clients did decades ago.

This makes the delivery of legal services simpler, more convenient and cheaper (not to mention real time and transparent) while also generating greater profits for the legal service provider.

Current providers ignore or dismiss, and when threatened seriously, seek regulatory protection?

Perhaps the greatest indicator of the ripeness of law for disruption is the disdain most lawyers have for efficiency, technology, convenience and cost effectiveness (or value). These client serving attributes are exactly what drives the market to find alternatives to the current business model. The disdain, distrust or unfamiliarity with these values by incumbents in the industry is what leads to innovation from outside the industry.

As the 2015 Altman Weil Law Firms in Transition survey reveals, law firm leaders from firms of every size understand that the glory days of economic growth in legal service delivery will never return. However, they admit they are doing nothing about it and have no idea what to do.

This approaching tsunami takes the providers unaware as disruptors move into the market to provide legal services better, faster, cheaper and more profitably.

Today most lawyers rely on the "unauthorized practice of law" dogma to persuade themselves that their lair is safe from intruders. Ask the dentists in North Carolina how well that works. After attempting to ban technicians providing teeth whitening services from the "unauthorized practice of dentistry" the Federal Trade Commission argued and the United States Supreme Court held this year that when permission to perform services is doled out by license holders, the regulation of providers is inherently suspect and cannot be used to restrain trade because not in the consumer's best interest.  

Self interested restraint of trade regulations cannot survive that scrutiny. Are you listening lawyers?

A great audio interview (Are Robots Really Coming to Take our Jobs?) produced by the Harvard Business Review illustrates this phenomenon perfectly. Without using words like exponential, disruption or legal services, Boston School of Law Professor James Bessen, economist and former software executive, discusses the impact of innovation on the workplace and workers.  Whether digital or mechanical, innovations initially depress the wages and economic opportunities as "workers" (manual or knowledge worker) retool to become equipped to to serve the new economy. Ultimately, they are better served economically by a wide measure as a result of the "disruption".

Some economic forces are too great to be ignored, dismissed or regulated. An industry ripe for disruption will be disrupted. Tsunami's cannot be stopped. The only thread that ultimately saves the industry is the thread of disruption.  All others have broken.

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