Ask those in the know, and many will tell you that the greatest surfer in the world is Laird Hamilton. However, he’s never won a world title in competitive surfing. He doesn’t compete. In fact, it’s Kelly Slater that holds 11 world titles and has won in excess of $4 million in prize money.
Does that mean Laird isn’t really worthy of mention as a surfer?
No one would dispute that Laird is an amazing innovator and waterman that has elevated the sports of surfing, rowing, kayaking, diving, fishing and other domains. He’s also invented, mastered or put new twists on activities including windsurfing, kite boarding, waterskiing, and is seen as the primary force behind the stand up paddle board movement. As a big wave surfer, he pioneered the use of jet ski launches and something called “foil boarding”. He is also known for curating intense high performance training and nutrition programs. And like any CEO, he’s a pro at evaluating risk and dedicating himself to push through uncomfortable barriers.
If we only looked at competitive surfing as the measure, Laird would not register. This is what makes him a stand alone category. By the way, he has made a fabulous life financially both in and out of the ocean.
In management speak, Laird would be delighted to be described as a Blue Ocean – a concept made popular by INSEAD professors and their compelling book. A Blue Ocean Strategy captures new demand with a superior product that makes competition irrelevant. Red Ocean industries are bloody from battle among numerous commoditized competitors. When you think of Cirque de Soliel, it’s a unique category, and never competed head to head with Ringling Brothers, but it certainly made them irrelevant as evidenced by the close of operations after 146 years in business.
So what does this have to do with legal services?
A new category is emerging which could be viewed as Blue Ocean. Whilst traditional law firms battle directly, a “Law Company” offers a broader set of unique services under a different model. Certainly, the Big 4 ‘accounting’ firms are increasingly seen as Law Companies–but they are transitioning legacy organizations rather than building from scratch.
A Law Company definition is still coming into form, but broadly speaking includes some of the following traits:
• Corporate ownership structure in addition to or in place of a partnership • Lawyers are included, but not paramount in delivering all of the services • Allied professionals may be equally or more valuable • Process Excellence and technology are key planks • Tasks are assigned to the right resource • Tight alignment to the financial and enterprise goals of the client • Supply chain or “ecosystem” mentality and expertise
Setting discussion aside on the Big 4, this article will outline and assess the recent history, current state, and intriguing future of a select few of the more visible Law Companies including the now defunct but pioneering Clearspire, Atrium LLP and Elevate Services.
Clearspire offers many lessons for observers and action oriented entrepreneurs. It’s a gift when entrepreneurs are candid about both their success and failure and co-founder Mark Cohen has bestowed an excellent e-book “The Clearspire Story” which provides an inside account.
While founded in 2008, Clearspire did not hit the market more fully until 2011 and was a highly visible and unfolding experiment. In Mark’s own words, the model was a laboratory comprised of two organizations: an LLC law firm and a Services Company. The corporate organization housed all of the technological developments and “business of law” elements whereas the LLC ensured compliance with U.S. regulatory requirements for the “practice of law”.
Clearspire invested heavily in its proprietary technology (Coral) and was process driven in an effort to pare down real estate and other costs, and enable integration between its workforce and global client roster. The technology enabled lawyers (in-house and outside counsel) to work seamlessly and collaboratively across the globe, linking them as never before with business customers. Customers could track matter progress and budget to actuals in real time, as well as access and reuse intellectual work product. The comprehensive platform included multiple systems in a bricolage of document management, records, conflicts, finance, and unified messaging.
Additionally, a middle layer pulled data from the other areas allowing dynamic data flow and information systems for HR, project management and matter reporting. Tying it all together was the user interface serving as both an intranet and extranet.
All of this was in an era when nothing similar existed, especially in one package. Even in 2018, it is still rare to see client facing collaboration platforms with real time updates of matter status and work in progress billing.
The financial costs for launching Clearspire were startling at the time given the ambitiousness and highly speculative approach of “build it, and they will come.” The initial investment of $5 million represented a sunk cost before day one of revenue. According to Mark, technology was but one piece and the greater significance of Clearspire was the strategic decision to offer project management and fixed fee services in an era when it was still not en vogue among the intended client profile of F1000 companies.
By 2014, Clearspire had ceased operations. So why didn’t it flourish and what lessons have been observed for the benefit of successor Law Companies? Pundits are keen to query whether Clearspire was simply ahead of its time and the hypothesis now being tested is whether today’s market is more amenable.
A successful Blue Ocean business can arise from the most unlikely of conditions. Consider how nascent the video game industry was just a short while ago versus today where budgets exceed Hollywood productions. The flourishing video game studio system is just one part of the ecosystem, and other very unique and successful businesses have emerged. If you have not heard of Twitch, then you likely don’t play and certainly don’t watch video games.
Twitch is a video platform focused mostly on video streaming, “eSports” and other live and on demand content. Founded in 2007, Twitch was acquired by Amazon for $970 million in 2014. As of 2018, Twitch hosts 2.2 million broadcasters monthly and has 15 million daily active users. The predecessor company was called Justin.tv after the founder Justin Kan.
Through his entrepreneurial journey, Justin consumed a number of legal services ranging from corporate transactional support to litigation defense matters, as well as M&A and everything in between. As both a participant and angel investor through YCombinator, Justin also became familiar with the challenges of technology adoption by law firms, no matter how compelling the efficiency gain or value proposition.
Justin now has his eyes set on legal and is applying Silicon Valley, Lean Startup and YCombinator approaches through Atrium, the Law Company he founded in late 2017. Atrium shares striking similarities with Clearspire but there are also some key nuances. In terms of the “market” being served, Clearspire pursued well established corporates whereas Atrium is starting with what Justin knows best: startups and emerging high growth companies.
In the prior 18 months, Atrium has raised an eye popping $75 million and is comprised of two organizations, one of which is a technology corporation which can receive outside investment of capital. The technology company is designed to be in the service of the sister law firm of 35 full time lawyers which complies with the requisite regulations for provision of legal advice. Clearspire and Atrium are similar in respect of their underlying structure and goal to be the consumer of their own innovations which in turn vastly improves the client experience. Contrast this with the traditional law firm model which typically attempts to innovate based upon screaming client demand and rarely as a proactive and anticipatory strategy.
Elevate Services is also a Law Company with a founding team that has decades of experience building legal services business that blend people, process and technology. While operations commenced a few years ago and they’ve employed lawyers from the outset, they’ve recently aligned with U.S. based Valorem Law Group who created ElevateNext which performs all “attorney-required” work for clients, while the “attorney-not-required” work is provided by the primary Elevate business. It would not surprise if they continue to grow by acquiring law firms in the UK or Australian markets as permitted through Alternative Business Structure regulations that are not available in North America. Of course, the technology being developed by Elevate is for global client use among law firms and corporates, which is a nuance from Clearspire and Atrium.
The emphasis of Law Companies for upfront transparency on pricing creates pressures for efficiency at the outset of a matter to be able to deliver and maintain profitability. Absent a change order, once the work is scoped, the revenue is baked, and everything must be delivered under those constraints. While law firms have increasingly adopted fixed fee options as well, Law Companies are uniquely situated to predominantly utilize this measure.
In the case of Atrium, why would it tread where Clearspire struggled and how might it flourish?
Significant investment of time, resources and energy on what is essentially a product that doesn’t see real combat as quickly as possible, is an anathema to the startup ethos of getting a Minimal Viable Product (MVP) into market. Any new business is really just a testable hypothesis. The first patrons of Atrium were likely willing to sign up and “take a risk” on a provider that has the same approach to building their business as the customers themselves. Atrium definitely speaks the same language as its core startup customers — which is markedly different than established corporates.
Purchasers buy on emotion and then justify with intellect. Atrium and other Law Companies like Elevate Services had clients willing to buy before they had services to deliver. Atrium is already climbing the league tables among law providers regarding equity financings with notable Series A to C rounds and approximately 280 customers. That is impressive for a company/firm that only opened their doors less than two years ago and the decision to use Atrium is influenced by the brand and prior history of the founder(s) in addition to great legal expertise. Elevate’s quick rise is also attributable to the goodwill and prior dealings of the founding team and their impressive track records.
When business models, products, services and startups fail — it is usually because they spent more time building in isolation then they did testing with (paying) customers. When customers are indifferent, a business is dead in the water. In the case of Clearspire, there was too much building in isolation at significant cost as measured by financial, labour and time spent before launch. Rather distressingly, the stated and articulated enthusiasm of prospective general counsel purchasers did not translate into executing a buy decision. They loved the idea intellectually, but would not take any risk for certain types of work to be provided by someone other than the most reputable and venerable of legal brands. No one gets fired for hiring (insert known large firm brand here).
One of the more fundamental differences in approach by Atrium to Clearspire is the application of Lean Startup methodology and YCombinator staples of Build, Measure, Learn (BLM) as a constantly rotating and iterating process cycle of product and organizational development. The BLM cycle provides constant testing in a live environment with real clients providing feedback to optimize the offering so that it lands, ultimately, with what customers will accept and buy. The faster and more frequent the cycle spins, the more learning leading to adaptations takes place through feedback and observation on defects, gaps and omissions. You also see what’s working and can double down on delight for items that are hitting the mark.
Atrium has also been very selective in the initial types of work it delivers with focus on financings and more recently commercial contracts and blockchain counsel. Many high end law firms have tailored programs centered squarely towards emerging companies on the front end of their incorporating and early funding process. The firm’s hope is for life time value clients via supply of up stream legal services upon maturation of the company. That, however, is anything but a sure bet. Many of the firms that agree to take on risk in the early days of a company find themselves disappointed when the juicier (interesting and profitable) work migrates to others. It remains to be seen if climbing the “value chain” is something that Atrium can (or should aim to) achieve.
Technology: A Puzzle Piece, but not Panacea
The point of technology for both Atrium and Clearspire is first and foremost to provide quality of life improvements for the legal team members. Often, that equates to just buying the best of off the shelf technology that’s already in existence, but could also mean internal development of proprietary tools. This is an advantage of most Law Companies including Elevate which continues to buy and build as part of its development.
The data that’s laden in corporate documents could be purposefully fluid and dynamic, but most importantly, useful. Enormously valuable data is trapped in PDFs, Google Drives, email and of course legal documents like S.E.C. and other regulatory filings as well as contracts. The ability to mine that corpus is, in fact, much easier said than done–but the rewards are worth it. The goal of Atrium is to be a data-driven law firm through a structured platform that leverages originating corporate organizational documents and contract. It would indeed be a technical win to be able to convert narrative text to data, providing it structure, which can then be used in a myriad of ways.
While the early outputs might not seem revolutionary, like automation of cap tables by extracting data from static documents and creating a database, it is actually a step function forward from the traditional environment of mind numbing Excel spreadsheets. Once narrative text becomes true data, the use cases are tempered only by the imagination. Where there is data, there is insight and potential fodder for other types of product and fluid workflow creation.
Most of what Atrium is producing from a technology perspective is unseen by the client and is focussed on better uses of the inputs toward legal service delivery. While tech enthusiasts pine away for singularity approaching “computational” law with advice rendered completely through some flavour of Artificial Intelligence (AI), it’s a lot to ask of business clients to rely exclusively on programmatically or algorithmic delivered outputs. Law Companies, for all their innovations, are more often focused on mundane efficiency gains than reliance on machine produced legal advice. That will shift as technologies improve, but humans are always in the mix.
Augmented rather than exclusive reliance on AI will be the peak use case for quite some time. This still requires an enormous amount of trust to be exchanged from the client to the provider and that will always mean personal relationships where large sums of money hang in the balance.
From inception, Elevate has emphasized data science, machine learning and AI, plus human intelligence blended together as a key strategic plank of its ongoing development of products and services. Its program is titled E=ME^2 [pronounced ‘me squared’], or “Elevate uses Machines and Expertise in Everything.” Recent acquisitions include LexPredict lead by Dan Katz of Chicago Kent Law School specializing in analytics, data science training, strategy and, risk management consulting in legal services. LexPredict products (LexNLP, LexSemble and ContraxSuite) will eventually blend into Elevate’s “Cael” Enterprise Legal Management apps servicing corporates and professional firms. The prevailing outputs will include items like ‘AI data science meets teams of sophisticated human reviewers.’
Some of the early projects provide M&A due diligence of contracts for forward clients like Cisco – a shared engagement prior to the acquisition. Additionally, services will include AI-enabled contracts repository management, abstraction and search in CLM (contract lifecycle management), as well as process intake, assessment, process and workflow. With increasing regulatory complexity related to LIBOR, GDPR, and Brexit, for example, there will be greater need for ingesting and parsing of regulations and rules, then applying across many jurisdictions worldwide. Other Law Company outputs include Outside Counsel Guideline compliance and predictive modeling for litigation.
With the ability to start with a fresh canvas, adoption of technology for superiorly efficient and effective workflows is not a challenge for Law Companies. There is no cultural drag requiring coalitions of merely the willing to effect change. Lawyers at AM100 firms, for example, might go along with new programmes of delivering work. They might even readily align with transformational technology adoption in conducting their practice. Then again, they might not. Either way, they will continue to work for the firm without reprimand for not ‘complying’ with the firm’s approach especially in robust practice areas.
Law firm innovation efforts will always have fragmented uptake – even among the most successful – whereas Law Companies can have a golden thread laced through the entire operation. At Law Companies, recruited lawyers and allied professionals must contribute more than mastery of substantive legal knowledge via the “practice of law”. There is, instead, a Law Company way to delivery which you either agree to up front — or elect not to join. Established law firms have consensus building requirements which take considerable time to navigate and aren’t always productive.
Value Creation as a Capital Idea
Law Companies also have much more opportunity to build their businesses without taking money from institutional investors. The approach of Elevate has been to fund its organic growth from equity from its founders and utilize a credit facility from Morgan Stanley to part finance its acquisitions rather than take equity from a control venture or private equity investor, but as it grows, perhaps that will change.
Additionally, Law Companies can create value in more ways than the incumbents, especially where they develop their own technologies which could either be marketed, sold, licensed or otherwise extracted for value to an even bigger audience beyond the mothership. A typical law firm that purchases a matter management system would not then turn around and sublease or otherwise convey to someone else. Law Companies will be able to service themselves as well as others with developed technology and have revenue lines and intrinsic value of the underlying intellectual property.
There is also a valuation component for a Law Company that is real and relatively liquid either by further equity investment or straight up acquisition into another business. In many respects, that’s what has unfolded among some of the Big 4 accounting firms that have acquired technology and services companies like Ernst and Young purchasing Riverview Law to support a broad-based multidisciplinary globally diverse operation.
It’s difficult to imagine a traditional large law firm having as great an opportunity for other forms of value capture and especially sale as a going concern. In North America, the prospect of a publicly traded law firm is remote. The prevailing regulatory regime postulates that lawyers have a hierarchy of duties to the court and client such that adding a duty to shareholders’ for asset appreciation and dividends could be viewed as objectionable. In jurisdictions with Alternative Business Structures, this is much less of a concern. For a Law Company, where lawyers are not the stars of the delivery model, the non-law firm organizations could indeed have share capital changing hands in public and private markets. Share appreciation would float further growth of the offerings and underlying company to the benefit of customers. That’s a value multiplier exclusive to Law Companies over incumbents.
The assets beyond real estate for traditional professional services firms continues to be largely driven by fungible talent. Perhaps you really loved working with a specific AM100 firm for your recent acquisition. Was it truly the firm or the specific client team that served you? If that client team moved laterally to another firm, there’s a good chance you would go with them. This is the opposite to technology lead offerings where you are unlikely to change providers when you’ve had a really great experience and are content with price points. There are significant switch costs in changing well entrenched solutions, especially when technology is coupled with subject matter expertise.
Atrium is perhaps the most well-capitalized upstart, but their use cases are all driven towards automation, workflow, seamless operations, and essentially getting the legal work delivered without all of the friction that currently drags on law firms with a lack of dynamic data flow. When posed with questions related to computational law, meaning the idea that something like AI could deliver contextually relevant legal service provision in the form of advice without human intervention, there are no such moon shots being aspired to per se on the technology side for Atrium.
In short, they’re just trying to net out the fundamentals without the encumbrances of organizational and cultural drag preventing adoption and best use of available technology. Lawyers are definitely needed for legal advice, but the support mechanisms should not include armies of assistants who are simply doing tedium based tasks to produce output.
How is Success Measured?
The challenge with new categories of businesses, especially those that take on significant outside capital, is determining what are the proper key performance indicators, both leading and lagging, of which a board should require full account from the CEO. Established Software as a Service (SaaS) metrics include churn rate, monthly recurring revenue, committed monthly recurring revenue, customer acquisition cost, and inbound qualified lead velocity. Law Companies have some elements of SaaS, but also deliver hybrid professional services via talented subject matter experts. With a new category of business, it can be difficult to tell what the best measure of success should be in the early days, but client satisfaction needs to be captured, quantified and acted upon.
Certainly the internal operations can continue to iterate upon efficiency gains whether that be turnaround time, or transactional cost to produce legal outputs with fewer costly inputs of which traditionally, labor is far and away the greatest expense.
Atrium’s investors are world beating, industry making, pioneering innovators such that it’s worth querying, over and above their belief in Justin based upon his tremendous track record, what are they seeing as the business opportunity at Law Companies that would cause them to invest such significant sums? After all, this is only the beginning and more capital will definitely follow.
The two main Atrium investors are General Catalyst (GC) and Andreessen Horowitz – a pair of the most globally recognized venture capital firms. Marc Andreessen in particular coined the phrase that “software is eating the world”, and from his early days inventing the web browser, has since meaningfully participated in revolution across industries.
GC has a theory that verticalization of full stack businesses is happening across multiple industries and segments, like, for example, housing. Software is eating the world, but the way to get software into these industries is not with entrenched incumbents who are resistant and not always incented toward adoption. It is better to reimagine and build a business from scratch with technology as part of the core at inception rather than as a bolt on much later in the tenure of the company.
For Andreesen, a mentee of Michael Ovitz, the appeal of Atrium specifically, but legal more broadly, is that there is opportunity to follow something akin to the Creative Artists Agency (CAA) model which proved to be Blue Ocean. Prior to CAA — talent agencies were essentially order takers lacking vision and team strategies in support of their clients. CAA offered specialists that could handle more than just representation for movie and tv roles, but also product endorsements, publishing etc. and could package clients together including, actors, writers, directors — all on the same project — rather than wait for the studio to offer those roles piecemeal. That sounds like the approach of Elevate’s ME Squared and full stack mentality of Justin’s prior and existing businesses.
Evolution: Not Revolution
While Blue Ocean entities, don’t look for Law Companies to be akin to AirBnB or Uber — flaunting their “disruption” muscle and braying at regulators to vault past rules and regulations — even if those regulations were set out from another era to govern a different type of ecosystem. The larger mature state players like LegalZoom have taken on regulators, sometimes with amazing bravado such as litigating against the North Carolina Bar for restraint of trade. While it is conceivable that Law Companies would take an aggressive posture and it would make intriguing drama for industry pundits — it is has never been the intention.
Having met and chatted at length with the founders of Atrium, Elevate and Clearspire, they have little to no interest in bombastically challenging what remains fundamental ethical tenets unique to legal. No one disputes the reasoning behind regulatory ethics in the first instance. However, one can’t help but query whether regulations can really meet that standard in the modern era as relates to both business models and technological developments that are much more sophisticated than can be reasonably comprehended by the individuals and organizations charged with governance over the “profession of law’ or “business of law”.
It is still early sunrise on this aspect of the legal services industry and it would be folly to suggest that Law Companies will necessarily prevail over traditional players who are not standing still. Law firms have proved resistant for centuries and may always be relevant even if the exact context changes. However, at no time in history has there been as much opportunity for other players to enter the scene and a Blue Ocean wave could easily form to crest. Truthfully, it is more likely for law firms to start to resemble Law Companies than the reverse. No matter where you launch, a rising tide lifts all boats and (surf) boards alike.
This Article appeared in the Ark publication of Future Law Firm Business Models available for purchase HERE