Given property is often the second biggest cost of a law firm behind head count, I wonder what the impact would be of scaling back prestigious offices and reinvesting some of the capital in technology that would make a real difference for clients.
Later this week I’m running a session for a group of leading technology lawyers which will explore the future of the profession.
Why I think this will be particularly interesting topic for this group is that I believe technology will be the single biggest driver of change for the legal sector in the long term.
Sure, globalisation, outsourcing, commoditisation, changing procurement patterns are all shaping the market now, but technology has the potential to change it to a much greater degree.
There are a number of technology trends that have already influenced the profession to a greater or lesser degree:
However, to my mind, this is really only playing on the edges of what’s possible.
Where I’m really interested is the area of law where lawyers believe they add most value. The high-end, complex work. The work that NEEDS a specialist. A true expert.
Lets go right to the “business end” of the legal value chain.
Think about the legal sector and what it actually does.
Law is made (the government legislates, courts decide a case etc). This law is recorded and at a high level interpreted (often by academics and other commentators). The combination of these two steps provides a shared view of generally what the law is.
By and large, and the moment the value here is really only accessible to legal practitioners – the public can get access to certain statutes and cases for free online, but the public’s ability to understand what they mean remains limited – although this is beginning to change.
The next step is to turn this information into a broad set of tools (largely documents – agreements, policies and other commercial instruments) and for the lawyer to use these tools and his or her understanding of the law to interpret the high level meaning and apply it to a particular set of facts, and in doing so create some further value for which the client will pay.
S0mewhat simplistic, but in very basic terms, the majority of the value that the market will pay for is in this interpretation and application of the law to increasingly complex situations. There are other factors that drive value such as the scale and risk involved, but generally speaking, more complex work means higher fees.
Looking a bit more closely at what lawyers actually do in this high value phase, in the vast majority of cases it will take two forms – advising and creating documents. We already know that technology is starting to shape document creation (have a look at Epoq, Rocket Lawyer, legal Zoom and LexisNexis if you don’t believe me), but surely (SURELY) technology couldn’t actually start to creep into advising clients?
This is the skill honed over years of hard-earned experience. The ability to steeple fingers, sit back in chair and let the cogs turn. To casually drop a Latin phrase into an argument. Those uniquely human abilities to find meaning and similarities between cases and facts. To both synthesise, analyse and structure highly complex information.
The skill that requires (in the UK) a three year law degree, a year of practical training, a two year stint of on-the job training, before the brightest and best graduates can call themselves qualified and enter the profession fully to “start” their career and their real learning.
Think about this, from a BBC article on the impact of technology in the City:
“Trading floors were once the preserve of adrenalin-fuelled dealers aggressively executing the orders of brokers who relied on research, experience and gut instinct to decide where best to invest.
Long ago computers made dealers redundant, yet brokers and their ilk have remained the masters of the investment universe, free to buy and sell wherever they see fit.
But the last bastion of the old order is now under threat.
Investment decisions are no longer being made by financiers, but increasingly by PhD mathematicians and the immensely complex computer programs they devise.”
While there are many differences between this activity and the legal profession, there are also plenty of similarities.
Once you start really looking at what lawyers do, and begin to grasp what technology is already capable of, a real threat to the profession as we know it doesn’t seem so far fetched.
Entity recognition (understanding, finding and cross-referencing individuals and organisations in documents) is already well established, and software like Autonomy (“the leader in meaning based computing”) can do magical things in terms of identifying relationships between “things” and deriving meaning from raw information (think “facts”).
Look at recent developments in ediscovery and contract management software, and have a read of Jason Wilson’s great post on lawyers “I am now an app” for lawyers, and of course, whether you agree with him or not, do revisit Susskind’s work .
For me, rather than the commentary in the area, what makes me really believe big change is coming, is what I hear and see when I talk to some of the leading technology thinkers in this area.
To hear them describe the law by talking about decision trees and statistical probability (based on historic data and future trends), to hear them explaining rules engines, logic and information structures, really makes me pause for thought.
It’s a different language, but with the same objective of solving problems and creating value for clients.
This type of technology promises paradigm shift in speed, accuracy and cost reduction that goes far beyond what an LPO could offer with a human based process.
Of course it’s not that simple. Apart from the very real time, effort and money required to build the technology, aside from the judgment required to apply the law, there is of course a truly human element in providing legal service (that word is a clue). This service wrapper is likely to keep large chunks of the profession safe for a while, and of course as one work type is automated, the opportunity for the profession is to find a new, higher value area of law to explore.
My (human!) instinct is that it will be lawyers who first use these new generation of tools first, to provide faster, better services to their clients, rather than clients using them directly to replace lawyers.
The lawyers may be at traditional law firms (large or smaller niche players) or LPO or other volume providers. Either way the early adopters will become the Terminators, the firms that resist will be Sarah Connor.
Seems far fetched?
My belief is that the fundamental changes now facing the profession are only the beginning of the beginning, and that technology will shape the end game far more than any of us can probably predict.
Regular visitors to this blog will know I’m a big fan of Michael Porter’s work, and have a genuine belief that all business people should read his two books (Competitive Strategy and Competitive Advantage). Competitive Strategy provides a framework for analysing industries, and helps the reader think about how attractive their marketplace is.
One of the determinents of this attractiveness, are the presence (or absence) of “barriers to entry”.
If a market is particularly profitable, the high profits will attract new entrants who will join that industry and increase the competitive intensity of the market (ringing alarm bells any UK lawyers?!). This ultimately reduces profitability across the industry. Barriers to entry are factors that stop these new entrants, or at least make it more difficult for them.
One of the most obvious barriers to entry, is of course regulation. The legal profession has benefitted from this in most countries for many years, and only now as the cold wind of deregulation blows through town, do we see this barrier to entry crumbling.
However, this isn’t the barrier to entry I want to consider today.
Rather, let’s spend some time thinking about “switching costs” – essentially these are one-off costs that a buyer (i.e. law firm client) faces when switching from one supplier’s product or services to another’s.
Now on the face of it, the concept might seem more relevant to industries other than legal services – for example if you were switching your CRM (customer relationship management) software from Oracle to Microsoft. There you might have data migration costs, systems integration challenges, and user training issues.
However, it was another book, Information Rules by Shapiro, that got me thinking about how the concept of switching costs could apply to legal services.
The situation I want to investigate is not whether or not a client wants to stop using a particular law firm or not (see some of my previous posts on client relationships or quality for factors that might influence THAT decision), but if they do make the decision to say goodbye, how hard is it for them to actually make the switch.
At the lower end of the spectrum, where the relationship between clients and law firm is pretty transactional, there are very few switching costs. The client takes their business elsewhere (probably not even telling the previous law firm), gets the minor hassle of identifying a new firm, making contact, and then after engagement letters and anti-money laundering checks are complete, they are up and running.
Another fairly unsophisticated, but surprisingly effective tool at the lower end of the spectrum, is the classic smaller firm technique of being named as the registered office of a company (possibly supported by company secretarial activities). Not a major block to an advisor move, but certainly another layer of inconvenience. There are plenty of similar examples for consumer based law firms (for example, retaining a copy of the client’s will).
Moving up a level, where the relationship with a corporate client covers multiple services, and includes a large degree of interaction, this can definitely make a move more difficult, particularly if both the legal team and business people (for example the HR vice president) at the company instruct the firm.
It might be that this type of broad relationship benefits not just the law firm, but also the client, in that the larger volume of work underpins significant price discounts. Subsequently trying to move one work type to a new firm could put those enterprise-wide discounts at risk. These broad relationships provide even stronger ties (higher switching costs) if the relationship is multi-jurisdictional.
Many firms try to achieve this type of model, but a much smaller proportion really do it effectively, frequently lamenting their failure to cross-sell and up-sell. Perhaps the notoriously protective attitude of many partners to their clients (and the firm cultures that support these attitudes) contribute to this, or maybe it’s the siloed nature of many larger firms that makes providing a truly integrated services to clients challenging, but either way, experience suggests it’s not as easy as it should be.
The other large switching cost that might cause a client to think twice about a move, is the depth (as opposed to the breadth) of the relationship with the law firm.
If the firm has made a large investment in understanding the client, this can be difficult for a new supplier to replicate. Here I’m not just talking about understanding the way in which the client works, but also things like their commercial models, their decision making process (formal and informal), the personalities involved, their history, their competitors and their products.
If this is done well (and both in private practice and in-house, I have seen firms do this VERY well), then this is a benefit which should be carefully weighed up before a relationship is terminated – it’s not the type of information that a new firm could harvest in an “investment in a new relationship” (such as spending two days on-site with the client, notionally free of charge).
Another area of potential switching costs can arise from technology and documentation ties. If a law firm provides a useful extranet for a client, or hosts a large number of important documents (having perhaps scanned and indexed them for the client), then a move may put these benefits at risk. Greater technical integration (such as access to time recording systems, maintained and automated precedent banks) offers clients higher benefits but may also increase switching costs.
So in my view, switching costs are alive and well in the legal profession, even if they are not recognised as such. With one critical barrier to entry being swept away in the UK with the full implementation of the Legal Services Act, it’s maybe time for law firms to look at the concept of switching costs a little more closely.
The one caveat I’d say, is that often creating switching costs requires an investment by a law firm. To know whether that investment makes sense, the firm really needs an understanding of the likely return from that client, and the concept of “lifetime customer value” is not often applied in the legal profession, but that’s a topic for another post….