Having been strictly regulated for many decades, the legal industry has remained almost unchanged as its conservative principles, structures and dynamics have shielded it from many threats of disruption. As such, the legal practice is commonly based on an information-asymmetry between lawyers and clients, an opacity in its value creation and an hourly billing model. Moreover, regulations can play a role in two different ways: with respect to the ownership of law firms and with respect to the practice of law. With regards to the latter, the practice of law has only changed a little, if at all, over the course of the past decades. In recent years, however, technology and engineers of disruptive innovations have slowly begun to unravel the legal industry’s rigid foundations and to digitally transform it, like many other industries before. There are many approaches that offer the possibility of adjusting the legal practice to new client demands in the current age of digitalization. To understand these possibilities better, it is important to examine the underlying concepts of disruptive innovation and platform business models.
According to Clayton M. Christensen (Christensen, C.M., Raynor, M.E. & McDonald, R. (2015). What Is Disruptive Innovation?. Harvard Business Review, (December 2015)), there are two types of innovations. On the one hand, there are sustaining innovations that usually improve performance, target the most attractive customers who are willing to pay extra for improved performance, and extend profit margins by exploiting existing resources and capabilities. Incumbent players usually have an advantage due to their established position in the market as well as their experience when it comes to sustaining innovations. An example in the legal industry of incumbents employing sustaining innovations would be traditional law firms that incrementally expand or improve their legal service offerings, while catering to the same clients in the same (or only slightly altered) manner as before.
On the other hand, disruptive innovations either (1) disrupt an existing market and value network or (2) create a new market and value network. In both these cases, market leaders will eventually be displaced, most commonly by new entrants.
First, new entrants might create goods or services that already exist in the market, but unlike incumbents offer them to the low-end segment of the market (low-end disruption). In this case, new entrants benefit from the lack of established or even entrenched structures and processes within their company and thus can more easily react to new emerging customer needs. Often, incumbent players tend to overshoot in performance with respect to what customers can absorb and utilize. In contrast, new entrants may offer the same good or service in a different way, e.g. more user-friendly or cheaper. Usually, the incumbent player will not be very interested in serving this low-end customer segment, as it may seem not profitable enough in comparison to the high-end, margin-rich existing customer segments it serves. As a result, the incumbent will easily and flippantly cede the low-end market to disruptive new entrants. In the case of the legal industry, examples of low-end disruptors are legal (tech) companies or alternative legal service providers that offer access to minimal and affordable legal services. Traditional law firms are unlikely to be interested in competing in this lower market segment.
Second, new entrants may offer innovative goods and services that are totally new or have never been offered in these ways before. Thereby, entirely new markets are created, giving these kinds of innovations their name: new-market disruption. New-market disruptions extend the use of a good or service beyond the existing market boundaries by making it more accessible and affordable to a larger target customer group. In the case of the legal industry, examples of new-market disruptors are legal tech companies creating whole new markets for online legal services in areas of former nonconsumption, providing legal services in ways that formerly were not possible without their respective innovative approaches.
Most disruptions are driven by catalysts of change, such as rapid advances in technology, changing customer expectations and preferences, macroeconomic shifts, public policy shifts and platforms (Deloitte (2017). Next generation family businesses. Leading a family business in a disruptive environment. Deloitte NextGen Survey 2017, (May 2017)).
Platforms can be considered as disruptive players in almost any industry, especially in ones where information is an important asset. Looking at examples of some of the fastest-growing global brands, such as Airbnb, Uber, Alibaba or Facebook, it becomes apparent that all of these platform businesses have disrupted existing markets by fundamentally changing the way goods and services are exchanged. Specifically, platforms facilitate matches among users and the exchange of goods, services, or social currency, thereby enabling value creation for all participants (Parker, G. G., Van Alstyne, M. W. and Choudary, S. P. (2016) Platform Revolution. New York: W. W. Norton & Company). In the case of the legal industry, many types of platforms and marketplaces have been established in recent years, for example ones facilitating the exchange of legal services in new, digital and affordable ways.
Disruptive Legal Technology
Disruptive legal technologies and platform business models are driving the disruption of the legal industry. Specifically, disruptive legal technologies can be described as the application and combination of technology, principles of disruptive innovation and platform business models within the legal industry. They provide opportunities for greater efficiency and transparency by leveraging platform business models and allow legal professionals to employ new methods of sourcing legal services digitally and in entirely new ways. Legal tech platforms are emerging as a new kind of legal service providers that create and offer innovations to make legal services more efficient, transparent, affordable and accessible. These disruptive solutions address widely prevailing non-consumption and latent demand in the legal industry, i.e. many consumers cannot afford the traditional legal service offerings. By unlocking new sources of value creation and supply with their open and participative infrastructure, legal tech platforms dramatically lower transaction costs. Further, disruptive legal technologies are improving the existing information asymmetry between legal service providers and consumers and will make the value creation of legal services more transparent and comprehensible for consumers (Andreae, Z. (2020) The Common Legal Platform Revolution, in Liquid Legal: Towards a Common Legal Platform, pp. 231-254).
A visionary example of disruptive legal technology and innovation is the Common Legal Platform of the Liquid Legal Institute e.V. Its objective is to advance the legal industry as a whole by increasing collaboration, industry standardization and the quality and speed of legal services, while at the same time reducing the overall costs for all stakeholders in the legal industry.
As the legal industry is on the verge of disruption, members of the legal community that will be affected include not only law firms and lawyers, but also corporate legal departments, individual consumers, the legal academia, the judiciary and many more. Typically, it is apparent that many of these will not take disruptive entrants and their novel approaches in their respective field seriously at first. They are likely to reject the lower quality and slimmer profit margins of the disruptive services, and to recklessly believe that regulations will protect them from the disruptions in the long run. As a result, many incumbents of the legal industry will easily and flippantly cede many existing and new areas of the market to disruptors, will likely only invest in a range of sustaining technologies that support and enhance their traditional legal business models, and will unlikely invest in disruptive low-end or new-market innovations themselves. Overall, disruptive legal technologies will fundamentally reshape and transform the legal industry.