It's the Business Model, Stupid

Alright, let me rephrase that: It’s the stupid business model.

James Carville’s famous refrain (“It’s the economy, stupid”) is appealingly witty, but in this case, it places blame on the wrong heads. Solo attorneys who strain to apply the big firm model to their tiny offices aren’t stupid and they aren’t crazy; they’re doing what they’ve always been taught.

From law school classes to CLE conferences to meetings with local consultants, we’re fed the leveraged, hourly-billed, Churn model of practice every day. We’re persuaded that we’re only as good as our next case or our next hour. No one tells us about building assets, innovating business models, or designing products.

It’s no wonder we feel like the Churn is the only option.

What is the Churn?

In my upcoming book, I go into a lot of detail about the big firm model of practice and how it’s been adapted to small firms, an approach I call the Churn. I share the history of Paul Cravath’s System that he adapted from Thomas Edison’s “inventor factory” model. And I explain why that model is so insufficient for the challenges of modern practice.

Without unfolding all of that, I’ll summarize the Churn model of practice this way: if you look at each month with panic, wondering where revenue will come from, you’re practicing in the Churn. It’s a model obsessed with cashflow rather than assets, and it never makes you more valuable than the next hour you sell.

I don’t believe that model is client-focused, healthy for lawyers, or endemic to lawyering. We have other options, and I want to encourage you to create them.

What’s in a Model?

Let me give you an example of a business model shift that changed an industry.

Once upon a time, commercial flights were for the rich. Host countries subsidized unprofitable airlines to help move business along. The flights created commercial connections that countries valued, and they maintained monopolistic control through heavy regulations.

In that environment, a tiny carrier called Ryanair rose up to challenge British Airways’ dominance. They started small, flying passengers only on the Dublin-London route. And without government subsidies, they lost money. A lot of it. Until deregulation and an accountant named Michael O’Leary came along in the late 80s.

O’Leary joined Ryanair with a mission to make the company profitable. Borrowing from his experiences flying Southwest Airlines in the U.S., he took the model further. As far is it would go.

Calling Ryanair a “no frills” airline would be an understatement. The company flies buses in the sky meant only to get people where they’re going, certainly not the posh sky parties of yesteryear. They charge for snacks, drinks, and bags. They have no curtains, reclining seats, or air sickness bags. They fly into small, regional airports far from desirable destinations. As a result of all these cutbacks, they offer absurdly cheap tickets, sometimes only a few Euros for an international flight.

So how did Ryanair become the most profitable and popular airline in Europe? Because they charge for everything else you can imagine: food, drinks, upgrades, bags, bank fees, priority boarding, parking, travel and life insurance, vacation planning, online games and movies, onboard tech gadgets, and so on… The result is surprisingly profitable.

Harvard Professor Thales Teixeira summarizes Ryanair’s financial health this way in his book Unlocking the Customer Value Chain: “In 2016, Ryanair lost money on its transportation operations, as many airlines still do. Yet it reported a US $1.56 billion operating profit, thanks to its high margin cross-selling business.”

Ryanair used business model innovation to get passengers on board, then the company leveraged that relationship to generate massive profits.

Business Models, Explained

So, let’s return to the Churn model of practice. If you go to legal conferences, you typically hear something like, “If you do a great job, you’ll have all the clients you’ll ever need.” But if offering a better product were enough, companies like Ryanair would never beat their entrenched predecessors. Superior products often do not predict success.

“Many businesspeople assume,” Teixiera writes in his book, “that innovative products and services and the advanced technology behind them determine market share outcomes.” (This is the Content Trap that I wrote about a couple of weeks ago.)

But Teixeira’s research found that most companies secure patents for major product innovations only after they succeed through business model innovation, not the other way around. Rethinking the business model creates space for improving the product.

Ryanair, Teixiera points out, had no new technology not available to other airlines, but it innovated how it delivers and charges for value. The company saw its customers as a portfolio of possible purchases. It focused on getting customers on the company’s pricing curve with an obvious offer (cheap tickets), then owned a near monopoly on serving them once they were in the air.

Every business model, Teixiera explains, specifies how the company creates value, and for whom, and how it captures value, and from whom. It’s how the business functions in theory.

A very instructive shift in model that Teixiera shared is Best Buy. When the company found that customers would come to stores to view products, then look up the barcode on Amazon to actually buy the products, they panicked. Best Buy tried everything from hiding bar codes to blocking cell signals to stop this expensive window shopping.

But then they rethought the value they offered and how they charged for it. They realized that customers loved handling products before they bought them (the value they could offer) and that tech companies loved those customers engaging with products before they bought them elsewhere (the value they could charge for). Now, Best Buy makes enormous revenue charging tech companies for prime space in the store. That is business model innovation.

Can this framing help you identify a new business model? Could you rethink how you create and capture value? Or do we only have one or two ways to serve legal buyers?

The Model We’re Handed

These questions are not merely academic. Disruption is happening and, as Teixiera notes, it’s coming from customers' demand rather than competitors.

Look around and you’ll see a few broad business model trends that have reshaped markets over the last couple of decades: unbundling (selling small pieces of your service), disintermediation (cutting out middlemen to sell direct), and uncoupling (solving one particular problem along a customer’s experiential journey).

Broadcast media, for example, monetized for decades by offering free content (shows, news, and music) to customers, then charging other brands for advertising. Later, premium cable and satellite radio appeared, providing the same value (media) but obtaining value differently (charging viewers for access). And, later, broadcasters unbundled their channels, cut out the cable company middlemen, and monetized by serving only specific points in the customer journey.

Right now you’re the incumbent that’s ready to be disrupted by someone who’ll follow one of these business model innovation paths. Or you can be one of those innovators by stepping away from your product for a minute and imagining a new business model.

The innovation we need is in business design. Adding some fancy new tech onto a flawed model will not solve anything.

But Don’t You Work for a Tech Company?

That last bit about not adding tech to a bad model might seem a little weird coming from me.

Yes, I did recently join Casetext, a legal research company with an innovative artificial intelligence offering at its core. But assuming Casetext began with product innovation ignores the company’s history.

When Jake Heller started the company, he had a goal to democratize information. His mission to make law free was supported by venture capital companies who were happy to take on the industry’s two enormous incumbents. While those companies made their bones by putting information behind a (very expensive) paywall, Casetext would begin by breaking those walls down.

That’s a business model innovation. The company provided a similar value (access to information) but obtained value differently (investor funding). And the innovation continued when the company created CARA, Casetext’s very cool and useful A.I. tool.

CARA’s awesomeness created a new value opportunity for Casetext. As I explain it, information at Casetext is free, and the tools that facilitate insights cost. CARA recognizes patterns, makes citing and writing easier, and helps lawyers avoid errors. It’s designed specifically for next-level lawyering.

In this case, the value offered is different (insight tools for expert litigators) and the value collection is different (a free offering of information plus a fee for higher-level tools). Rather than being a shiny tech toy without a sound business model foundation, CARA is evidence of Casetext’s focus on delivering value for its users.

How can you think the way Casetext has about your potential offerings?

Take Some Time to Think Through This

In closing, I’d invite you to take some time to sit with these ideas. Pull out a piece of paper and ask yourself a few questions:

• How do you create value?
• Who’s that value for?
• How do you get value in return?

If you can understand and rethink your answers to those simple questions, you might be able to create the disruption your clients need.