How Do We Perfect the Legal Market?

Chris DeConti, Executive Vice President, Global Solutions, at Axiom, the leading alternative legal services provider, offers insights into the changing structure of legal services for Lawyer Monthly, and what emerging trends will create a more perfect future for the legal sphere and its clients.

In economics, a perfect market is one with transparency and perfect information flows, where knowledge is freely available to all participants. As a result, the market will come to an optimal balance of supply and demand, with production distributed to each market participant on the basis of comparative advantage. In a perfect market, the market relentlessly self-corrects to weed out inefficiencies or economic rents in which a single market participant or group enjoys a disproportionate share of the economic surplus.[1]

In contrast, when we look at the legal industry, inefficiency, opaqueness and imperfect competition are hallmarks of the profession one General Counsel (GC) described as “the last vestige of the medieval guild system.”[2] As a result, production is distributed inefficiently across the legal ecosystem, creating enduring economic rents, with most legal production handled by legacy law firms at prices that most customers consider excessive, despite high levels of satisfaction with the work product itself.[3]

Mark Harris, Axiom’s founder, once stated that: “If one party in an exchange is satisfied and one is miserable, somebody struck a terrific bargain. But if both parties are miserable, the exchange needs to be reconceived from the ground up”.[4] While it’s tempting to think the inefficiencies in the legal industry are driven by law firms having ‘struck a terrific bargain’, with mounting financial pressure and well-documented levels of dissatisfaction among law firm lawyers, the truth may be that the exchange (the market) itself is broken.[5]

GCs spend billions of dollars with outside law firms that have comparative advantage in advisory services, when most of that work they need done is transactional (i.e. work, that by its very nature, follows a path that has been trodden many times before). Recent Axiom analysis reveals that although internal perceptions reveal that law firms (partners, in particular) provide very high-quality advice, 50% of total law firm hours are billed by junior associates with two years or less experience. These junior associates, who are often very bright but fresh out of law school, cost the client more than a senior in-house lawyer with decades of relevant and specialised experience. In the current model, in order to get the partner-level, specialised advisory services they want, GCs are forced to buy billions of dollars of junior associate hours as part of a ‘bundled’ package. Neither the complexity of the work, nor the risk underpinning it, demands this.

These juniors aren’t typically ‘advising’ but rather handling the surrounding transactional work which is informed by the advice their partners are delivering. Top law firms have genuine competitive advantage in high-end advice. Even if nominally expensive at $1000, $1500 or even $2000/hour at the most rarefied levels, client feedback suggests their offering represents real value for money and alternatives would likely be even more expensive or of lower quality. But what about the $300+/hour junior associates supporting transactional legal work? For this work, the argument that alternatives would be more expensive or of lower quality just does not hold up.

Conventional wisdom is that high-end advisory and transactional legal work are inseparable. For decades this may have been true but a number of trends have converged to challenge this status quo. Taken together these trends create the conditions for unbundling these once inseparable elements.

• Technology: Technology is a great disruptor, and the rise of legal technology and applications is causing the industry to rethink how work is done. But traditional, artisanal approaches to legal work don’t mix well with technology. At clients’ urging, most firms are adopting new technologies (with varying levels of speed and success) and developing the more linear, more standardised approaches technology generally requires. By defining discrete tasks and processes, this development paves the way for unbundling. Other technology can be used by partners to assist in the review and quality control of unbundled work, disarming the conventional argument for bundling. Technology can also facilitate unbundling by allowing for collaborative working, since individuals no longer need to be working within the same building to get work done.
• Increasing client comfort with a more diverse ecosystem of providers: Not so long ago, the legal ecosystem was pretty simple, consisting of just in-house departments and law firms. Today, clients are increasingly embracing a rapidly changing and more diversified ecosystem, including alternative legal services providers (ALSPs), the Big 4, legal technology companies, and legal process outsourcing providers (LPOs) and managed services providers. As comfort and familiarity with this expanded ecosystem increases, client tolerance for the costs of bundled offerings and persistent economic rents is on the decline.
• The rise of mega-projects (like Brexit, GDPR, Margin Reform): If necessity is the real driver of innovation, huge projects with massive requirements for tech-enabled legal execution have been speeding us toward a future state. For example, with millions of contracts to amend as a result of Brexit, companies face little choice but to find new ways of working.[6] In-house departments aren’t set up for huge one-off projects and legacy law firms would be prohibitively expensive. This has created a rich proving ground for ALSPs and new technologies, and has acted as a forcing function for unbundling work into projects that can be taken on by the most capable provider. These projects provide an opportunity to demonstrate that these new approaches aren’t just cheaper but faster, more scalable, and less of a headache for GCs. Once they’ve seen them work in the context of a massive ‘bet-the-company’ project, it’s a much smaller leap to apply these new alternatives to business-as-usual work.

While imperfections in the legal market have persisted for decades, we believe these three emerging trends combined will create the conditions for a more perfect future – where each part of the ecosystem plays to its strengths (law firms doing pure advisory work, firms with scale and process expertise taking on more execution based tasks with technology enabling that, and in-house lawyers directed at higher value activities).

[1] Economics Online, Perfect Competition

[2] The Wall Street Journal, Law Firms: “The Last Vestige of the Medieval Guild System”

[3] Financial Times, Technology: Breaking the law

[4] Legal Week, Rethinking the firm/client relationship – a conversation with Axiom CEO Mark Harris

[5] UCLA Women’s Law Journal, The Alarming Growth of Dissatisfaction Among Lawyers

[6] Axiom, Axiom launches BrexitBridge to Handle the More Than 7.5 Million Financial Services Contracts That Require Updates for Brexit