What’s a ‘Law Company’ and why are legal consumers embracing it

In What’s a ‘Law Company’ and why are legal consumers embracing it Mark Cohen tackles the rise of the NewLaw business model head-on. It’s no longer a question of whether NewLaw providers will succeed and take market share from BigLaw firms. Rather, the relevant questions are How fast? and By how much?

A recent American Lawyer article by Roy Strom extolls the growth of ‘alternative providers.’ It focuses on The Corporate Legal Operations Consortium (CLOC), an oft-cited industry bellwether. Strom references a recent CLOC survey that reveals the growing use of ‘alternative providers’ (read: non-law firms) by corporate consumers, especially among the Fortune 500.

Connie Brenton, CLOC’s Chairman and chief of staff and director of legal operations at NetApp noted, “When a Fortune 500 GC sees that 46 percent of their peers have leveraged [a legal service outsource firm], it is not risky any longer.”

Shifting legal services buy/sell dynamic

Ms. Brenton’s comment casts a bright light on the shifting legal services buy/sell dynamic. The CLOC survey confirms that: (1) it is changing; (2) legal buyers—especially the largest ones—are signaling that ‘it’s safe to use service providers, even for more complex work’; (3) that means that a tipping point has been reached where sourcing to ‘alternative providers’ becomes the norm—not an ‘alternative’ (necessitating new nomenclature for service providers); and (4) traditional law firm market share, already showing signs of softening, is projected to erode further. The big winners will be companies like Elevate and Axiom, the leading provider sources in the CLOC survey. Thomson Reuters and Adam Smith, Esq. project legal provider revenue will mushroom from $2B in 2015 to $55B by 2025. Law firm revenue is targeted to decline while in-house share will increase during this same timeframe. It’s a changing marketplace indeed. [For a detailed forecast of changing shares in the legal services supply chain, in other words by how much the share of BigLaw business model firms will shrink, click here.]

This begs the larger question: why is this market shift occurring and what is it about the new provider sources that consumers find attractive?

Why are legal consumers embracing ‘law companies’

Market change is about elevated consumer expectations and providers that satisfy them. Legal consumers—like buyers in other industries—have elevated provider expectations in the post-global financial crisis era. Providers of goods and services are expected to deliver on a ‘faster, better, cheaper’ basis. Consumers expect easier access to providers, more transparency and choice, faster delivery, lower cost, and instant, ongoing connectivity with providers. Corporate legal buying is no longer the exclusive province of in-house lawyers; procurement and the C-Suite—especially CFO’s—now routinely participate in legal buying decisions. Legal ‘services’ are not presumptively bespoke. In fact, the pendulum is shifting in the other direction. That means fewer ‘relationships’ and more metrics. Law has always been about admissible evidence and burden of proof except in the sale and purchase of its services– until now. With procurement and the C-Suite in the purchase mix, the burden shifts to lawyers to show cause why sources other than law firms are required to handle non-differentiated work.

What’s a ‘Law Company’

But what about the provider side? That’s the other element of the larger story of law’s metamorphosis from guild to digital marketplace. Initially, disaggregation—peeling ‘legal tasks’ from law firms and having them performed by other sources– played out in two ways: (1) migration of work from law firms in-house (labor arbitrage); and (2) sourcing high-volume/low value and risk tasks–research, document review, etc.– to legal process outsourcers (labor arbitrage and adoption of technology). The emergence of CLOC and The Association of Corporate Counsel Legal Operations group signals the digital phase of disaggregation. This involves melding technology and process to leverage ‘practice’– differentiated legal skills, judgement, and expertise. By separating legal ‘practice’ from ‘delivery’ the legal industry has fashioned a new delivery paradigm. Legal delivery is no longer solely about lawyers and law firms deploying a labor-intensive, value-insensitive approach to all tasks they deem ‘legal.’  Consumers now decide what’s legal and when a lawyer is required. And consumers—not law firms—determine the appropriate resource–lawyer, other professional, paraprofessional, and/or machine—best suited to perform a task. The new delivery paradigm is also about automation, predictive tools, data, and analytics designed to enable consumers to detect legal problems before they metastasize and to solve business challenges that raise legal issues more quickly and efficiently.

Law is entering the digital age

Law is entering the digital age, and a handful of ‘alternative providers’—and the Big Four accounting firms– are providing digital solutions to the legal marketplace. The new providers are filling a market demand fueled by the void created by law firms resistant to digitization because of its short-term, deleterious impact upon profit-per-partner. Law firm hubris, structure, economic model, culture, greed, and short-term perspective have opened the door to new providers and the unwillingness—or inability—of firms to effect material changes is starting to have significant economic impact.

CLOC and the Association of Corporate Counsel (ACC) Legal Operations groups embrace the separation of legal practice—differentiated skills, judgement, and knowledge that (some) lawyers possess—from the business of delivering legal services. That divide did not exist when the traditional law firms morphed into the large, multinational organizations many have become. While their clients increasingly relied on technology and process to manage their complex, geographically dispersed business(es), law firms resisted change and remained labor-intensive to sustain their economic model. Legal practice was—and remains—what firms sell. But with the confluence of the global financial crisis, the accelerated, pervasive impact of technology across all industries, and the inability of legal self-regulation to immunize ‘the legal island’ from their impact, law firms are selling a declining portion of what legal buyers are buying. To put it another way, legal practice is shrinking, and legal delivery is expanding. It’s easier to bolt legal expertise onto a digitized model than it is to transform a traditional law firm partnership model into a corporate digital one.

It is in response to this market shift and its underlying causes that companies like Elevate and Axiom—among others– are garnering increased market share and wider use, especially among Fortune 500 companies. Liam Brown, Executive Chairman of Elevate, noted in the American Lawyer article that he expects the lines between law firms and ‘law companies’ –his description of Elevate and other evolved service providers– will gradually blur. Brown posits that clients will determine the expertise required and where to find it, noting that it might come from more than one source.

Reasons behind the growth of law companies

As the CLOC survey confirms, Elevate, Axiom, and other ‘law companies’ are answering consumers’ clarion call and the market void created by law firms. Law companies have a different DNA than law firms, one that is aligned with the digital age. They employ lawyers, but they are not lawyer-centric in delivering legal services. Technology, process, and a willingness to deploy ‘the right resource for the task’ also distinguish them from law firms (of whom they are a handful of exceptions, notably Allen & Overy).

Some additional distinctions between Liam Brown’s ‘law company’ and the traditional law firm include:  (1) performance and reward structures that value output over input; (2) closer alignment with the financial and enterprise objectives of the consumer; (3) a corporate structure that takes a long-term, client-centric view over profit-per-partner; (4) continuous process improvement; (5) investment in technology; (6) focus on ‘the right resource for the task’; (6) compressed delivery time; (7) a continuous quest to use technology and process to automate tasks and gather ‘big data’ for benchmarking, predicting, and quantifying risk; (8) a transparent, 24/7/365 accessible connection with legal consumers; (9) supply chain management expertise; and (10) reduced cost.

Conclusion

The legal industry is undergoing a fundamental transformation. Law is no longer solely about lawyers; it is a three-legged stool comprised of law, technology and business. Law firms are no longer the sole providers of legal services, nor are they arbiters of what is ‘legal’ or what requires a lawyer. The structure, economic model, and culture of law firms appears increasingly out-of-synch with a digital world. Consumers are dismantling the insular legal guild and embracing ‘law companies’—operating in the corporate and retail segments—that better serve the needs of consumers and society at large.