Disruptive Innovation in Legal Services

Lead Article From The Practice January/February 2015
Are legal services on the cusp of disruption?

From Silicon Valley to Main Street, disruption, it seems, is everywhere.

Its ubiquity has been bemoaned by perhaps the term’s greatest originator, Clayton Christensen, professor of business administration at the Harvard Business School. Christensen has said he regrets using it at all.

Yet it’s apt. In a time of exponential technological change, companies spring up and die off with startling rapidity, and entire industries are being dramatically transformed. It makes sense that it’s become a buzzword. Whether the disruptive process is good or bad is another question entirely.

The law has long been unaffected by these winds of change. The Center on the Legal Profession convened a conference at Harvard Law School on disruptive innovation in legal services in the spring of 2014 (see video), setting off a year of discussion, including an issue of American Lawyer devoted to the topic. When it comes to technology, “I like to say I’m trying to bring law into the twentieth century,” Ron Dolin, a technology angel investor and research fellow at the Stanford Law School, said at the conference.

Disruptive Innovation Conference – The Nature of Disruptive Innovation in Professional Services

Yet changes are undeniably arriving. Imminent technological advances may bring benefits to clients in the form of lower prices and greater ease of use of legal services, as well as increased access to justice. But they may also herald equally tough times for firms. Below, we review the theory of disruptive innovation and examine what it may mean for legal services, exploring the changes on the horizon for the legal profession—and how you can stay on top in disruptive times.

The Takeaway

Though some may be surprised to hear it, legal services fit the classic profile of an industry on the verge of disruption. Smart firms will take steps to prepare now by improving internal processes, incentivizing efficiency, and researching alternative ways of doing business that maximize client value. Some may consider developing or working with disruptive technologies.

What is disruptive innovation?

Highly influential in the business world, the theory of disruptive innovation was developed by Christensen in books such as The Innovator’s Dilemma (Harvard Business Review Press, 2000) and The Innovator’s Solution (Harvard Business Review Press, 2003). The theory describes how change occurs in markets over time as new entrants overtake successful existing companies.

Christensen notes that established companies often fail, ironically, when they seem to be doing all the right things. In fact, he writes in The Innovator’s Dilemma, smart management itself is the cause of incumbent companies’ ultimate failure, since “the very decision-making and resource-allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies.”

According to the theory, established companies, preoccupied with serving current customers, tend to ignore new technologies and competitors—on perfectly rational grounds. Since disruptive technologies tend to be simpler and cheaper than existing products and services, their slimmer profit margins in emerging markets simply aren’t appealing to established incumbents. Incumbents therefore cede the low end of the market to new players, content with the higher profits found at the smaller top end.

Meanwhile, established companies’ customers usually aren’t interested in a disruptive technology for the simple reason that they’re satisfied with what they already have. However, new-entrant technologies, as they become established, drift upmarket—where they begin to attract upmarket customers with their cheaper and more efficient options. At that point, the new entrants have a compelling lead, one established companies can’t hope to catch.

Eventually, the new-market disruptor becomes an incumbent, and the process begins again. Once established, companies face powerful disincentives to invest in new technologies, since they naturally drift upmarket in search of higher profit margins and, as they do, take on costs that make a move back downmarket difficult to justify, if not impossible.

In a nutshell

Market disruption tends to proceed in four steps:

  1. New competitors arrive.
  2. Incumbents ignore them and flee to higher-margin work.
  3. Disruptors establish a firm foundation in the middle of the market.
  4. The market “flips,” and established players must compete on new grounds or risk losing significant market share—or worse.

According to Christensen, innovations in products, services, or processes divide broadly into two categories:

  • Sustaining innovations bring improvements to existing products or services. A better TV screen, a longer-lasting battery—these are improvements for customers and products that already exist. In the legal market, computer-aided review of large datasets (used in electronic discovery) and automated document assembly are sustaining innovations, since they improve on existing processes.
  • Disruptive innovations create new markets or reshape existing ones. In the legal market, some matters are routine enough that they don’t require a high-end law firm. Legal process outsourcers have stepped into the breach to offer lower-cost services, creating a low-end innovation. Other disruptions target new customers: in the United States, LegalZoom has arguably created a service for many people who would not otherwise have chosen to work with a lawyer. In the United Kingdom, Cooperative Legal Services, an alternative business structure licensed upon liberalization of services in that country, now offers low-cost legal services to consumers.

Even Jeff Bezos, founder of Amazon, recently admitted that Amazon, the great disruptor of bookselling, “will be disrupted one day”—though it’s hard to imagine this happening anytime soon. Still, the language of disruption seems to reflect the reality of today, and no less than the world’s biggest companies think so, too.

No longer immune

What does this theory mean for legal services? The law has long been insulated against disruptive market forces for a number of reasons, notes David B. Wilkins, professor of law and faculty director of the Center on the Legal Profession at Harvard Law School. It has always been the most conservative discipline, in both culture and practice. (Indeed, Wilkins quips, it’s the only field in which, in order to say something new, you must prove it’s been said before.)

Law has also been among the most heavily regulated businesses—and lawyers themselves have controlled that regulation. In the United States, lawyers control education and standards of practice and expulsion via the American Bar Association. Tight rules on competition, and even stronger norms regarding traditional market conduct, such as lateral hiring, have historically limited how the law is practiced.

Like consulting, law is a “black box” industry, historically customizing solutions in an opaque process largely inaccessible to clients, Christensen points out in an October 2013 article for the Harvard Business Review. Firms in both fields are hired precisely because they have knowledge clients lack. As a result of this informational asymmetry between clients and law firms, Larry Ribstein noted in “The Death of Big Law” (Wisconsin Law Review, August 2010), “It may be impossible for clients to determine in advance which lawyers present the highest risks.” And because it’s difficult to guarantee the results of a law firm’s or consulting partner’s work in advance, clients are forced to rely on external indicators—such as reputation, educational pedigree, even cost—when making crucial decisions about whom to hire.

When disruptive change appears on the horizon, managers need to assemble the capabilities to confront the change before it has affected the mainstream business. In other words, they need an organization that is geared toward the new challenge before the old one, whose processes are tuned to the existing business model, has reached a crisis that demands fundamental change.

Clayton Christensen, professor of business administration at the Harvard Business School

All of this is changing. The opacity of the law is breaking down, thanks to the rise of in-house general counsel and a broad trend toward democratization of knowledge (see “The Global Age of More for Less,” Fall 2014). Regulatory reform has begun, particularly in the United Kingdom and Australia. Canada announced in September 2014 that it, too, is considering liberalizing legal markets. And even in the absence of regulatory changes in the United States, new organizational forms are appearing, such as Axiom and Rocket Lawyer.

Ripe for disruption

Christensen’s theory spans several causal mechanisms for disruptive change—technology is a primary driver, as are disruptive business models and processes (like Netflix’s DVDs in the mail to Blockbuster’s brick-and-mortar video stores, or Airbnb to traditional hotels). While legal processes and regulatory models may increasingly be under examination, many would say law is not subject to the same technological forces roiling other industries—and thus that the theory of disruptive innovation largely doesn’t apply.

Yet that, too, may be about to change. By definition, law is an information-intensive industry. As computing power expands exponentially and legal services are unbundled and modularized, the practice of law is becoming increasingly susceptible to automation. Processes such as the document analysis used in e-discovery demonstrate technology’s encroachment into law. And existing apps and software already attempt to make sense of the vast volumes of data lawyers require to effectively practice day to day. Yet even greater encroachment is just over the horizon.

Consider IBM’s Watson, an artificial intelligence system capable of parsing natural language. (See “Cognitive Computing Will Transform Professions” for thoughts on Watson from guest columnist Scott Ferrauiola, associate general counsel for the IBM Watson Group.) Developed in the company’s Research Labs—the same division responsible for Deep Blue, the supercomputer that bested chess champion Garry Kasparov in 1997—it was initially the product of a small team working without financial pressures who simply wanted to see whether a Jeopardy run was credible, even possible. In its first public test, Watson actually won the show in 2011.

At the spring 2014 Center on the Legal Profession conference, Watson’s Senior Vice President, Michael Rhodin, noted that medical doctors—their interest piqued by Watson’s ability to quickly process large amounts of information and provide answers paired with confidence levels—called IBM asking about the technology after the episode aired. What was once simply an enjoyable challenge for engineers was beginning to show commercial promise.

As computing power expands exponentially and legal services are unbundled and modularized, the practice of law is becoming increasingly susceptible to automation.

IBM, says Christensen, is one of the few established companies that has survived shifts in technology over time. It has done so by separating disruptive units from its main headquarters, allowing them to develop independently and, ultimately, compete against its core products. (IBM, as the parent company, of course retains gains from both, so little is lost.)

Watson is no exception. In early 2014, IBM made the formerly fledgling Watson unit a standalone division and sent it off with $1 billion to search out commercial applications. In August, the division unveiled Discovery Advisor—a real-time data-processing system that can process information, such as academic research papers, and distill a visual representation of the connections therein. “What Watson is very capable at is consuming vast bodies of information,” Rob Merkel, of IBM’s Watson group in New York, told NBC.

Watson “will reinvent careers and reinvent industries,” IBM’s new CEO, Virginia Rometty, told Forbes in September; she has earmarked $100 million in funding for startups that incorporate Watson’s powerful technology. Potential uses are already multiplying. Watson is being tested in settings as diverse as health care, call center automation, personal shopping, even interactive toys for children that can diagnose developmental issues and a food truck that generates recipes from customer preferences on the fly. Watson’s capabilities, in fact, would seem to have unlimited application—to use the terms of Christensen’s theory, it is now simply an innovation waiting to find a market. And IBM is optimistic: it projects $16 billion in revenue for the division by the end of 2015.

Is your organization ready for disruptive change?

Just as much as employees, organizations have capabilities—defined by Christensen as resources, processes, and values. In The Innovator’s Dilemma, he identifies three potential routes to creating new capabilities, some of which have historically performed better than others.

  1. Attempt to change the values and processes of your organization. This is the most difficult route, Christensen says, since no amount of cajoling or close managing will change values that are deeply embedded within an organization. If your staff is accustomed to high gross profit margins on work, for example, they are unlikely to enthusiastically pursue lower-margin work. Existing boundaries support existing processes—as they should, in successful organizations. But they are unlikely to support new processes as well, if at all.
  2. Acquire an independent organization that already has the capabilities you’re looking for, one whose processes and values match the task. Christensen notes Johnson & Johnson used this method to invest in several disruptive technologies—disposable contact lenses, endoscopic surgical equipment, and blood glucose meters—to great effect: each initially small company, fueled by the parent company’s resources but left to cultivate a market on its own, eventually became a billion-dollar business.
  3. Create a new, autonomous division focused solely on the processes and values you wish to cultivate. (Morgan Lewis’ eData division is a standout example of this method.) It should be separately funded rather than forced to compete with existing priorities or projects—and though it’s more likely to be successful as an independently functioning unit, will require close attention from leaders as it develops its own processes and values, given the inexorably drifting nature of resource allocation toward mainstream priorities.

Ultimately, Christensen points out, organizations facing disruptive change must ask not only whether they have the resources to succeed in a fundamentally altered business environment, but whether they have the values and processes to succeed. What sort of processes do your values support? What customers and problems do your processes support? If all three—processes, values, and resources—aren’t aligned with the customers you wish to reach, an effort is unlikely to succeed.

The high end of the legal services market may always require human, not artificial, minds. Yet Watson’s applications to a data-intensive discipline such as law are apparent. Watson may be used to produce customized, automated document delivery, write briefs after searching for precedents in case law, and even predict courtroom outcomes as part of initial case review. (For further discussion of the developing role of Watson in law, see “The Pragmatic Innovator,” “Finch Solutions,” and the “Cognitive Computing Will Transform Professions.”)

Disruption 2.0

Regulation still represents a significant barrier to innovation, at least in the United States (see “How Regulation Is—and Isn’t—Changing Legal Services“). But market forces will increasingly push the boundaries of traditional legal services. As we see it, three broad trends are poised to reshape the legal market.

  1. Sustaining innovations. Technology has the potential to streamline or replace basic legal tasks—even replace some legal jobs altogether. Process management tools can bring efficiency to legal services. Automated document assembly can routinize and even customize frequently used legal documents. Meanwhile, data analytics and pattern-recognition techniques, such as those used in e-discovery, can dramatically shorten the time needed to process and organize large amounts of data (see “Finch Solutions” for an example of how these techniques are being used in Brazil’s legal industry).
  2. Disruptive processes. Changes in the way the law is practiced will have far-reaching effects. Matching networks, such as that provided by the lawyer-screening service AdvanceLaw, which serves in-house counsel, can change the way consumers purchase legal services. Legal OnRamp has developed a knowledge management system that enables secure collaboration, facilitating greater communication among lawyers (see “The Pragmatic Innovator”).
    At the commodity end, legal process outsourcers and other nimble service providers can shift work down the value chain by disaggregating existing matters—and “hollowing out” providers. At the strategic end, multidisciplinary providers can shift work away from traditional law firms by reframing problems that are inherently multidisciplinary. In some locales, regulatory changes will allow both groups to shift the core definition of what constitutes “law” and “legal work”—and those changes may expand to major global markets, even the United States.
  3. New markets. At the low end, individuals and small business represent the largest underserved market in law. Those who develop technologies to serve this market may benefit handsomely. (See “LegalZoom, Rocket Lawyer Make Inroads.”)

These innovations are attracting significant interest from venture capital and private equity firms. More importantly, all are already being used by sophisticated general counsel, who are increasingly being pushed to cut costs and streamline services by business leaders. In a growing number of domains, the emergence of third-party funders will further accelerate development of these technologies. And all of this will require law firms to change how they do business.

What might such disruption ultimately bring? The Center on the Legal Profession sees issues of quality, access, price, and scale (particularly versus global accounting firms), as well as notions of professionalism, all being affected. What lawyers distinctly do may be up for redefinition in an era of disruptive innovation and concomitant regulatory changes—which will affect, more broadly, our definition and understanding of the law itself.

Disrupting for excellence

Legal services may be on the cusp of change, but savvy firms can adapt. Now more than ever, excellence requires continuous innovation in how firms do business—and connect with the client’s business. For many firms, innovation will require “disrupting” existing practices, while creating pathways for business clients to do the same. To do so, leverage your own data: how can existing institutional knowledge be utilized in creative ways, repackaged for existing or future clients, or applied to more efficiently conduct firm business? If data capability doesn’t exist within your firm, partner with organizations that can access and harness “big data.” When working with clients, look for ways to embed law into ordinary business processes. Finally, be rigorous about measuring results: clients will increasingly demand such accounting.

But be careful. As Christensen warns, “Never outsource the future.” Don’t give away so much business that providers are then able to move upmarket and claim what remains of your client base. In addition, it’s easier to disaggregate than reassemble (remember Humpty Dumpty!). Due to the consultative nature of legal work, relationships will always matter.

Innovating with the blank-sheet exercise

When asked whether they’d design their law firms in a traditional, leveraged pyramid structure, with a small army of associates supporting a handful of equity partners, the Center on the Legal Profession notes that practicing law firm leaders often issue an emphatic No. Yet few consider making changes. Why not? In an uncertain market, improvements are a way to set yourself apart from competitors. It may be time to think more broadly about how firms are organized.

Author and legal consultant Richard Susskind asks his clients to perform a “blank-sheet” exercise: given a blank sheet of paper and a week to think about it, how would you design your firm if you were starting from scratch today? Susskind reports that many firm leaders come up with dramatically different organizational structures than their firms currently hold.

Try your own blank-sheet exercise. To get you started, we’ve compiled questions based on the five skills of innovative managers described in The Innovator’s DNA by Jeff Dyer, Hal Gregersen, and Clayton Christensen (Harvard Business Review Press, 2011). According to the authors, leaders of innovative companies score, on average, above the 75th percentile for these skills in a standard battery—in comparison to about the 40th percentile for executives or noninnovative entrepreneurs—and innovative companies exhibit them just as much as their managers do.

There are no necessarily right answers. Respondents are likely to come up with very different responses based on their circumstances, interests, and areas of expertise. What would your different be?

  1. Associating. Innovators make connections that don’t occur to others. To stimulate your ability to make novel associations, try the SCAMPER method. That is, consider how you might Substitute; Combine; Adapt; Magnify, minimize, or modify; Put to other uses; Eliminate; Reverse or rearrange elements in your firm.
  2. Questioning. The ability to ask the right questions has distinguished thinkers throughout history. (“If only I had the right question,” Einstein was known to lament. ) Try asking at least 50 questions about your firm’s organization. Ask about basic conditions, what caused them, and reasons for those conditions and causes. The authors report that simply focusing on asking probing and detailed questions can lead to sharply more productive discussions—and innovative answers.
  3. Observing. Observing carefully and in new ways can lead to insights others miss. Try looking for the functional, social, and emotional dimensions of the job a client is hiring for. For example, they may functionally need consultation regarding a particular deal. But socially or emotionally, they may be looking for something else, such as the assurance and security a knowledgeable partner gives them. Paying attention to the real job a product or service performs may offer new insights. In addition, look for surprises, workarounds, and anomalies, which can offer hints for how a process can be improved.
  4. Networking. The authors distinguish between idea networking and resource networking. Resource networkers interact with people who are similar to them or have greater resources (financial or otherwise) in order to further their careers or interests, while idea networkers interact with a variety of people from varying backgrounds to gain new perspectives and are often looking simply to learn or test out ideas. Not surprisingly, speaking with people who hold a variety of perspectives can result in more innovative ideas. To increase your idea-networking skills, seek out novel perspectives on your firm’s work by talking with people who are different from you on some measure—age, socioeconomic status, country of origin.
  5. Experimenting. The authors found innovative leaders were more likely to broadly associate and to have a greater depth of experience to call upon in solving problems as a result of a greater tendency to experiment and seek out exploratory experiences. Taking opportunities to learn can lead to serendipitous connections that are the essence of creativity and innovation. Try a new experience just because you’re interested in it—and then see if it sparks ideas about your firm’s organization.

Even if there’s no immediate payoff or “eureka” moment, performing these exercises should help you gain perspective on your firm’s particular strengths and challenges, and may lead to fresh insights over time. Dyer, Gregersen, and Christensen tell the story of Steve Jobs, founder of Apple, who sat in on a calligraphy class in college simply because he was interested in the art. But when he built the original Apple computer, Jobs added sophisticated typography to its capabilities, a feature no desktop had at the time. In doing so, he found an early market in designers and publishers and created one of the most distinctive elements of the now-iconic Apple interface. “Of course, it was impossible to connect the dots looking forward when I was in college,” Jobs said of the experience. “But it was very clear looking backward 10 years later. So you have to trust that the dots will somehow connect in your future.”

There may be a further benefit: the authors note that questioning, observing, and idea networking (steps 1–3) naturally reduce the risk and number of experiments—actual prototypes—required to produce a successful innovation. That’s not to say experiments won’t be necessary, or that they won’t fail. But the path to success will likely be shorter, and cheaper, in proportion to the time spent on these steps.