Resisting change or Evolving? Legal services through the lens of disruptive innovation theory


Executive Summary:
The rise of the robots; this is becoming the mantra of our age. And, further, it has become the preferred headline when legal news pages report on technology in the legal industry. “Lawyers are being replaced by robots”. Let us ponder on this for a second. It might seem like a farfetched scenario of a sci-fi movie but, as inane as it may sound, many consider it to be true. Indeed, an increasing amount of legal commentary has been concerned with the relationship between information technology and the law and a debate has been ignited on how IT is shaping the legal profession. Technological advancements allow for easy information collection, storage and retrieval and also for the use of the information in a systemized way. In a time when AI is designed to grant access to multitudes of legal textbooks and court judgments, to assist in the drafting of contracts and to trigger red flags in case of non-compliance with mandatory legal provisions, is disruption of the legal profession becoming a reality?

I. Introduction

1. Departing from neoclassical economic theory, the Coasian (1) view is that the market, i.e. the price mechanism, is the primary way to facilitate the efficient allocation of resources by organizing production thus satisfying consumer needs. This would mean that there is no place for firms in economic reality, since all transactions are by definition efficient and therefore superior to all possible alternatives. However, the existence of firms can be explained by the existence of transaction costs, namely research and information costs, negotiation and decision costs, policing and enforcement costs etc. Yet, recent technological developments are reducing significantly transactional costs thus eroding the Coase firm theory. The use of new technological platforms to deliver labor and services challenges many of the fundamental assumptions of 20th century capitalism, from the nature of the firm to the structure of careers. Indeed, Internet allows people to stay connected to each other and to design or to find ad hoc answers to almost all sorts of business problems previously solved by the structure of the firm.

2. Technology -being not the sole decisive factor- together with globalization, de-regulation, the unbundling of services, the demand for efficiency and the quest for lower cost has a serious effect; the movement from a firm-based economy to an on demand-based one. The on-demand economy is the result of pairing workforce with the smartphone, which now provides far more computing power than desktop computers, which reshaped companies in the 1990s, and to far more people. Still, the recent economic crisis, which resulted in a huge increase in unemployment rates, evidenced the fragilities of the traditional capitalist system. In this sense, internet has been influencing consumer behavior for some time now, leading to the proliferation of sharing platforms and other similar tools which are reshaping business models. This transformation process does not leave the legal field intact.

II. Disruptive innovation theory

3. Disruption is becoming an overused word. We hear it so frequently that it almost produces a reflective need for immediate contempt. Moving past this impulse however, how well does one understand its meaning?

4. Clayton Christensen in several seminal works (2) proposed and deliberated on the disruptive innovation theory, which essentially describes a process though which a product that lacks traditional favoured traits but holds alternative benefits – typically being affordable, more convenient or simpler- will revolutionize a market and drive leading firms out of it while capturing consumer surplus. In the beginning, the disruptive product will either only attract a few consumers of an existing market or create a new market which is limited in size and profit margins. While the product improves over time, it becomes gradually embedded in the market causing previously incumbent firms to lose ground on their consumer base (3). The theory in essence resembles the Schumpeterian theory (4) of economic innovation and business cycle, a process of creative destruction (schöpferische Zerstörung), where outdated production units are replaced by new ones.

III. The legal profession

5. The disruptive innovation theory can be applied to any sector of the economy. The legal industry is no exception to the rule. How so? Big law firms have been holding a dominant position in the market for some time now. They try to beat competition by finetuning their services and expanding their expertise in order to meet the perpetually diversifying clients’ needs. This leads to increasing rates excluding thus a large portion of consumers who are in need of legal services but cannot keep up with the upward pricing trend. These consumers would be satisfied by simpler and faster solutions. And here is where incumbents make their fist mistake. They leave room for entrants in the market who offer services typically inferior but they do the job and at a much lower cost. The neglected consumers opt for these services, aware of their quality -in most cases-, and incumbents start to lose their foothold. Then it is too late. The momentum has given rise to “disruptors”.

6. Traditional legal practice is rapidly evolving becoming a tripod supported by legal, technological and business expertise. Lawyers are no longer the sole providers of legal services. Artificial intelligence (AI), blockchain, the Big Four accounting firms and other entrants into the legal marketplace are considered by many as potential disruptors. The disruptors proceed either with packaging or with automatization using technology to streamline the delivery of legal services, or they combine both.

7. Firms, legal firms included, are not ignorant of the key driver to change, i.e. technology, although many do not seem to grasp the full magnitude of the consequences of the technological evolution. The smartphone and the tablet are now omnipresent. Legal library applications are commonplace. Yet the real challenge is not the adoption of mobile technology in the legal field, as the rest of the world has already done; it is the adaptation to change per se since it is the core essence of the legal profession that is critically changing. Some firms however, quickly learn their lesson and instead of being too focused on squeezing profits from their biggest customers, they adapt to change. In this context, the recent launch of the first automated legal product by Wilson Sonsini Goodrich & Rosati (its subsidiary SixFifty to be exact) (5) came as no surprise, forging the era of a new global legal community.

8. A bespoke or typical boutique legal practice is transitioning to one that becomes commoditized. And although Susskind’s “the end of lawyers” (6) might seem like an exaggeration, at least for the time-being, legal innovation is altering the scene beyond recognition. Once the preparation (research, drafting, organizing) of legal work was handcrafted. Now a large portion of routinised work leaves the hands of lawyers as software engineers step in. The SixFifty tool for example shall draft documents for compliance with the California Consumer Privacy Act taking effect in early 2020.

9. Law is a big business, one that will continue to grow. Companies shall continue to transact and shall continue to require legal advice when doing so (or after doing so regretting not having requesting a legal expert’s advice prior to the emergence of a legal dispute). And although there is a plethora of online platforms which facilitate the drafting of legal documentation, there is no device so far that provides sophisticated legal advice. Even SixFifty will not provide legal advice similarly to most automated legal services. And there is a reason for that. An AI system is designed to stimulate human thinking but not creative or independent thought. Information is one thing; perceiving it with a trained legal mind is another. In-depth knowledge, expertise and experience cannot be automated and cannot be ousted even by a sophisticated software.

10. And it is not solely the application of legal knowledge for the resolution of multifaceted problems that leaves enough space for lawyers. One can further argue that the market for lawyers is not contracting since new areas -or new sides of existing ones- of legal practice are being created; data protection, dispute resolution, jurisdictional issues and the regulatory implications of an inherently unregulated technology. For instance, lawyers that specialize soon enough in blockchain technology shall capitalize on the new areas of legal practice this will create.

IV. Conclusion

11. Legal practitioners need to embrace the imminent changes of technological innovation but they should do so with a hint of skepticism. Being a good lawyer is no longer enough. In order to remain relevant, a lawyer needs to adapt, to take advantage of what technology has to offer, to move forward from the role of legal information provider and to rise to a competent interpreter applying solid legal skills and experience offering cost-effective and market-oriented solutions.

12. Change is inevitable. Hanging onto the past and resisting change shall not prevent it from happening. Quoting Charles Darwin “it is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.” Same stands in business; either you change with the times or flame out. Change can be seen as a two-edged sword—a threat but also an opportunity. Ignore change and one is expected to go the way of the dinosaur. Effectively adapt to change and one can make great strides.

[1] Coase, R. (1937). The Nature of the Firm. Economica 4(16).

[2] Bower, J. L., & Christensen, C. M. (1995, January – February). Bower J. L Disruptive technologies: Catching the wave. Harvard Business Review, pp. 43-53., Christensen, C. M. (1997). ‘The innovator’s dilemma: When new technologies cause great firms to fail. Boston, MA: Harvard Business School Press.

[3] Christensen C. M. (2006). The ongoing process of building a theory of disruption. Journal of Product Innovation Management, 23 (1), pp. 39-55., Christensen C., M., & Raynor M., E. (2003). The innovator’s solution: Creating and sustaining successful Growth. Boston, MA: Harvard Business School Press., Schmidt G., M., & Druehl, C. T. (2008). When is a disruptive innovation disruptive? Journal of Product Innovation Management 25 (4), 347-369.

[4] Schumpeter, J. A. (1994, 1942). Capitalism, Socialism and Democracy. London: Routledge.

[5] Strom R., Wilson Sonsini Launches Software Developer Subsidiary to Automate Legal Services, (2019, February), The American Lawyer.

[6] Susskind R., (2010, September). The end of Lawyers, Oxford University Press.