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INSIGHT: Exponential Threats Push Law Firms to Tipping Point

Dec. 10, 2019, 9:01 AM

Law firms face a looming tipping point in profitability as a result of exponential growth in four areas: LegalTech, BigLaw, law companies and legal operations. To thrive in the face of these increasing threats, firms need to provide clients with high quality, efficient outcomes using a combination of people, processes, and technology.

Traditionally, a lawyer’s subject matter expertise was enough of a differentiator. With a reputation as a good lawyer, work tended to follow you. Given the universal pressure on in-house legal departments to do more with less, they now demand cost-effective solutions and process optimization from firms.

Competitive Landscape Growing Exponentially

These threats in the competitive landscape have grown exponentially. Exponential growth follows a logarithmic growth trajectory rather than a linear one. In essence, it is a doubling in size every period.

A folk tale from India illustrates exponential growth. A king challenged all palace visitors to a game of chess. When a sage accepted the challenge, the king asked what the wager should be. The sage suggested simply rice, starting with one grain on the chessboard’s first square and doubling the amount with every square moving forward. Thinking this to be small stakes, the king agreed immediately. The sage won, so the king ordered a few bags of rice to be brought up. But it soon became clear that the king would not be able to honor his debt. By the time the game had gotten to the 64th square, the king owed the sage 200 billion tons of rice. Legend has it that the king was dethroned, and the sage became the new king.

The problem for lawyers is that exponential growth of competitive forces can creep up and conquer seemingly without warning. We have seen digital cameras replace traditional film manufacturers, on-demand services erase video stores, and online retail clobber department stores.

In an adjacent professional services sector, traditional accountants are at risk from machines, with robotics soon to displace 40 percent of basic accounting work. BigLaw has felt comfortable for decades, but it is about to get pretty uncomfortable pretty fast … and some will not know what has hit them.

LegalTech applies technology to make legal processes faster and cheaper. For example, LegalTech company LawGeeks put its artificial intelligence solution up against 20 top corporate lawyers to review five non-disclosure agreements. The lawyers scored an average of 85% accuracy and 92 minutes per document, while the machine achieved a superior 94% accuracy and 26 seconds per document.

Operationalizing LegalTech has challenges due to the bespoke nature of legal problems, technical limitations, market inertia, and perceived risk issues. Yet, LegalTech has enjoyed notable investments as well as successes in matter management, resource allocation, invoice management, electronic signatures, and contract automation.

With BigLaw, the major accounting firms are investing in building their own law firms. This strategy began in the mid-1990s but came to a halt with the regulatory backlash following Enron. However, the Big Four are back in a big way. Each of them now have more than 2,000 lawyers globally, exponentially growing over the last five years.

Law companies like Axiom, Elevate, and UnitedLex mostly started by providing legal solutions at a lower cost using labor cost arbitrage models. This approach often included using offshore delivery centers. However, they are coming up the value chain and augmenting the low-cost resourcing with technology and process efficiencies. Interestingly, the Big Four have purchased some Law companies.

In legal operations, in-house teams evolved their approach. At one time, the general counsel faced minimal outside review of legal spend. Procurement’s arrival caused GCs to consolidate panels, reduce rates, and push firms for efficiencies.

Now the legal operations officer functions like an in-house COO, looking for the most effective legal solutions while considering new models involving LegalTech and law companies. The prominence of legal operations executives has grown exponentially. Since 2017, the Corporate Legal Operations Consortium (CLOC) has seen membership more than quadruple to 2,300, including two-thirds of Fortune 100 companies.

What Can Law Firms Do?

What must law firms do to combat this increasing competition? For starters, they need to continually evaluate and evolve how to best serve clients in the ever-changing legal ecosystem. Successful legal service innovation involves creativity of leadership, empowerment of individuals, diversity of people, and partnership with experts.

Progressive firms lead the charge across these important areas. NRF Transform is Norton Rose Fulbright’s global change and innovation program, specifically focused on driving effectiveness in the firm’s deployment of people, process, and technology, thus maximizing the value of the service provided to clients.

Firms should also consider outside organizations for swift and successful innovation. Norton Rose Fulbright recently entered a relationship with Syke Legal Engineering to augment its contract-automation capabilities.

The organizers of Reynen Court bring law firms together in a different way than ever before. CLOC and Legal Geek host forums for in-house stakeholders, alternative legal service providers, and firms to share ideas. Even organizations not typically geared toward law, like IDEO global design firm, examine the way the legal industry views itself across all stakeholders.

Numerous challenges stand on the horizon for law firms. However, the world is getting more complex, and lawyers thrive on complexity. So the practice of law is not under threat. It just requires lawyers to adapt their ways of working, embracing technology to provide superior client service. Expect leading law firms to respond to the competitive threats by investing in innovation. Better to be the clever sage than the dethroned king.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Nick Abrahams is Norton Rose Fulbright’s global head of technology and innovation and is based in the global law firm’s Sydney office. A corporate lawyer, he is heavily involved in the technology sector as a lawyer, adviser and regularly advises on tech M&A, IT procurement, and data privacy/cyber-security matters.

Gerry Pecht, based in Houston, is Norton Rose Fulbright’s global head of dispute resolution and litigation. He concentrates his practice in the area of complex business and commercial litigation, including securities litigation and enforcement, energy litigation, internal corporate investigations, and international litigation and arbitration.

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