Adaptation not disruption – the big issue as law firms eye future

Law firms which resist the need to adapt in changing markets will hand a free pass to the alternative providers seeking to supersede them, writes Jordan Furlong.

In a recent post, acclaimed law firm consultant Ron Friedmann poured cold water on the notion that large law firms are anywhere close to being ‘disrupted’, or in danger of losing the commercial legal services market to hi-tech NewLaw raiders. Disruption? More Like Incremental Change for Big Law, the headline asserted on Friedmann’s piece, in which he writes: “Many commentators claim that tech, especially artificial intelligence, will do something to Big Law. I disagree. Tech more likely will do something in it: incremental change.”

It is hard to argue with Friedmann’s view. Disruption became a flashpoint term in the legal community a couple of years ago, when Clayton Christensen’s groundbreaking 1997 work, The Innovator’s Dilemma, belatedly reached the legal market and the ‘Reinvent Law’ boom was at its loudest. Friedmann’s post suggests that it’s time we take another look at this concept and begin to parse the difference between disruption theory and on-the-ground practice in the legal world. Let us do just that.

Searching for a point of difference

All market activity, obviously, requires two parties: a source of demand (purchaser) and a source of supply (seller). Market disruption requires the presence of a third party: a new, alternative source of supply that can appeal to the source of demand in ways that the primary supplier cannot. The alternative’s appeal lies in its ability to provide value to the purchaser to a degree, or in a dimension, that the incumbent supplier has overlooked, ignored, or believed to be impossible. The alternative supplier can generate this value because it has adopted a means of production profoundly different from the incumbent supplier’s; one designed to produce deliverables (in dimensions such as affordability, timeliness, convenience and quality) better aligned with what the source of demand really values.

Now, disruption theory states that given all these circumstances, the alternative supplier will steadily grow its market share – starting from the edges of the market and its least complex and lowest-value needs, then gradually working its way up and into higher-value sectors as it develops and matures ­ until at a certain point, the established supplier fades away and the challenger becomes the new incumbent. Christensen cites numerous examples of this pattern, from steel, computer chip and many other industries. So how about law?

It seems to me that we have all the pieces in place right now, in the corporate-commercial legal market, for this kind of disruption to occur. We have demand on an enormous scale – several hundred billions of dollars spent every year, by an increasingly irritable and cranky corporate client base. We have traditional supply – incumbent law firms with little imagination – by the hourly-billing boatload. Now we’re finally approaching a critical mass of the third ingredient: alternative sources of supply. You could group these options into three distinct categories.

1. Alternative options for lawyers’ services. It used to be that if you needed to buy a legal service or solution, you had to go hire a lawyer. Today, demand for some legal services can be met by viable substitutes for lawyers. These are primarily technology solutions (including online dispute resolution systems, e-discovery software, contract analysis programs, advanced document assembly software, expert applications, predictive analytics and various cognitive reasoning systems), which can perform some tasks or achieve some outcomes that previously only lawyers could manage. The result: some legal work never makes it to a lawyer, going instead to a viable lawyer substitute.

2. Alternative platforms for lawyers’ services.Suppose that for your particular need, however, there is no viable substitute: you must have access to a lawyer. Well, it used to be that if you needed to hire a lawyer, you had to visit a traditional law firm (including solo practices) to find one. Today, demand for lawyers can be met by alternative platforms for lawyers’ services: project and flex lawyer companies, managed legal services providers, the legal divisions of accounting firms, and various self-identifying NewLaw firms, among others. The result: some ‘lawyer work’ never makes it to a law firm, going instead to a viable law firm substitute.

3. Internal options for addressing legal needs.The ultimate alternative to an external legal solution of any kind, though, is to remove the need for the external solution altogether. Corporate law departments have expanded their internal productive capacity ­– increasing lawyer headcounts (insourcing); developing their legal operations capacity through software installations and process improvement techniques; and (to take another of Friedmann’s observations) “doing less law” and eliminating some legal demand altogether. The result: some legal work stays in-house and never gets shipped to any external provider, period.

It is nothing short of fantastic that buyers can now access all these options. But so far, these alternatives have captured just a tiny sliver of the entire commercial legal market. A few worthy exceptions aside, large corporations and institutions haven’t significantly changed their legal buying patterns. That’s not because the alternative sources of supply have proven inferior to the incumbent suppliers – in fact, by most indicators of cost-effectiveness, quality, and value to the buyer, the opposite is true.

The real cause is that most front-line purchasers of corporate legal services (in-house lawyers) care more about what traditional suppliers (law firms) can offer them (strong personal relationships, a reliable brand, routine buying processes and a familiar culture) than what they can offer the enterprise. Lawyers who buy legal services are just as conservative, risk-averse and change-resistant as the lawyers who sell them – probably more so – and they define ‘value to the buyer’ much more narrowly and individually than their company does.

Now, corporate procurement personnel are currently hard at work infiltrating and influencing legal purchasing, either by persuading the legal department to exercise its buying power differently or commandeering that power altogether. Take the lawyers out of the equation, and maybe you start getting somewhere. But so long as lawyers are buying legal services from lawyers, and especially so long as both sets of lawyers emerged from the same type of law firm culture, there’s little reason to anticipate imminent change.

Fate of law firms in own hands

The larger point, though, is this: disruption is a means to an end, not an end in itself. It’s not a goal towards which anyone in the legal market should be bending his or her efforts. It’s simply a process by which other goals ­– chief among them, a more effective legal market that serves its customers better – can be achieved. Disruption will come when it comes. The more interesting and important question is how the traditional incumbents will react to the high-tech upstarts in the meantime. What law firms do in response to the market’s emerging NewLaw options will determine the long-term success of both groups.

It should be pretty apparent that the longer the disruption process takes, the more difficult life becomes for most of the innovative alternatives. The builders of better mousetraps can wait only so long for the world to beat a path to their door – eventually, the venture capitalists who funded the traps want to see some Return On Mice. A drawn-out disruption period is especially hard on smaller upstarts, who either run out of money or become ever more vulnerable to acquisition and consolidation by rivals with larger footprints and deeper pockets. Of course, if market resistance to innovative new options is strong enough and lasts long enough, there’s a chance that the whole concept of viable alternatives to traditional suppliers will fall out of favour altogether, and the revolution will be stopped before it can begin.

For all these reasons, you’d think that traditional law firms would have every incentive to prolong the ‘steady state’ of the old legal market, with its toothless demand and monolithic supply, as long as possible. But if anything, the danger to law firms here is more acute than to the upstarts.

The longer disruption takes, the more comfortable life will seem for the incumbent suppliers and the more likely that they’ll be lulled into a competitive slumber. But whether it arrives tomorrow or next year or 10 years from now, change is gonna come. The value proposition of alternative suppliers is too strong, and the well-publicised process of adjustment is already under way within some of the biggest sources of legal demand (including Shell, Cisco, Honeywell, AIG and Capital One). Just as importantly, the alternative suppliers that do survive will get bigger and stronger by the day, growing and consolidating into truly formidable opponents. Law firms that fall asleep will be shaken awake to the realisation that the waters kept on rising while they slept, until the levees eventually gave way.

Adaptation the key to success

So for law firms, the concept they should be focused on isn’t disruption, but adaptation. How will they adapt to changing market demand? How will they adjust their offerings and rework their operations to compete against powerful rivals for the attention of sophisticated and aggressive buyers? Will they try to destroy high-tech providers, or integrate them? Will they ridicule process improvements, or adopt them? Will they keep trying to ‘out-lawyer’ everyone or, as I’ve argued, start trying to out-customer them?

The more that law firms accept these realities and adapt to these new alternatives, the less business they will lose, and the less these new alternatives will advance: by co-opting their rivals’ best features, they will improve their own productivity and value and maintain their dominant market position.

Conversely, the more firms resist the advancement of substitute providers and stick to their old ways of doing things, the more time they’ll grant their most fearsome competitors, the more ground they’ll lose to them, and the faster the disruption process will proceed. For every day law firms fight adaptation, that’s another day in which the alternative platforms receive an extended lease on life – and that’s a dangerous game for law firms to play. If you give competitors with a better way of doing things enough time and oxygen to grow, then grow they will.

So this is a key moment for law firms. Viable substitutes to law firms have established themselves on the margins of the market, offering a genuinely better option for at least some legal services to (what is currently) a skeptical and conservative community of buyers. Most law firms seem to be betting that the market will remain skeptical and conservative; that the odds of real demand in market change are so small that the substantial payload of the corresponding risk can safely be ignored. That’s not a bet I’d care to place right now.

Disruption has not reached the commercial legal market, and maybe it won’t for a long time. But adaptation is here, right now. For law firms, adaptation is by far the more pressing and important matter. Law firms can afford to put off worrying about disruption for the foreseeable future. I don’t see how they can put off thinking about adaptation one day longer.

Jordan Furlong is a leading analyst of the global legal market and a forecaster of its future development. Based in Canada, he is a regular contributor to publications such as the ABA Journal, The Legal Intelligencer, ABA Law Practice, Law Firm Web Strategy, The Lawyer (UK), Legal Business (UK), The Lawyers Weekly and Bloomberg Business of Law.