Three strategies for law firms as NewLaw reaches a tipping point
In just three years, NewLaw has become a powerful force in the legal sector and the major firms have started evolving to adapt to their new environment, writes Eric Chin.
As recently as 2013, I coined the term NewLaw. This came in response to (1) Axiom CEO Mark Harris’s interview with Bloomberg when he noted (after being quizzed if Axiom was a legal process outsourcer) that the challenge of innovating and creating a new category of provider was that no vocabulary had yet been created; and (2) The Lawyer’s series of articles on how the 2018 legal landscape may look like (highlighted by a notable absence of any mention of the so-called alternative legal service providers).
In my 2013 article, I suggested that NewLaw firms would be a permanent fixture of the legal services industry in 2018 by intentionally projecting Axiom’s early compound annual growth rate (CAGR) of a start-up against the CAGR of DLA Piper (the largest law firm in the world in 2013 by revenue) during the same period.
Today, the NewLaw neologism has cemented its place in the legal industry lexicon. Indeed, the idea has taken on a life of its own, with different consultants putting forward their views on what a NewLaw firm is, as you can see in Jordan Furlong’s An incomplete inventory of NewLaw or George Beaton’s Fresh thinking on the evolving BigLaw-NewLaw taxonomy.
As they suggest, NewLaw is a broad church of businesses providing alternative services while using different business models in the legal services industry. Regardless of the changing face of NewLaw (which also includes LPOs and Legal Tech firms), have we reached the NewLaw tipping point? This article examines the recent developments of NewLaw firms in the corporate legal services arena and BigLaw firms’ adaptive responses.
Crossing the threshold
Last year and 2016 have been annus mirabilis for the NewLaw movement, with many headline-grabbing deals being announced such as Axiom Law’s acquisition of Cognition’s general counsel business, Lawyers on Demand’s acquisition of AdventBalance and Deloitte Legal’s acquisition of Conduit Law.
From their humble beginnings as periphery players in a knowledge-intensive and relationship-driven industry, NewLaw firms are today viable competitors to the traditional establishment. As recently as the early 2000s, when an organisation had a legal need, it essentially had two choices; first, to turn to its in-house legal department; and then, if needed, appoint law firms to help solve that legal issue. Fast forward to today, that same organisation would be faced with myriad options to service its legal needs.
The mushrooming of NewLaw providers is made possible because the vast majority of legal work is unbundled. This breaks down the traditional value chain of the industry, with components being serviced by the most cost-efficient providers. Using publicly announced deals, I have mapped major NewLaw firm deals (excluding BigLaw deals with NewLaw) announced since my September 2013 article (click on graphic to see full size).
This analytical excursion of NewLaw firms’ deals and expansion reveals:
- NewLaw firms are expanding into and in Australia (i.e. Keystone Law’s Keypoint Law, Neota Logic, Nexus Law) as well as in the UK, the US and South Africa;
- NewLaw firms are consolidating to expand their service portfolio (i.e. Exigent Group’s acquisition of mLegal), enter new markets (i.e. Axiom Law’s acquisition of Cognition) and add new capabilities (i.e. Elevate Services’ acquisition of Legal OnRamp); and
- NewLaw firms are collaborating to expand their service portfolio (i.e. Exigent Group’s partnership with HUB International), enter new markets (i.e. Neota Logic’s partnership with Transform Data International) and add new capabilities (i.e. Hive Legal’s alliance with Neota Logic to develop the Hive Legal Super app).
It is interesting to see how these firms are steering in different strategic directions. Riverview Law is engaging deeply in the application of legal technology, artificial intelligence and data analytics, while Lawyers on Demand is expanding geographically, entering into a partnership with DLA Piper and launching an online matching platform, www.spoke.law. Axiom Law, already a global player, is filling its geographic gaps in Canada via the acquisition of Cognition and in Australia via an alliance with Plexus Law. Elevate Services is expanding its LegalTech capability via the acquisition of Legal OnRamp. In Australia, Bespoke Law has expanded its corporate commercial capabilities and Nexus Law is growing its national footprint. This begs the question: how are the BigLaw firms responding as the NewLaw movement gathers pace?
Spreading like wildfire
The rise of NewLaw is most evident when examining partner-level talent movement, as evidenced by an increase from 0 per cent to 6.4 per cent for the period of FY12 to FY15 in the Australian legal services industry. Agile BigLaw firms are taking action, incubating their own versions of NewLaw as they future-proof their operations by investing in different business models. In the UK, for example, the likes of Allen & Overy and Pinsent Masons are building law firms of the future. The orthodoxies of what makes up a law firm are changing as we speak. Much like the different outsourcing waves that engulfed the industry, law firms with sufficient capacity are first setting up outsourcing centres to brick-wall clients from LPO providers. They are also tapping into their alumni to create secondment-lawyer services as in-house departments require additional lawyers during peak seasons.
We are currently entering an era in which firms are also working with expert systems such as Neota Logic or an artificial intelligence provider such as ROSS as data analytics and visualisation enters the legal industry. I have mapped publicly announced deals of BigLaw firms’ acquisitions, alliances and partnerships with NewLaw firms, and BigLaw firms’ incubation of NewLaw skunkworks (an autonomous group that has free rein to build whatever it wants) below (click on graphic to see full size).
This analytical excursion of BigLaw’s NewLaw deals and foundation reveals:
- BigLaw firms are diversifying their service and business models, setting up their version of NewLaw, whether it is outsourced experienced lawyers (i.e. Peerpoint, Simmons & Simmons Adaptive, Orbit, Lexvoco, R&T Asia Resources, AG Integrate, MinterEllison Flex), provision of legal documents (i.e. Cooley GO, Allens Accelerate) or online legal services (i.e. Aosphere);
- BigLaw firms are collaborating with NewLaw firms to enhance service (i.e. Morgan Lewis partnership with Exigent Group), provide new service (i.e. Norton Rose Fulbright alliance with LawPath) and access new technology (i.e. BakerHostetler partnership with ROSS Intelligence);
- BigLaw firms are establishing joint ventures with NewLaw firms to create new services (i.e. Littler Mendelson joint venture with Neota Logic) or to access the ability to create lawyer on-call services (i.e. DLA Piper joint venture with Lawyers on Demand);
- BigLaw firms are investing in NewLaw firms to use and learn new technologies (i.e. Pinsent Masons’ Cerico deal, Gilbert + Tobin’s LegalVision deal); and
- Deloitte Legal’s acquisition of Conduit Law marks the first deal in the NewLaw space by a Big Four accounting firm.
Interestingly, among the BigLaw firms, we are seeing most incubation of BigLaw’s own NewLaw skunkworks in the UK (4) and Australia (4), followed by the US (1) and Singapore (1). This points to the fact that the UK and Australia are mature legal markets that have seen the deregulation of law firm ownership.
However, BigLaw firms in the US lead the way when we look at partnerships and alliances between BigLaw and NewLaw firms which lower the cost of servicing legal needs by parcelling out some of the work to the most cost-efficient provider. BigLaw firms such as Pinsent Masons are venturing into automated compliance solutions through the acquisition of Cerico to help Pinsent Masons’ clients proactively respond to legal risks.
Meanwhile, Gilbert + Tobin’s equity investment in LegalVision gives the firm access to pre-existing online legal service capabilities and also works as an externally developed skunkworks that is not beholden to traditional orthodoxies.
Three strategies for law firms
In my 2015 article applying Clayton Christensen’s theories on BigLaw vs NewLaw, I suggested that the task for lawyers is essentially to assist their clients in navigating the regulatory environment by stopping money flowing out and making sure money comes into the client’s organisation.
In other words, corporations hire external lawyers to buy a commercial outcome by solving a legal problem. This problem was traditionally served through all-encompassing law firms in which legal knowledge was retained and practised. As Richard Susskind and Daniel Susskind so succinctly put it in The Future of the Professions, the professions’ raison d’être in a print-based society was to provide practical expertise to their clients under a grand bargain; an arrangement where they provided services at the exclusion of others, thus creating an economic rent as they acted as gatekeepers, curating their own body of knowledge. The difference, of course, is that we have now entered the digital age where knowledge can be codified, democratised and transferred. The rise of NewLaw is an inevitable evolution in the legal services industry and reflects the experience of most industries that have lived through disruptive innovation.
In the publication Your Strategy Needs a Strategy, the Boston Consulting Group prescribes the need for different strategies in different competitive environments. A combination of strategies should be applied to future-proof law firms. Here are three strategies for law firms at the NewLaw tipping point.
1. Incubate NewLaw skunkworks
Firms such as Allen & Overy (Peerpoint), Corrs Chambers Westgarth (Orbit), McInnes Wilson (Lexvoco), MinterEllison (MinterEllison Flex) and Pinsent Masons (Vario) have successfully incubated their respective NewLaw services – providing experienced lawyers to in-house legal departments on short-term contracts or projects. Most firms will be able to tap into a portion of their alumni or the freelance lawyer market to access talent that enjoys the alternative employment model of project-based work. There are a few ingredients required for skunkworks to be successful:
- relative autonomy from the mothership to shape the skunkworks;
- different performance metric should be applied to gauge the success of the skunkworks; and
- promotion, adoption and support of the skunkworks by the mothership.
2 Co-opetition with NewLaw firms
Co-opetition was a concept introduced by Adam Brandenburger and Barry Nalebuff in their 1997 book, Co-opetition. They asserted that businesses are simultaneously competitive and cooperative, whereby the success of most companies is dependent on the success of others, while at the same time they must compete to protect their own interests. Joint ventures and alliances/partnerships are ways law firms can compete and collaborate with NewLaw firms. Exemplars from this analysis include Morgan Lewis-Exigent Group, Littler Mendelson-NeotaLogic, Norton Rose Fulbright-LawPath and BakerHostetler-ROSS. There are several ingredients required to make co-opetition work:
- define the market segment and problem to be solved jointly by the alliance/partnership;
- agreement on the go-to market strategy and defined roles of the alliance/partnership;
- agreement on shared cost and revenue arrangements.
3. Diversify value proposition
Diversification of value proposition and revenue in most law firms would typically translate to classical expansion of new practice groups or new geographic markets. In a buyer’s market where legal spending is depressed or stagnant at best, law firms will have to diversify beyond the provision of legal services. The Big Four accounting firms are best in class at this among the professions; most now derive more revenue from non-audit and non-tax businesses. In recent years, some pathfinding law firms have been paving the way. Here are some examples:
- Seyfarth Shaw’s SeyfarthLean Consulting helps in-house legal departments remove ‘waste’ in their organisation to optimise their legal expenditure;
- Littler Mendelson’s Littler CaseSmart provides a centralised dashboard which, using attorney-privileged data analytics, provide a comprehensive view of legal charges and litigation portfolios;
- Pinsent Masons’ Cerico provides automated compliance solutions.
Given (some) BigLaw firms’ adaptive responses to NewLaw, it seems we have arrived at the NewLaw tipping point in the legal services industry. It is quite interesting that some industry commentators are warning the end is nigh for BigLaw firms. But like multicellular organisms, these BigLaw firms are evolving to adapt to their new environment. It is also important to note this is not a journey for the faint-hearted, as Dominic Barton of McKinsey & Co shared in this Harvard Business Review interview in which he notes that unyielding leadership is required in a partnership environment. Most successful change programs in a partnership environment are those driven by the voice of the client in internal debates.
This year, there have been many NewLaw headline-grabbing deals. Malcolm Gladwell once wrote that “there are exceptional people out there who are capable of starting epidemics. All you have to do is find them”. As we observe the NewLaw tipping point, it is the innovators, the disruptors, the adopters and shapeshifters who are shaping this new normal in the legal industry.