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Event Summary: “Disruptive Innovation: Are Alternative Service Providers a Threat for Traditional Law Firms?”

AMERICAN FRIENDS OF BUCERIUS – ROUNDTABLE

“Disruptive Innovation:
Are Alternative Service Providers a Threat for Traditional Law Firms?”

Thursday, May 1st 2014, 4:30-6pm, IESE Business School – University of Navarra, New York, NY

Speakers:

Markus Hartung, Bucerius Law School, Director of the Center on the Legal Profession
Carolina Pérez, Senior Tax Counsel, Pfizer, Office of New York
Michael Hertz, Chief Marketing Officer at White & Case, Office of New York
Julia Prats, IESE Business School – University of Navarra, Associate Professor

Moderator: Antonio Vázquez del Rey, School of Law – University of Navarra, Full Professor

On May 1^st 2014, the Bucerius Center on the Legal Profession and the IESE Business School hosted a roundtable discussion on the changing landscape of the legal industry. With clients expecting more for less, and legal service outsourcing becoming more frequent, traditional business models no longer guarantee profits and survival. Keynote speaker Markus Hartung, Director of the Bucerius Center on the Legal Profession, has extensive experience in managing law firms. He recently published a strategic analysis titled Game Over? The Global Legal Market in 2018, in which he examines the impact alternative service providers have on the market and the resulting implications for the legal industry.

Disruptive innovation, in contrast to sustainable innovation, has the potential to create new markets, instead of tapping into preexisting ones. Hartung compared the process to J.B.S. Haldane’s four-stage theory on the acceptance of change: 1) “This is worthless nonsense.” 2) “This is an interesting, but perverse point of view.” 3) “True, but unimportant.” 4) “I’ve always said so.” In Hartung’s opinion, companies like Kodak and Blackberry lost faith in their innovations along stages two and/or three, resulting in the decline of market shares, while other companies like Microsoft, Yahoo, and Nokia are still struggling to keep up with current market trends.

So what type of firms are the ‘Blackberrys’ and which are the ‘iPhones’ of the legal industry? Citing a recent article from the Harvard Business Review, Hartung pointed out that the shifts in the legal field were similar to those in the consulting business. While the traditional model of consulting agencies derives value primarily through consultants’ expertise in the form of fee-for-service, new models, such as McKinsey Solutions, focus on addressing problems by implementing repeatable standard processes with the customer paying for output only. The acceptance of such non-traditional models is rising, and Hartung believes that the same holds true for the legal field.

However, elite law firms still generate very high profits while middle size firms are stable and profitable, though not necessarily growing. So what are the reasons for new, non-traditional business models emerging? In Hartung’s opinion, the financial crisis of 2008 led to clients demanding more transparency of services and billing procedures, as well as an unwillingness to pay exorbitant fees. This development is further heightened by the shrinking of information asymmetry between the lawyer and client due to the possibilities our ‘information age’ offers. Another factor contributing to the emergence of non-traditional models is the rise in legal process outsourcing (LPO). Clients are starting to distribute their legal services needs amongst different providers in order to get the best value for each component. As a result, clients are more aware of billing processes and firms with opaque procedures become increasingly less attractive.

Looking at recent publications, Hartung pointed out that it was easy to get the impression that these new models are becoming a threat for traditional law firms. Titles such as Susskind’s End of Lawyers, Mayson’s Delusion of Partnership, and Reinvent or Disappear by Morley are only a few examples. Citing a survey on future developments in the field, Hartung observed that 42% of lawyers interviewed nevertheless believed that the conventional model would survive, even though 27% are convinced that traditional law firms have no effective defense in the long run.

Julia Prats, Associate Professor at IESE Business School, agreed with Hartung, adding that markets are now aligning in different ways. Professional clients, e.g. corporations, are expecting more from firms, with legal services only being part of the solutions demanded. She believes that integrated services are key to gaining a competitive advantage in the future, along with hiring the best talent for comprehensive problem solving approaches. According to Prats, graduates with combined degrees or those with additional legal training, such as those from IESE Business School, will be exactly what law firms are looking for in the future.

Michael Hertz, Chief Marketing Officer at White & Case, shed some light on the matter from a global law firm’s perspective. Contrary to the 42% who believe that there is no immediate need to change traditional business models, he believes the industry to be in the middle of a significant shift. Technology and sourcing are evolving, and the classic ‘pyramid model’ of law firms has changed significantly. Firms are more reluctant to hire young lawyers, and with smaller incoming classes, investments in knowledge management and associated technologies will become necessary. He is also curious about how the application of law principles to big data will develop in the future. Citing Daniel Katz’ model of quantitative legal predictions, Hertz believes that the implications of such approaches will be enormous. Both Hartung and Prats, however, cautioned against jumping to conclusions about the effects this may have on the industry, as successful predictions of human behavior through quantitative methods have limitations.

Adding the perspective of a corporate client, Cornelia Perez, Senior Tax Council at Pfizer, highlighted that companies are willing to hire different firms for different services based on an overall desire to hire an expert that will spend as little time as possible on a matter, while maintaining the highest level of effectiveness.

When asked what could be considered a ‘game changer’ in the field, the panelists agreed that a successful business model could be that of a small global law firm without a home office, connected to its partners and experts around the world through technology, that uses sophisticated knowledge and information management systems. Hertz believes that this model is already starting to emerge and will shake up the legal market, constituting the kind of disruptive innovation that could lead to long-term success.

In the end, all the panelists believed that the future of the profession will depend not only on the type of business model a firm implements, but also on how successful law firms are at creating long-term relationships with their clients. Hartung and Perez pointed out that trust alone does not guarantee future engagements from the same client. Trust has to be renewed constantly by engaging and listening to what the client needs. Young, committed lawyers, who are enthusiastic about their profession, open to change, and who continuously seek out opportunities to learn will be able to succeed in the legal profession, despite the challenges that may lie ahead.

K. Kempiners