In the Master of Science in Law (MSL) program, innovation is taught as a process that can be learned, practiced, and mastered. This post is a companion to an article published on the Northwestern Pritzker School of Law Journal of Technology and Intellectual Property (JTIP) blog; it explores a case study on diffusion theory from a student’s perspective and through an interview with Professor Bill Henderson conducted in November 2019. #MSLGoesSocial #legalevolution #legaltech #northwestern #innovationdiffusion

March 19, 2020, by Justin Chae

The Last-Mile Legal Problem

There is a scenario known as the “last mile” problem that plagues many industries. Typically, the issue concerns the delivery of a service or product from a hub, where things tend to run efficiently, to a customer at the point of need, where things tend to get bogged down. As a general example, the 600-mile flight between airport hubs of Chicago and D.C. may only take 2 hours but it might take you just as long to drive 20 miles home from work in rush hour traffic. The transportation example plays out in the commercial sector where big names like Amazon and UPS are tackling their own last mile problem with drones. However, in other sectors with cultural and process issues, pure technical solutions like drone delivery can’t solve the last mile problem alone.

As a law student in the MSL program, I was surprised to learn that the American legal industry struggles with last-mile service delivery in serving both corporate and individual clients. For example, while studying How Innovation Diffuses in the Legal Industry, students learn that although the legal industry is generally enjoying record profits, millions of Americans lack access to representation. How can it be possible that revenues are at record highs at the hub of American law firms while many corporate and individual clients go underserved at the point of need?

The Challenge

There is more legal work to be done, and the law is more complicated than ever, but there is not enough legal capacity to deal with all of it. How do legal departments decide what to do when the cost of dealing with legal complexity has grown much like the exponential growth in data?

First, frame the problem. A simple measure of legal complexity, framed in terms of cost per unit of legal complexity that Professor Henderson provides, is the growth in length of the U.S. Code of Federal Regulations (CFR) and the Commercial Clearing House (CCH) Standard Tax Reporter. For example, according to CCH data, the U.S. tax code has grown from about 10,000 pages in the 1940s to over 70,000 pages by 2010. In the case of the CFR and CCH, they serve as tangible memorials to what legal complexity looks like; in turn, their sheer volume serves as a proxy for measuring the scope of complexity.

To deal with legal complexity, and with unlimited resources, legal departments might have the option to increase spending and magic the problem away. However, in reality, legal departments are constrained by budgets and this has the economic effect of reducing supply relative to demand in the legal market. As MSL students learn in Business Strategy, when limited supply is combined with growing demand for legal services, prices generally rise. Although this is a long-winded way of explaining one reason why law is so expensive (a point obvious to many with major social impacts), the point is that there are cultural and economic issues be solved in legal service delivery that require multidisciplinary approaches to problem solving.

Second, frame alternatives. The impact of run-away fees in legal services presents different options for consumers and providers. Among the consumer options, people can decide to pay up or opt-out. As an example of opting out, Professor Henderson, a tenured law school professor, opted to use Legal Zoom rather than hire a lawyer to manage a legal matter – not to make a grand point about anything – but simply because it was a good consumer decision. As for legal service providers, Professor Henderson points out that one option is to lower hourly fees.  He argues, however, that a better option is to manage more complexity per hour.

Third, learn from a case study. In the same way that students learn from case studies in Business Strategy, legal service providers might find a way to deal with complexity by learning from the success and failure of innovative companies in the legal space.  One case study we reviewed in class involved Levenfeld Pearlstein, LLC (“LP”); it was through this case study that I first learned that the major innovation challenge is a business strategy problem rather than a technical one.

The LP Case Study

A hidden gem in the MSL program, the How Innovation Diffuses class allows students to learn information directly from CEOs and other disruptors; Professor Henderson brings case studies to life by inviting industry leaders into the classroom. In preparing this post, I researched my notes from class and interviewed Professor Henderson at the conclusion of the Fall 2019 semester. For a brief background on how LP serves as a case study on innovation diffusion, consider reading my JTIP blog post or go straight to the source at Legal Evolution.

About seven years ago, CEO Angela Hickey joined an ambitious experiment at LP that is now quietly disrupting how law firms are managed, although perhaps the disruption isn’t so quiet. In Professor Henderson’s opinion, LP is a “middle-market firm [that] is totally crushing it financially.” At a high-level, the LP case study follows a familiar pattern – a change agent fosters an innovative business model and implements technology to support it. The novel headline with LP and Angela is that they ditched the billable hour. However, despite the radical shift from the billable hour, Professor Henderson focuses instead on the disruption in culture and leadership.

The disruption, in this case, is holistic. At the top, there is Angela. She is a businessperson and a leader. That a law firm would appoint someone other than a lawyer as CEO is one key innovation to pay attention to, but that is only part of the story. Among the many unique things that Angela implemented at LP, she fostered the idea that a law firm could focus on “creating an unparalleled client experience at an exceptional value.” To do this, LP tracks revenue, profits, and personal contribution as measures of performance. When introducing flat fees and transparent pricing over traditional methods of racking up billable hours, Angela demonstrates a second key innovation that the legal industry may want to pay attention to. Firms can be profitable, manage legal complexity, grow, and deliver value to clients, without focusing on the billable hour.

How long will it be before others try to copy LP’s success? Professor Henderson hinted that industry-wide change takes more than just a management technique – this is not as simple as just getting rid of the billable hour.  To illustrate how difficult it is to change, Henderson says, “there are so many, kind of, Swiss watch piece elements to getting LP to work right. So, it’s not just one thing. It’s like all the pieces working in concert so it works like a timepiece.”

One example of the intricate time piece required to enable a law firm to move away from the billable hour is the need for great leadership – those with the technical expertise, knowhow, and soft skills to navigate people and technology to execute a vision. When commenting on Angela and the LP case study, Henderson points out that “[Angela] was able to be successful because she had tremendous trust.” With that, I realized that the selection and empowerment of a leader with a high emotional quotient (“EQ”) who can foster trust and manage broad expertise is the third innovation to pay attention to.

Ending on trust, Professor Henderson went on to say, “once you see Levenfeld Pearlstine’s model, you realize that great leaders are rare.”

Key Points and Summary

• There is a last-mile problem in the delivery of legal services that requires innovation to the legal business model; a well thought-out technology insertion should follow.
• A radical shift in the legal business model may make a positive impact on social issues such as access to justice by increasing the availability of legal services.
• Legal departments must decide how to operate in an environment where legal complexity grows faster than budgets; they have to figure out how to do more with less.
• Although not new, the concept of doing away with the billable hour is still in its infancy; firms may stand to gain competitive advantage by studying The LP Way.
• Business-savvy CEOs that are capable of fostering trust backed with expertise can thrive in law firms and enable lawyers to practice law.
• Highlighting the interdisciplinary nature of the MSL program, I saw the importance of the LP case study as a result of taking Business Strategy with Professor Justin Lenzo.