Innovation in the continental European legal market has long seemed to lag relative to the UK, US, and Australia. I have puzzled if my perception was wrong or reflects an actual lag. A recent conversation with a European innovator suggests it is the latter. And I am glad to see this company aims to help the continent catch up.
Introduction and Background
Filip Corveleyn is one of four shareholders of Xenion Legal GmbH, a new type of legal services provider. He is a Belgian lawyer with practice experience at Allen & Overy and other law firms. Filip recently earned an MBA at Cambridge’s Judge School of Business, where he studied law firms and professional services. He studied together with Felix Rackwitz, a former partner and global business development manager of top German law firm Beiten Burkhardt; Felix is another Xenion shareholder. Filip and I spoke in September about the European legal market and Xenion’s approach.
While studying – and continuing now – Filip and Felix compiled a database of alternatives to large law firms. Their list, now up to 261 entities, includes new law, LPO, software developers, and publishers. Their research and analysis of it drives Xenion’s strategy. They presented some of their analysis in The Legal Innovation Matrix (PDF) to the Bucerius Law School in Germany in September. Before turning to what Xenion is doing, I asked Filip to explain the innovation gap.
Legal Market Innovation Lags in the Continental European Legal Market
Felix and Filip believe that the main reason for the lack of real legal innovation in general is the inherent contradiction between the law firm business model and the new demand of clients: more for less. In businesses that do not bill by the hour, which is most, efficiency gains drive down cost and increase profit. In contrast, with the billable hour model of law firms, efficiencies drive down revenue and profit (at least in the short term). That, however, does not explain why Europe lags behind in legal innovation.
Filip offered several reasons why continental innovation lags. The European market is multilingual and multi-jurisdictional, which makes it, at least from a perception point of view, sub-scale for innovation. He also noted that the advantageous tax regimes of Switzerland and the UK have led many companies that formerly had headquarters in Brussels to move to London or Switzerland. That removed key decision makers and buyers who might have driven change.
Perhaps the bigger reason though is conservatism; French, German, and Italian lawyers apparently resist change even more than Anglo ones. He relates one story from practicing when he offered to “buy” a big company’s labor and employment annual spend at 75% of its current budget (fixed fee for all work). The cost savings would have come from efficiencies at the firm, at the company, and how they worked with each other. The client simply was not ready to abandon hourly billing. Also, hourly rates on the continent are generally speaking slightly lower, which somewhat reduces the pressure to change.
Continental Europe has also seen far less of the massive redundancy rounds in law firms than the UK or US have.
News of UK, US, and Australian development has, however, prompted some conversations in Europe. And the conversation has led to some new offerings, which include an Axiom-like outfit opening in Scandinavia, HR companies moving into legal services in Northern Italy, and Dutch payroll companies offering legal services. Most of these companies however still simply offer labor cost savings rather than using their advantage of being commercially organized and motivated. Instead of shifting the playing field, they competed head-on with law firms via somewhat lower hourly rates and so only slowly gain momentum.
And finally, Filip explained that a barrier to legal innovation everywhere, but especially in Europe, is that most initiatives are over-engineered and rely too much on a push strategy. Lawyers dislike both process complexity and being told what to do.
A Theory for Closing the Innovation Gap: Focus on Recurring Legal Work
Filip’s initial innovation inspiration came from his own practice experience, where as a labor and employment lawyer, he saw that only 10% of work was legal. The remainder, a full 90%, was process and project management. He observes that often law firms seem to perform that 90% poorly. I pushed back on this. While I seldom jump to defend Big Law, I hear few complaints about quality.
Filip clarified that the quality of the output is not the problem; rather, the issue is poor service delivery. Again, based on the law firm business model, introducing proper project and process management in the front-end service delivery model of a law firm drives down revenue. “Lower level work does not get the focus and care from large law firms that the high end work does,” he said relating to Clayton Christensen’s model of incumbents providing a service offering that is overshooting the actual market demand for that type of work. This directly relates to aspects of good process and project management and understanding aspects of work flow and decision tree analysis. “There are vast opportunities for new ways of service delivery for commodity legal work, whether that be through people or technology solutions or a combination of both,” he said
Filip reports that Xenion thinks about legal work in three buckets: (1) prevent where possible, (2) remedy where prevention is not possible, and (3) complete projects, which reflect transactions and counseling not related to prevention or remedy. All three can involve new ways of working, but especially prevention. Filip says companies are not yet necessarily ready or interested in this paradigm. Rather, he finds they are typically more interested in having budget or discounted rates than in actually changing how inside or outside counsel work.
Though European clients continue to reject wholesale change, frustration with the status quo drives them to want some improvements. Xenion finds their readiness to accept change is highest for recurring legal work.
Complexity Reduction for Recurring Work
Filip emphasizes that Xenion is about working better, not just deploying labor cost arbitrage solutions. To determine better ways to perform recurring legal work, Filip and Felix spoke to many general counsels on the continent. They learned what they want and what they like and do not like about outside counsel. They also talked to legal start-ups and publishers.
They saw that successful innovation is, in Christiansen terms, sustaining rather than disruptive. So the focus at Xenion is on better service delivery and R&D to find ways to speed recurring legal work with better processes and project management and targeted people solutions. Filip thinks Xenion’s model initially will be similar to what he offered a few years ago: buying a set of legal problems at a fixed, lower price and then engineering solutions and service that solve them at lower cost. The cost savings will stem from combining process improvement, legal outsourcing, and traditional legal services, not just lower cost labor. The main difference is that efficiency gains and consistent quality will drive the business model instead of obstructing it.
The company currently develops technology with an emphasis on simple tools that do just enough. The software will focus on a few core functions and require minimal to no training. Xenion develops software with domestic, outsourced resources and hopes eventually to bring development in-house. Development follows an Agile approach with regular client involvement in scrums, based on design thinking principles.
While Xenion is not yet a law firm, its shareholders are all experienced lawyers. In time, it will probably become a new-look firm that focuses on process improvement and technology in combination with targeted people solutions. He indicates it will not compete on price because he notes that low price in professional services is rarely an effective strategy.
An aspect of Xenion’s approach I found particularly intriguing is how they will avoid software complexity. The company will continually educate clients to avoid “over-asking”; that is, not to request features that go beyond a core function and therefore risk complicating the software. His market studies found that trying to fulfill every lawyer request about a system is what ultimately leads to failure – not success.
I was glad to learn about the state of the continental European legal market and Xenion’s plan to innovate there. Filip and his colleagues have clearly given much thought about how to practice law in a new and better way. The next chapter will be bringing the company’s tools and processes to a more mature point. So I look forward to when they are ready to demonstrate their handy work.