Legal Market Change Is Gradual; A Paradigm Shift Will Be Sudden.

“How did you go bankrupt?” Two ways. Gradually, then suddenly.”

― Ernest Hemingway, The Sun Also Rises

Thomson Reuters (TR) released its “2023 Report on the State of the Legal Market.” This came on the heels of its “Alternative Legal Services Providers 2023 Report,” TR’s fourth biennial review of providers that do not share the legacy firm partnership model, practice/lawyer-centricity, and DNA. Both data-rich analyses reveal a gradual—but accelerating— shift in the corporate legal market segment.

The ALSP Report’s sub-heading, ”accelerating growth and expanding service categories” offers a truncated summary of its detailed findings. Some key takeaways are:

· The ALSP market totaled approximately $20.6B by the end of the 2021 financial year, an increase of 45% since the preceding biennial report;

· The gains since the 2021 Report have far outstripped past reports;

· The ALSP market as proscribed by TR (see below) has grown 145% since the initial Report in 2015;

· TR divides ALSP’s into three categories: independents, law firm captives, and The Big Four.

· ALSP’s are growing their customer bases among law firms and corporate legal departments;

· ALSP’s are moving up the complexity chain and are well-positioned to expand into new business lines such as technology consulting services;

· The lines separating law firms, corporate legal teams, ALSP’s, tech, and software firms are blurring.

The 2023 Market Report points to erosion of law firm hegemony and suggests increased uncertainty ahead. Some key findings include:

· Law firm profit-per-equity-partner (PPEP) registered its first decline since 2009, the aftermath of the global financial crisis;

· Falling demand and productivity, rising expenses, notably the cost of talent, and competition from mid-size firms are among the challenges confronting law firms;

· Mental health issues, high turnover, and the steep odds of becoming an equity partner also pose challenges to the partnership model as does the threat of poaching from other firms, in-house teams, and the Big Four;

· Peripatetic clients—50% of legal buyers changed their law firm rosters;

· In-House spend eclipsed outside legal spend for the first time according to the 2022 ACC/MLA Benchmarking Survey cited by TR;

· That coincided with more work migrating from firms to ALSP’s as well as more direct engagement of ALSP’s by in-house teams;

· The foregoing trend line helps explain the increase in law firms establishing an affiliate(s) providing ALSP services, including legal software (22% of global firms surveyed—up from 17% two years ago).

TR’s $20.6B ALSP market total would have been dramatically higher if it included:

· B2C companies whose primary revenue sources are derived from individuals and SME’s—e.g., LegalZoom, Rocket Lawyer, DoNotPay, Avvo, etc.;

· In-house legal teams that perform ALSP-type services (e.g. legal ops, etc.);

· Pure-lay technology and software companies

The genesis of ALSP’s is unmet market demand for value-driven, efficient, cost-effective, data-reliant, predictive, proactive, interdisciplinary solutions to customer challenges. Pure-play technology companies may not fit within the legal establishment’s “legal service providers” parameters, but they are key players and catalysts of market change. Generative artificial intelligence, machine learning, robotics, quantum computing, blockchain, and other technological advances will reshape legal delivery as we know it.

Legal Delivery From The Customer Perspective

Lawyers like to draw distinctions between themselves and others in their—and other—industries. But business is increasingly indifferent to lawyer-created classifications such as outside vs. in-house counsel, law firms vs. ALSP’s, or the practice of law vs. the business of delivering legal services. “Legal services” for corporates is what’s required to help solve business challenges. Business is also expanding law’s remit beyond its traditional corporate defender role include value creation for the enterprise, stakeholders, and customers. To satisfy this mandate—often with the same or lower headcount—requires new ways of doing things.

The narrow, internally-focused lens through which the legal industry examines itself supports its widely held view of a gradual change trajectory. A wider lens, one that examines the legal function from the business and societal perspectives, produces a different image. Business is reimagining itself in response to a constellation of challenges: changing customer expectations, a fundamental shift in the buy-sell dynamic, macroeconomic forces, geopolitical shifts, consumer activism, new risk factors, regulatory and operational complexity, competition, and an explosion of technological advances that are at once promising and daunting. The legal function must align and collaborate with other business functions to meet these challenges as well as participate to seize the opportunities they present. This cannot be accomplished by fealty to legacy models and cosmetic change at the margins.

Law’s legacy stakeholders— law schools, providers, regulators, and the judiciary—should reassess law’s purpose, role, resources, methods, and tools from the business and societal perspectives. Few are engaging in that exercise. That’s why law’s disruption will come from outside and why legal change will remain gradual until it does not.

The People Sector And The Canaries In Law’s Coal Mine

The legal press focuses almost exclusively on the corporate market, because that’s where the big money is. The “people law” (B2C) segment, however, is where the bulk of legal innovation is occurring. It’s worth taking a closer look because a handful of people sector pioneers. They are—with corporate “ALSP” and a handful of corporate legal teams— the canaries in law’s coal mine.

Legal Zoom, Rocket Lawyer, DoNotPay, and cadre of other “people law” providers have made significant strides expanding access to tens of millions of individuals and small businesses in dire need of legal services. They have used technology, data, capital, a corporate structure, and multidisciplinary expertise and process acumen to flip the legacy legal delivery paradigm on its head.

These pioneering legal providers have leveraged legal expertise by pairing it with technology platforms and data insight. They have created a “lawyer-lite” delivery model that flips the artisanal, labor intensive law firm one. By doing so, legal delivery is not only more accessible and affordable, but it is also more predictive, proactive, efficient, and easy to understand. Services are user-friendly, offer a range of options, and can be accessed remotely in real-time. These are many of the same elements that have disrupted other industries including ride hailing, hospitality, and e-commerce. Law is no different even if most lawyers maintain that it is.

Equally important are the contributions these providers are making to address the access to justice crisis. That is a societal cancer that has contributed to an erosion of trust in lawyers, the legal system, the rule of law, and democracy. The legal establishment has impeded, not encouraged, these efforts to democratize access to legal services. Several State Bars have filed unsuccessful unauthorized practice of law claims against these companies under the spurious guise of “protecting the public.”

To date, there has been little convergence between the people and corporate legal segments. That will change because the “flipped model” of LegalZoom and others is equally applicable to the corporate sector. So too are the tools that enable it. The re-imagination of legal delivery from the consumer perspective is the connective tissue linking the two.

A New Legal Delivery Paradigm

What would a new legal delivery paradigm look like? Here is a starter list.

· Legal delivery will be reverse-engineered from the client/customer/end-user/societal perspectives. Platforms will play an important role in shaping a new legal environment. It will be far more tech-enabled, data-backed, multidisciplinary, accessible, efficient, transparent, result-driven, fit-for-purpose, proactive, predictive, cost-effective, easy-to-understand, user-friendly, and aligned with business and society than law as we know it.

· Legal delivery will be platform-driven. Platforms enable people and organizations to interact and work within a basic collective framework conducive to address multiple use cases and common challenges. Holistic platform solutions are well-established across multiple industries and provide a secure environment for tackling complex challenges affecting multiple organizations, geographies, and constituencies. The legal function will operate this way.

· Generative artificial intelligence, machine learning, cloud computing, enterprise platforms, quantum computing, and the Metaverse each hold enormous transformative power. The legal function will play a critical role in their regulation, creating guardrails to insure that their impact on business and society is predominantly positive. These tools will create new areas of law that lawyers have an opportunity to help shape. That requires an understanding of the tools—their benefits and potential harm. Already, for example, generative AI is creating a legion of intellectual property (IP) issues. This is a challenge and opportunity for the legal function. To seize the opportunity, it must look for agile, creative, collaborative, diverse, and purpose-driven individuals, not simply graduates of T14 law schools.

· Legal delivery will become more synergistic and standardized. Standardization is anathema to most lawyers because it undermines the myths of legal exceptionalism and bespoke legal work. These fictions have sustained the legacy legal delivery economic model. Other industries regard standardization as a way to share investment costs, speed time to market, simplify processes, create uniform quality standards, and share data. They leverage economies of scale and create impactful synergies by targeted cooperation and collaboration with like-minded companies. This is the path new law will take. (See www.dlex.org).

> Law firms and corporate legal departments as we know them will be replaced by smaller dedicated teams that provide differentiated professional judgment, enterprise knowledge, and specialized skillsets (not limited to the practice of law). That is in large part because many “prep work” legal positions will be hollowed out by new technologies. New ones will be replaced, but the skills required to fill them cannot presently be acquired by current law school curricula—or mindset. That’s why many corporations are collaborating with “lesser brand” academic institutions to tailor fit-for-purpose curricula and experiential training.

· The smaller teams described above will access additional resources as needed from an Amazon-like platform-driven marketplace that will offer a wide range of resources, data, technologies, self-serve tools, etc.

· Lawyers will learn to leverage their critical thinking skills to engage in functions that have previously been outside the scope of their narrow remit. These include, but are not limited to: business strategy, talent management, brand building, etc.

· Professional judgment will be enhanced by technology and data, not replaced by it.

· The legal function will adapt the language, customer-centricity, ability to make a business case, balanced risk assessment, and data-backed recommendations of other business functions. This will not compromise its independence but it will elevate its standing within the enterprise and the larger society.

· Legal will function proactively across several business functions, not reactively with the legal group. There will be greater focus dispute avoidance, early detection, mitigation, early-resolution. This will be enhanced by data-insight platforms. Commercial transactions will, likewise, be streamlined by AI, machine learning, blockchain, and other tools.

· Legal will be a business facilitator and value creator, not a business blocker and cost center.

· From the customer/end-user perspective, data insight will enhance law’s predictability, transparency, speed, holistic risk assessment (legal factored into other risks), and reduce legal spend, lost opportunity cost, and brand risk.

· Generative AI and other technological tools will replace many tasks presently performed by lawyers , This is an opportunity for legal buyers and a challenge to legacy legal stakeholders. Law firms will be especially challenged by these tools as they will challenge their economic model. Their opportunity is to acquire expertise in these tech-driven fields and to provide differentiated expertise that will always command a premium from whatever model or platform it is delivered.

· There is also an opportunity in the retail market to open it up to a far wider segment of individuals and SME’s. Liberated from the shackles of the traditional lawyer-centric, input-focused model, providers that utilize technology, data, and other tools can provide scalable legal services to an enormous new market if they are accessible, fit-for-purpose, reliable, and affordable.

· Legal services will be designed to be fit-for-purpose, not “one-size-fits-all.” Sometimes “good is good enough.”

· Law has always been a knowledge-based industry. For decades it largely failed to capture and reuse institutional knowledge internally, much less make it accessible even to its clients that paid for it. That will change. Clients will have greater access to legal information that, in many cases, will obviate the need for engaging counsel. When counsel is engaged, the client will have far more information upon which to base the selection, greater fee options and transparency, data upon which to evaluate likelihood of success and risk, and other factors.

>Humanity, emotional intelligence, empathy, and other qualities will become more important- not less- as reliance on non-human tools and resources increases.

Conclusion

The languid pace of legal change has convinced many in the industry that disruptive change will not occur in their lifetimes. For them, the key takeaway from the TR Reports is ALSP’s may be growing, but they are still minor players. They pose little threat to law’s legacy paradigm. The partnership model may be witnessing a slight decline overall, but elite firms are doing better than ever.

Where’s the fire?

That’s why a wider lens is required, one that looks beyond the legal market and focuses on the forces impacting business and society. Ferris Bueller famously said, “Life moves pretty fast. It you don’t stop and look around every once in a while, you could miss it.” The legal industry would do well to heed his words.

Source: https://www.forbes.com/sites/markcohen1/2023/03/16/legal-market-change-is-gradual-a-paradigm-shift-will-be-sudden/