The problem of non-scalability in the business of law

TL;DR If you are an early stage business owner/founder, would you pay me a fraction of the legal fees usually charged if I were to (1) provide you with what I think is a model template of the document you are looking at; and (2) provide you with the knowledge and education on how the document works so that you have the ability to work with it? For example, instead of paying me $2,000 to review your term sheet, pay me $200 to learn about how it works, and get a model template of a term sheet.

 As a technology lawyer who advises on venture capital funding, as well as a limited partner in a venture capital fund, I see a great deal of startups and companies.

One of the critical things we usually look for in companies is scalability – is the business scalable, and structured in such a way that the product can reach millions, or tens of millions?

Scalability, at its core, is simply the ability to multiply revenue with minimal incremental cost. Most scalable businesses must employ a certain degree of technology in their business processes to achieve this. Technology is great because it addresses both the cost issue (minimizing incremental cost) and increasing revenue (with the ease of distribution).

Some business models lend themselves naturally to a certain degree of scalability. The business of law however, as conventionally practised, is a terrible model for scalability.

This is primarily because lawyers trade time for money, and (usually) charge on an hourly rate. There are a fixed number of hours a day, and the only way to increase revenue past using up all these hours would be to charge more per hour – but market forces generally control this. The only way to “scale” the business is to have more people under you trade more time for money. That’s why law firms want to hire more lawyers, grow bigger, expand to other countries.   

Two other factors generally prevent the scalability of the business of the practice of law– the need for customization, and professional liability (economics).

Anything which requires specific customization is generally non-scalable. If you want bespoke, custom made tailoring, you need specialized attention which requires time. Professional liability also comes along with the practice of law – give the wrong advice, and you face a professional negligence suit.

The problem of non-scalability, the need of customization, and the risk of professional liability affect the economics of law, and generally leads to the conclusion that is only one profitably sustainable model for law – charge relatively high fees.

This is the prevailing practice of law now.

This though, sometimes matches terribly with the needs of the market, because this model really only makes economic sense for highly specialized matters which require a high degree of customization. In this case, the economics on both sides match, because, you expect to pay top fees for specialized attention.

The reality of the matter though, is that, many times, clients don’t need that kind of specialized attention. You don’t need a brain surgeon to stich up a simple cut. In such cases, there is a mismatch of economics – why should a brain surgeon be paid any less when he can be charging higher amounts in another case with finite resources (time), and why should a client pay so much for a simple cut?

Two solutions have come up. One, the lawyer takes a hit on his potential earnings and compromises on fees, or two, the lawyer rejects the case. One way or the other, someone doesn’t win – either you have an inefficient business practice, or, an underserved market.

It is an underserved market because volume-wise, there will always be more straightforward cases which require some degree of legal knowledge VS highly specialized cases which require a highly specialized degree of legal knowledge. There are always more simply cuts and bruises than brain injuries requiring brain surgeons.

Solving the scalability problem

The solution for the business of law lies in being able to capture the mass market (a volume play). If there is a sustainable scalable way to capture volume, then it is possible to meet the economic needs of both sides – lawyers either do a small number of customized cases for high fees, or, in this case, do a large number of non-customised cases for lower fees.

There have been some attempts to try to address this in specific areas of law – for example, the automated drafting of Wills, or simple form documents which generally do not need specialized attention.

I think there are other areas which can be served better. And it has to do with a little bit of self-help.

• There are certain areas of the practice of law which, for non-specialised issues, require only very specific areas of legal knowledge. For example, in the subject matter of general employment law, you don’t need to know about shipping law at all.
• It is possible for lawyers to pass this knowledge on to consumers quite easily on the basis that this is only on a very specific area of law. In fact, a lot of business owners start to realize this and for example, draft their own simply employment agreements etc.
• Some areas which I have been personally asked to advise on which I think fall into this – (1) shareholder documentation; (2) employment contracts; (3) General intellectual property protection for staff; (4) basic service agreements

So my proposition is this:

• I’ll create an online repository/library of legal documents.
• Each legal document will come with a full, thorough explanation of everything in the document, how it works, and even in slight variations or permutations (with an explanation of their differences). Something like a “handbook”, or say even me by means of an online video explaining it. The point is to equip you with sufficient knowledge in this specific area to be able to use these documents.
• For regulatory reasons and to deal with professional negligence, you can’t rely on this as “legal advice”. You will have the assurance though, that there is a team of lawyers which regularly review the documents to ensure they are up to date and compliant with laws.

And the benefit is this:

• Users, especially younger businesses where cost is an issue, you don’t need to pay expensive lawyer fees for basic documents. At the same time, you won’t be blindly using random free templates off the internet which may not work, or, even if you pay for customised templates, be completely left without knowledge when you need to make minor changes.
• Level up – why not learn a bit of legal knowledge which is generally always helpful in life? In this day and age of knowledge, charging a premium for knowledge is much less valuable and justifiable.
• I free up my time for specialized cases – if you need any follow up or customised work, you can pay me a fraction of the fees since this will save both of us time.

To me, law firms should also explore this avenue of the “business” of law. If anything, this automatically leads as a channel to attract more clients.

I will also admit that this would probably only work in very specific areas of law – as identified above, areas which are generally not too complex or complicated requiring very specialized knowledge, and do not require dedicated or specialized attention. Generally a range of day to day basic corporate matters.

I would love to hear your thoughts on some of the following questions:

• To founders/users/business owners – is this something you think you would pay for?
• To lawyers/law firms – why haven’t you explored this model? For those in the know, do the current legal tech startups do this?
• To legal startups creating templates – have you considered education as part of the service offerings to bridge this gap?

Of course, any other feedback is more than welcome.

I’m on a journey to try to make knowledge and education more accessible and affordable, and to sieve out the noise in an age saturated with information. Practicing lawyer by day (I specialize in working with clients in the technology industry), and aspiring technology educator by night. I’ve advised both companies and venture capital funds in their investment rounds with a combined total transaction value of more than US$500m. I am also an active limited partner in a venture capital fund, and sit as an advisor to various startups.