Oliver Duchesne, Client Operations Associate at Priori, sat down with Richard Susskind to discuss the future of law, technology and the evolving relationship between the two. Richard Susskind is an esteemed author, speaker and professor who specializes in the future of professional services, particularly the law. In Part 2 of the interview, Oliver and Richard talk about the threats innovation poses for the legal profession. Read Part 1 here.
Oliver: Can you outline the resourcing challenges facing in-house legal departments?
Richard: The “more for less challenge” is that in-house departments are expected to do more work than ever before but with less resources. It is captured best by general counsel who report that they’ve got more legal and compliance work to do than they’ve ever had before, but they are under pressure to spend less on external law firms and to reduce their own internal headcount. We live in a more complex, technology-based society where we have increasingly difficult legal problems. I have never said that the demand for legal services is declining. On the contrary. But there are serious questions about who will satisfy that market demand. Unless law firms change the way they deliver and bill services, they will not be able to carry on as they have done for the foreseeable future. In-house departments need greater legal capability but simply cannot continue spending as they have done in the past.
Oliver: What do you see as the biggest threat to the traditional law firm?
Richard: I think one has to distinguish between top law firms — there are maybe twenty to fifty of these in the world — and the rest. For these outstanding firms, a lot of this discussion is less relevant in the short-to-medium term given that these firms remain tremendously profitable. As a result, you can understand partners who say: “I've heard all the stuff about change before, but we're doing as well as we’ve ever done.” And I do think that traditional legal service will still be required for many years yet. However, I doubt that major firms will stay exempt from the pressures of change in the longer term. So what are the biggest threats to the leading firms?
First, an in-house community is emerging that's more discerning and more demanding than it was in the past. The best example of this is the Corporate Legal Operations Consortium (CLOC) where thousands of legal operations and in-house professionals come together to address how the market can collectively innovate, use technology and think about new business models. The coming together of these individuals presents a very significant threat to the traditional model because in the past, law firms have relied on a rather chaotic, disorganized community of in-house lawyers who are under constant pressure and feel reliant on external law firms. The emergence of legal operations professionals whose sole focus is making sure that legal departments function more efficiently and cost-effectively, will require law firms to work and charge differently.
The second pressure faced by traditional law firms is alternative providers such as Priori and the Big Four accounting firms. Consider this - the Big Four each spend more on training than the turnover of most of the largest law firms in the world. They are an order of magnitude larger and have investment capability, technology, experience, human resources models, and access and credibility at board level which exceeds any of the law firms.
The third factor is technology. Increasingly, more and more of the work that we thought could only be done by intelligent human beings can now be completed by systems.
The final factor is decomposition, the idea that you can break down legal work into component parts and have it delivered by different providers. We're seeing the emergence around the world of in-house counsel who retain traditional law firms for the difficult, bespoke advisory work. However, for the less complex legal tasks, such as project management and document review, they take advantage of opportunities to use workflow technology or less expensive providers. I think large law firms would be wrong to believe that they are immune from change. There’s also a great opportunity for second tier firms to emerge as global leaders if they change the way they work and embrace new technology. The next five or ten years will be a period of flux where we might see some leading brands fade and some new firms emerge, precisely because they embraced technology and innovative ways of working.
Oliver: How is the “innovator’s dilemma” applicable to law firms?
Richard: The “innovator’s dilemma” is a term coined by Clayton Christensen, a professor at Harvard Business School. It’s the idea that when a market leader is doing very well there isn't an incentive for it to change. You see this in two contexts in the legal world. When I'm addressing partnership meetings at major law firms, I find it hard to convince a room full of millionaires that they've got their business model wrong. Similarly when I'm speaking to the best law schools around the world, I'll say to them: “I know you're still attracting the best people and placing these people in the best law firms, but the world is likely to change radically over the next couple of decades and surely you should want to be at the vanguard and leading edge of that change rather than responding and being on the back foot.” Both the leading law firms and law schools will tend to respond by saying: “But do we need to change quite yet?” That's the innovator’s dilemma - why would you want to destroy the model that is delivering so well for you today? Why shouldn't we just wait until it's very clear that the time for change is upon us?
What Christensen highlights is that by the time market leaders react to the change, it's often too late. A popular example of such a phenomenon is Kodak. They invented much of digital camera technology. Yet they didn't themselves embrace it and by the time they recognized the market had shifted, other players had rapidly come to dominate. The point is that because the market can move quickly, leaders can find it very hard to adapt in time.
Oliver: What are your thoughts on the ongoing relevance of the hourly rate?
Richard: The hourly rate is more than a pricing model. It’s also a mindset. Most law firms are selling human labor and when law firms come up with alternative fee arrangements, they are usually evaluated in relation to what it would have cost the client on an hourly billing basis. I'm a great fan of what I call “task based billing” which is the idea that you take a complex piece of work and break it down into tasks. For example, you can divide a project into ten different tasks and allocate seven of the tasks as fixed fee sub-projects and be more open-ended with the remaining three because you want people to be creative and imaginative rather than hemmed in.
The classic problem with hourly billing is it incentivizes inefficiency, where profitability comes from working as many hours as the client is willing to pay for. But I think that applies more to junior lawyers than senior lawyers. When genuine experts get involved, they are so busy that their incentive, based on their workload, is to be as efficient as possible. So I believe the better a lawyer you are and the more in demand you are from the market, the more efficient you are likely to be and the more sense it makes to use hourly billing. I think to some extent the problems associated with hourly billing will dissolve rather than be resolved because a lot of that work will no longer be given to junior lawyers. Rather, it will be given to alternative providers who will be doing it on a fixed fee basis or, in the long run, it will be done by our increasingly capable systems.
Oliver: Do you have any advice for current law students or recent graduates?
Richard: Strangely enough, it's the same advice that I give to law firms when we’re discussing long-term strategies. From my perspective, they both face a very simple strategic decision: do you want to compete with the emerging systems or do you want to build the emerging systems? By competing with the systems, I mean that you (as an individual or a firm) accept that these emerging technologies exist but you aren’t convinced that they will replace the kind of work you do. Many law firms seem to be opting to compete - they can’t imagine how their high-end work could be replaced by technology and so they plan on continuing to deliver their services in the traditional way. I call that competing with the systems because what we're seeing is the emergence of technology that is offering an alternative way of delivering these services. Now, I'm not saying that competing is a bad strategy for a firm or a poor career plan for an individual. But I am saying that if you believe the thesis that machines are becoming increasingly capable, then over time there is going to be less and less for traditional human lawyers to do. As such, the slice of the pie that lawyers are able to eat is diminishing. Competing is an interesting strategy and career plan - to choose a chunk of the market that we know is diminishing.
The alternative is to build the systems that will replace a lot of the current ways of working. This is very personal to you at Priori. Many of you have made the decision that you don't want to be traditional lawyers and that you'd rather be involved in a business that is replacing the way that traditional lawyers work. I often recommend the same to other law graduates. Having said that, I wouldn't say “don't practice as a lawyer”. Doing so will give you credibility, experience and confidence in tomorrow’s legal world where there will be remarkable opportunities to develop the systems that will replace our old ways of working and, moreover, help deliver increased access to justice and improved court systems.
To people at the beginning of their career I say that it's a privilege to be alive at this time of greater and more rapid technological progress than humanity has ever witnessed. Do you really want to say that your response to this is that you’re going to devote your lives to competing with these emerging technologies?