Partner structures, behavioural mechanisms and financial incentives - it seems there are plenty of reasons why the legal profession avoids change. In this article, we take a deeper look at what prevents law firms from innovating.
It's been a while since the financial sector embraced the digital transformation. Financial markets today are largely governed by algorithms and a good auditor has to not only navigate several accounts but also commit to a fully digital setup with a broad variety of products. That this cannot be said for the legal industry is no secret. The term legal tech is often accompanied by words like “potential” and “future”, and it's always a big deal when a law firm adopts some kind of digital technology.
But why is it that law firms hesitate so much? What is holding them back from innovating?
According to a study by Altman Weil, about 70% of the participating partners see themselves as the biggest obstacle to change. A partner-driven company structure often counteracts incentives for innovation because aims of short-term profit usually dominate. This is particularly so given that the partnership structure is, in reality, individual businesses gathered under one roof. Innovation is a costly affair, evidenced by the trend that it is primarily the largest law firms that are driving innovation. Since partners typically work for many years to get their share of profits, a lack of dividend is not going to be popular. Innovation is about securing a business for the future and it can take quite some time before it pays off. So, partners with more short-term goals in mind can prove to be obstacles to investing in technology.
Law firms are doing pretty good. In fact, Danske Advokater's (The Danish Lawyer Association) most recent report Advokatbranchen i tal (The legal industry in numbers) shows that the industry has had an average growth of 4.3% in the recent years. Thus, the total turnover for the Danish legal industry is somewhere between DKK 12 and 14 billion - in a country of just 5 million people.
Why would one deviate from the current strategy when the profits are steady? With no crisis, there is no sense of urgency. Furthermore, the most widespread business model is also a potential obstacle since efficiency is not rewarded when you are selling services as running hours. So as long as the billable is the most common, there will be less economic incentives to innovate workflows.
As long as the lawyers are protected by law, there will also be fewer incentives for a major change in the industry. In many countries, Denmark included, core legal services can only be exercised by a law firm which must be owned by lawyers. As it protects the legal profession, it also slows down innovation. For good and for worse.
In some countries, such as the UK, the legal profession has been liberalised, which has increased competition from digital platforms and consulting firms, such as The Big Four. These competitors are more evolved, digitally, which forces traditional law firms in the same direction.
The legal system functions as an important and stabilising factor in a society so it must be a conservative. Precedence is one of the guiding principles of the system, and such a significant cultural marker cannot fail to have an impact on the lawyer's way of thinking. As a partner in the Danish law firm, Horten, told K-News, "we are not that happy about taking risks in the legal industry, so we all want to be the smart second mover.”
Furthermore, the legal industry is known for its zero-error culture. As innovation inherently entails risks, it runs counter to a risk-aversion ethos. Together, these cultural factors means that nobody really wants to take a chance and be the first to make a move.
Larry Richard and his US consulting firm, LawyerBrain, have conducted extensive psychological studies of attorney behaviour over the past 25 years. He points out that lawyers possess some typical personality traits that make them less likely to try new things. "Lawyers score very low on openness to change... People who are highly skeptical, autonomous and sensitive to criticism naturally tend to be risk averse. They focus on everything that could go wrong as opposed to what could go right, and they are afraid of being criticised if something does go wrong,” he says in this interview.
These personality traits are intensified by the cultural factors mentioned above and by the fact that a lawyer's job primarily is to minimise risk and ensure compliance.