World Masters: 7 lessons for law firms grappling with digital disruption

In the first of a series of articles covering the recent World Masters of Law Firm Management conference in Sydney, ALMJ reports on seven important trends for law firms to consider.

At the World Masters conference in Sydney in July, Karim R. Lakhani, a Professor of Business Administration at Harvard Business School, addressed 75 law firm leaders on the subject of Digital Innovation and Transformation: The New Dynamics of Value Creation and Capture Utilising Platform-Based Business Models. The conference helped attendees better understand the new management revolution in an era of evolving business ecosystems, digital innovation and big data. Using the famous Case Method pioneered by HBS, one of the sessions covered the implications of the rise of Riverview Law, a legal services firm in the United Kingdom that was the subject of research by Heidi K. Gardner, a Distinguished Fellow at Harvard Law School’s Center on the Legal Profession, and Silvia Hodges Silverstein, Executive Director of Buying Legal Council. Following are some of Professor Lakhani’s key takeaway messages from the session.

1. Riverview Law is just the start, so prepare to respond

Context: Riverview Law, a start-up legal services firm, is run like a business rather than a traditional law firm. The firm’s unusual approach includes performing legal work for annual fixed-price contracts, using data and analytics to advise clients on ways to reduce their legal problems and spending, and evaluating lawyers’ performance based on client satisfaction surveys rather than metrics such as billed revenues.

According to Professor Lakhani, legal services disrupters such as Riverview Law represent the early days of change – “We are just seeing one market in the United Kingdom” – and no clear pattern has emerged as to which models will succeed in the long-term. However, he believes it is crucial for law firms to study and analyse such innovations (do not simply dismiss the threat they pose) within a framework of the pressures that traditional firms are facing.

There will be pressure to review value-creation and value-capture strategies as typical law firms determine whether their focus on legal expertise, specialist skills and brand reputation will be sufficient to survive and thrive in future. Part of the discussion should be on the proportion of matters that are derived from ‘commodity’ work compared with higher-end ‘rocket-science’ work. Some attendees at World Masters suggested that many firms and in-house legal teams have approximately an 80-20 per cent split across commodity and rocket-science work, respectively, with a similarly large proportion of the firm’s profit margins still being reliant on the commodity work.

Professor Lakhani suggests that this leaves little room for firms to respond to price pressures from clients. They may be able to cut margins 30 per cent in one year and still be viable, “but the second year, the third year, the fourth year – the partners will get mad eventually”. “So part of the story here is to be rigorous about where the margins are and where the revenue is for your business,” Professor Lakhani says. “And then use that to think about what comes next.”

2. The customer is always right?

Context: Riverview Law’s business model is based on long-term contracts and high renewal rates as it builds and maintains trust and delivers a high-quality service to ‘customers’, not ‘clients’. Senior management prefers the term ‘customers’ because other businesses do likewise, and the firm takes the view that its lawyers are worth paying because they provide value to paying customers.

The power shift whereby clients and in-house legal teams call the shots, rather than lawyers, is already a very real phenomenon for traditional law firms. New digital tools and hyper-connectivity are empowering clients (or customers) to demand higher levels of service at a lower cost.

“This focus on customer satisfaction is going to be part of the story,” says Professor Lakhani, who notes that the basis of competition between traditional law firms and new firms is being redefined. The start-ups are not just rethinking where they are targeting their revenue streams; they are also changing how they go about it. Professor Lakhani says the focus now is on a more proactive relationship with customers that includes a deeper integration with their businesses; in the process creating a different value-capture model. With Riverview Law being a case in point, Lakhani says these new market players are “running (their firms) like corporations and less like a partnership”.

3. It’s time to become investors in new technology

Context: Riverview Law prides itself on a value proposition that creates ‘business value’, not just legal value. It does so by capturing data on legal issues so a customer can use that data to understand the root cause of issues and make broader business decisions.

Modern law firms, Professor Lakhani claims, will have to take advantage of existing technology and digital platforms while simultaneously investing in the models of the future. “My view is that you have to both exploit and explore at the same time,” he says.

In addition to adjusting to a data-driven business world, firms will have to invest in technology, analytics and HR (among other areas) to keep up with or eclipse their competitors. Mirroring the likes of GE (which has transformed itself into a leading digital industry company after previously being a conglomerate that engaged in everything from the media to finance and industrial), the larger law firms may also have to invest in and test new business arms to see what delivers the greatest returns.

“In many ways you have to start thinking about doing that as part and parcel of the strategy of large law firms,” Professor Lakhani says. He believes there are lessons to be learned, too, from the major accounting firms, which have ramped up spending on technology – including in some cases implementing an internal R&D tax – to ensure they innovate and stay competitive in an era of technological disruption. “They are increasingly saying that R&D investments matter a ton.”

For smaller firms, such spending on technology and R&D will be problematic, so consolidation may be required for them to compete. Professor Lakhani concludes: “The two-person law firm may not actually be able to survive or we might see that smaller firms aggregate via platforms that allow customers to bid out work just like Uber does for transportation.”

4. Write of the disrupters at your peril

Context: Riverview Law is an outgrowth of AdviserPlus, a human resources advisory outsourcing business. Over time, customers started asking AdviserPlus to undertake legal work related to employment issues, so Riverview Law was founded in 2011. Today, lawyers are joining the firm in droves and it boasts annual revenue of tens of millions of dollars.

For all the consternation over digital disruption and the potential threat it poses to many sectors, including legal services, Professor Lakhani has a blunt warning. The disrupters are only likely to become more proficient and powerful.

Consider a common scenario. They come into the market as a low-cost, low-performance provider that resonates with a niche in the market. Meanwhile, the incumbent market leaders dismiss the disrupters out of hand. “The firms say ‘this is not what our clients want,” Professor Lakhani says. “So they ignore them and over time (the disrupters’) performance keeps getting better and better and the market switches to them.”

5. Spinoffs may knock a firm off its axis

Context: Just as Riverview Law has morphed into a successful law firm, a number of existing law firms are spinning off alternative business arms as they seek to compete in the digital era.    

So what type of new operating model should law firms adopt? The typical response to date among traditional law firms that have wanted to deliver new service lines has been to create a separate, low-cost entity that can take on the disrupters. This, in theory at least, allows the core firm and its partners to adopt a business-as-usual approach as they continue to target high-end legal work.

While the notion of creating an entity that has different value-creation and value-capture qualities may make sense, Professor Lakhani warns that simply spinning off a separate entity without changing the overarching nature of the business comes with inherent risks. “Keep in mind that the strategy of spinoff means that the core firm is not participating in the change,” he says.

This makes it very difficult at a later stage to bring the new entity – and its leaders – back into the fold of the main firm. Such a move is often too confronting for existing partners and fractures can occur.

6. You’re now competing with Google and Facebook for talent

Context: A strong corporate culture has been a cornerstone of Riverview Law’s model, with the firm’s founders ensuring that hiring, on-boarding, performance management and compensation systems reinforce that culture. A lot of time is spent on induction and training.

Law firms are starting to come to grips with a recruitment field where flexibility and remote workers are becoming the norm, while the disrupters are determined to offer lawyers better career options. However, the real threat to traditional law firms in the war for talent may well come from outside the legal sector. It may sound far-fetched at first, but Professor Lakhani has no doubt that technology giants such as Google and Facebook will start influencing law firms’ recruitment policies. How? Well, the consensus is that technology will be a key part of the future for law firms, yet existing hierarchical structures dictate that the top lawyers either go on to become partners or they get ushered out of the firm. Where does that leave highly qualified tech talent? They are unlikely to progress through the ranks unless law firms change their ways.

“These technology people won’t have a career in your organisations in the existing partnership model,” Professor Lakhani observes. “On the one hand you want these staff to come in and run your organisations, but on the other hand they won’t have a career because they are not going to get a promotion; they are not going to be able to share in the firm’s equity.”

In any event, the best technology brains are going to be in serous demand from powerful brands such as Google and Facebook. As Professor Lakhani says: “Law firm leaders are going to have to think about what will get these people to come and work for them.”

The other possible change is that more lawyers will seek to join the disrupters, rather than the major firms, as they seek different opportunities and a better work-life balance. Professor Lakhani notes that new players such as Spoke – a digital marketplace for flexible legal professionals – are coming to the fore. Another business, HourlyNerd, is tapping into the ‘MBA mum’ market, a talented group of MBA-trained lawyer-mothers who want to opt in and out of the workforce.

7. Less is more as disrupters try to cut clients’ service needs

Context: Riverview Law is using management information and trend data it gathers from cases to work with the client’s own legal and operational team, with the aim of helping them reduce disputes and costs – and even cutting their legal requirements.

Could law firms adopt a similar approach to fitness centres? Gyms have made considerable profits over the years from members who rarely, if ever, use their facilities. In truth, they are the perfect customers; they enter into long-term contracts but impose few costs on the gym because of their infrequent visits.

Disrupters in a number of sectors are similarly signing up customers to contracts and then using technology tools and digital platforms to improve their internal processes to such a degree that their requirements diminish. Riverview Law, for example, has rolled out annual fixed-price contracts while using data and analytics that effectively let clients reduce their legal issues and budgets. One innovation, its virtual legal assistant called KIM (an acronym short for Knowledge, Intelligence and Meaning), is designed to help in-house legal teams make quicker and better decisions while taking on many tasks formerly performed by lawyers.

Professor Lakhani says such strategies are contrary to those of traditional law firms which have wanted to generate more and more work with clients under a billable-hour model. The more they work, they more they can charge. He expects more clients to put pressure on law firms to make a shift towards the disrupters’ digital-savvy model. One thing for sure, Professor Lakhani warns, is that traditional firms have to be ahead of the innovation game because “clients will never give you the bad news” if they decide to embrace a different, cheaper model. “They just shift their business somewhere else.”

In coming editions, ALMJ will cover other key topics from World Masters.