Disruptive Innovation in Legal Services

Volume 1 • Issue 2 • January 2015
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Selling Innovation to Law Firms

The Innovative Practice:
The challenges facing legal startups—and how to respond

Consider this scenario: a firm’s litigation associates are tasked with helping a major client, which has found itself in a compromising situation and wants to understand its exposure. The client wants a full-scale report analyzing risk. Across multiple jurisdictions. And as soon as possible.

Tracking down every individual court case across the country, understanding the relevant statutes, and making sense of them in a short period of time: it’s a tall order for even the smartest attorney.

The firm has new data analytics software, however, and the associates use it to see cases in context. The software links legal precedents and provides key comparisons across circuits. Without it, a thorough search through thousands of pages of documents would take weeks, if not months. With it, the project takes less than a day.

Technology’s benefits are clear: tools like those above sound like a no-brainer. And legal experts and practitioners widely agree it’s time to innovate. In a 2014 Altman Weil survey of more than 800 major U.S. law firms, managing partners and chairs overwhelmingly acknowledged current firm business models are unsustainable.

So why aren’t legal startups doing better? Investment in legal startups declined sharply last year, after peaking in 2013 with over $150 million committed. Though law firms want innovation, there are key institutional challenges and barriers that make the legal space a challenging environment for startups. Below, we explore these challenges, then look at ways startups can respond. If startups overcome these barriers, they’ll find incredible opportunities to disrupt an old, slow-moving industry.

1. Chicken or the egg?

The lean startup movement has taken the startup world by storm. Pioneer Eric Ries, author of The Lean Startup (Crown Business, 2011), advocates building a minimum viable product—one with core features that can be deployed to early adopters, then iterated.

However, many law firms, focused on short-term gain, are unwilling to engage with a product that is not complete. Law firms would rather evaluate a full product before making a decision regarding whether they will use it, let alone purchase it. Venture capitalists also don’t typically invest in startups looking to build out an initial product and test basic hypotheses; instead, they look for startups ready to scale. Thus, legal startups need a product to find funding, and need funding to build a product, all without any hint—not to mention guarantee—of future sales.

howtobuildmvp

Lean startup principles advocate building a “minimum viable product”—one that starts with valuable, usable features, even if they’re basic, then adds on functionality over time as a product’s user base grows. Law firms, however, are often unwilling to engage with less-than-sophisticated products, making it difficult for startups to develop products for them. Image courtesy of fastmonkeys.com

2. Software as a service

Once, the initial sale to a customer was a “win.” Software, however creaky and fault-ridden, took time to adopt and integrate into a firm’s IT department. This is largely why legacy technology platforms—such as age-old document management systems—are still used in law firms today.

Now, however, software-as-a-service subscriptions involve per-user sales to software that is then managed by vendors and tailored in real time. Customers are no longer locked into enterprise software and can cancel at any time.

In the subscription business model, adoption and usage rates—metrics that were previously irrelevant—now dominate. As a byproduct, startups must do more than sell: they must create a product that is actually used by, and useful to, a profession strapped for time and resistant to change.

3. The billable hour

The billable hour, it has often been said, incentivizes inefficiency. Though 80 percent of managing partners and chairs of global law firms believe non-hourly billing is an increasing trend, according to the Altman Weil 2014 survey, the billable hour is still largely alive and well today. As a result, technology products that improve efficiency and reduce hours spent on work directly butt heads with revenue generation for many law firms today—even if they improve quality. Startups are therefore in the awkward position of trying to sell products that may ultimately eat into the bottom line.

4. Security concerns

Law firms are overwhelmingly hesitant to embrace cloud-based technologies. In a 2013 American Lawyer survey of technology professionals from the 200 largest U.S. law firms, few responding firms said they are placing sensitive information on hosted platforms. Only 12 percent said they use the cloud for storage; just 5 percent use it for document management.

The reluctance stems from security concerns. Though the cloud promises efficiencies, with recent data breaches at major institutions such as Target, Home Depot, and J.P. Morgan Chase, law firms’ tentativeness is unlikely to disappear anytime soon. For startups, this presents a challenge: most technology solutions today are built either as applications in the cloud or link to existing information systems through the cloud.

The billable hour, it has often been said, incentivizes inefficiency. Startups are therefore in the awkward position of trying to sell products that may ultimately eat into the bottom line.

5. Navigating purchasing

Unlike startups working within traditional corporate structures, which typically have known and consistent purchasing processes, startups attempting to sell innovation to law firms face opaque decision-making structures.

A 2013 survey conducted by InsideLegal and the International Legal Technology Association identified a variety of parties holding the technology purse strings in law firms: IT directors, managing partners, management committees, firm administrators, C-level executives, technology committees, and still others. Firms also have varying protocols regarding whom they involve in purchasing decisions.

The sheer variety of law firms’ purchasing processes dramatically lengthens the sales cycle, forcing startups to understand the internal dynamic of each prospective customer. A lengthened sales cycle is especially challenging when it comes to raising capital, since venture capitalists typically exit investments in a relatively speedy five to seven years. A slow sales cycle dampens investor excitement for legal startups and results in capital deployment moving to other industries.

6. Legal dinosaurs

Startups must understand that the legal profession has long been one of the most conservative disciplines, in both culture and practice (see “Disruptive Innovation in Legal Services”). Thus, just as startups must navigate a complex purchasing maze, they must also understand that they are entering a market, and potentially dealing with purchasers, who view change with inherent skepticism.

How to respond

The problems facing startups in selling innovation to law firms are serious hurdles, but they’re not insurmountable. Consider the following strategies.

1. Emphasize efficiency

Startups must make a clear case for how their product affects law firm profit margins. With growth trajectories for legal services near flatline and law firms being squeezed by their clients to do more with less (see “A Global Age of More for Less”), firm profit margins will correlate with their internal ability to adapt technology and lean practices to optimize efficiency—and thereby drive down costs. Startups may also find allies in-house, since general counsel exert outsized influence on their law firm partners. Either way, startups need to clearly articulate how their product will affect bottom lines.

2. Focus on smart design

Lawyers and technology haven’t always been the closest of companions. Some argue lawyers fundamentally don’t understand technology, and that’s why they don’t use it. But historically, enterprise software providers haven’t paid much attention to user experience. It may not be lawyers who aren’t inherently good with technology, but that the technology supplied to law firms isn’t good for lawyers. Startups have a much better chance of succeeding if they create well-designed, easy-to-use software.

3. Aim for low-hanging fruit

The billable hour won’t go away overnight. Instead of fighting it, startups should create solutions that materially benefit firms by maximizing efficiency or time—in other words, aim for the low-hanging fruit. For example, firms with emerging company or venture capital practices spend time doing nonbillable work, since incorporating companies and packaging startup documents require time but do not generate revenue for firms. Startups would do well to create software that optimizes such work.

It may not be lawyers who aren’t inherently good with technology, but that the technology supplied to law firms isn’t good for lawyers.

4. Educate firms and attorneys

Law firms’ concerns with cloud-based technology are rooted in uncertainty about how cloud technology actually works. Enterprise software company Box has addressed this concern by building extremely high security directly into its value proposition. As a result, insurance companies, hospitals, and even the government have all adopted it. Similarly, startups should integrate security into their products and focus on educating attorneys regarding the relative safety of their products versus existing practices.

5. Don’t spread yourself too thin

Startups can’t change the internal structure of law firms—but they can strategically identify early adopters to make subsequent conversations easier. They might also establish their presence within one geographic location or within firms that are strong in a particular practice area prior to focusing on scale. Navigating internal purchasing processes is much easier with references and successful case studies in hand.

 


 

Contributing writer: Romeen Sheth.

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Disruptive Innovation in Legal Services Volume 1 • Issue 2 • January 2015

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