TAX AND TECHNOLOGY

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Transformation in the legal service industry

Looking back 10 years

Marc Derksen

Assistant Professor (VU & TiU)

If you look at the legal service industry from an economic perspective, the real stimulating driver in the demand of (units of) legal production is legal complexity. People pay money to consume units of legal production because it is not cost effective for them to tackle the complexity themselves. In the last decade we see an increase in legal complexity accompanied by an increasing demand for efficiency in the legal services market. This blog explains how these developments have pushed transformation in the legal service industry.  

Legal complexity theory (Ruhl et al) describes the law as a complex adaptive system: a large network of components, with no central control and simple rules of operation, giving rise to complex collective behavior, sophisticated information processing, and adaptation via learning or evolution. With legal complexity being hard to measure due to its social, economic and political aspects, one could imagine it has virtually grown in every way possible. For example, the volume of legislation, its piecemeal structure, its level of detail and frequent amendments, and the interaction between different legal systems, mean that today even legal professionals (not to mention layman) have a difficult time to understand and comply with the law.

"the real stimulating driver in the demand of (units of) legal production is legal complexity"

As legal complexity increases, legal service providers are forced to increase their efficiency in order to meet their clients’ demands for units of legal production (or services). However, considering the traditional (bespoke) business models of legal service providers, we see that they typically utilize high priced labor to solve high complexity problems. This means that solving legal problems is becoming, in relative sense, more expensive over time while clients are showing less willingness (or ability) to pay for the increasingly expensive legal services. This is a serious problem, especially for the individual client market as it inevitably leads to an increasing number of citizens going without access to legal services.  

Also, during the financial crisis that started in 2008, significant economic pressure was placed on many organizations, challenging them to operate in a more cost effective manner. In order to drive down costs, these organizations started to innovate their legal operations and introduce some level of operational discipline. The question here was whether aspects of the legacy models of legal service providers could be augmented or replaced with alternative model(s) in order to adapt to the increasing complexity and propel legal productivity at lower costs. Consequently - over the last decade - organizations started to rely more heavily on inhouse council, alternative legal service providers and legal tech suppliers. In doing so, control of the legal supply chain was wrestled away from the traditional suppliers (e.g. law firms).

According to Sir Richard Susskind, we see that legal services are slowly being transformed from bespoke to commoditized. Legal professionals normally provide services by the hour (most still do). However, nowadays we see that more and more aspects of legal work are being standardized, systematized, packaged and sold in (cheaper) fixed price arrangements. This is partly thanks to developments like legal process mining and automation through (AI) technology allowing legal professionals to work cost effectively. As such, the traditional legal service industry is slowly becoming productization of legal knowledge.

The commoditization of legal services allow for a ‘one to many’ approach as opposed to the ‘one to one’ legacy models. It seems that these models could provide a solution of the rising demand of productivity and efficiency in the legal sector. However, as legal complexity also rises, one might ask whether the technological solutions available today are advanced enough to automate the inherent complex legal processes.

"one might ask whether the technological solutions available today are advanced enough to automate the inherent complex legal processes"

Over the last 50 years the US Tax Code (including statutes, regulations and caselaw) has exponentially grown to over 70.000 pages. This trend is not limited to the US, nor to the tax domain.  One could question whether this growth is actually something that is necessary in order for people to pay their fair share of taxes. A case could be made that the problem of rising legal complexity should be solved at the source (e.g. through a better legal system) instead of through the use of advanced technology by commercial parties. However, I would not expect that the law itself will become less complex anytime soon through initiatives stemming from the legal service industry as their own business depends on it.  

To conclude, the last decade has indeed nurtured transformation in the legal domain, but still the vast majority of the legal service market relies on bespoke business models. Looking forward a decade, one could imagine that the transformation of the legal service industry will continue through the development of legal tech solutions that allow for the automation of complex legal processes. New business models and advances in technology may ultimately completely take over from the legacy models, however I personally think that will only bring us halfway there. In order to facilitate change, key players such as law students, governments law firms, Big 4, legal tech and their clients will need to keep on challenging the status quo and think of ways to make the law less complex.

Marc Derksen

Assistant Professor (VU & TiU)
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