HOW TO BUILD A LAW FIRM FOR FUTURE

Machines, cannot replace lawyers. This notion has stood the test of time. Not anymore, we are at the tipping point to see shifts of a lifetime, the most profound technological transformation in Human history. The major threat to displace lawyers work comes not from the machines taking over office but, the real trojan horse is application of increasingly sophisticated implementations of applied machine learning.¹

This change is going to be defined by the way in which cognitive machines take over our decision-making functions — something that can only be performed by humans as we have always believed. While earlier Industrial revolutions had allowed workers the opportunity to raise the value chain, this time it appears that the machines will finally breach the cerebral bastion that we have always assumed will remain our sole preserve.²

There is a profound message here for lawyers — when you think about tech, the challenge is not just to automate work process that are not efficient. But presents an opportunity to practice law in ways that we could not have done in the past.³

NOT FOR A SLICE

How can law firms prevent the slaughter of their market share by other firms in this rapidly changing tech landscape? which is also giving birth to new marketplaces, and entirely new employment sectors — with legal information engineering, legal analytics, and licensed software taking center stage.⁴

Do we need to re-think the age-old notion that legal expertise, can’t be replaced by machines?⁵

Changes in the following verticals will be the leading cause of disruption:

1) Process

2) Speed

3) Cost

The question that arises is what the firms can do to survive the challenges?

LESSON FROM PAST

When was the last time when major shifts in legal practice areas were taking place. Did it catch the majority of law firms by surprise? And what happened to the firms that embraced the change.

In the 1970s all of a sudden, the things that the old-line law firms didn’t want to do — hostile takeovers and litigation — were the things that every law firm wanted to do in America.⁶

Such cases landed up at the doors of small law firms, who were able to build exclusive expertise, in this under-recognized area of practice. A small 4-people law firm capitalized on this opportunity, and it helped them turn into one of the largest & most powerful legal business in the world.

From the mid-1970s to early 1990s, the amount of money involved in mergers and acquisitions every year on Wall Street increased 2,000% peaking at almost a quarter of a trillion dollars.⁷

How did such small niche firms started were able massively to capitalize on the market?

It was the ignorance of the tailwinds that was about to impact the legal industry.

For about three decades, if you were a Fortune 500 company about to be taken over or trying to take over someone else, or merely a big shot. Joseph Flom has been your attorney and Skadden, Arps has been your law firm, and if they weren’t, you probably wished they were.⁸

Perhaps during the same time, another most famous example of such a substantive innovation is the poison pill defense (shareholder rights plan) crafted in by Martin Lipton in response to the ever-increasing set of corporate raiders who were targeting companies for a hostile takeover.⁹

This time the opportunity is knocking again in the form of 4th industrial revolution. There won’t remain a major practice which can completely shield itself.

The odds will further compound way more disproportionately than ever have in history.

TAILWINDS

In India, some legal practice areas can grow at a healthy and sustainable level, certain common factors apply to them:

(1) Personality-driven practices;

(2) volume/functionality driven;

(3) Difficult to replace with machines;

(4) Niche expertise and experience.

These are sectors where the personal expertise of individual lawyers drives the quality of advice or representation.¹⁰

We are at the inflection point — things are changing very quickly, and the practice of corporate law practice as we know it I believe is just about to be a thing of the past.-Suhas Baliga

One key challenge for the legal profession, however, is to adopt new systems earlier; to identify and seize the opportunities by emerging technologies.¹¹

MOATS

Fortifications were required to provide a defence to a king’s castle. These defences were also, known as moats. The wider the moat, the more easily a castle could be defended, as a wide moat made it very difficult for enemies to approach.

Similarly, I think moat refers to a law firms’ ability to maintain competitive advantages over their competitors to protect their pricing power, long-term profits and market share.

Because there is nothing that stops a Tier -II or Tier-III law firm to deliver the level of services that Tier-I law firms do. Apparently, apart from costs, there is no easy measurable difference between work done by top law firms, at least from the client side.¹² Giving no reasons why a client should stick with a particular firm, if the odds gets better.

law firms should be prepared to replace labor for capital (i.e., software, process, and other related technology.)

The opportunity for some of the largest financial returns which likely will be obtained by the firms or set of individuals who can help transition the legal industry to the proper reallocation of the legal production function.
- Daniel Katz

For example, Allen & Overy developed an online legal service, division which leads to an increase of about additional £12 million in subscription revenues each year.¹³

There is a need to build a such fortress with high barriers to entry; it may be technological, by way of patents or developing niche area expertise.

Hence, the firms must have an incentive structure in place to encourage investments in legal tech.¹⁴ And already this process to build technological moat which shall affect the ability to compete with other firms is already increasing at an alarming rate.

Patents filed under ‘Legal services & handling legal documents. Source: WIPO

In the above figure you can see there was 484% rise between 2012–16 in the number of patents filed under legal services and document process handling.¹⁵ What better indicator of tailwinds than these figures?

In order to retain the clients it is necessary for the client to be able to notice process-centric differences between otherwise similar law firms.¹⁶

Such efforts could reward the law firms with huge competitive moat over other law firms who continue to work in a transitional manner.

The moats provide a competitive edge, which serves three functions: 
1. Bring new business
2. Ability to retain the clients 
3. Bestow pricing power on the law firms.

And to build and sustain these moats two things are indispensable:

1. INCENTIVE STRUCTURE

Law firms need to have an incentive structure, which could help them transition, their financial resources into investments in technology. Better processes lead to less expensive & more efficient services for the client. For the reward structure to have any real chance of impact, incentive structure is inevitable for development and sustaining the moats.

2. RE-IMAGINE LEARNING

Our current system of education was devised generations behind, during the first Industrial age where value, came from the scarcity of information, follow instructions written on a piece of paper was all required to adhere.

The architecture of the education system gave rise to instruction compliance and not encourage critical thinking.

In the process, we consciously suppressed our very human tendency to extemporize, as any deviation from the mechanized production processes could be disastrous.
There is need to build education to promote creative thought over rigid process-based solutions. Otherwise, the coming generation will be woefully ill-equipped to deal with their future.
- Rahul Matthan

Hence the notion that “well they went to some X elite college or were at the very top of their class.” This reputation signal served as a metric because lawyer quality is among the most difficult of the measurement problems. Not anymore.

To be successful in the future workplace, we will all need to know some computer science. It accelerates our learning, discovery, and understanding of the world. — Brad Smith, CLO Microsoft

Law students would need to develop advanced cognitive skills so that they can parse complex problems in different ways to come up with unorthodox solutions that are not immediately obvious.¹⁷

References:

[1] See Mitchell Kowalski, Avoiding Extinction: Reimagining Legal Services for the 21st Century (2012); Bruce Macewen, Growth Is Dead: Now What? Law Firms On The Brink (2013); Mehryar Mohri Et Al., Foundations Of Machine Learning (2012);

[2]Susskind, Richard. Tomorrow’s Lawyers: An Introduction to Your Future (Kindle Locations 344–346). OUP Oxford.

[3] Rahul Matthan, Education Needs Disrupting.

[4] Id.

[5] Richard Susskind, Tomorrow’s Lawyers: An Introduction to Your Future pg 13

[6] Erin Winick, Lawyer-Bots Are Shaking Up Jobs.

[7] Malcolm, Gladwell Outliers, The Story of Success Chapter 5 The Three lessons of Joe Flom, pg 118.

[8] Id.

[9] Liz Hoffman, Martin Lipton: Poison Pills are “Critical in the Face of Increased activism

[10] Suhas Baliga, should you invest in building a corporate law firm today?

[11] Susskind, Richard. Tomorrow’s Lawyers: An Introduction to Your Future (Kindle Locations 323–324). OUP Oxford.

[12] Katz, Daniel Martin, The MIT School of Law? A Perspective on Legal Education in the 21st Century University of Illinois Law Review, №5, 2014.

[13] Id.

[14] Susskind, Richard. Tomorrow’s Lawyers: An Introduction to Your Future (Kindle Locations 748–749). OUP Oxford.

[15] Id.

[16] Supra note 12

[17] Supra note 1

[18] Supra note 2