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Innovation in the Legal Services Industry
Professor Daniel Martin Katz
“The Future is Already Here It is Just Not Evenly Distributed”
There is storm brewing
the consequences of which are not entirely clear ...
but if you were to write the story of this era ... it might go
something like this ...
The UnderInvestment Problem
Chapter I :
Meet Bob
Bob Likes Bow-Ties
Bob is also Equity Partner at a Large Law Firm
Like Many Other Equity PartnersBob is > 49 years old _
Thus, Bob has a different time horizonsthan his associates and junior partners
The Managing Partner Has Just Called a Meeting
During Which ...
He Will Ask Bob and his Other
Equity Partners
To Defer Compensation
Today ...
In Order to a Support a Series of Initiatives
That Have Significant Upfront Costs and a long Term horizonAssociated with a Positive Return
Bob May Say Yes, Bob May Say No
But As He is Deciding What to Do ...
Remember he is not deciding what
to do with the company’s money
He is deciding what to do with
his money
In other words ...
He Can Support More Compensation For Himself Today ...
Or Support Investments in a Future with
Speculative Associated Returns ...
The Underinvestment
Problem
Partnership is a business model
with serious inherent
weakness
There are strong incentives for
under-investment
Whether that be human capital investments
such as training younger lawyers
or capital investments in software,
info technology, long term marketing,
etc.
There is a strong incentive to maximize
in the present and trade away the future
this point has been raised by
several others ...
The Dimensions of Competition
Chapter II :
A Thought Question ...
Is There Really a Difference Between the AmLaw 153rd Firm and
AmLaw 147th Firm ?
Is There Really a Difference Between the AmLaw 57th Firm and
the AmLaw 61st Firm ?
Perhaps?
But it is losing argument
because they are all “great lawyers”
these entities are primarily competing on one dimension ...
{ Law }
Legal Expertise
But If They Expand the Dimensions of Competition
{ Law }
Becomes
{ Law + Tech + Design + Delivery }TM
{ Tech + Design + Delivery } = Process
{ Law } = Substance
Every entity claims to be innovative,
process driven, etc.
It is Not True
It is a bumper sticker ...
Are They As Efficient as ...
Modern Manufacturing Facility
Fortune 500 Logistics Center
Data Driven Emergency Room
Chapter III :
SophisticatedClients and the Birth of a ‘New’ Market
What are the historic barriers to real innovation?
Client Sophistication
The Sophisticated General Counsel
The Financial Crisis Placed Significant Pressure on GC’s
To Control Their Legal Spend
Legal was brought in line with
the Other C Level Officers/Divisions
The General Counsel as Legal Supply Chain Manager
“I am not running your training program ...”
(i.e. Don’t Put 1st and 2nd Year
Associates on our work)
“If you want our work - you are
going to work with other providers”
Blended Teams
of Providers
Big Law+
E-Discovery Firm+
Legal Process Outsourcing+
Law Division Insourcing+
Software/Analytics Firm
Client Sophistication is Critical to this Story ...
Their changing demands help support the efforts of
entrepreneurial entities
of those looking to challenge the
established order
Chapter IV : Lawyer Regulation
What is the big limitation on innovation?
Rule 5.4: Professional
Independence of a Lawyer
Historically it was this non-lawyer ownership rule
that stymied competitionand stifled innovation
Competition was a major reason that
a reform package was implemented
in the UK
That Brought Forth the “ABS”
But Here in the U.S. (and in
Canada)Non-Lawyer
Ownership Rule Remains
This imposes some real functional limits on
outside investment
Obviously, this has very little to do with protecting clients ...
It is pure protectionism ...
Among other things, it essentially prevents
law firms from taking on a corporate form ...
Model Rule 5.4 has historically hindered
innovation
But there have been some very
interesting developments ...
Now it may hurt the very people it was designed to protect ...
Indeed it may be the case that Rule 5.4
no longer matters ...
Chapter V :The LegalTech Industry
This is a mature sector
and in mature sectors ...
firm efficiency trumps
firm growth
My Friend Bill Henderson ...
Took A Photo When We Were At LegalTechNYC
He Then Asked ....
Who Are
These Companies?
Turns Out that the legal tech sector is heating up
They are eating the lunch of traditional entities
What are they doing?
Process / Project Mgmt.Workflow Optimization
Discovery / Document Management
SearchInfo Visualization
Document Generation
Quantitative Legal
Prediction
What is to be done?
How Can a Traditional Law Firm Compete Against these Organizations?
Answer is simple ...
Become Them ...
Chapter VI :Why Can’t a Law Firm Also Be a Software Company?
Why Can’t a Law Firm Also Be a Process Engineering Firm?
Why Can’t a Law Firm Also Be a Design Firm?
Why Can’t a Law Firm Also Be an Analytics Firm?
Why Can’t a Law Firm Also Be a Software Company?
Why Don’t Law Firms Have R&D Departments?
Systematic Problem with Partnership as a
business model
Individual partners have an incentive to defect
to underinvest in components that offer
short losses versus long run gains
commitment mechanisms are needed
strong leadership is needed
or you have to start over
you have to “startup”
Turns Out That None of this is a Thought
Experiment ...
The Rise of the Rule 5.4 Optimizers
Empowered by the financial crisis and the
quest for reduction in legal spend
We are observing the rise of confederated entities
That have elaborate organizational structures
Which allow for both legal service provision by partnership
Which allow for both legal service provision by partnership
technology, process, marketing by separate entity with outside capital
Solve the defection problem by long term service contract between partnership and other entity
Remember Legacy Platforms
include both software + people
Adoption by Key Actors is as important as
Building Great Technology
That is why starting over is so attractive
So if you could start over ...
and build a law firm from first principles ...
you would change the business model
you would build the tech/process/data driven
platform first
to do so you would raise outside capital
for that platform
monetize that investment by
strategically licensing it to other entities
This is the flavor of one major restructuring taking
place within the current rule environment
And It Points to a Fairly Plausible
Portrait of the Future
and it does NOT require any modification of Rule 5.4
Thus, You Should Expect
{ Law + Tech + Design + Delivery }TM
even more innovative configurations of
Going Forward ...
and while the Final Chapters of this story are still to be written ...
Here is What We Have So Far ...
The UnderInvestment Problem
Chapter I :
The Dimensions of Competition
Chapter II :
Chapter III : SophisticatedClients and the Birth of a New Market
Chapter IV : Lawyer Regulation
Chapter VI : Why Can’t a Law Firm Also Be a Software Company?
Chapter V : The LegalTech Industry
So, the Cat is Out of the Bag ...
The One Way Ratchet has clicked
Something fundamental is a
foot
With respect to a significant component of this industry ...
“The future is already here ...
It is just not evenly distributed ...”
Professor Daniel Martin Katz
Assistant Professor of Law @Michigan State University
Co -Founder @#ReInventLaw Laboratory
@computationalTwitter :
ComputationalLegalStudies.comBlog :
