Are traditional law firms about to have their Kodak moment?
There’s been a lot of talk about disruption and innovation lately, and rightly so. The profitability of traditional law firms is being threatened. But what does disruptive innovation actually mean? asks Mira Stammers.
Most people liken the words to the Silicon Valley interpretation, which strives for “better, cheaper and faster” products and services. But are these products and services always disruptive?
If you ask Clay Christensen, a Harvard Business School professor, the answer would be no. Christensen describes “disruptive innovation” in The Innovator’s Dilemma as a process by which products or services takes root initially in simple applications at the bottom of a market, and then relentlessly moves up market, eventually displacing established competitors.
According to Christensen, disruptive innovation transforms products or services that, traditionally, are so expensive and complicated that only a handful of people with a lot of money and/or skill could access. It takes these products and/or services, and makes them more affordable and accessible so that a larger population may gain access.
Disruptive products or services tend to address a market that previously couldn’t be serviced (i.e. a new-market disruption) or they offer a simpler, cheaper or more convenient alternative to an existing product or service (i.e. a low-end disruption).
So how does this affect the established players in the market? In short, established players often find it almost impossible to respond to a disruptive product or service.
In a new-market disruption, the established players aren’t servicing those clients precisely because it would be unprofitable to do so under their business model. In a low-end disruption, the clients lost typically aren’t profitable for the established players anyway, so they are happy to lose them.
So what’s the problem? Why should established players, in say, the legal profession care? If it’s uneconomical to respond, then why not ignore it?
Because, as they theory goes, once these innovators have found their place in the market, they improve rapidly until they reach a level of quality where, compared to their competitors, their product or service is the best product or service for the majority of the market’s needs.
Let’s think about a real life example. One that easily comes to mind is the fall of Kodak. Kodak was obviously the market leader in cameras and film. They operated with a ‘razorblade’ business model, in that they sold cameras cheaply and made their profit from film. In the late '70s, they held the majority of the market, that was, until digital photography and phone cameras came along. Suddenly their traditional and successful strategy no longer worked. They were risk-averse and failed to adapt quickly enough. Kodak eventually filed for bankruptcy protection in 2012, later emerging from bankruptcy having sold most of its businesses. Kodak is now a much smaller company that makes equipment for printing and packaging.
What’s interesting about Kodak is that they have seen change coming. They actually built one of the first digital cameras back in 1975. They had the technology and the dominant position in a traditional market, but they failed to change their business model to adapt to the changing environment.
Now, let’s apply these concepts to traditional law firms. Many traditional law firms ignore disruptive innovators because these innovators are attacking the lower end of the market. They decide instead to pursue the higher end of the market. This is what had historically helped them succeed and be profitable, so who can blame them? They charge high hourly rates to clients at the top end of the market in order to achieve greater profitability.
These firms remain risk-adverse and conservative, so disruptive technology is also ignored. After all, in their view, disruptive technology is not in demand at the higher end of the market.
However, in making these choices these firms are actually assuming risk. Not only have they opened the door to disruptive innovators at the bottom of the market, they are also ignoring the impact that technology could have on their practice.
In my view, this is a big mistake. Traditional law firms cannot, and should not, simply ignore the disruption that is taking place. They are not safe. Disruptive players in the legal services market are set to grow, both in numbers and in market share. It is inevitable, and when that growth happens, it will happen quickly. Now is the time to move. Invest in these companies, innovate yourself, leave room for failure, and reinvent your offering.
Whatever you do, however you respond to this change, do it now, before it’s too late.
Mira Stammers is a lawyer, entrepreneur, academic, consultant, author and public speaker. A pioneer in legal innovation, Mira is most commonly known for being the co-founder of Legally Yours, one of the first legal marketplaces in the world. She writes regularly for legal and business publications, teaches contemporary issues in the legal profession at La Trobe University, and is soon to release her book The Modern Lawyer.