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On Disrupting the Legal Industry …

I don’t think I will surprise anyone here when I say that I’ve heard quite a bit about how people want to disrupt legal practice. I have been thinking about this possibility and reading more about the theory of economic disruption, so now I thought I would elaborate on this here. Before starting I would like to assure those who roll their eyes at the mention of the word that I am also tired of hearing about it, but that there are some things that I think are worth saying.

Disruption isn’t simply making a more competitive business, which makes competitors’ businesses unprofitable. Simplistically, the theory of disruption says that newcomers to an industry may find ways to profitably serve the needs of people who are not customers of incumbent businesses because they are not profitable to serve under the incumbent companies’ business models. These newcomers may then be able to develop better services and eventually move up market and displace the previous incumbent businesses. This is when they become disruptors:

In a new-market disruption, the unserved customers are unserved precisely because serving them would be unprofitable given the incumbent’s business model. In a low-end disruption, the customers lost typically are unprofitable for the incumbents, so the big companies are happy to lose them. (TechCrunch, “What ‘Disrupt’ Really Means“)

Apple is a good example of a disruptor: Apple disrupted the market for laptop computers, not because it made better computers, but because the iPhone allowed people to do what they needed on their phones and not purchase as many laptops anymore. Another example is discount department stores, which have been disruptive to incumbent mid-market department stores (Clayton M. Christensen, et al, “What Is Disruptive Innovation?“, Harvard Business Review). As you can see from those examples, disrupted companies may have a harder time after the disruption, but they often still have room to maneuver and succeed over time. The biggest problem for them is frequently that they have pre-existing debts or other weaknesses that make them less robust than they would otherwise be.

It is important to note that not all innovative competitors are disruptors. Uber is often mentioned as disrupting the taxi industry, but in universities it is used as an example to define the limits to the theory. Uber’s main innovation was to automate taxi dispatch systems and billing. It also found ways to avoid the regulations that the rest of the industry are governed by (for now). It doesn’t focus on a lower market clientele than taxis do or conform to the other elements of disruption theory. Uber is a new competitor that was able to be successful through finding ways to avoid inefficiencies and limits of the taxi business. This is not generally considered a disruption.

Now we come to what the theory of disruption means for the legal industry. The legal industry looks like a good candidate for disruption: it is dominated by premium services with a large group of unserved potential customers who would be willing to pay something, but not many lawyers’ current rates. Instead they are stuck without a good solution for their problems. Most people’s legal problems are difficult for them, but relatively simple from a legal perspective, which means that there are many possibilities for alternative ways to help them. This can include decision trees, online forms, advice offered over online chat services, instructional kits, etc.

There is room to create a profitable low market service or product that could serve these customers. Many providers of premium legal services may respond that the quality of these substitutes for expert legal advice are inferior to the premium services they provide. This conforms to their expected behaviour according to disruption theory: incumbents underestimate the threat and wait until it’s too late to respond to the disruptors.

But is there reason to doubt that law firms will be disrupted?

The most difficult part of disrupting an industry is when the disruptor moves to compete directly with incumbent businesses. To do so, it must leave the low market niche where it was initially successful and move into the high value market where there is more willingness to pay and profits. This is difficult because to do this it must provide value to customers beyond price. This is where most disruptions fail, and the difficulty of doing this is the reason disruptions are rare.

Disrupting conventional legal practice for clients of existing legal services who feel that they are getting value for money and like having customized assistance will likely not be easy, though there may be pressures put on firms’ business models to modify their practices. This may make many law firms’ businesses stronger by forcing them to provide better services that clients value more and finding ways to provide lower value services more efficiently as is currently done with e-discovery. The organizations that are most likely to suffer are already only marginally profitable, which is unfortunate for the owners and employees, but not synonymous with a full transformation of the industry.

There has been a push in the press against the use of the word disruption, especially since it is frequently used so loosely:

In our experience, too many people who speak of “disruption” have not read a serious book or article on the subject. Too frequently, they use the term loosely to invoke the concept of innovation in support of whatever it is they wish to do. Many researchers, writers, and consultants use “disruptive innovation” to describe any situation in which an industry is shaken up and previously successful incumbents stumble. (Clayton M. Christensen, et al, “What Is Disruptive Innovation?“, Harvard Business Review)

That said I think that we should consider disruption in the legal industry as a real possibility, and note that there are ways to provide legal services beyond the common model for practice now. This is especially important because of the large number of people who need legal assistance and are not getting it. There are moral and business cases for finding better ways to address these issues before being compelled to by external forces.

Comments

  1. Hi Sarah,

    Knowing that some industry or profession SHOULD be Disrupted isn’t the same as knowing how or when. Sometimes as is the case with airlines, a key element is the air traffic control system which cannot expand to accommodate additional airstrips (where people remain in or underserved). In colleges, Disruption won’t take place until HR is made irrelevant. In the case of banks, its money that has to be replaced since money all belongs to the Fed an the Fed is a collection of the largest banks (yes I know that sounds crazy, but if you research you will be amazed).

    The legal profession will be Disrupted, no doubt, but the key there will be to make legal proceedings redundant/irrelevant to outcomes. How will that be done and in what niche will it begin? The answer is most likely in a market which does not (and perhaps cannot) utilize the legal system as we know it.

    Arbitration strikes me as a process which bypasses the legal system, so maybe it looks like that. The legal system would also be bypassed if one could obtain preliminary judgements based on intent coupled with a specified methodology – prior to committing an act which might otherwise be adjudicated after the fact. This is something that I believe current legal practitioners are unprepared for.

    How it happens exactly is, of course, unknown, but these are the kinds of questions one ought to ask to know more sooner than others (and/or perhaps instantiate Disruption yourself).

    Rick Mueller
    Manager – Disruptive Innovation Forum Manager at LinkedIn

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