I think a lot about crystal balls.
It started when I was at a carnival a few years ago and saw a stereotypical fortune telling stand.
I’d never been before and was extremely curious as to what my future held. (No, she didn’t mention anything about not changing out of sports gear for 3 months solid).
The experience left me thoroughly mesmerized.
The fortune teller was a performer of the highest order, the palm reading almost theatrical.
Her predictions took advantage of the trends that came from our conversation, had certain features that made them realistic and were long enough in the future so that by the time they rolled around my memory of the reading would be rather hazy as to their detail.
I can only aspire to prognosticate so well.
In that spirit I don’t know if I’ll leave you mesmerized but I’m going to try my hand over the next few weeks at a couple of predictions about where the legal industry is going.
Prediction # 1 – We will see a large technology company (Amazon, Apple, Google or Microsoft) enter the market for legal services in a meaningful way in the next 12 months.
The reality is that the biggest companies in the world are already ‘law firms’. Their in-house teams rival the size, geographic footprint and specialist expertise of any global firm.
Currently these firms only service their own businesses.
What’s to stop them from taking on external clients and generating revenue from their existing set up?
Isn’t that the pivot from cost centre to business value driver that so many in-house teams aspire to?
Some of you might be asking why they would do this, we already have enough law firms!
They have a big incentive to change your mind.
Professor Scott Galloway of the NYU Stern School of Business wrote a great piece about how much incremental revenue the big tech firms need to find over the next 5 years to justify their valuations (Link).
Spoiler alert – the figures are huge.
Numbers of this magnitude also limit the industries that big tech can enter and take enough market share to be meaningful to them.
Legal is estimated to be a $750bn global industry this year and hasn’t yet been disrupted in any meaningful way, so it’s a great target.
The other good thing about legal is that whilst competition is fierce, no existing player has more than 1% market share, so the tech companies wouldn’t face any incumbents who can match their scale in a fight.
The tech firms also have a number of other structural advantages if they wished to enter the market:
- Capital – Tech firms at this stage in the cycle have unlimited access to capital. They’re also generating more cash flow than they know what to do with. Even if they spent all of the cash on their balance sheets, traditional law firms wouldn’t be able to spend 5% of what a large tech disruptor could spend.
- Cost Structure – It’s generally accepted that the cost per hour of an in-house team member is roughly 50% that of a private practice lawyer. As we established above, large businesses are already effectively running their own full service law firms. Why wouldn’t they pass this cost of service on to external clients?
- Technology and Process – It goes without saying that optimizing technology and process are key competitive strengths of large tech firms. If they turned their sights on legal processes there’s little doubt that they could drive the cost of service down meaningfully. Law firms are already in this same race to lower costs by adopting legal tech. The difference is that tech firms can bring scale of deployment and engineering resources that no law firm could match. They could build a world class, integrated law firm infrastructure quickly and without difficulty.
- Data – If there’s one thing that big tech is good at it’s aggregating data and doing useful things with it. Legal is awash in data but it’s fragmented and hard to analyze. Big tech would make short work of this problem, buying data where required, to make legal truly data driven. It might be surprising to some (as it has been in lots of other industries) how the relative value of expertise is diminished in the face of highly trained and sophisticated algorithms driven by the best data sets.
- Alignment – One of the most common refrains we hear from clients is that law firms don’t serve them as well as they could because they’ve never spent time in-house to see how businesses actually work. An in-house firm offering services to other firms will not have this issue.
- Cross Sell – One thing that amazes me about law firms is that partners in most cases are expected to be not only great at their area of expertise but also great sales people and client service professionals. Big tech will crack this open and bring a truly professional sales and customer care function to bear. These sales organizations already exist, touch thousands of potential clients every day and can scale rapidly.
- Playbook – Tech firms have the playbook for entering and disrupting an industry. The strategy usually goes something like the following: step 1 – enter with great fanfare, step 2 – deploy capital at scale that the incumbents can’t match, step 3 – subsidize the products offered so they offer a significant price advantage, step 4 – buy competitors at a discount as they begin to suffer from reduced revenue and profit margin erosion. This has worked over and over again, especially where the tech firms are facing an industry that is capital constrained (legal is an extreme example of this given the traditional partnership structure of many firms and their inability to raise outside capital).
Big tech companies are already starting to dip their toes and run pilots.
Check out what Amazon is doing for fixed price IP work (Link).
Let me acknowledge a few limitations on this thesis:
Yes, they’ll have more conflicts with competitors, suppliers, etc. – There are plenty of fish in the sea in terms of customers outside of these areas.
They can’t operate as law firms by operation of regulation – In some jurisdictions no, but they’ll find a way around it and their lobbying budgets are beyond comprehension. To the extent that they can’t, boutique firms will continue to exist to write opinions and litigate (don’t bet on them being able to determine which motions to file though, the algorithms will have that handled).
Clients only want to work with law firms they know and trust – Very true. Right up until the big tech sales person goes directly to the CFO and says that they’ll take 90% of your external work, do it at a fixed fee equating to 50% of what it used to cost to send externally and they’ll guarantee to reduce that by a further 5% per annum for the next 3 years.
If you think this sounds expensive, remember that WeWork burned through almost $15bn of capital, ‘reinventing’ the commercial property market before anyone said boo.
This won’t happen overnight of course.
They will make mistakes and have to iterate.
Having gazed into my crystal ball though, I think it’s coming.
Reading the tea leaves,
Christopher Thurn
Founder – Alacrity Law
PS: If you have any good fortune teller stories I’d love to hear them!
