Pundits have long predicted the disruption of the legal industry, but the traditional model is seemingly impervious to their augurings. Yet, forward-looking firms are embarking on ambitious transformation programs amidst record years, which begs the question: why now? We recently concluded a two-year strategic transformation effort with a prominent law firm in the Asia-Pacific region, and here we discuss the disruptive challenge faced by the legal industry, describe the response of a leading practitioner, and highlight the five questions that managing partners should consider.

 

WHY TRANSFORM A SUCCESSFUL BUSINESS MODEL?

Law firms have relied on the same business model to compete with familiar rivals for decades, if not centuries. These competitive battles are hard fought, but routine to seasoned leadership teams. However, there are periods in the lifespan of companies when the underlying foundations of the business are slowly shifting and when leaders must consider transforming a still successful business model.

New business models, how firms capture, create and deliver value, and digital technology drives disruption in the legal industry. Technology alone is not disruptive, and business models by themselves are not gamechangers, but the combination of the two can be transformative. Here, examples from other industries are helpful to illustrate the four strategic scenarios. There are circumstances where companies can leverage emerging technologies and other innovations within their core business model, and the way industrial enterprises deployed Six Sigma quality methodology to eliminate defects and is illustrative of this approach. Major airlines were partly disrupted by budget airlines, but the business model lacks technology leverage. As such, disruption was not fatal, and many major carriers incorporated budget airlines into their portfolio. However, in retail, disruption struck with force because Amazon, most prominently, combined technology with a new business model that changed the industry’s cost structure and customer value proposition in significant ways.

An insight from our two decades of consulting and academic research is that previously stable industries change profoundly during a window of disruption that is characterized by a tipping point in technology and business model innovation. Early in the disruptive window, the challengers cannot meet the performance requirements of the mainstream legal market and capture only a small portion of industry spend. However, they predictably attack from below, offer a novel value proposition to clients and leverage a different business model following the well-worn path of disruptors that have successfully unseated incumbents in other industries. Initially, the business impact seems inconsequential to established firms, but after the window opens, they have limited time to develop, implement and scale a transformation strategy. Once some of the challengers, be they alternative legal service providers or the Big Four, have identified a scalable and profitable business model at the lower end of the legal market, they will inevitably move upmarket in pursuit of higher margins. Absent a clear transformation strategy, incumbents will equally predictably retreat towards the crowded top of the market.

The legal services market will change in predictable and inevitable ways because law, as a pure knowledge industry, cannot escape disruption catalyzed by digital technologies that transform how information is captured, processed, stored and transmitted. These technologies are becoming more capable and broader in their application within the legal industry, and companies that are not able to systematically leverage these productivity tools will lose the competitive battle, ultimately also at the top of the market. It is a mistake to believe that having “best-in-class” quality is a sustainable growth strategy. The reason for law firms to proactively transform a successful business model is that the window of disruption is open, and the future battles in the legal industry will be fought with new rules, tools and mind-sets.

What are my strategic choices?

Legacy firms have three options (or combinations thereof) to address the disruptive challenge. They can choose to focus on the core business model and pursue a “retreat to the top” strategy. This option is predicated on the assumption that challengers attack from below and pursue the most cost sensitive clients first and that firms can sustain themselves by focusing on the core business model. The approach assumes that many clients highly value the traditional delivery model and will not readily abandon their established counselors. The problem with the “retreat to the top” strategy is that even in the most optimistic scenario it resigns the firm to managed decline.

The second option is to focus on what we call Transformation A. This strategy implies changing the core delivery model of legal services but continuing to solve the same client “job to be done” (the problem the client is trying to solve). The A strategy is predicated on the assumption that traditional firms can transform their delivery model to effectively incorporate the same productivity enablers that disruptors leverage. The strategy implies a transition from the Core to the A model over several years when the two coexist. An illustration of this strategy is the ongoing shift of the automotive industry from internal combustion engines (ICE) to electrification and autonomy. Amidst the historic transformation effort, automotive companies still produce millions of ICE vehicles and continue to address the same customer job to be done.

The third option is to pursue Transformation B, which implies using core capabilities to address new client jobs with a new business model. This model is predicated on the assumption that companies identify new opportunities where some of the firm’s core capabilities can be leveraged. An illustration of Transformation B is Amazon entering the cloud business with AWS (Amazon Web Services) that uses a completely different business model compared to Amazon’s core retail business, but that leverages many of the same technology resources and organizational capabilities. In the short term, firms can pursue combinations of the three strategies, but for the medium to long term, they must make focused “where to play” and “how to win” choices.

How do I decide on the Right strategy?

Leadership teams should recognize that all three strategic options have significant, but distinct challenges. A strategy of managed decline is problematic for obvious reasons. However, transforming the Core business model (options A or A+B) also presents vexing issues. Based on our experience with diverse industries and clients, we have learned that firms should innovate as close to their core business as possible. Indeed, it is hard to argue that a firm should ever innovate further from the core than is necessary to meet its medium and long-range growth targets. Yet, it is not easy to determine “how far is far enough” for a specific company, because the answer depends on both internal ambition and external threats and opportunities. Suffice it to say that the disruptive challenge in the legal industry cannot be addressed by the legacy business model.

Most forward-looking law firms will choose to focus on either an A or an A+B strategy and indeed, this is what we can observe in the legal industry. There are arguments for both approaches, but the dual A+B strategy is certainly more challenging to execute than a focused A strategy. Pursuing B opportunities implies solving new (to the firm) client jobs to be done with a new business model. Examples in the legal industry include entering the legal technology segment (software development) and the provision of legal consulting services to name a few.

Pursuing the dual A+B strategy presents law firms with three challenges: first, they must still execute Transformation A with its inherent challenges; second, they must develop a novel B business model and third, they must manage the difficult resource allocation process not only between the Core and A, but between all three strategic initiatives.

Developing and scaling a B business model requires expert timing and execution. If firms attempt to challenge a scaled incumbent that already occupies the B space, the outcome of the competitive battle is predictable. These incumbents will be motivated and capable of defending their market and have considerable advantages in terms of scale, resources, brand recognition and client base. It is axiomatic that firms should not challenge scaled incumbents in the “B space” with the same business model unless they have deep pockets and are prepared for an uncertain and prolonged competitive battle. Conversely, firms must scale their B models as quickly as possible to establish a defensible competitive position, which in turn implies that the firm must expeditiously manage the development, validation and scaling of the new model.

Managing the resource allocation process between the Core, A and B is one of the most challenging aspects of transformation. Transformation A and B are characterized by a high degree of strategic uncertainty and by longer planning horizons than core initiatives. As such, making the business case to allocate resources away from core business initiatives to Transformation A will always be challenging. Managing the resource allocation process between the Core, A and B will be even more so.

Given the multiple challenges associated with the dual A+B strategy, most law firms should not pursue B opportunities before they have defined, validated and scaled their Transformation A business model.

What is the path forward?

Firms that pursue Transformation A need to focus on two apparently simple questions: what ways of working and what widely held beliefs need to change? Firms need to consider enablers and blockers of change in the firm’s systems, relating to structures, processes and resources, and culture, relating to ingrained ways of working and widely held beliefs. Parenthetically, we found that focusing the analytical effort on the blockers is more effective, because by identifying the blockers we were able to also define the enablers, whereas the opposite was not necessarily true. In the context of Transformation A, the objective is to deeply understand the blockers that prevent employees from systematically and constantly using the right tool(s) for a given task. Though the objective of using the right tool for a task is obvious enough, many law firms have business models and cultural mores that actively and profoundly inhibit the pursuit of this apparently simple objective. Some are obvious and entrenched, such as the hourly billing model and associated reporting systems, others are more nuanced, such as the norms and expectations around how technologically adept lawyers should be or the hiring criteria for graduates. The blockers must be prioritized and at first, no more than a dozen solutions should be developed, tested and deployed to overcome them.

Somewhat to our surprise, we found that the process of answering these questions was more important than the answers themselves. The disciplined process drove the continuous refinement of the solutions, and even more importantly, it catalyzed broad and deep alignment around the final strategic choices and tactical solutions. We found these to be difficult, but not intractable questions, and our experience suggests that practical and actionable solutions can be developed, validated and scaled in a large law firm.

How do I align my Organization?

The primary challenge of transformation in the legal industry is not analytical. The real challenge is aligning the board, leadership team, partners, and employees on the transformation imperative and strategy. There are two primary reasons for the alignment challenge. First, most leadership teams and partners don’t have firsthand experience with disruption and lack the vocabulary and framework to conceptualize the disruptive threat, its impact and strategic implications. Second, firms should start the transformation effort when the core is still healthy, and for obvious reasons, it can be difficult to convince partners operating a highly profitable business model of the transformation imperative.

To drive alignment on the transformation imperative, we used a conceptual tool known as Kissinger’s Cross that crystalizes the timeless dilemma between uncertainty and action. In countless human endeavors, we observe that information and freedom of action are inversely corelated, and that as information about an opportunity increases, our ability to seize that opportunity decreases. The mechanism for the inverse correlation is that rivals provide both the information about an opportunity (in business, the market size, profitability and growth rate) and simultaneously limit our freedom of action to seize that opportunity (by occupying the high ground in the marketplace).

Kissinger’s Cross presents firms with three options. First, they can choose to be Patient Visionaries that act early in the disruptive window and are prepared to wait for a prolonged time for the technology and new business models to mature. Nestlé’s Nescafe technology is illustrative of this approach, with the first patents filed in the 1970s and the business model scaling profitably only in the twenty-first century.

Second, firms can choose to be Followers that let other companies, both incumbents and challengers, develop and scale disruptive technologies and business models. These companies are sometimes known as fast followers and typically have a significantly lower cost structure compared to incumbents, offer customers a different value proposition (typically predicated on lower margins) and leverage a different business model.

Third, firms can choose to be Deliberate Innovators that try to prudently time the launch of their transformation efforts by studying the weak signals from the market, developing a nuanced understanding of the emerging challengers and their business models, by looking at industry analogies, by understanding technology trajectories, and above all, by understanding disruption. These organizations invest to deeply understand the causality, direction and trajectory of industry change and develop an appropriate transformation strategy. In the legal industry, the window of disruption opened years ago, and Deliberate Innovators are taking decisive action yesterday.

Making decisions on strategy and strategic resource allocation with good or near perfect information is relatively easy. However, as the Covid-19 crisis acutely demonstrates, decisive action must sometimes be taken with directional and incomplete information. The same is true of pursuing strategic transformation in disruptive times. However, every day of inaction is priced in reduced freedom of action and leads to a predictable and deeply problematic outcome, that of paralysis. Action, even with its inherent risk, enables firms to reimagine, learn about, and to ultimately own their future.

 

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About the Authors

 

Pontus Siren is a Partner of the growth strategy consulting firm
Innosight. psiren@innosight.com

 

 

 

Utsav Bhatt is a Manager at Innosight. ubhatt@innosight.com

 

 

Rachel Lee is a Consultant at Innosight. rlee@innosight.com

 

 

About Innosight

Innosight is a strategy and innovation consulting firm that helps organizations navigate disruptive change and manage strategic transformation. Now a member of the Huron Consulting Group, we work with leaders to create new growth strategies, accelerate critical innovation initiatives, and build innovation capabilities. Discover how we can help your organization navigate disruption at www.innosight.com.

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Own the Future of Law