Anyone who has seen the film Cabaret or heard the soundtrack will remember Liza Minnelli’s ode to the power of money:
“Money makes the world go around
The world go around
The world go around
…A mark, a yen, a buck, or a pound…Is all that makes the world go around….”
Money’s role has hardly diminished since Weimar Germany. If anything, financiers’ influence-and the power of money- has expanded during the intervening decades. Capital is the engine that drives most industries. Why not law?
The Legal Guild Eschewed “Outside” Capital
Law is a trillion-dollar global industry that has many unusual characteristics. One is that it has been closed to “non-lawyer” money. Lawyers have elected to pass on outside capital (excepting credit facilities) to preserve their guild. Law’s growth has been organic–self-regulation has enabled lawyers to control supply and dictate the terms of demand. The legal industry was provincial by design–lawyers carved up fiefdoms with clearly demarcated territorial boundaries. They protected their turf from legal “interlopers” by creating geographical practice boundaries. External competition-other professionals and business structures- was stifled by regulations that precluded “non-lawyers” from investing, managing, or engaging in interdisciplinary practice with law firms. To borrow from a Seinfeld episode, lawyers were “masters of their domain.”
Whereas most industries have used capital to fuel growth, brand equity, differentiation, and increased market share, law has had its own captive market. The profession eschewed outside capital, viewing it as a menacing “foot in the door” for non-lawyers, not a resource to improve delivery and to invest for the long-term. Lawyers reckoned there was no need for outside capital since they controlled supply of the one thing they sold: legal expertise.
Law did not have financial accountability to investors that other industries have had. A small cadre of “partners” were its sole stakeholders. Partners divvied up profits at the end of each year; there was no financial incentive to reinvest. This promoted a short-term, status quo approach and unresponsiveness to changes in legal delivery and mounting client dissatisfaction. Law firms maintained a culture, structure, economic model, and culture that has become increasingly misaligned with clients. That’s why there has been an accelerating migration of work from law firms to in-house legal departments and law companies. It also helps explain the growth of law companies.
The confluence of the global financial crisis, rapid technological advancement, globalization, and a new customer mantra of “more with less” is changing all that. The past decade has seen disruption of many industries–retail, ride hailing, and hospitality are three among a legion of examples. Law is gradually experiencing the effects of these macro-economic forces–especially a new buy/sell dynamic where legal buyers- not law firms,-dictate how, when, from what delivery structure and economic model, and at what price legal services are required. Law is not just about lawyers anymore, nor are law firms the only provider source. Law companies–and that includes the Big Four–have begun to challenge law firms for non-regulated legal work. They have leveraged their tech and process savvy with substantial capital infusions to acquire the resources and scale required to compete successfully with law firms for an expanding share of “legal” work.
The parameters of “legal work” are shifting. There is no longer a presumption that lawyers must perform all “legal” functions; what is “legal” is now determined by corporate buyers. That means that law firms no longer command the market–buyers do. Legal delivery involves legal, technological, and process/project management expertise and the ability to scale it. Law companies now vie for a growing segment of legal business without a deep bench of legal expertise and they are not constrained by law firm practice rules. It’s little surprise that “outside” money–and lots of it–is being pumped into the legal market.
“Outside” Money Comes to Law
There are many explanations why law is now piquing the interest–and attracting the greenbacks–of institutional investors. In no particular order of significance they include: (1) the impact of the financial crisis and the “better, faster, cheaper” mindset of consumers; (2) disaggregation and the growing distinction between legal “practice” and delivery of legal services; (3) the size of the legal market and its fragmentation (Deloitte has the largest market share of legal services–just over 1%); (4) practice is shrinking and “the business of law” is increasing–most incumbent law firms are not equipped to compete with the Big Four and other well-capitalized, tech and process-savvy law companies for that business–it is different than the “legal practice” business; (5) consumers are increasingly willing to procure legal services–including sophisticated ones–from non-law firm providers; (6) legal services can be scaled in both the retail and corporate legal services making them attractive to investors; and (7) the projections for “alternative legal service provider” growth are enticing to investors.
The legal industry is ripe for digitization, consolidation, and scale. Investment will accelerate that process. Consider that LegalZoom recently announced a whopping $500M secondary investment. The company is now valued at $2B–five times what it was four years ago. It has already served approximately 5M individuals and 1.5M small and mid-sized businesses. Burford Capital, a litigation finance company, is putting $3B of capital to work and quietly transforming corporate litigation from liability to asset class. Burford, a publicly traded company in the UK, is now valued north of $4.5B–not bad for a company that launched less than a decade ago. Axiom, UnitedLex and other law companies have put significant institutional investment to work. Ernst and Young recently acquired Riverview signaling a new era in the evolution of legal service companies. Capital is bringing new consumers into the market–especially in the retail segment–and providing all legal buyers with new options. Capital is not changing the practice of law but it is fundamentally altering how legal services are structured, delivered, and priced.
Bill Henderson wrote a blog post analyzing the impact of capital on legal innovation. He noted the uptick in legal investment in recent years and questioned: “Will it be enough, at last, to push legal innovation forward? It’s a fair question, especially to those in the industry frustrated by the gradual pace of change. Money-like technology– will not produce innovation on its own. But capital and technology are tools that, in the hands of entrepreneurs, can accelerate change. LegalZoom, Burford, Axiom, UnitedLex, and other law companies are achieving scale by access to capital. And while it’s intriguing to ponder whether the money or underlying systemic changes in the legal buy/sell came first, it’s the confluence of the two-and an emerging open-mindedness of buyers- that is propelling change in the legal marketplace. The Big Four have long had the money to invest in the legal space, but it’s only recently that they have declared their intention, as Cornelius Grossman, EY’s Global Legal Head put it, to be “a leading disruptor of legal services.”
David Perla, a serial legal entrepreneur, now a Managing Director at Burford maintains capital is perhaps the most scalable of assets. He cogently explains its recent infusion into the legal industry:
“Over the past few decades, the legal industry has learned to use technology, process and project management, and offshore resources to improve the way legal professionals serve clients and solve client problems. In many respects, the profession has adapted around these new tools, to the benefit of providers and clients alike. Yet as a result of a number of factors – including the equity structure of law firms, the difficulty in measuring and quantifying legal risk, and the ability of underwriters to understand both finance and law – law had previously seemed immune to using capital as a force for positive change. That is changing fast, as capital is applied to litigation and a growing array of other areas of the law.”
Implicit in Perla’s observation is that law is no longer solely about legal (practice) expertise–it also involves technology, process, and project management. This helps to explain the incremental change issue raised by Bill Henderson; it’s only recently that significant capital has been infused into law companies. Perla rightly concedes that where the capital–and the scale it provides–will lead is presently unclear, but the experience of other industries suggests it will be beneficial both to legal buyers, those presently denied access to legal services, and providers.
The asymmetrical knowledge and expertise that enabled lawyers to control legal delivery has ceded a growing segment of its monopoly to technological, process, and project management expertise. This has helped to puncture the legal guild and has opened the legal services marketplace up to new entrants with different structures, economic models, skillsets, cultures, tools, and consumer-centric approaches. Capital is one of those “tools” that will enable law companies to achieve scale by providing consumers with greater access, transparency, efficiency, predictability, choice, and value. Money is starting to make the legal world go around. That will be good for consumers and society.