innovation in the legal services industry - "the future is already here, it is just not evenly...

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

katzd@law.msu.eduEmail :

@computationalTwitter :

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