Vertically Integrated Legal Service

When lawyers and clients discuss the future, a number of questions are typically debated. Is the platform burning yet? Will there be a tipping point for the legal market when traditional players are displaced by alternative providers? Why have technology, knowledge management, and innovation not fulfilled their promise? Why are law firms failing to meet the changing needs of clients? Why do clients seem hesitant to adopt new models of legal delivery?

These are recurrent questions that, as long-term collaborators, we have been considering for many years. In this paper, by challenging much conventional thinking about the disaggregation of legal work, we suggest some answers and propose a different way of looking at the division of labor in law.

Whose platform?

It is often claimed that there is no “burning platform” for law firms, by which is meant that there are no compelling reasons for them to change. The traditional business model continues to deliver solid income and profits, so there is no commercial incentive for successful firms to shift direction. The core business seems sustainable for a while yet, so long as there is no new competition in the market. As a short-term position, this perspective seems hard to dispute.

However, this is a strikingly provider-oriented view of the legal marketplace and it obscures the view of a different platform that surely is burning—that of many in-house legal departments. They are being asked to shoulder more legal and compliance work than ever before and yet are suffering from relentless pressure on costs. In turn, many general counsel and now chief operating officers within legal departments are clamoring for lower-cost legal services, novel methods of handling legal risk, and new opportunities to generate valuable insights for their business colleagues.

The irrational legal market

Despite this apparent demand for great change, the legal market does not seem to have responded rationally. In the global legal market, roughly of the value of $850-900 billion, just over 1.5 percent is currently served by alternative providers. Why has the evident demand for change been met neither by entrepreneurial law firms nor by an avalanche of new players and disruptors? How can this apparent market failure be explained? Two answers are commonly given. One is that conventional law firms, as noted, have not been under sufficient competitive pressures to require them to change. Their platforms are scarcely smoldering. On this view, law firms have been motivated much more by preserving their positions than by creating and dominating new, uncontested market spaces. That is, they are defensive rather than proactive players. They may innovate, but only modestly, enough perhaps to appear responsive to the winds of change.

Another answer to the absence of breakthrough new services is that, in most jurisdictions, traditional legal services and traditional law firms are protected by regulation. This is perhaps seen most clearly in the U.S., where the net of unauthorized practice of law is cast widely, so there can be no effective competition from beyond the legal profession. Once again, the argument is that there has been no need for the incumbents to change. Alternative providers are being regulated out of the market.

There is a third answer, however, that does not assume law firms are resting on their laurels, under the protection of regulation. It is a simple answer—that the innovations by law firms and the new business models of alternative providers have not yet actually met the demands, needs, and wants of clients. Despite the global enthusiasm for “new law,” the reality is that most of what has been offered is more efficient “old law”—innovation in law has, in fact, involved the improvement of old processes, rather than the introduction of services that are fundamentally new, genuinely exciting, and commercially relevant for clients.

If clients were shown new solutions, systems, and business models that demonstrably and clearly slashed their costs, while maintaining the level of quality that they require, they would surely leap to these alternatives.

No alternative legal business has yet scaled

What about these alternative suppliers? It is striking that very few of these new legal providers has yet achieved massive growth. In other sectors, such as consulting, it is not unusual to see remarkable scaling—many thousands of people recruited and put to work in less than a year. In contrast, with the exception of e-discovery businesses, none of the legal process outsourcers, the alternative legal service providers, or even the Big Four, has scaled so significantly. It appears that none would yet make the top 100 rankings of law firms by turnover. At the same time, the low-cost service centers and the teams of paralegals that many law firms have put together have been modest in scope and their fee income has been minor relative to that of their motherships.

There has been little commentary on the reasons for this modest advance. It would not be plausible to suggest there is insufficient demand for alternative delivery models in the legal market. On the contrary, as said, there seems to be great interest in and appetite for innovation. This is clear from commentary, discussions at conferences, and research into the needs of in-house legal departments. On the face of it, there is considerable unsatisfied appetite for new businesses or models that can reduce legal costs and more effectively meet legal needs.

Challenge to conventional thinking

What change has there actually been in thinking and practice? Until around 2005, it was commonly assumed that there were two broad categories of legal work—low volume, high-value, and complex work, on the one hand, and high volume, low-value, and routine legal work on the other. In broad terms, large law firms chased the first category, called it “high-end,” “big ticket,” or “bet-the-ranch” and regarded it as price insensitive—when there was so much at stake in a big deal or dispute, the fees of law firms were not a defining expense. Smaller firms were expected to undertake the second category of work, regarding it as “everyday law” or “business-as-usual” activity, which had to be competitively priced because the market was crowded.

In general terms, the prevailing view at the time was that there was far greater scope for technology and knowledge management in the conduct of routine work, where processes could be standardized, than in high-end work, where the client wanted the high touch service of a trusted adviser.

From 2005 onwards, however, as cost pressures on clients and law firms mounted, a new possibility emerged—that even the most complex and high-value deals and disputes could be disaggregated, that is, broken down into component parts. And, crucially, that some of these components—such as document review in litigation or due diligence in transactions—could be done differently, either by using lower-cost labor (for example, by outsourcing or employing paralegals) or by technology (at least in principle).

This, then, was thought to be the way ahead—the routine elements of more complex work would be parceled out to new businesses (initially, the legal process outsourcers) and to new units within law firms that could undertake this work at far lower cost. Meanwhile, the main practices within law firms would carry on much as they had done for decades.

Fifteen years on, this approach has not delivered the outcomes that clients want.

The limitations of disaggregation

It transpires that disaggregation is much easier to talk about than to implement. Practical problems abound. The first is inexperience. Very few people are familiar with the challenges of breaking down complex legal matters into work packages, identifying and selecting the best suppliers for each, farming out the work to a group of preferred providers, controlling the quality of their activities, bringing their work product together to agreed deadlines, integrating their output, and delivering a seamless product to clients. This requires a capacity for process analysis and project management that few law firms have, as well as a depth of legal expertise and experience not resident in most alternative suppliers.

There is, at the same time, a nervousness in the client community. It has become apparent from research over the years that clients still prefer their legal matters to be handled by one supplier. When legal work is disaggregated and several providers are involved, they worry that the service can become disjointed, responsibilities are not clearly delineated, and crucial tasks might fall between suppliers. Even when clients have encouraged panel law firms to collaborate, this activity has often fallen far short of genuine collaboration.

It may be that these concerns will fade over time, as the discipline and techniques of legal logistics are refined and legal supply chains are better understood and managed. For now, though, most clients instinctively seem to prefer organizations that disaggregate internally and maintain all the work packages under the one roof to structures that involve collaboration amongst diverse providers. It is not enough that there is one main contractor who is accountable overall, managing and taking responsibility for a network of sub-contractors. Clients tend to be more comfortable with one supplier per job.

The missing ingredient

This preference for single sourcing presents a fundamental challenge for alternative legal service providers. Built on a vision of disaggregation, they have tended to assume that the market for legal work can be carved up horizontally, with different types of providers operating at different levels. Typically, this has been depicted as a pyramid, with expert lawyers at the peak, paralegals or alternative providers at the base undertaking process-based work, and junior lawyers in the middle focusing on everyday tasks. In this model, as depicted in Figure 1, most of the alternative service providers have positioned themselves or been pigeon-holed as operating in the lower reaches of the pyramid, while technology is expected to encroach over time, working its way from the base to the peak, consuming more and more human work as systems evolve.

However, it turns out that this model is an oversimplification. It is true that there are many legal tasks that are, on the face of it, routine, repetitive, and can therefore be standardized. But the extent to which legal work can be reduced purely to administration and process has been overstated. In relation to the everyday or business-as-usual work, it is often assumed that, if the matter is low-value, then the legal content is correspondingly low. There is, however, no direct mapping between the value of legal work and the complexity of legal work. Low-value issues can raise impenetrable legal questions, while high-value problems can sometimes be legally straightforward. In daily practice, it is not possible simply to allocate everyday legal work to the lower reaches of the pyramid. A human lawyer is invariably needed in the loop—to check for anomalies, to control legal quality, and to resolve questions that are not in the playbook. This involvement of lawyers is not an occasional need. It is at the heart of reliable legal service.

Likewise, when large-scale deals are being conducted, the routine elements, such as document analysis and due diligence, cannot be handed over to administrative staff without supervision by human lawyers. It may be that this supervision consumes a small fraction of the overall time spent on document processing, but it is indispensable, high-value, and (for now at least), an irreducibly legal job.

In both instances, whether the work is everyday or bet-the-ranch, a simple horizontal disaggregation does not work. It is a pleasing theoretical model but, if put into practice, it neglects crucial ingredients—legal expertise and legal experience. It should come as no surprise that very few legal tasks can, in their entirety, be reduced to administration and parceled out to pure process providers.

A vertical approach

This analysis leads to a different way of looking at legal work—vertically, rather than horizontally. The idea here is that all legal matters require a mix of legal expertise, legal experience, and process, even if the great bulk of human hours spent are on the process component. For routine legal work, therefore, the law and lawyers should lie at the heart of legal service. The common narrative that great swathes of legal work can be taken on by non-lawyers with playbooks or by autonomous advanced technologies neglects the essential sense-checking, supervisory, quality control, and gap-filling contributions that only lawyers can make, if legal service is to be robust and reliable.

If it is accepted that legal expertise and, therefore, lawyers are needed for all legal jobs, the challenge for alternative legal providers becomes clear. Without lawyers or access to lawyers with appropriate knowledge and experience, their offering becomes of limited use—efficient process without sufficient legal assurance. The offering instead has to have vertical reach, as shown in Figure 2.

One way of achieving this reach is for alternative providers to collaborate with law firms. However, if clients continue to be hesitant about this form of co-operative provision, then this model is hard to sell. Another answer might be for alternative providers to employ lawyers. However, in many jurisdictions, regulation prohibits legal businesses that are not law firms from delivering legal services.

Here, then, is one clear explanation of the apparent failure of alternative legal service providers to scale—it is neither possible in practice, nor desirable for most clients today, for great quantities of work to be undertaken without the direct and active involvement of practicing lawyers.

The one exception here, as noted, is the great success of e-discovery businesses. Why might this be? First, the process of disaggregating discovery may well be cleaner than other areas of legal practice. While lawyers are heavily involved at the outset—whether in specifying the scope of the discovery, training any systems, or finally reviewing the output and deciding on next steps—the actual tasks of search and analysis are, at once, relatively self-contained and massive. In contrast, in other areas of legal work, such as business-as-usual, the involvement of lawyers is often more iterative and ongoing. Second, certainly when advanced technology-assisted review is deployed, this requires deep technical expertise that most law firms lack. There is thus little alternative but to outsource.

Vertical integration for law firms

E-discovery services aside, then, the market has not yet delivered a scalable and credible alternative to external legal service delivered by conventional law firms.

If alternative legal service providers are constrained (depending on the jurisdictions in which they operate) by not having lawyers or appropriate types of lawyers, where does this leave law firms? It might be tempting to conclude that law firms do not need to change after all. If lawyers are always needed, then so too are good old-fashioned law firms. This conclusion misses both the threat and the opportunity. The threat yet again lies in the pervasive pressure on clients to secure more legal service at less cost. Alternative legal service providers may not be the answer, but the market will surely, in due course, unearth new ways of meeting client needs. The obvious option here is that law firms themselves diversify and embrace alternative legal service provision and that law firms should provide a blend of traditional service in conjunction with new capabilities—lower-cost labor and technology. Many firms have done this, for example, by setting up low-cost service centers or building teams of paralegals. Generally, however, most partners in these firms regard these as add-ons. Indeed, they have rarely been integrated with mainstream services. Instead, they sit on the edge, regarded as peripheral and not integral, a nod towards innovation rather than a new business model.

Evidence that the business model has remained unchanged, even when law firms have developed alternative approaches, is found in dominant billing practices. While the low-cost provision may be charged on a fixed fee basis, the traditional advisory component tends still to be billed in the time-honored fashion, based on six-minute units. In contrast, a fully vertically integrated legal service will be offered on a full fixed-fee basis, in many ways marketed, sold, and delivered in the manner of a product, rather than of a service. The fee will be based on the outcome achieved, rather than the time spent, giving clients greater budget certainty.

Full-scale vertical integration in law, as a business model and in operational terms, can be regarded as transformative, unlike much of the current work on innovation in law firms, which has been focused on improving old processes or applying technology to streamline traditional ways of work. Vertical integration is a much more fundamental change.

Will there be a tipping point in the legal world? Will the floodgates of radical innovation open overnight, heralding a brave new environment? For cultural and regulatory reasons, a big-bang revolution is unlikely. Nonetheless, it is likely that there will be steady evolution, leading to a legal landscape in a handful of years that will look quite different—in terms of the range of providers, the sophistication of clients, and the more widespread deployment of knowledge management and technology.

Knowledge management

Since the 1990s, there has been great hope in the legal world for the discipline of knowledge management—systematic ways of capturing, preserving, distributing, and reusing the collective expertise and experience of a legal community. Professional support lawyers have been the specialists in this field, creating precedents and templates, ensuring that teams of lawyers are up to date, creating local research resources, and much more. And various supporting technologies—including intranets, e-learning, document automation—have also been put in place.

So far, however, knowledge management has not fulfilled its early promise. This has had little to do with the quality of the people or systems involved. Rather, the dominant business model (and indeed mindset) for legal work undertaken by law firms has been charging for services on an hourly basis. The anomalies that this creates have been widely noted, most generally that hour billing has placed the commercial incentives for law firms in the wrong place—charging for input rather than output, rewarding inefficiency, and discouraging firms from streamlining their businesses. In this context, knowledge management, which helps avoid duplication of work and encourages recycling, flies in the face of the prevalent business model.

It is less easy to explain why knowledge management has not taken hold in in-house legal departments, where time-based work is not the underpinning model. The explanation here is perhaps more prosaic—that GCs have found it hard to secure budgets for professional support lawyers and for technology. Short-sighted though this seems, it has been easier to make the case to finance departments for the recruitment of lawyers to undertake clear, short-term legal tasks than for more strategic investment in systems that would deliver efficiency gains in the medium and long terms.

In any event, if there is a shift towards legal service as a vertically integrated service that is provided on a fixed-fee tariff, then the incentive system changes radically. To maximize their profits, legal providers who work on this basis will surely be motivated as never before to contain their costs. And thus a new imperative will emerge—re-use of past experience and work product.

The 2020s, therefore, should be the decade during which knowledge management comes of age—helping lawyers to become more efficient, providing playbooks for staff engaged in process-dominated work, and underpinning the automation of appropriate tasks and activities.

Technology

The vertically integrated model also calls for law firms to use technology more extensively. The twist here is that the systems that differentiate in the legal market will not be those that have dominated the world of legal technology for the past few decades. These have essentially been back-office systems, originally accounting systems, email, and document management systems—and, more recently, case management, project management, and collaboration spaces. These traditional systems will be necessary, but not sufficient, for tomorrow’s integrated law firms. The leap here will be from systems that improve the efficiency of a firm’s operations to systems that take on legal tasks and provide insights into the legal needs of clients. This is the world of artificial intelligence (AI) and machine learning and of legal products and solutions.

AI will be used for document analysis (in litigation and corporate work), in generating polished documents, and in providing guided pathways through complex bodies of law and regulation. Some of these systems will be used by law firms, but they will also provide easy-to-use self-help systems for clients, both in-house lawyers and people deeper in the business. Machine learning techniques will be used to undertake analysis of client data and so identify patterns and correlations that will help these clients anticipate legal problems, set priorities, and allocate their limited legal resources more effectively. Moreover, these systems will help clients make predictions about the outcome of disputes, the prospects for deals, and, in due course, the parts of the business most likely to give rise to legal risks.

As with knowledge management, then, the 2020s will likely see a fundamental integration of technology and legal service.

Conclusion

Vertically integrated legal service calls for a combination of legal expertise and process engineering, playbooks, and high-quality templates. When enabled and delivered using technology and supported by data analytics, the resultant legal service shifts from a defensive provision and a necessary cost to an offering that helps manage risks and generates additional business insights and value. Lawyers will become guided in their work not only by their knowledge of the law, but also by the business understanding revealed from analysis of client and market data.

More generally, there are messages here for alternative legal providers and for law firms. For alternative providers it is clear that to scale rapidly, to win major engagements, and to meet clients’ needs, it will be necessary to recruit a credible number of experienced lawyers. Their work must lie at the heart of the overall service. In some jurisdictions, of course, it is not currently permissible for practicing lawyers to be engaged in this way. In these countries, this is likely to inhibit the development of alternative providers.

There is opportunity here for law firms—if they can build vertically, supplementing their mainstream lawyers with paraprofessionals, technologists, project managers, and others, then they will be able to compete with full-service alternative providers (where they are permitted) and dominate the markets in which regulation prohibits lawyers from delivering their services from alternative vehicles.

For both law firms and legal suppliers that integrate vertically, new competitive opportunities will emerge. In turn, clients will be more confident in the outcomes when they outsource their work, and this will lead to new opportunities for cost reduction and improved risk management.

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Professor Richard Susskind is president of the Society for Computers and Law, technology adviser to the Lord Chief Justice of England and Wales, and chair of the advisory board and visiting professor at the Oxford Internet Institute.

Neville Eisenberg is a partner in Bryan Cave Leighton Paisner.