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Law Firm Barriers To Innovation
by Darryl Mountain
June 2005

In a recent article (http://www.law.com/jsp/ltn/pubArticleLTN.jsp?id=1104759335187), Laura Owen, director of Worldwide Legal Services at Cisco, set out some good advice for corporate counsel and their lawyers in seizing opportunities in technology.

The principal message to law firms was that they need to change the way in which they deliver legal services. For example, they need to automate their documents using document assembly tools. This would enable them to offer transactions on a fixed price basis and to license out firm documents for use by clients. Clients would be able to generate their own documents without the need for an outside lawyer.

Implementing these and other revolutionary ideas would be a huge challenge given the current framework because law firms today operate in a structural straitjacket that creates barriers to innovation.

Imagine Google as a partnership of ex-IBM executives who make decisions based on consensus and who have access only to their own capital and you have some idea of the structural challenges to innovation in today’s law firms. They are not built for innovation. The lofty goals that Google sets and achieves simply would not be possible with the structures and compensation in place in modern law firms.

Disruptive Innovations

Licensing out internal documents to clients is what Clayton Christensen (The Innovator’s Dilemma, The Innovator’s Solution) would describe as a disruptive innovation. In the legal industry context, a disruptive innovation is a low-end commoditization that eliminates the lawyer. A sustaining innovation, by contrast, is something that enables law firms to do better what they already do, which is to provide legal advice to clients and generate billable hours and income for their partners.

Doing transactions on a fixed price basis is a sustaining innovation. According to Christensen’s theory, law firms would be relatively quick to offer fixed price transactions. The billable hour culture of law firms undoubtedly creates a drag on this process.

Helping clients to generate their own documents, however, is a disruptive innovation. Anything that eliminates lawyers is not a good fit with law firms as they operate today.

The Structural Straitjacket

The partnership model, based on committees and consensus, makes for conservative decision-making. Partners who have risen to the top by doing things the conventional way are not the sort of people who are going to think differently. The innovative people who could make a difference get squeezed out early in the partnership race because they don’t fit into the prevailing culture. A few rebels occasionally slip through, and it is these rebels who have initiated the timid progress that has been made.

In most U.S. law firms, partners are compensated in an “eat what you kill” fashion rather than the lockstep compensation that is customary in the U.K., Canada, and Australia. The incentive for partners is to hoard information rather than share it with other lawyers. Consequently, these firms have difficulty in building up significant precedent banks. Without precedent banks, they don’t have much scope for knowledge management initiatives. That is one reason why the large U.S. law firms are several years behind their U.K. counterparts in the utilization of technology.

As Marc Lauritsen has pointed out in his forthcoming book, Working Smarter with Legal Knowledge Tools, the partner-associate ratio is another structural characteristic that accommodates old ways of doing things. It may be based more on tradition than on the most effective way to leverage the work to be done.

Restrictions on outside capital are another barrier to technology-based innovation. Technology is not cheap. Senior partners who are going to retire within a couple of years do not wish to invest money in new technology. They will lose interest even more quickly if they are told that this technology will cannibalize their existing revenues.

You can have some success by patching onto the existing partnership model. Some law firms have created a new category of lawyer, the PSL (professional support lawyer), who functions as a sort of legal knowledge engineer, keeping legal precedents up to date and automating documents. This is certainly better than leaving knowledge management projects to IT people with little lawyer involvement. Yet knowledge management lawyers generally don’t have the same status or compensation as other lawyers because they don’t bill their time. And their focus inevitably will be on those projects that generate more billable hours and income for the partners, not on disruptive initiatives.

The Clementi Report

The straitjacket is being removed in the U.K., as Lord Falconer moves to adopt the recommendations of the recently released Clementi Report. Sir David Clementi was commissioned by the Secretary of State for Constitutional Affairs “to consider what regulatory framework would best promote competition, innovation and the public and consumer interest in an efficient, effective and independent legal sector”.

Sir David has chosen to broaden the types of permissible law firm structures by allowing the legal disciplinary practice (“LDP”), a structure that would allow non-lawyers to manage and own law firms so long as they do not form a majority by number of the managers of the LDP and don’t provide professional services to the public. Other safeguards would also be in place. For example, outside owners must be “fit to own”, provide an indemnity, and be subject to conflicts rules. The success of the LDP would be monitored before making a decision on whether to allow multidisciplinary practices
(“MDPs”), in which lawyers and non-lawyers work together in providing professional services to the public.

LDPs would improve the climate for innovation in several ways. First, they would allow huge infusions of capital into law firms, presumably coupled with new ideas for making the practice of law more efficient. The mindset of outside capital would be toward increasing productivity, not generating more billable hours. It is not the conventional leaders who generate loads of cash who would be raising money in the capital markets. It is the disruptors, targeting the low end of the legal market initially and moving relentlessly upward.

The separation of ownership and management would permit a more long term view of innovation, with “patient” money that is willing to wait for results.

Giving knowledge management lawyers and IT people an ownership stake in the LDP would motivate them in the same way that stock options motivate the employees of technology companies.

The birth of LDPs may lead to the creation of new, dynamic law firms whose focus is on providing a mixture of legal advice and legal information services to clients. Their structure would be more like that of a software company than a conventional law firm. Imagine the innovative approach toward such services that a law firm wholly owned by Google would adopt.

One thing is clear: Britain is about to become of the most liberal legal markets in the world and the rest of the world is going to have to play catch-up.

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Darryl Mountain, a lawyer based in Vancouver, Canada, is President of Ontago Inc., a company that specializes in document assembly. He is a member of the ABA’s eLawyering Task Force. Darryl can be reached at (604) 771-9424 or darryl.mountain@ontago.com.