What’s wrong with innovation in law firms?
They don’t exist. In the last years, the number of patented inventions in the legal tech has grown by 484%. Guess how many of them belong to law firms.
You guessed absolutely right. And if not, then find the answer at the end and lie that you guessed it.
But why is it so, and what are the ways to change it?
How an innovative company differs from a cart
Here is the formula for innovation: take a company’s financial statements and divide its market capitalization by its net assets. So we get a coefficient at which the conventional Kernel (1.5) or Myronivsky Plant Bakery (1.6) lag behind Tesla (11.), plus or minus forever.
I overheard this formula at a lecture by Pasha Plastovets at iForum 2017. I trust Pasha because he leads innovation in the Kyiv office of Deloitte. And Deloitte, as it turned out, defines legal innovations in Europe.
But this formula is not well suited to consulting, especially legal one, as the market capitalization is determined by eye, and net assets are only two hundred laptops, several tons of paper clips, and unpaid overbill invoices.
We are measured by income and profit per partner, not some net assets with market capitalization. Therefore, we have a different formula for calculating innovation.
Innovation as self-satisfaction
Every year, the Financial Times takes a look at the world’s innovative law firms. Allen&Overy has become the most innovative this year.
Let’s see why Allen & Overy received such recognition — the Financial Times knows precisely what formula to measure innovation:
- For a partnership with Deloitte to create a machine learning product for the process aspects of large transactions.
- Work for VEON on its joint venture with CK Hutchison.
- Work as part of the IMF-backed bailout of Ukraine, structuring and implementing the largest ever World Bank guarantee and the World Bank’s first trade finance programme.
- Work using a standstill agreement for Metinvest to prevent smaller creditors from calling in debts against the backdrop of the Russia-Ukraine conflict and
- Two-year charity partnership with health development agency Amref in Tanzania.
Yes, you understood everything correctly: for the partnership with Deloitte (I told you that Deloitte defines legal innovations in Europe), for two projects around Ukraine’s pre-bankruptcy convulsions, and legal support for the already difficult life of some agency in Tanzania.
Why, why the hell, in the hundred years of its existence, didn’t the hypothetical Allen & Overy invent something that could change the legal business now, in the post-industrial era?
Insightful story of Kodak
Kodak was the first in the world to patent a digital photography process in 1975. Top managers of Kodak decided not to develop the technology because they were afraid to kill the main business — the film. Kodak went bankrupt and did not live to see the post-industrial era.
Do you appreciate how screwed up those Kodak idiots are? They were the biggest in the world and decided not to bite off their core business with some kind of digital technology that wasn’t even close to film quality. It is as if Ford, as he was advised, would breed faster horses instead of building cars.
So, these idiots from Kodak had 1,700 patented inventions and over 600 patent applications by the time they went bankrupt in 2012. They did not sit on the cash cow with folded arms but were engaged in innovation for real. Well, yes, they screwed up with one of the inventions; who doesn’t.
What lessons does the Kodak story have for law firms?
It was not in vain that I introduced you to Pasha Plastovets. At the same presentation, he told how, in four years, he hacked Deloitte’s immune system and built the infrastructure that allows you to create innovative projects constantly.
While this sounds abstruse and self-confident, it’s very to the point. I’ll explain now.
A junior lawyer comes to me with burning eyes and says: I did some digging around here at the weekend and taught the neural network to do all the legal, due diligence procedures without the participation of lawyers.
I look at a junior lawyer and see how the market average due diligence fee just dropped by 90%. But I am an innovative managing partner and do not lose heart, but all because I think in terms of the post-industrial economy.
I take, therefore, and add up three indicators in my mind: (1) income from innovation, (2) time two markets, and (3) the number of active users.
Income from innovation will increase: I can sell due diligence for the same money as before, only I will do it not with the help of five lawyers in a month but with the help of one secretary in two days. If at the same time, the fee is slightly reduced, the number of projects will also increase. The only question is when we will bring this product to the market: the junior lawyer, of course, washed down the neuron, but I still need to assess whether it is really as cool as he says.
Well, my main question is how soon competitors will make exactly the same neuron and, accordingly, lower their cost slightly below mine. If our junior lawyer could do it, so could their junior lawyer.
Here I finally understand what Pasha meant by the phrase “hack the immune system so that it constantly creates innovative projects.” After all, it is not enough to make one innovation. Two innovations are also not enough.
Just to stay in the legal market, I must constantly invent how to reduce the cost of my processes.
Investment in innovation
Due to internal innovations, we will increase revenues by 5%, let’s say by 10%. When I read about Uber’s next investment round, the size of a quarter of Ukraine’s budget, a 10% increase in revenue sounds like a humiliation. I dream of 200, 300 percent growth. In other words, I dream of a unicorn.
Dentons is the largest law firm in the world regarding the number of lawyers. They created the NextLawLab, which scouts startups worldwide (though the world is still limited to the US and Canada) and invests in them, receiving in return a few shares.
During the year of their existence, they invested in nine projects. They closed the last deal to finance the Canadian project FILEFACETS quite recently, at the end of March 2017.
So, according to the NextLawLab, only 3% of projects survive anything even remotely similar to success. This means that Dentons will have to invest in 100 projects for 3 of them to pay back the costs of unsuccessful 97.
I, like Dentons, need to play venture roulette and invest at least ten kilo-dollars in 100 legal tech startups. That is, to spend 1 million dollars. A million dollars, which I obviously don’t have. And if I had, then I didn’t save it for several years just to lose it in the casino like that.
Let’s be honest: law firms are not seriously considering developing legal tech. The words disruption, blockchain, artificial intelligence, bots, and smart contracts alert them but do not frighten them. Because no one has yet become a millionaire with the help of these incomprehensible words. Because Dentons’ efforts just look like expensive marketing. And why, really, bite off your own business and automate something there if everything works like that?
This is exactly what is wrong with innovation in law firms.
There are two ways to do something about it: create (or rebuild) a legal company that constantly innovates or sit down and play venture capital investments in legal tech.
✍️ Dima Gadomsky
