Could most law firms deliver 20 percent more useful work at 20 percent less cost on a typical matter?

I think the answer is self-evidently “YES,” and we’re increasingly seeing firms mobilize to ensure they do—or risk getting left behind.

Call it Prudent Innovation.

Let’s look at some recent developments.

First, check out McKinsey Quarterly’s profile of Seyfarth’s transformation around Lean, entitled “A new order for law.” According to Stephen Poor, Seyfarth’s long-serving chairman, “That cycle [the legal industry boom] camouflaged a structural problem. Corporate legal departments were facing more demands from internal clients to deliver higher value at a lower cost. As a result, the solutions that general counsels needed were becoming more sophisticated. Law firms were not meeting that challenge.”

The key takeaways from Seyfarth’s experience are that taking a “modern” approach to service delivery doesn’t detract from traditional lawyer strengths, it’s a force multiplier, and that while greater efficiency is a good thing, the real value of new methods is greater efficacy, work product that’s more attuned to modern client reality.

Second, take note of the accelerating interest in IBM’s Watson and machine learning generally, e.g. recent coverage around Watson, Ross and Dentons. (I was asked by the ABA Commission on the Future of Legal Services to contribute a piece on Watson for a volume of the South Carolina Law Review dedicated to legal services delivery.) I’m not at entirely sold on Ross’ notion of Watson as displacing legal reasoning (it’s hard to train, hard to validate and hard to get paid, but I could be wrong), but Watson as integrating unstructured client data with systems and legal content and experts seems very powerful.

We held two meetings at Watson’s headquarters in New York, one for law firms and the other for banks.

For the banks, we’re beginning to see a consensus that new tools are needed to handle the large-scale complexity of the big bank compliance needs, e.g., the new Qualified Financial Contract requirements (PDF), as well as ring-fencing, resolution and recovery planning and MREL (PDF) . “Too complex to manage” remains a big issue for banks, and they’ll need to adopt new approaches to solve that problem.

For law firms, we’re seeing many firms’ leaders push their firm into the Prudent Innovation mode, trying to apply new tools like Watson in discrete matters to test and evaluate and catalyze improvements to service delivery.

There are many parallels between the introduction of machine learning and the advent of flight—see David McCullough’s new book about the Wright Brothers. Like flight, machine learning is not a new idea, and the path to widespread use will have twists and turns. But the primary application of airplanes in their early days was delivering the mail, as governments recognized the strategic important of aviation and wanted to support its development. The danger for firms is in oscillating between committed inertia and magical thinking, or as Seyfarth’s Andrew Baker comments in the McKinsey article: “Lately, the problem seems to be that everybody wants the easy button and the ‘one software package’ to solve every issue.”

Third, there is accelerating pressure from nontraditional competitors. Here’s an example of Deloitte taking on law firms in large-scale bank work: Deloitte is managing the service. Clients “don’t want to spend millions of millions of pounds going to lawyers basically scraping data from these agreements. They don’t want to send White & Case or Clifford Chance 30,000 agreements and ask them to get [the data] off the agreements.“

Take a look at the excellent essay from my friend Janet Stanton on the need for law firms to begin to invest in R&D and the cultural and structural impediments to change.

Finally, we see the tragic consequences of optimizing profits through financial engineering in the Dewey trial. Even giving the Dewey management the presumption of innocence for now, it seems they saw no way to reconcile accelerating partner demands for pay with declining financial results, other than financial engineering. How many firms today are spending more time on financial engineering than they are in value engineering for clients? How many managing partners would prefer to spend their time on improving value?

That’s not to say that the path ahead for firms will be entirely smooth. Firms are generally uneasy about the notion that their performance could be better, and they are reluctant to ask clients how they can improve. In-house teams are not always eager to upset the status quo, either. But as both George Beaton and Dan Currell point out, both savvy clients and new competitors are ahead of law firms in their sophistication around service delivery.

Of course, some firms fear that if they deliver 20 percent more value they’ll simply get 20 percent less revenue. That seems like a decidedly anti-market and indeed unlawyerly approach to competing. The risks of lack of innovation are more evident every day as we see Citibank dialing down its growth forecast for 2015.

In 2011, I contributed to the Ark Group’s report, “The Future of Legal Services: Expert Analysis” (PDF), and last month they asked me to update it for a new edition. Most of what I wrote four years ago seems pretty dead on in describing the future, although much of it still seems to be … in the future. For those of us who’ve been forecasting change in law for a while, this is all a little disjointed—as the saying goes, “the future is here, it’s just not evenly distributed.” (Mark Chandler from Cisco and I wrote about Lean in law in 2005 in the ACC Docket.) But nevertheless the future does seem to be happening, and there is no great logic or passion for opposing it.

What is self-evident is that almost every managing partner is somewhat ahead of their firm, every client is ahead of their firm, and almost every client business is ahead of their in-house legal team. So the direction of travel seems quite clear, and the greater risk lies in inertia. The logical path for any firm is Prudent Innovation.

---

Paul Lippe is the CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering.

Editor’s note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, Patrick Lamb, founding member of Valorem Law Group and their guests. New Normal contributors spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. You’re invited to join their discussion.