Law Firm 3.0: Generating Competitive Advantage Through Cloud Solutions

OVERVIEW

Over the past decade, digital transformation has had a profound impact on the legal services sector and the competitive landscape of the industry, particularly for small-mid sized law firms. The proliferation and adoption of digital technologies have shifted client expectations as it relates to the efficiency and quality of service in an increasingly interconnected, mobile, and "on-demand" world. This paper focuses on how cloud-based applications can enable the development of a non-traditional business model for "future-ready" law firms in an increasingly competitive market.

THE LEGAL INDUSTRY: A SHIFTING COMPETITIVE LANDSCAPE

The legal services industry in the United States is the largest globally, with cumulative revenues of nearly two trillion dollars between 2012-2018. By 2023, revenue generated by the legal sector is projected to surpass $340 billion. According to the American Bar Association, the number of lawyers in the United States increased by 15.2% over the past decade. The number of US attorneys is expected to grow another 6% through 2028, even though estimated year-over-year revenue growth for the same period is estimated to grow at less than 2%. In other words, despite its size, the supply of legal services is outpacing the demand in an increasingly saturated and highly competitive market.

New approaches to differentiation through operational efficiency and effectiveness, especially as it relates to client service, will be essential for law firms to remain competitive in what continues to be a buyer’s market in an overall decline in demand in legal services since 2004. The perception gap of how clients view law firms as it relates to technological adaptability vs. firm perception is significant. Nearly 20% of clients in one study were less convinced than law firms that changes driven by technological innovation will be made to existing service models to offer greater value.

PRE-EXISTING BUSINESS MODEL

The majority of small-mid sized law firms are modeled after a "full-service" approach, meaning that they contain multiple practice areas. The focus of traditional law firm management is typically on the total number of attorneys representing the broadest range of practice areas possible to expand the scope of potential new clients and workflow. Differentiation is attempted by firm-centric (as opposed to customer-centric) factors like headcount, scope, and scale of representative transactions, the breadth of geographic coverage (i.e., the more locations, the more competitive the firm), and the cache of the physical office space as an extension of the brand. The basic value proposition of this model is based on positioning the firm as a "one-stop-shop" to increase client convenience through cross-servicing while mitigating business risk through diversification.

However, a firm’s ability to capitalize on this structure and effectively deliver its value proposition is increasingly challenging in the current landscape, in part due to the industry’s slower adoption of digital technology, including cloud-based solutions. The legal sector has not kept pace with other industries as it relates to digital integration to improve internal efficiencies and capabilities (including overhead reduction) and client service.

A recent survey by KPMG revealed that 85% of enterprise decision makers, including law firm managers, think they have “a two-year timeframe to making significant inroads on their digital transformation before sustaining adverse financial impact and/or lagging behind the competition.” And yet only 19% of in-house legal teams are well-positioned to support enterprise digital efforts, and according to a recent American Bar Association (ABA) legal technology report, less than 55% of law firms currently use cloud computing (including Software as a Service, Infrastructure as a Service, or Platform as Service offerings). If we extrapolate and apply this data to the more than 440,000 law firms operating in the U.S., approximately 240,000 law firms are still relying on legacy and on-prem applications and software to manage business practices. This approach puts traditional firms with multiple practice areas and brick-and-mortar offices at a competitive disadvantage, stifling operational efficiency and client service while simultaneously increasing costs associated with space, maintenance, and IT staffing.

NEW BUSINESS MODEL

A new “future-ready” business model for small-mid sized firms is possible through the adoption of cloud-based applications that enable the firm to adopt a distributed (virtual) model (either in place of brick-and-mortar offices as seen with the entry of firms like Fisher Broyles or a combination thereof). Unlike the traditional model, virtual firms can leverage the power of cloud solutions to gain competitive advantage by improving and optimizing operational and financial efficiencies, productivity, scalability, and client service and engagement.

From a financial efficiency standpoint, the reduced costs of digital operation and decreased overhead allows for greater flexibility in determining client rates and fee structures, creating value for both the client and the firm. The reduction in overhead is passed as a benefit to the client in the form of a lower hourly rate without compromising the firm’s ability to maintain a competitive rate relative to its costs.

In the new model, quality of service remains the same for both parties, regardless of how new matters are structured financially to create a win-win scenario between the client and the firm. Disassociating rate with service quality is a significant point of difference and advantage for virtual firms vs. traditional firms, particularly as it relates to client acquisition through a more compelling value proposition and client retention, both of which impact profitability. 

Leveraging cloud solutions also enables the firm to provide the same breadth of service for clients with multiple matters across different geographies at a fraction of the cost of traditional brick-and-mortar firms, and to deliver those services more efficiently through process optimization.

CHANGE BARRIERS & DRIVERS

The proliferation of digital adoption across client industries and a buyer’s market is driving the transformation of the legal sector and the new business model. Shifting client expectations requires that firms adopt a client-centric mindset to survive, particularly as we enter the fourth transformation of augmented, mixed and virtual reality solutions and AI/ML applications for enterprise. 

For many law firms, pivoting this quickly to keep pace with the technological changes in the market is not realistic, given the constraints of the pre-existing model. While other industries have been innovating throughout the digital transformation cycle, the legal sector remained stagnant, in part due to an initial tension between public/private/hybrid cloud adoption, confidentiality compliance, and security concerns creating barriers to adoption.

However, as of 2019 more than 20 US state bar associations have issued ethics opinions on this topic and concluded that lawyers and law firms “may use cloud computing, so long as they exercise reasonable care to keep client files and information confidential.” To this end, more than 30 US states have adopted ABA Model Rule 1.1. which requires law firms and attorneys “to keep abreast of changes in the law and its relation to technology,” and remain “aware of the benefits and risks of technological applications and the standards that regulate them.”

Despite ABA approval, lack of attorney and law firm awareness and education as to the competitive benefits and risks of integration continues to be a barrier to cloud adoption. According to a recent survey by the ABA, only 10% of law firm respondents said they expected to replace a legacy tool with a cloud tool in 2019, and 47% had no plan to do so. Among firms that had adopted cloud solutions, only 40.7% responded that the adoption had resulted in “changes to internal technology or security policies.”

While regulatory forces have been a driver for the opportunity for digital transformation, increased competition and shifts in client expectations will drive the adoption of the new business model moving forward.

The proliferation of digital integration has shifted buyer behavior across all segments of the professional services market as an “increasingly technologically aware workforce is upping its expectations in terms of the use of technology,” including rapid communication and response time from advisors. The digitization of legal documents, including e-signatures, has changed client perception of turnaround time. Law firms that represent clients in industries well-versed in technological adoption and innovation will be required to update their own models and practices to align with their clients’ practices and policies for successful retention.

Virtual or hybrid firms, enabled by digital technology, are shifting the paradigm for the development and delivery of legal services. Firms that embrace the new model of delivery will capture and maintain a competitive advantage over late-stage traditional model firms that cannot keep pace with the digital innovation in the market.

 According to the ABA, cloud services are part of the overarching IT equation and strategy for “only a small majority of lawyers and law firms,” as compared to 96% of enterprise in general. These statistics reveal a significant disconnect between clients and their legal providers and raise important strategic questions for traditional law firms around client service and value creation in a digital era.

THE FOURTH TRANSFORMATION: AI, BLOCKCHAIN & THE LEGAL INDUSTRY

Embracing digital technologies and cloud-based solutions is essential for law firms to survive not only based on current market factors but also to prepare for future applications for competitive advantage, including AI and blockchain.

AI and machine learning solutions are already being adopted by firms to leverage systems data for more accurate financial forecasting, operational decision-making, hiring, and to identify actionable client insights. There are reports of firms even leveraging AI/ML to forecast the outcomes of litigation cases by analyzing a selection of cases that have appeared before a certain judge, to inform litigation strategy while providing value-added information to the client.

Lawyers and law firms should also be focused on the development of blockchain technology, and the implications of blockchain not only for their own practice, but also as it relates to its clients' industries. According to a recent study by Deloitte, nearly one-third of professional services firms anticipate investing $5 million or more in blockchain initiatives over the next 12 months as “momentum has begun shifting from ‘blockchain tourism’ and exploring toward the building of practical business applications.” In the same study, 53% of firms responded that blockchain technology has become a critical priority for their organizations in 2019.

While enterprise adoption of blockchain is currently outpacing regulatory and legislative action (with the exception of Delaware in the US, which now allows corporations to list its shareholders on the blockchain), lawyers and law firms that have a working knowledge of blockchain issues and opportunities will be at an advantage, particularly as it relates to how to help clients navigate and manage smart contracts.

Emerging AI/ML and blockchain applications also present an opportunity for new business model firms to attract lateral talent from traditional firms that remain behind the digital transformation curve, to capture client share and advantage.