What is the clear path to law firm success?

It doesn’t take too much reading to understand that technology is crucial to the success of any modern law firm. With the mergers and investments in LegalTech continuing to rise, law firms truly cannot invest too much in tech and innovation. I think we can expect to see the below example more often:

A law firm that does everything starts from scratch with founders having both deep business and legal expertise. They commit to being early adopters of technology. It takes three years and $5M in custom technology, but they are able to deliver on the vaunted promise of “BigLaw at half the price”, even with complex litigation. They launch to tremendous media buzz and continue to grow quite successfully.

I’m likely not telling you something new in saying that it’s only a matter of time before BigLaw firms who don’t act in this way will fall off a cliff.

I took that excerpt from a real firm. They really did invest that much in custom software. They really delivered on “Big Law at half the price.” They did all the things that so many are clamoring for. But in September 2014, after just four years in operation, Clearspire closed its doors. So which is it: is more tech and innovation the answer, or not?

I don’t think we can attribute Clearspire’s failure wholly to being “ahead of its time.” When it launched in 2011, legal innovation was having its coming out party:

• General Counsels were facing unprecedented pressure to lower costs.
• The Association of Corporate Counsel launched its “Value Challenge”.
• Richard Susskind published two books (The End of Lawyers? (2008), and Tomorrow’s Lawyers (2013)) – both with glowing reviews from esteemed lawyers and GCs.
• Disaggretation (breaking up legal work to various service providers) was steadily growing.

Not only did Clearspire create what the market said it wanted, it did it better than anybody else. But as one of its founders readily admits, “there is a big difference between expressing admiration for a model and becoming a paying client.”

Markets don’t care

Every business is fundamentally limited by the size and quality of the market it attempts to serve: “Market matters most; neither a stellar team nor fantastic product will redeem a bad market. Markets that don’t exist don’t care how smart you are.” (1) While Clearspire’s feats in efficiency are impressive, the market did not care. Given that 59% of law firms in 2018 did not feel enough economic pain to motivate more significant change, the partnership model was and arguably still is the most profitable game in town.

Even though the partnership model, coupled with self-regulation, has a tendency to disincentivize innovation in the present day, it was still a stroke of genius when first developed. The challenge of how to both foster and retain talent is an intractable one for all industries – just ask anybody who wants to hire good developers today. Paul Cravath figured out how to both scale the number of sophisticated lawyers and enjoy the investments he made in training them. No small task, considering nobody else had successfully done it before. The fact that law firms were able to so profitably address this challenge for so long, and enable lawyers to become increasingly specialized as the law became more complex, speaks to the power of the innovation.

The partnership model transformed law into the esteemed profession that it is today. As the legal “profession” slowly becomes the legal “industry”, it will inevitably encounter many new problems related to the harnessing, augmenting, or distribution of legal expertise – expertise that would not be in such abundance if it were not for the partnership model. We forget that for most of this profession’s history lawyers were not highly-paid nor experts (most were generalists). This is not to say that the practice of law for the past century is not without its problems. But they are the sort of problems that emerge only after an entirely different set of more serious problems has been solved. For example, the fact that the internal combustion engine pollutes only becomes a problem when the far bigger challenges solved by automobiles have vanished from view.

Just because we are now seeing issues with the partnership model doesn’t mean that it was a bad idea at the time. Just because doubling down on new technology gets you media buzz doesn’t mean it’s a good idea, either. It all depends on what people are willing to buy. Clearspire’s downfall and the continued profitability of law firms suggests that the market for visionaries is pretty small.

So if you’re going to go all-in on the latest tech and innovation, you have to at least admit that it’s an experiment. Experimenting means trying one’s best at which might work, but not assuming in advance that it will:

“It doesn’t matter how beautiful your theory is. It doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong.”

– Richard Feynman

References:

(1) Marc Andreessen, Venture Capitalist and Founder of Netscape (which was, arguably, ahead of its time), quoted in The Personal MBA.