Adaptive Innovation

Lead Article From The Practice January/February 2019
The Innovator’s Dilemma in Big Law

This piece is adapted from a chapter of the same title featured in the volume Legal Informatics, coedited by Ron Dolin and published by Cambridge University Press.

Big Law has been described as being in the throes of a painful transformation brought about by factors such as the increased use of technology, globalization, and a transition from a supply-driven market to a demand-driven one. A common framework for such upheaval is Clayton Christensen’s seminal work The Innovator’s Dilemma, which generally portends an inevitable collapse of market incumbents when they cater to the performance requirements of their high-value customers’ demands. Big Law is not immune from the principles of The Innovator’s Dilemma. However, neither the disruptive nor sustaining innovation described in Christensen’s work seems to adequately characterize the changes occurring.

Innovation addresses not only the efficient delivery of quality work but also the opening of new markets that would be inconceivable under inefficient delivery models.

This issue of The Practice is dedicated to exploring some of the underlying concepts pertaining to innovation generally, and innovation in the legal professional specifically. In this article we describe a hybrid model, “adaptive innovation,” that takes into account the opposing forces in play. As with most other sectors, lawyers have argued that Big Law is different. This article reviews some of the most cited factors predicting and denying the demise of Big Law. We argue that market-imposed values such as quality, efficiency, and return on investment (ROI) will very likely dominate over reputation and comprehensiveness, forcing a fundamental change in many common features of Big Law. However, law firms will most likely remain an inevitable mechanism for the delivery of many of the services currently occurring there, albeit under a different model. In “Marketplace of Ideas,” The Practice offers a primer on what innovation is—and isn’t—by talking to those who research and practice innovation for a living. In “Designs on the Law,” we explore one notable innovative practice taking hold in the legal profession: design thinking. And finally, in “Venturing into the Unknown,” David B. Wilkins sits down with Dan Nova, a general partner at Highland Capital Partners, to discuss innovation and technology from the perspective of an investor.

The Takeaway

Innovation and the technological implementation of legal practice injects efficiency as a core value of the delivery of legal services. Efficiency creates tension with quality and requires an examination of cost–benefit tradeoffs. Law requires predictability and precedent, while innovation focuses on positive change. The potential conflict, however, is a false dichotomy. Innovation forces a reexamination of core values—the changes are often in process, not product. Such examination emphasizes quality, expertise, data-driven decision-making, and efficiency. Abandoning low-margin work and moving upmarket, rather than changing the delivery model, portends the classic Innovator’s Dilemma failure model—there is simply not enough room at the top. Innovation addresses not only the efficient delivery of quality work but also the opening of new markets that would be inconceivable under inefficient delivery models.

Setting the stage

In the summer of 2013, Norm Scheiber heralded “The End of Big Law” in a controversial cover story in The New Republic. (We define “Big Law” as those law firms that are among the top 200 by revenue or number of lawyers. Another workable definition is firms of 500+ lawyers whose clients include Fortune 100 companies for common corporate and litigation services.) Spotlighting Mayer Brown as a representative of Big Law more broadly, Scheiber described an unsustainable law firm model racked with infighting, threats of partner flight, and unsatisfied associates. Scheiber is not alone in highlighting the headwinds facing the industry, and the Zeitgeist suggests that Big Law is on the brink of collapse—see Larry Ribstein’s “The Death of Big Law,” Steven J. Harper’s The Lawyer Bubble: A Profession in Crisis, or Richard Susskind’s The End of Lawyers? Rethinking the Nature of Legal Services for just a few examples. The American Lawyer’s annual rankings of firms’ profitability paints a different picture of the industry though: firms are watching their profits by partner return to, or exceed, precrisis levels, and even the much maligned Mayer Brown saw record profits for 2013, the year of its profile in The New Republic.

In The Innovator’s Dilemma, Christensen identifies “sustaining” and “disruptive” as two distinct classes of innovation.

On the future of Big Law and legal services, many have been calling for the industry’s “disruption” in the parlance made famous by Clayton Christensen of Harvard Business School. Legal technology companies like LegalZoom threaten to undermine the traditional delivery of legal services, while legal process outsourcing (LPO) companies such as Axiom have worked to take rote work like document review or e-discovery away from law firms (see “Axiom: An Innovator’s Journey”). Even Christensen, in a recent article titled “Consulting on the Cusp of Disruption,” has noted the disruption of Big Law embodied in the development of in-house legal departments to handle matters that normally would have been assigned to outside counsel.

In The Innovator’s Dilemma, Christensen identifies “sustaining” and “disruptive” as two distinct classes of innovation. Sustaining innovation allows incumbents to better serve their high-value customers, making it difficult or impossible for new entrants to get a foothold in an established market. Disruptive innovation, where a business uses a new methodology and/or technology to create a new market or provide low-cost alternatives to lower-value customers, often overtakes established players who do not react fast enough to compete. As noted by Christensen, established companies in every industry have argued that their industry is unique and therefore they are not amenable to disruptive competition. We ask the question as to whether Big Law is distinguishable in some fundamental structural way that renders it immune from typical notions of disruptive innovation. We argue that Big Law seems to be characterized best as a hybrid on an innovation spectrum, what we call “adaptive” innovation, that would leave some form of Big Law in place, while potentially vastly restructuring much of its current common elements.

In this article, we first review Christensen’s disruptive innovation framework and identify Big Law’s structural defenses to disruption. We then contextualize adaptive innovation and offer examples of its nascent existence in Big Law. Finally, we address what Big Law could be doing additionally and what it stands to gain from embracing adaptive innovation.

Disruptive innovation and “The Innovator’s Dilemma”

Sustaining innovations improve existing products or services according to accepted notions of performance and, regardless of the identity of the first mover, benefit the established incumbents in a particular industry. Disruptive innovations, on the other hand, are usually less effective in terms of existing performance metrics but offer other attributes that attract a different segment of the market by redefining quality metrics. The disruption occurs when these cheaper, less powerful products evolve to the point of capturing mainstream customers, displacing incumbents and often redefining concepts of performance. For an illustration of the difference between the two types of innovation, consider camera technology, an example Christensen himself used in an interview.

Low-end disruptions provide a simpler and cheaper version of a product to less demanding, typically lower-value customers.

Film-based cameras differentiated themselves ultimately in the quality of the pictures the camera could take based on the lens quality, available shutter speeds, and intrinsic film quality, for example. Digital cameras came onto the market taking pictures whose quality was considerably worse than film but redefined the relevant performance metrics to include the ability to view pictures instantly on a screen and later triage which pictures to print after reviewing them on the camera or a computer. This new performance metric helped capture a new segment of the market: those who wanted “good enough” pictures with the ability to review instantly and triage later. Eventually, digital camera and printing technology improved to the point at which digital pictures were of the same quality as film pictures, if not even better based on digital editing abilities. At some point, for most consumers, the hassles of dealing with film were too great compared to the convenience of digital photographs. Similarly, cellphone cameras disrupted digital cameras, redefining performance to include the ability to capture a moment without the foresight of bringing a standalone camera and the ability to share the moment immediately with others. Cellphone cameras have improved to the point that the picture quality is similar to a traditional (low-end) digital camera, but the cellphone enjoys an advantage in the new quality metric of portability and ability to share quickly. The convenience of an all-in-one pocket device became increasingly more important than the high-end features offered by standalone digital SLR cameras to all but serious photographers. Time and again, the feature set at the high end overshoots the needs of the market, leaving it ripe for disruption.

There are two major categories of disruptive innovations: low-end disruptions and nonconsumption disruptions. Low-end disruptions provide a simpler and cheaper version of a product to less demanding, typically lower-value customers. Mainstream products outperform the needs of these customers, so new entrants can create new solutions that address these simpler needs. Over time, these solutions improve in performance and begin to penetrate the higher value end of the market. An example that Christensen predicted in 1999 is Google Sheets. Microsoft Excel, Christensen hypothesized, contained far greater functionality than most customers needed. The market was ripe for a streamlined spreadsheet application. Google Sheets does not have the same functionality as Microsoft Excel that demanding corporate clients may require, but it offers simplicity of use, easier sharing, and cloud access—and it is free. These qualities redefine the “performance” of spreadsheet software and appeal to different customers. Eventually, the product gained traction even with the higher-value corporate clients.

Nonconsumption, alternately, creates a product or service for consumers who previously did not have access to a mainstream version of it. The personal computer (PC) is an example: it was far less functional than the mainframe computers existing in large corporations and universities at the time, but it opened up an entire new market—that of individual consumers—to computing. PCs facilitated common tasks such as word processing, document storage, and printing, as well as simple gaming and office functions—activities not previously available in such a manner.

Neither disruptive nor sustaining innovation, as described in Christensen’s work, seems to adequately characterize the changes occurring in law.

Another insight that informs much of Christensen’s analysis of disruptive innovation is that of values, processes, and resources (VPR). The VPR of a given company defines its capabilities, and Christensen argues that the VPR of successful incumbents necessarily makes it harder to adopt or create disruptive innovations. For example, if a camera company defines itself on the basis of the quality of its film prints, fosters distribution networks and processes to emphasize quality of photos, and allocates capital to projects that improve film prints, it would be futile to try to develop digital camera technology in that organization. Efficient organizational decision-making requires embedding decisions into processes and employee values; the different decisions required in the face of disruption are thus slowed down or simply precluded. A marketing and distribution network that depends on high profit margins, for example, cannot easily be rebuilt in the face of a low-cost provider. This was critical to Christensen’s insight that great companies fail precisely because they are great; the VPR that made them great often does not allow them to disrupt.

“The Innovator’s Dilemma” framework and Big Law’s protections

Big Law, and legal services more broadly, are unique and enjoy structural peculiarities that reinforce their incumbency and mitigate the effects of full-blown disruption. First of all, law firms are not selling products but rather are offering regulated professional services. The Model Rules of Professional Conduct, and its counterpart in state legislation, regulate who can offer legal advice and who can own law firms (for more, see rule 5.5). Big Law also enjoys the advantages of information asymmetry that define professional services: clients come to law firms precisely because they cannot do the job on their own. Finally, the concept of outside counsel serves a vital role in offering both specialized services to a broad set of clients and a degree of liability insurance for clients. The law firm, as a provider of outside counsel services, is a logical delivery method based on reputational bonding as a signal of quality that reduces adverse selection in the market for legal services.

Big Law enjoys protections from the information asymmetry that underpins the very nature of its work.

The American Bar Association’s ethical rules and their statutory counterparts provide regulatory protection for Big Law. In particular, the rules against the unauthorized practice of law (UPL) and the nonlawyer ownership of law firms help entrench existing law firm structures and the structure of the Big Law market more broadly. UPL statutes prevent nonlawyers from offering legal services with the stated goal of protecting the public, but judicial decisions and enforcement proceedings at the state level suggest that protecting the profession is the more salient goal, as Deborah Rhode and Lucy Ricca have argued. The ethical rules also restrict law firm ownership to lawyers, preventing analogous professional advisers such as consultants and investment bankers from competing with Big Law despite their similar connections to corporate boardrooms. These rules are strict barriers to entry in the legal market, reducing the number and efficacy of new entrants with alternative value propositions for clients. The practice of law, in a sense, is the delivery of intellectual property (IP) maintained at an individual or firm level, and UPL statutes ensure that even if one could extract that IP, only a lawyer can legally monetize its delivery. The equivalent governing bodies of Australia and the United Kingdom relaxed their ethical rules regarding law firm ownership, allowing for the expansion of alternative business structures (ABS) in these markets (see “How Regulation Is—and Isn’t —Changing Legal Services”). ABS provisions maintain standards for legal service delivery, and there have been few complaints about the services ABS companies provide. The performance of these companies in the coming years, both financially and in the quality of service provided, will be instructive for their potential in the United States. But the ABA’s Commission on Ethics 20/20, a special commission created to examine changes in the legal profession as a result of technology, determined in its final report in 2012 that it will not move forward with policy changes related to nonlawyer ownership of law firms.

Other model rules that help entrench the existing structure of Big Law include advertising and referrals (Model Rule 7.2), fee splitting (Model Rule 5.4), and imputed conflicts (Model Rule 1.10). Proposals to revise these rules came up during the proceedings for the Commission on Ethics 20/20 but were rejected by a number of sections and divisions within the ABA through comments submitted to the Commission. In some of these comments, such as a letter from nine general counsel, the protests to update the rules based on the impact of technology on law practice were blatantly protectionist of traditional law firm operations and effectively halted the potential for the Ethics Commission to make any substantial model rule revisions.

Beyond the regulatory protections it enjoys, Big Law enjoys protections from the information asymmetry that underpins the very nature of its work. Clients are at a necessary information disadvantage when seeking legal advice from a specialist—they have retained outside counsel precisely because they do not have the necessary ability to solve a problem on their own. Lawyers can rely on the opacity of their work product and the agility with which they can respond to client needs to amplify the sense of necessity regarding their work (though, as Christensen, Dina Wang, and Derek van Beyer argue, that opacity is beginning to dissipate). The information asymmetry is an important advantage to clients in one respect, though. By retaining outside counsel, thus acknowledging a lack of expertise, a company takes on a measure of liability insurance. For example, if a company wants to employ a legally risky transaction structure, the third-party expert approval of outside counsel can help protect the company from shareholder suits if the structure becomes problematic, in a way not available if the company used only in-house lawyers. It is important to note, however, that the information asymmetry protecting law firms has narrowed with the growth of in-house legal departments, and the opacity of a law firm’s work product will continue to diminish as more lawyers transition from law firms to in-house counsel roles.

The client goal is not inherently toward dismantling law firms as groupings of experts working together. Instead, the push is toward increased efficiency with different cost and quality controls within the law firm.

As an organizational form, the structure of the law firm serves an important function in the marketplace for legal services, conferring additional protections to Big Law’s incumbency. Information asymmetry naturally exists in any marketplace for expert services because a lay consumer will not be able to properly evaluate the expert’s quality. The structure of a law firm, which organizes groups of specialists under one umbrella organization, reduces the information asymmetry and associated agency costs through reputational bonding. Law has not (yet) moved to empirical quality metrics, standards, or certification, so a proxy for quality is generally reputation and pedigree. Rather than an individual lawyer convincing a client that she can provide suitable legal services, the lawyer can point to the firm name on her business card as a signal of quality. A law firm with a reputation for quality has a vested interest in continuing to hire competent lawyers who can continue to deliver quality services. The client need not do the same level of due diligence in hiring outside counsel because he knows the reputation of the law firm that has hired this particular lawyer. Agency costs are reduced, benefiting both parties. (For more on reputational bonding, see Larry Ribstein’s “The Death of Big Law.”) Further, law firms relying on reputational bonding are best organized as partnerships of lawyers, because nonexperts would be unable to monitor the lawyers effectively to maintain the reputational bonding. This need for oversight to ensure quality also motivates in part the ethical rules regarding non-law-firm ownership.

Finally, law firms are efficient within a societal legal system from an informatics perspective. If we look at law firms through a data flow model, the processing that goes on there between the various inputs and outputs can be viewed as a series of operations. Some of these operations are more efficiently performed as the equivalent of callable routines. Imagine a given lawyer or practice group with unique expertise. The number of matters drawing on that expertise within a given client corporation may be quite limited. However, when that lawyer or practice group is able to apply that skill set across many clients, the overhead costs of maintaining the expertise drop. That is, it is more sustainable for some specializations to exist within a neutral law firm model available to multiple clients than for each of those clients to maintain that level of expertise directly. Since the expertise lives in the heads of the lawyers, some form of law firm model is simply efficient. However, when the level of inefficiencies of the law firm itself (for example, the billable hour) increases the overhead of the availability of such expertise, it becomes more cost-effective for clients (large clients in particular) to move those lawyers in-house. This would remain true until the law firm model becomes sufficiently efficient (something on par with what in-house does) such that it becomes, yet again, more cost-effective to work within the law firm structure. Thus, the client goal is not inherently toward dismantling law firms as groupings of experts working together. Instead, the push is toward increased efficiency with different cost and quality controls within the law firm. There is economy of scale at a law firm in terms of not only using human capital but also working with various legal service providers. For example, for all but the largest corporate clients, the frequency of litigation may be variable. One can imagine that such clients may not be able to attract the same pricing from LPOs and e-discovery vendors, for example, as a law firm that is pooling the work of many clients.

Several factors work to keep Big Law in place. Some, such as the ethics rules, are more oriented toward maintaining the current model. Others, such as the inherent efficiency of independent practice groups, are more focused on Big Law’s substantive contribution. Protecting the status quo derives from a model focused on the billable hour, with associated “productivity” measured as the number of hours billed per lawyer. One justification for this type of business model is the comprehensiveness of the work product. In contrast, the benefits of reducing societal redundancy derive from the goal of having high-quality, efficient delivery of Big Law expertise. The disruptions occurring are not necessarily focused on the core values that Big Law ideally presents.

Adaptive innovation and Big Law

The question arises, therefore, as to whether the current framework that protects the existing Big Law model is likely to maintain the status quo indefinitely. Several trends point to increasing challenges to Big Law regardless of the existing protections. As previously discussed, the percentage of corporate clients’ legal spend going to Big Law is decreasing, and Big Law revenue for all but the very top firms has been basically flat for years (see William Henderson’s “From Big Law to Lean Law”). In addition to corporate in-house departments unbundling legal services and taking key areas of work away from Big Law firms, new models of legal interaction also simply do not require a Big Law solution. For example, new forms of dispute resolution, such as Modria (acquired by Tyler Technologies in 2017) or Lex Machina (acquired by LexisNexis in 2017), simplify the process. While much, though certainly not all, of this work focuses on consumer, low-end, or commodity work, it will continue to move up market. Within an Innovator’s Dilemma framework, there are not only new alternatives to the current procedures for transactional and litigation issues but also increasingly new procedures and mechanisms for which the traditional law firm is currently ill prepared and for which viable alternatives exist. As a result, the existing regulatory framework is probably inadequate to hold back the tides of innovation that clients are demanding.

While an in-house department could certainly obviate the need for outside counsel for certain tasks, structural defenses prevent in-house departments from entirely ousting Big Law.

Structural defenses against disruption suggest that Big Law cannot suffer large-scale disruption in the way the film camera industry did, or the integrated steel manufacturers did in Christensen’s The Innovator’s Dilemma. The required license to practice and to own—the UPL and law firm ownership statutes—are steep barriers to entry that help insulate law from disruption. This license reflects the expertise inherent in the profession, and as long as there is an information asymmetry between consumers and providers of legal services, there continues to be a need for retaining licensed lawyers. And while the growth of in-house legal departments is a step toward disrupting Big Law, few companies, if any, have the need or resources to maintain a fully functional law firm in its organization. A large corporation could hire a team to handle all M&A work without the help of outside counsel, but it is hard to justify that allocation of capital if deal activity slows. An in-house litigation team would fail under similar scrutiny if the team does not have the case flow required to remain sharp or has a sudden influx of cases it does not have the bandwidth to handle. Big Law will continue to offer specialized services, providing the liability insurance and staff augmentation capacities that its clients’ in-house departments need. And the law firm as a reputational bonding vehicle will continue to mitigate search and monitoring costs in retaining outside counsel.

Total disruption is not likely to be on the horizon for Big Law, but the industry would benefit from the lessons of The Innovator’s Dilemma, even embracing a middle ground of “adaptive innovation.” Adaptive innovation would require a hybrid approach to innovation, acknowledging the peculiarities of the industry that prevent total disruption while embracing tenets of disruptive innovation to help cement the incumbents’ position in the market, augmenting and amplifying the services they provide. Core values, such as quality and expertise, are not antithetical to efficiency-based models. Thus, these innovations neither sustain common practice nor disrupt core values—they are adaptive in nature for those firms that incorporate them.

Christensen has pointed to the growth of in-house legal departments as an example of disruptive forces at work in Big Law. While an in-house department could certainly obviate the need for outside counsel for certain tasks, the structural defenses mentioned prevent in-house departments from entirely ousting Big Law. Embracing the disruptive elements of in-house legal departments in a way to create new bonds between law firms and their clients would be an effective adaptive innovation that could help sustain Big Law firms. Firms, for example, could offer legal consulting services to help their clients grow their in-house departments, as the law firm Eversheds (see “Navigating a Brave New World”) is doing with the U.K. secondment.

Part of the irony of disruptive innovation for Christensen is that it results in the failure of well-managed companies that successfully cater to their highest-value clients. (In fact, in the subtitle of The Innovator’s Dilemma, Christensen notes that disruptive innovation causes “great” firms to fail.) For example, according to a report by the American Bar Association Standing Committee on the Delivery of Legal Services, while the majority of the respondents to the poll were not aware of unbundling as an alternative form of legal service delivery, once they knew of the availability, they found it an important factor in deciding to select a lawyer. The New York Times captures Intel’s transition succinctly.

Core values, such as quality and expertise, are not antithetical to efficiency-based models.

The lesson for future high-end legal service delivery, with a decreasing emphasis on the billable hour, is to make efficient not only the AFA-related components but also the interaction between the two. The typical argument that legal work is too fact-intensive, or that lawyers’ work product is too specialized to be susceptible to the pressures of technology, assumes that all aspects of the workflow must be done manually and redundantly. A more sophisticated, hybrid model balances efficiency with flexibility while maintaining quality. (For more, see Dolin’s post, “Big Law as Legal Fiction and the Lack of Innovation.”)

Finally, another adaptive innovation for Big Law would be the establishment, development, and implementation of standardized quality metrics (see breakout box below). One likely key to this shift would be the process of “unbundling.” As described by Christensen and his coauthor Michael Raynor in The Innovator’s Solution: Creating and Sustaining Successful Growth, market maturity is measured in part by a move from all-encompassing integrated solutions to componentized, modular ones. In law, such componentization is referred to as unbundled services. To that end, ABA Model Rule 1.2 formally allows for the unbundling of legal services by stating “(c) [a] lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances and the client gives informed consent.”

Quality metrics in law research project

As demonstrated by ROI, quality metrics are financial metrics. Certainly, in the push to increase efficiency of legal services, quality is part of the equation, explicitly or not. Otherwise, for example, we could resolve disputes by a simple coin toss or use the monkey approach to writing legal memos. Efficiency without quality is useless.

How does the lack of standardized quality metrics hurt the field? As one legal tech startup CEO said, it can be insufficient to show a prospective client quality data for his company’s service if a competitor can be dismissive of the meaning of the metrics, arguing, for example, that other factors are more important. Without standardization, quality metrics become an apples-to-oranges comparison.

Once quality is compared to efficiency, one can arrive at high-value work. This is especially important within a non-billable-hour framework where performance is measured by work output per hour, rather than by the number of hours billed per employee.

As we inevitably increase the role of automation in the legal system, building in quality metrics and automated evaluation guarantees that increasing efficiency does not come at the cost of decreasing quality. This is as important for large corporate clients managing their Big Law providers as it is for middle-class consumers using an automated online document delivery system, not to mention those who simply cannot afford an attorney at all.

The development of standardized quality metrics via the application of quantitative techniques and empirical analysis is an important component of unlocking the efficiency gains in law that technology has provided in other industries. Quality benchmarks guarantee the preservation, or even improvement, of the quality required for removing existing barriers to the adoption of technology and the further injection of efficiency.

Evidence of adaptive innovation

Much has been written about the changing landscape of Big Law and the pressures coming from disruptive legal service providers, including smaller midsize firms, LPOs, and upwardly mobile new entrants, as well as the trend of more legal work moving in-house. From an Innovator’s Dilemma perspective, these alternatives represent lower-margin competitors and new entrants initially focused on prior nonconsumption who can be expected to move up market and increasingly compete for Big Law’s more-lucrative clients. And certainly, in a classic response to disruptive innovation, there has been talk among Big Law firms about dropping lower-margin work and moving up market. The Innovator’s Dilemma highlights that there simply is not room up market to accommodate all Big Law firms and that under such an approach, most of those firms would not be expected to survive. Under an adaptive innovation framework, however, we would expect to see Big Law starting to incorporate disruptive methodologies and migrate their VPR to adapt to changing market demands such as efficiency and evidence-based analysis. But is there evidence of this among Big Law firms?

Efficiency without quality is useless, but without standardization, quality metrics become an apples-to-oranges comparison.

There are some well-publicized examples of law firm innovation awards and rankings, such as ILTA and the Financial Times. Professor William Henderson of Indiana University Law School describes the 2014 ILTA Big Law innovation winners: Bryan Cave (realistic financial performance data, integrated technology training), Seyfarth Shaw (client-focused interdisciplinary R&D), and Littler Mendelson (workflow optimization and client-available KM). “It is time to put down the broad brush used to paint BigLaw as inefficient and out of touch,” he says. “As it turns out, BigLaw has on balance a surprisingly good hand to play. Many will thrive, but at the expense of taking market share from the rest.” At the same time, there are also commentaries explaining that so-called innovation at many or even most law firms might be best described as the uptake of technology or methodologies that have been common in other industries for years. As Henderson says, “What is missing at some firms, but clearly not all, is the will, courage, and leadership to seize the opportunity.” In fact, he estimates that only 10 to 15 percent of large law firms have embarked on strategic initiatives that take into account the “new normal.” While this pattern of trend setters and laggards is normal in the adoption of technology and innovation (see Geoffrey Moore’s Crossing the Chasm), the reasons most likely vary sector by sector.

Firms are experimenting with alternative fee arrangements (AFA), leveraging technology, and partnering more with in-house departments. Likewise, suppliers to law firms are making strides in the technology space that will allow Big Law to make the changes it needs to make. One example of using AFA to embrace low-margin work is the innovation in Silicon Valley during the past few decades to address the legal needs of startups. While a Fortune 500 company may be able to afford four-figure-per-hour rates for legal advice, a startup that is little more than two founders and a good idea most likely cannot. Law firms in the Valley began offering a suite of startup services such as incorporation documents, shareholder agreements, and IP advising on a flat, deferred fee basis or, in some cases, in exchange for equity in the company. These innovations allow law firms to make the low-margin work of incorporating a company profitable by using it as a hook for a longer relationship that ideally involves negotiating a sale to a strategic buyer or advising on an IPO and future securities regulation compliance. Firms like Orrick, Herrington & Sutcliffe and Fenwick & West have taken this a step further, using technology to better leverage the associate and partner resources required to deliver these startup services.

Legal technology startups are making large strides that, if Big Law chooses to embrace the changes, can help Big Law further defend its position in the delivery of legal services.

In the world of suppliers to Big Law and in-house departments, legal technology startups are making large strides that, if Big Law chooses to embrace the changes, can help Big Law further defend its position in the delivery of legal services. For example, Allegory Law (acquired by Integreon in 2017), founded by a former litigation associate at Gibson Dunn, simplifies the case management process for litigation teams, helping them become more efficient and productive and increasing the value of the services they deliver to clients. Prior to its acquisition by LexisNexis in 2017, Lex Machina positioned itself as the dominant patent litigation database, using big data to help predict outcomes and identify salient issues in patent infringement claims. Likewise, Ravel Law (also acquired by LexisNexis in 2017) received a lot of press coverage about its legal research tool. Part of the significance of these suppliers’ offerings is that, in embracing an efficiency-based value system, they will quite likely force the way big suppliers like Thomson Reuters deliver and charge for services in the future. For example, as legal research startups move toward comprehensive coverage of case law, at a greatly reduced cost structure with useful additional features, the older methods are no longer viable. The same holds for the disruptive impact of cloud-based e-discovery. A change in values among Big Law firms—such as incorporating efficiency—forces those changes down the supply chain.

What comes next?

Projecting forward, we see the concurrent patterns of pressure by external forces and an increasing response by Big Law, including a shift toward increasing AFA and efficiency, and a change in financial metrics redefining productivity to be based on work product. The trends seem to indicate that disruptive innovation is abundant and that law firms are fundamentally changing in response by adapting to market changes rather than by simply collapsing and yielding to new entrants. This is what we would expect to see under an adaptive innovation framework.

Law often portrays itself as substantially distinguishable from other industries. While in many regards that may well be true, it is also true that in many material ways, law is quite similar. It seems unlikely that law would be able to avoid the deep reimplementation resulting from technology, globalization, and so forth seen elsewhere. Big Law may have a unique response to such drivers, but it is not immune to them. Adaptive innovation is a framework that integrates those aspects of law that are necessary with those implementation details that are quite likely to change.

Ron Dolin is a senior research fellow at the Harvard Law School Center on the Legal Profession and a lecturer on law at Harvard Law School. He can be contacted at [email protected].

Thomas Buley is Vice President of Business Operations at Guideline, a venture-backed financial technology startup, and a graduate of both Stanford Law School and Stanford Graduate School of Business.