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Innovation in law firms: when the problem is the lawyers

"Why don't lawyers and large law firms innovate their business model even though the risk of losing their dominant position in the market for legal services providers is just around the corner?"

Large law firms emerged in the late 1985s. Different authors have tried to explain the reasons that led lawyers to associate and start offering their professional services in conjunction with other lawyers, leaving behind the liberal practice of the profession. The diversification of human capital (Gilson & Mnookin, 2010), the reputational link (Ribstein, 1937), transaction costs and technological change (Coase, 2012), the greater demand for specialized legal services (Wald, XNUMX), among other reasons seek to explain its appearance in the legal profession.

The rise of large law firms is perhaps the most significant development in the legal world in the last century, as it brought about a profound change in the nature of legal work. Before the emergence of law firms, the practice of law was carried out by independent professionals or small offices where lawyers shared space and general costs, but the work was individual and they carried out their own practices separately.

The history of law firms goes hand in hand with technological advances. The use of the typewriter and the telephone is considered the first technological transformation in the legal industry. The evidence from those years shows how the work that a lawyer did in three days, with the typewriter it took only one (Strong, 1914). It was the end of the XNUMXth century and the legal profession was experiencing a true technological revolution.

And almost a hundred years later, lawyers would experience a new revolution, when, in 1973, Lexis-Nexis invented the UBIQ terminal that allowed lawyers to search online jurisprudence instead of having to go to the books. Then came the word processors, the fax and the cell phone.

And today, in 2020, lawyers cannot go out without their smartphone, they work from personal computers, they communicate by email, abandoned libraries to browse Google, use software management, automation of legal documents and trial follow-ups, and some even rely on artificial intelligence.

However, the legal firm model has remained the same since the late XNUMXth century, organized around a pyramidal structure that is now known as the "Cravath System", in reference to Paul Cravath, partner at Cravath, Swaine & Moore. Said organizational model supposes a structure where a few partners are leveraged by associate lawyers.

It is a model that, although it arose in the United States, was exported to other countries, contributing to a global commercialization of the practice of law. It is difficult to find today a country where the legal profession is practiced outside of the traditional legal firm structure.

After the financial crisis of 2008, many predicted the end of the traditional model of law firm, being an obligatory reference of those years the article by Larry E. Ribstein published in the Wisconsin Law Review and entitled “The Death of Big Law”, Where he predicted the contraction and disappearance of large law firms, the product of a radical paradigm shift.

Technological developments and the entry into the Fourth Industrial Revolution predicted a radical change in the legal profession, which today has generated even more enthusiasm with the Covid-19 pandemic that has forced lawyers to jump on the bandwagon of digitization. .

The world has turned to technology and the law has not been left out of it. Technological advances have allowed the entry of alternative providers of legal services, which, leveraged in technology, are capable of offering legal services at a lower cost than traditional law firms do. The explosion of Legaltech and the digital transformation of the legal world have marked the agenda in recent years.

In general terms, today we can find three categories of Legaltech start-ups. First, those companies that offer legal services online (AXIOM, Rocket Lawyer, LegalZoom, Incfile, among others). Second, the platforms or marketplaces that connect lawyers with clients (LawPath, UpCounsel, Avvo, LegalMatch, among others). And finally, there are those that can be considered the most disruptive, offering legal services using technology and, mainly, artificial intelligence (Ross, Kira, DoNotPay, Lawgeex, clearlaw, Blue J, among others).

In response to this increased digitization of the legal field, large law firms have begun to invest massively in legal technology solutions in an attempt to stay competitive. Some have even developed incubators to create and develop legal technology.

However, for now at least, these initial moves have not been accompanied by substantial changes in the structure of large law firms.

The question to be asked, then, is why lawyers and large law firms do not innovate their business models even when the risk of losing their dominant position in the market for legal services providers is just around the corner.

Two, it seems to me, may be explanations for the low innovation we see in the large law firm industry. On the one hand, the particular personality of lawyers that makes them reluctant to innovate, and, on the other, the structure and business model of traditional law firms does not create the right conditions to encourage innovation.

As Larry Richard (2002) points out, "Managing lawyers is like herding cats." Based on several empirical studies, Richard highlights a number of personality traits that distinguish attorneys from the general public, which could be behind the low innovation in the legal industry.

One of the characteristic features of lawyers is skepticism. Although this is a characteristic that gives lawyers an advantage in their professional practice, and especially as litigants, skepticism is a great enemy of innovation. Lawyers tend to hesitate, and when it comes to innovating they say that there is no time, money, availability or resources for the project or they insist on asking if something similar has already been tried before or if some other firm is doing something similar. Attorneys are trained to carefully select which pieces of information to pay attention to in order to reach the conclusions they want to be true.

Another characteristic of lawyers that does not help innovation is their special sense of urgency. Lawyers live by "putting out fires", running to miss the deadline, and being impulsive. They do not listen, they want everything for yesterday, they do not allow the sentences of their interlocutors to finish and their sense of urgency only ends in frustration on the part of the teams or other professionals who promote new ideas within the firms.

Lastly, lawyers are often more risk averse than the average person. Legal training, plagued with "legal certainty" and "legal certainty", is marked by an environment where risk is frowned upon. When they come to companies, lawyers are viewed by employers as "deal breakers" because of the tendency to be cautious and risk averse. Just think of the usual way lawyers set their fees, the hourly rate, where risk is not in the equation.

And that aversion to risk is transferred to the culture of law firms, where risk is not part of the business. Lawyers often follow the easy path: law school, entering a firm, secure salary, and the transition from associate to partner; all low risk. Entrepreneurs, on the other hand, are the opposite.

Innovation is not in the DNA of lawyers. Innovating implies taking risks, betting on the break, hoping to win one day, but without any security. It is about questioning the way things are being done, getting out of the comfort zone. As Clayton Christensen (1997) showed, the innovator has a dilemma because he is faced with a different activity, a different business model, anchored in mental models that he often cannot see because they require another way of thinking.

The second reason that can explain the low innovation in law firms is the short-term trap to which the current structure and business model leads (Molot, 2014). Law firms place too much emphasis on current income generation, as opposed to long-term value creation. The traditional capital structure of the firms is the reason for their short-term outlook.

Law firms focus exclusively on the short term because their partners are compensated solely on the basis of short-term performance and do not have an equity stake that guarantees future returns that incentivize long-term value creation. Partners only earn money while actively working at the firm, and upon retirement they often leave empty-handed or a compensation that resembles a retirement pension, losing their share of the firm's equity.

In this scenario, lawyers have little incentive to invest in innovation, the return of which they will not see. And the age differences of the partners make the investment disincentive more intense. While the older partners are thinking about retirement, the younger ones are only thinking about paying the mortgage, the education of their children and the car payments for the year. Neither the young nor the old are thinking of investing, since they know that their participation in the equity capital lasts only as long as they remain in the firm.

The billable hour is part of this very problem. Why are firms reluctant to innovate when setting their rates? The answer is, again, the short-term trap. The billable hour maximizes current profits, and any change in favor of alternative billing systems could reduce the current revenue and profitability of the firm, which would be perceived by the partners as a decrease in their income.

It is very difficult for an organization to invest in innovation when it comes to asking its employees to sacrifice current compensation in the hope of increasing compensation in the future, particularly when the organization cannot offer employees any mechanism to ensure they capture the benefit. long-term resulting compensation.

How do you ask for innovation from a company whose leaders are skeptical and risk-averse, and whose income will only come from their current job, unable to capture long-term value? This is the trap of law firms when it comes to innovating: they are led by lawyers.

The challenge that law firms face if they want to innovate and not be crushed by competition, which comes from alternative providers, technology, other professionals providing legal services and their own peers, is to rethink their structure and business model, through in order to favor long-term value over short-term gains.

We will surely continue to hear in the coming years about the changes in the legal profession, the digital transformation and we will find a new Covid-19 that makes us think that now if things will change in the legal industry. The bad news is that the changes will not come from the lawyers' side, it will be the clients who will drive the transformation of the legal industry. Gone are the years where the client was loyal to his bedside attorney; Today, the customer moves to the provider that provides the best service, a better experience and a better price.

Image of the author Rafael Mery Nieto

Rafael Mery Nieto

LATAM Director at Mirada 360º

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