The following is a guest post from our long-time friend and astute observer of Law Land, Alastair Morrison. –Bruce & Janet
Alastair Morrison, Legal Consultant
Alastair Morrison is a London-based legal consultant with extensive experience in law firm strategy and innovation. He spent 20 years at Pinsent Masons leading firm-wide strategic and innovation initiatives and now advises law firms, while also investing in and advising legal tech and risk advisory startups. In 2019, he was named Europe’s Most Innovative Lawyer by the Financial Times. +44 7836 336111, alastair@relevista.co
A professor would have little truck with a student who complained about their grade on the basis that it should have been higher because they worked really hard. The point, of course, is that the student’s input is irrelevant to the grade. It is the output that matters.
Clients are no different. They seek the satisfaction of a desired outcome or goal and want their external advisers to spend time understanding, testing, and agreeing that goal. They then want those advisers to help them achieve it, ideally with flying colours. They do not care how hard the law firm works to get there, and they certainly do not want to pay on the basis of those inputs. They want to pay for the achievement of outputs.
While there is often a coincidence of interest between inputs and outputs, the inputs themselves are irrelevant. It is the outcome that matters. Yet clients remain in the grip of law firm inputs and, whether they like it or not, this is what they pay for.
Before I get going, one clarification. I am not really talking about how individual transactions are priced. Plenty of work is already done on fixed fees, success fees, and volume-based arrangements. However, regardless of how a price is ultimately arrived at, the bulk of businesses in the Legal Industrial Vertical still use time inputs to build prices and budget revenues. The economic model remains input driven.
That model is simple: donkeys, carts, and golden bricks.
Each donkey has a year to carry as many bricks up a hill as possible. The more bricks carried, or the heavier they are, the greater the reward. The owners of the donkeys do very well too. So well, that almost all of them also insist on being donkeys themselves, even when they are ostensibly charged with management responsibility or with leading very large firms. A defining feature of the profession is that those who own and run the business are reluctant to let go of fee earning, and the economic model both reflects and reinforces that choice.
I am not saying lawyers are donkeys. I am saying that the model is built on remarkable feats of stamina and endurance. And no matter how particular transactions or relationships are priced, the success of the business always comes back to the weight and number of bricks the drove of donkeys carries in a year.
It has been magic because the risk of brick inflation is passed on to clients. They really are golden bricks.
The obvious point is that law firms are now experimenting with machines that reduce both the weight and the number of bricks, and which can carry the bricks quickly and effortlessly. Major law firms are buying the machines from the likes of Legora and Harvey, and for now, they are being priced on a per seat basis. Lawyers love them, the load is lighter, and the path is smooth, but an anxiety remains. If fewer heavy bricks are required, how do lawyers stay incentivised and rewarded in the way they are used to?
The conundrum is this. Although most law firms already use data, process, and technology to price many deals and litigations around achieving a client’s outcome, the underlying economic model of the firm is still based on an aggregation of inputs. From a client’s perspective, these inputs are neither desired nor relevant. Where machines materially reduce the weight and number of bricks, firms are left with little choice but to rethink the model if they want to sustain their businesses.
Change is already under way. We are seeing consolidation. Firms in good health are merging from positions of strength, weaker firms are being acquired, and others are experimenting with new equity models and participants. We are also seeing shape change. Fewer trainees are entering larger firms, lawyers at all levels who are slow to adopt AI are quietly disappearing, and partnerships are becoming more inclusive, with technologists who are genuinely accretive of value participating meaningfully in equity.
All of this matters, but what really changes everything is the economic model. Frontier businesses in the Legal Industrial Vertical will move beyond innovative transactional pricing to something more fundamental, an output driven economic model.
It has to happen for a simple reason. If the means of production have changed, then the means of valuing production also has to change.
But do not forget, it is the client who sits at the apex of the value chain. Even firms that recognise the need to change their economic model in line with new means of production will fail unless clients are all in. If, as seems likely, the means of production shift from a pure Seats model (time based) to a Seats and SaaS model, SaSaaS, where firms deliver lawyers coupled with software products, then clients cannot sensibly insist on paying only for the seats.
Yet that is where much current thinking sits. Many clients want two things at once, to pay by the hour, and to pay for far fewer hours. That may be understandable in the short term, but it is incoherent in the long term. If technology materially reduces the labour required to achieve an outcome, and the outcome remains the thing the client values, then value must migrate away from inputs towards intellectual capital and technology delivering outcomes. Delivering that value requires both seats and compute power, and a return on that investment is essential for sustainability. Time inputs alone are unfit for purpose.
How the Legal Industrial Vertical, and the professional component within it, evolves is hard to predict. My own thinking keeps circling back to two themes.
First, the fitness for purpose of the partnership structure in delivering desired legal outcomes. The power and profitability of law firm incumbency, coupled with annual financial models and generational inertia, leads to something I will call incumbency corpulence. The result is that many firms will not adapt their value proposition or economic model in time to exist beyond the retirement age of partners currently in their early fifties. Expect equity disruption to ride side saddle with AI disruption. I am not going down that rabbit hole here.
Second, and really the first, given the thrust of this piece, if the means of production are undergoing radical change, and I dare you to say they are not, then a new economic model that responds to those changes is essential. Legal bums on seats, and I do not mean that we are bums, are not going to be replaced. But Software as a Service is already here, enjoying valuations based in part on recurring revenue. If the legal profession wants to sustain its position, it has no option but to embrace SaaS alongside Seats. If it does not, substitution risk, by clients or other members of the Legal Industrial Vertical, is enormous.
If I am right, and the means of production are now, or soon will be, Seats and SaaS, and if it is in our societal, institutional, and business interest to sustain a healthy legal profession, then the real work lies in collectively moving from the golden bricks model to an output based Seats and SaaS model. SaSaaS, as I like to call it.
Or, of course, you can hang in there, get to the finishing line, enjoy a good few years of corpulence, and then have fun writing, consulting, and dreaming up metaphors.
Image courtesy of Alastair Morrison
