Innovation in the legal sector
Legal services are changing. You might not notice by looking at the way most lawyers behave, but there are some strong trends emerging.
First, there is the squeeze on small firms. In the last 3-5 years a lot of old practices have closed. This is the result of two things, tighter profit margins and an inability to get people to take over the practice when the older generations want to retire. This succession problem has a lot to do with profit margins.
National firms have, over the years, become international firms through growth or joint ventures. Large regional firms have become national firms. Ordinarily this might look like these firms are growing through success, which is sometimes the case, but it is more commonly driven by fear of losing market share in a changing sector. As my old managing partner David Kerr of Bird & Bird used to say, the fat man always wins in a starvation contest.
Let's look at the people in law firms. The attrition rate is terrible. Far too many people leave the profession between qualifying as a solicitor and becoming a partner. Some firms mask this trend by making pretty much everyone a partner within a couple of years of qualifying. The number of people more than 7 years qualified in those firms is just as low as other firms.
This gulf between the junior people in firms and senior people means that the career path just isn't clear. Junior people aren't interested in the traditional career path to becoming a partner and have few role models on that ladder at the moment.
The traditional route out for older partners simply isn't there any more because they don't have a younger generation snapping at their heels.
Law firms on the whole still haven't realised that 35 years’ experience working in a law firm doesn't give that person insight into what clients want. Law firms tend to be autocracies, where the highest paid person's opinion counts most. Those people typically haven't actually used a lawyer for years and have little in common with the customers that they're trying to attract.
Millennials have a completely different value perception when it comes to services, in which knowledge is a commodity. The next wave of decision-makers in business genuinely don't see any value in experience because everything they have ever needed to know has been on the internet. Law firms that are still talking about having done deals for X, Y and Z aren't reaching that generation at all. Those decision-makers are much more likely to be influenced by the impression they get in the first 3 seconds on a website than what a team of lawyers have done over the last 30 years.
Lawyers like to think that they have the role of being a trusted adviser, but how often is that true? Lawyers typically act in a transactional way rather than having a relationship with their clients. By that, I mean they get involved in specific events and when that event is over there is no necessary connection until the next event takes place. That means it is relatively easy for a client to move from one lawyer to another, which also makes it easy for lawyers to move from one firm to another.
A lot of this comes from the way lawyers charge by the hour for their work. That puts clients off getting lawyers involved until they need to be involved. Acting after the event can't impact on how that event takes place. Lawyers that get involved to write up a deal when it has been agreed by their clients aren't advising their clients on the deal, they're advising their clients on the terms of the deal. There is a real difference in the value that the lawyer adds in those two roles.
The legal tech market has a long way to go
Looking at the impact of digital in other advisory sectors shows almost invariably that it has caused significant disruption - take accountancy, travel agency, estate agency, etc as examples. If you look at the technology revolution in the legal sector there is little that is really disrupting business models; the technology that is currently being introduced in legal-tech just makes the current business models more efficient. That suggests that the legal-tech market has a long way to go and time-based billing is an indicator of that.
If the legal sector is like other sectors, there are three factors that have to come together before we see fundamental change take place at pace. They are insight, commerciality and design. Service design is a really interesting area but for these purposes it is enough to assume there is no shortage of design that can be bought in. Although a lot of lawyers have the insight to see a better way of doing things, their business model (i.e. charging by the hour) means it isn't commercially attractive for them to become more efficient.
There are three factors which have to come together for fundamental change
Commerciality is the single factor that has kept the legal profession stuck in the past.
The thing that stops people changing the commercial model is confidence. There is confidence in the model that has worked in the past and new approaches are by their nature unproven. The ownership structure of law firms mean that they are often more comfortable trying to do the same thing better, rather than trying to do better things. The business owners tend to want to protect their position. As investors, they are typically at the low end of the risk and reward scale.
It is that element which has opened the door for the big 4 accountancy firms to move into the legal sector. Those firms are confident about which sectors they can operate in efficiently, i.e. which ones have repeatable, scalable, high value services which can fit into the sort of staff model that has been proven to work in accountancy.
Those firms are being selective about the work they take on, so you don't see them weighed down with low value conveyancing work, low value litigation, family work, criminal work, etc. It is the best work for the best clients that they have specifically targeted and they have picked up a good amount of that work through their relationships (built on the accountancy role).
If the staff structure in those firms follows what has happened in accountancy, we will see more systemisation so that fewer expensive experienced senior people are needed and a younger generation of less experienced people can carry out work, confident because they are following a process, rather than through years of experience. From the client’s perspective, this isn't a bad thing, it is just a different way of doing things to the way law firms have worked traditionally.
The big 4 accountants are very good at applying consistent processes to well understood tasks on a large scale. That means that the work remaining for traditional law firms is that which is too low value to be of interest or too complicated or small scale to systemise. The law firms that will thrive in this new environment will be the ones that move into new areas.
The legal sector is suffering from innovation death
Despite what a lot of people say about the introduction of artificial intelligence into aspects of legal service, on the whole, the industry is suffering what designers call innovation death. Although there are lots of little sparks of innovation they are yet to turn into flames.
There are several causes of this but the biggest single factor is the way lawyers change firms so often. Where we have seen strong innovation driving efficiencies it is typically where someone has broken out of the traditional law firm model to set up a niche practice. Without that, it is difficult for an innovative approach to pick up the pace needed to make an impact. That said, without the resources and assets of a sizeable organisation, isolated innovations usually fail to get traction.
Service design processes always start by getting the business to be more customer-driven. What is it that the customer wants when they go to their lawyer? Typically they just want something done or a problem to be solved. Lawyers tend to be the adviser of last resort, coming into the frame when the client has identified a need and exhausted other options.
What is it that clients want from their lawyers? Typically this is just for some commercial pain to go away or for some hoops to be jumped through. If a client engages a lawyer to sue someone it isn't because they want to go to court, it is because they want a debt to be paid or because they want to inflict suffering on the other side. If a client engages a lawyer to sell a property or business for them it isn't because they want are interested in the process of selling, they just want to cash in their asset and the lawyer's role is just to make it happen.
What drives a client's choice of law firm isn't the subtlety of which lawyers will be providing the service or what experience they have, it is typically what impression people will have when they see the choice of lawyer. This is similar to the way people choose wine in restaurants, not based on the characteristics of the wine but on what the wine says about the person ordering it.
The thing that will change the legal sector is firms embracing the entrepreneurial people that are already in the legal sector. That would help stem the flow of frustrated people leaving the profession and it would start to stimulate the pace of change.