In spite of being the largest market for legal services, the US is also considered to have one of the world’s largest underserved legal markets. It is estimated that 50% of middle-income households have at least one legal problem, but only 20% seek legal assistance and 26% do nothing at all. The numbers for underserved small and midsize organizations are estimated to be similar.
The underserved legal markets as an opportunity
For recently graduated lawyers, these underserved markets offer a great opportunity to establish a practice, according to the American Bar Association. Since there isn’t a lot of competition, it’s possible to start a practice even with limited experience. The challenge is to keep your overhead costs down. Typically the largest cost burden is the time lost on recruiting new clients, since this is non-billable time. However, the internet and social media channels have made it easier to find and reach out to people in need.
The underserved legal market as a threat
Currently, most big law firms see no need to address these underserved markets. They’re too small and not prestigious enough. More importantly, perhaps, the excellent reputation of big law firms helps to attract large and well-paying customers. Hence there is no need to focus or spend resources on the bottom end of the market. In the meantime, current customers are not interested in do-it-yourself internet services, so why invest in such applications?
These are all very reasonable arguments, but an illustration taken from another industry, not so long ago, may make big law firms think differently about underserved markets.
Minimill industry (Christensen 1997)
In the 1960s most steel was made in massive integrated mills that could deliver any quality and quantity of steel required. Around that time, minimills were introduced—plants that used scraps to create small quantities of inferior steel. The greatest advantage was cost: minimills had 20% lower operating costs than massive integrated mills.
The only attractive market for minimills were rebars in the beginning, because the quality demands of rebars is low. However, minimills turned out to be so much more effective at producing rebars, that integrated mills could no longer compete in this market. Despite this fact, none of the integrated mill producers invested in minimills to recapture the rebar market. Then, with technology improving over time, the quality of the minimill steel also improved, and in a matter of two decades minimills took over the entire steel-making industry—and nearly all integrated mill companies went out of business.
Why could integrated mill companies not adapt? Because adapting would have required them to invest in the least profitable end of their business in order to retain what would have been their least profitable, least loyal and most price-sensitive customers.
Implications for the legal industry
It is not difficult to draw parallels between the minimill industry and the legal industry. The underserved part of the market is also the least profitable, least loyal and most price-sensitive client segment. Small, entrepreneurial legal firms that are able to address this segment successfully, will become more proficient over time while building their virtual legal service capabilities. Experience and improved quality will enable them to start serving midsize firms and from there the jump to serving large firms is not that difficult.
When that happens, big law firms will have to play catch-up. They will lag behind in internet capabilities, online reputation, etc. Experience has taught us that most incumbents lose this catch-up battle, leading to a near 100% turnover among firms in entire industries. Other notorious examples besides the minimills, where established reputable firms went under because of similar market disruptions, are the excavation, typewriter, and memory disk industries.
The future of big law?
Will big law firms be the next victims of disruptive innovation, or will big law firms take on the challenge and start innovating their services and offerings in ways that leave them unchallenged? A feat that only the IBMs, Apples, Amazons and Googles of this world have been able to accomplish so far, thanks to using very innovative strategies and practices.
Hadfield, G.K., Higher Demand, Lower Supply? A Comparative Assessment of the Legal Resource Landscape of Ordinary Americans. Fordham Urban Law Journal, 2009. 37(1): p. 129-156.