I wrote last week about law firms’ increased focus on innovation, the market forces behind it, and why it is important to the overall modernization of legal services.  

I believe this innovation effort will inexorably lead to five fundamental changes in the law firm business model.  Each change will have an impact on the others; once one changes, the others will necessarily adapt. 

Here’s how I think it will work:

Innovation Is a Search for a Better Way

To innovate is “to make changes in something established, especially by introducing new methods, ideas, or products.”  In legal services, innovation involves re-examining the established way of doing things and finding better ways that new methods, ideas, and tools make possible. 

Innovation is a search for a better way. A search that is motivated by a realization that the traditional way is no longer satisfactory.  It works, but not well enough.  It fails to draw adequately on the new reality of what is possible.  It is falling short of what the market is now demanding.

As they proceed to innovate, firms are finding that their business model needs to adapt to make a better way possible. 

Five Impending Changes in the Law Firm Business Model

Here are the five facets of the law firm business model that innovation will inevitably modify:

Service Model

Improving the way firms serve clients is at the heart of legal innovation. Here the clients are quite clear about what is unsatisfactory: legal service is too slow, too expensive, too opaque, and inadequately focused on clients’ business objectives.

The traditional law firm service model is based on what works for the firm.  The tried and true. What the firm is set up to do. How its practice groups operate.  How busy its people are. How many billable hours and how much revenue engagements will generate.

Innovation will lead firms to a model that is, instead, genuinely based on the client.  What are the client’s objectives? How does the client want the service delivered?  What is at stake for the client? Every engagement will begin with answers to these questions.

Innovative firms will increasingly focus their efforts on the optimal way to achieve the clients’ objectives and service preferences, at costs and fees that are reasonable in light of the stakes involved.  While maintaining the traditional commitment to quality, ethics, and outcomes, the service model will progressively be built on what the client is looking for, rather than  the way the firm has traditionally done it. That will mean new approaches.  It will commonly mean more attention to process design, a different mix of people designing and doing the work, and more use of technology. 

Resource Model

Law firms will not be able to optimize service with the traditional model that depends almost entirely on partners and partner track associate lawyers to design and execute the work. It is unnecessarily expensive, too narrow, and does not take full advantage of what the 21st century offers.

The innovative law firm resource model will include more of the following:

  • Legal Service Professionals: personnel who are not lawyers, but have the skills to do facets of the work to optimize legal service;  they will perform elements of the engagement that are not themselves “the practice of law,” as well as managing and executing critical functions such as planning, project management, technology, and R&D;
  • Legal Technology: both to perform tasks embedded in legal service and to facilitate optimal service delivery; as data analytics, machine learning and artificial intelligence continue to progress, the already meaningful role of technology will expand dramatically;
  • Third Parties: active collaboration with third parties who can provide resources and service at the requisite quality levels more efficiently than the firm can on its own; examples include legal process outsourcers, staffing firms, and data analytics providers;
  • Innovative Lawyer Roles: new lawyer roles that better fit what it takes to serve clients optimally, as well as the modern career objectives of lawyers; firms will offer lawyers reliable full time and flex-time non-partner careers.

Each of these changes to the resource model not only will promote efficiency and reduce cost, each also has the promise of improving quality and enhancing the job satisfaction of firm personnel.

Financial Model

The foregoing changes will, in turn, cause firms to change their financial model.

At long last, innovation will cause firms to move away from the billable hour as the cornerstone of their financial model. As service is increasingly provided by more diverse resources, especially technology resources, work will be done in a fraction of the time, yet be at least as valuable as ever.  The traditional paradigm will no longer work.

Instead, firms will  move to a financial model which is based on the value of the services provided, which incentivizes processes and norms that manage costs to their optimal level, and which manages revenue in a way that generates a sustainable level of profit.

Pricing Model

It follows that innovative firms will price their services based on the value delivered rather than the time it took. For one thing, as the service is delivered by resources other than lawyers,  billing by the hour will be less viable for the firm. More fundamentally, pricing based on how long it takes lawyers to do the work is inherently at odds with maximizing efficiency and constrains the ability of firms to achieve adequate profitability while reducing client fees.

Innovative firms will move to a pricing model that bases fees on outcomes, such as fixed fees for an entire engagement, for parts of an engagement, or for the achievement of designated milestones.

Investment Model

Finally, innovative firms will adopt a model of regular and meaningful investment in research and development for the future, recognizing, as Richard Susskind says, that innovation has no “finish line.”  They will build into their annual budgets funds adequate to pursue new ideas, processes, technologies, and resources.  

Such a model will enable the firm to keep pace with the evolution of legal technology and process design, and it will institutionalize the firm’s commitment to innovation.  Firms will commonly and publicly express their investment in R&D as a percentage of revenues, and it will be substantial.

Implementing a New Model

Implementing these new model elements will be challenging, particularly for firms that continue to post positive short-term  results. Those firms that make these changes earliest and best, however, will find it much easier to achieve the innovation the  market is demanding.  And gain a meaningful competitive advantage.