[close]

Blog

March 15, 2016

Disruption will not stop at the law school door

by Michele R. Pistone

Law schools are in crisis. A key driver of the crisis is a shrinking job market, which stems in large part from disruption of the legal services sector. Most law schools remain unable or unwilling to address the resulting problem in more than a marginal way. Their hope is that the market will eventually even out and return to the pre-crisis status quo. By doing so, law schools run the risk of overlooking the longer-term impact that disruption of traditional legal services businesses will have on the provision of legal services and, in turn, on law schools themselves. At the same time, higher education is experiencing a disruption of itself. In industry after industry, disruptive innovations have changed sectors in ways that do not allow for a return to the status quo.

In a new white paper, “Disrupting law school,” Michael Horn and I explore various aspects of the disruption with an eye toward how law schools can respond proactively. As we state in the whitepaper, it is clear to us that law schools need to change. Having worked in law schools for two decades, then, I can report that the single biggest obstacle to change is the belief that law schools are ultimately protected from disruptive forces by the regulatory scheme that grants lawyers a monopoly on the provision of legal services and effectively limits access to the bar to persons who graduate from law schools accredited by the American Bar Association (ABA). In our view, reliance on this regulatory scheme for protection will prove misguided. Here is why.

Heavily regulated industries can be disrupted. Uber’s assault on the taxi industry illustrates one strategy. Uber’s novel business model, which intentionally by-passed the regulators, has been embraced by customers, investors, and drivers. As we have seen in other industries, once innovations like this accumulate sufficient market support, the regulations will ultimately be loosened to accommodate them.

It is no surprise, then, to see changes in the regulations affecting both lawyers and law schools. Michael and I identify at least three cracks in the foundation.

First, to an unprecedented extent, advances in technology are altering the traditional legal services value network. An industry that for decades has provided expensive customized solutions for each individual client is now seeing technological innovations bring more standardized, systematized, and, in some instances, commoditized offerings to the market. The rise of LegalZoom is an example of this kind of disruption. LegalZoom has been challenged on regulatory grounds; the claims were that it was engaged in the unauthorized practice of law. LegalZoom won or settled the court challenges. Those successes have motivated it to expand upmarket, as is typical of disruptors.

Second, technological developments are breaking down the traditional rationale—the protection of the public—for granting lawyers a monopoly on the practice of law. If a non-lawyer aided by software can provide the same service as a lawyer, then it is not the public but the lawyers who are being protected by the legal profession’s monopoly on the provision of legal advice. State regulators of bar licensure are taking note. States are beginning to experiment with providing non-JDs limited licenses to provide legal services that until now only JDs could provide. The State of Washington is the first U.S. state to license legal technicians—non-JDs who are specially trained to advise clients in a limited practice area, in this case family law. Akin to a nurse practitioner, under new regulations, a limited license legal technician (LLLT) can perform many of the functions that JDs traditionally performed, including consulting and advising, completing and filing necessary legal documentation, and helping clients understand and navigate a complicated family law court system. Only two years old, this new model is already gaining traction outside of Washington; the bars in California, Colorado, Massachusetts, New York, Oregon, and Utah are each considering similar limited licensing options to authorize non-lawyer practitioners to practice in limited capacities in their states.

Finally, on top of the changes coming about through technological innovations and new licensing models, higher education itself is also seeing a variety of potential disruptors emerge, all powered at least in part through online learning. From coding bootcamps that blend online and face-to-face learning, to online course providers, and from providers of modules of online content, to online, competency-based programs, there is no shortage of organizations disrupting traditional higher education. These startups have the potential to transform higher education by offering programs that are more flexible, more convenient and, often, more affordable than programs offered in the traditional higher education model. And because they are able to take advantage of a variety of new technologies, business models, and teaching pedagogies, these players are positioning themselves to change the status quo in higher education. Here again, law schools may feel protected from the disruption that is coming toward the universities in which they sit because of strict ABA accreditation standards that limit online competition. But here, too, we warn against becoming too complacent when relying on existing regulatory protections. The ABA recently granted a variance to Mitchell Hamline Law School to offer a blended online, in-person JD program. This acceptance of online learning within the JD, coupled with the ABA’s push for the adoption of learning outcomes and formative assessment, suggest that efforts to innovate using online technologies will find support by accreditors. And students may find online programs attractive as well. Judging from its first class, there is pent-up demand for such an offering; the students who enrolled in Mitchell Hamline’s blended program had higher predictors of success (LSAT and undergraduate GPA) than the class of students enrolled in the traditional face-to-face JD program. The program’s former dean, Eric Janus, told me that students in the blended program even expressed gratitude to the school for offering them an opportunity to learn the law. That’s because before this offering became available, the alternative was nothing at all.

Once online learning becomes more available, schools may find students who would otherwise default to in-person programs flocking to online alternatives. For example, the convenience and flexibility that online education offers may become attractive even to traditional students, as more students seek out experiential learning and practical training opportunities that require them to be off campus during traditional class times.

Ultimately, law schools need to realize that they will be exposed to the same form of competition that has lead to the devastation of entire industries. To deny this truth is to ensure its application to the law schools of today.

Comments

  • Hi Michele

    Interesting that you use Uber as an example of a disruptor. In the HBR Dec 2015 article by Clayton Christensen https://hbr.org/2015/12/what-is-disruptive-innovation Prof. Christensen specifically uses Uber as an example of a company that is NOT illustrative of disruptive innovation theory. He goes to great lengths arguing why Uber is not an example of disruptive innovation saying that “Uber is clearly transforming the taxi business in the United States. But is it disrupting the taxi business? According to the theory, the answer is no. Uber’s financial and strategic achievements do not qualify the company as genuinely disruptive—although the company is almost always described that way. Here are two reasons why the label doesn’t fit.”

    by Dean on Mar 23, 2016 2:41 AM PDT REPLY
    • Thanks Dean for keying in on the Uber question. I’ve talked to Clayton Christensen about his assertion, and in the full white paper we address the question head on in a lengthy endnote. Here’s our take on Uber, which I’ve pasted in for you. We think it is clearly disruptive based on the same tests Clayton uses.

      Although several experts in disruptive innovation have opined that Uber is not a disruptive innovation, we disagree.

      Clayton Christensen, Michael Raynor, and Rory McDonald argue in “What is Disruptive Innovation?,” Harvard Business Review, December 2015, https://hbr.org/2015/12/what-is-disruptive-innovation (accessed February 16, 2016) that Uber does not meet the classic tests of a disruptive innovation because it did not originate in a low-end or new-market foothold and because it caught on with the mainstream quite rapidly in a way that has been described as being “better than” the incumbents.

      If their analysis is right, then Uber is indeed not disruptive even as it may be successful.

      But we think there is a misunderstanding in the origins of Uber’s business, the nature of its business model, and its subsequent growth. Clarifying its origins and this growth shows that Uber did follow the pattern of disruptive innovations and is indeed disruptive.

      First, Uber started in an area of nonconsumption—among people who wanted to have a black car service but could not afford it. The Uber version of a black car was certainly not as good or reliable as booking through a traditional black limousine service, but it was better than the alternative, nothing at all, for these consumers. And for the drivers of the black limousines, Uber created business for them, as it increased their utilization and allowed them to make money by driving when they would have been otherwise idle.

      For students of disruptive innovation, Uber’s next move—to take on the taxi industry—seems counterintuitive at first because it appears to be a march down-market as opposed to up-market. But for Uber to improve, grow, and ultimately build its profitability rather than just be a niche service that Lyft or one of its competitors might have swallowed up, it had to increase its capacity and availability, and the only viable market was the taxi market. Thus, this move we think appeared to be an up-market one from the perspective of Uber—counterintuitive to the broader market, and precisely why it was so effective, as disruptive innovations typically flip conventional wisdom around competition in an industry on its head.

      To take on taxis, Uber created its UberX offering, which allowed people who owned any car to monetize their time by driving others. The seemingly high-end offering that Uber already had—its successful black car service—boosted Uber’s reputation and likely reduced its marketing cost to acquire both customers and ordinary drivers, many of whom had never before driven to earn money, in the early going of the new UberX service, which likely made it more profitable than observers might imagine. In addition, because Uber’s core technology asset in many ways represents a fixed cost, each additional user on its platform carries only a marginal cost and therefore represents pure profit; as such, even with the addition of support personnel and so forth as the platform has grown exponentially, disrupting the larger taxi market has represented more of an up-market move than it might at first appear from the outside.

      And from the beginning, UberX cost significantly less than the comparable service from a taxi—the hallmarks of a low-end disruptive innovation at the very least, and potentially a new-market disruption as well in that Uber has served some nonconsumers of taxis who previously had opted for mass transit—as its technology platform eliminated the need for the middle-man taxi services. Today its service remains lower cost than the comparable taxi service almost everywhere, from the United States to Vietnam. This elimination of the middleman and accompanying reduction in cost has helped Uber create asymmetries of motivation that make it hard for taxi services to respond effectively—another measure of whether something is disruptive. Because of how fast Uber has cut into their businesses, taxis of course have responded, but their introduction of apps or other technology solutions has missed and not responded to the fundamental in- novation Uber’s technology platform allowed, which was the elimination of the middleman taxi company that owns taxi medallions and often the cars them- selves, as well as the role of the dispatcher.

      By having a technology enabler that allowed it to strip out the middleman, Uber has also been able to improve rapidly and retain its low-cost value proposition, a key test of a disruptive innovation. Although many have said that Uber was better than taxis from the get-go, a strike against something being a disruptive innovation, this analysis ignores the fact that Uber’s availability in many areas and at many times was far less reliable or predictable than the local taxi option, particularly in suburban areas just outside of cities, in situations where a customer would want to reserve a taxi in advance for a specific time, or in circumstances in which ordinary drivers did not want to be driving. By increasing capacity rapidly with the aid of its technology platform and its capacity for dynamic surge pricing, Uber has continued to improve along the same trajectory it did when it launched UberX after UberBlack and tackle these more complicated problems where there is less population density, timing is critical for customers, or there are fewer cars at a particular hour or in a particular circumstance. Thus, although Uber may now be better than a taxi service in many areas and situations, it wasn’t always so. The slope of Uber’s improvement has just been extremely rapid.

      There are also certain circumstances in which taxis are still arguably better than Uber, which further illustrates Uber’s disruptive origins. For example, because of regulations governing who can pick up at certain airports and how, for customers needing to get in a car as soon as they land, Uber can be a risky, unpredictable substitute for a taxi. The history of disruptive innovation, however, suggests that these regulations that preserve the status quo will likely fade away over time, and Uber will improve to serve these situations as well with its lower cost value proposition.

      Perhaps the most compelling point suggesting that Uber is not disruptive comes from Scott Anthony’s observation in his piece “How Understanding Disruption Helps Strategists,” Harvard Business Review, November 18, 2015, https://hbr.org/2015/11/ how-understanding-disruption-helps-strategists (accessed February 16, 2016). In the piece, he writes, “If you compare the snapshots of Uber and Airbnb on Crunchbase one fact stands out: Uber has had to raise 3.5 times the amount of capital Airbnb has raised ($8.2 billion versus $2.3 billion) even though it is a younger company. Uber knows its battle against incumbents will prove costly.” Anthony’s argument in essence is that Uber has to spend a lot of money because it is in a head-to-head confrontation with the incumbents as opposed to a disruptive one where it would not need to spend as much money. That said, we think the nature of Uber’s business, which operates in a different market from Airbnb, its rapid progress and growth, its competition from Lyft, and its loftier ambitions of replacing car ownership, likely helps explain why it has raised this much capital and yet still is disruptive.

      by Michael B. Horn on Mar 25, 2016 8:38 AM PDT REPLY

Leave a Comment

(Required)
(Required but not published)
(Optional)