Christensen and LegalZoom

Last semester, I did research on how legal technology companies such as LegalZoom track Christensen’s The Innovator’s Dilemma model for disruptive innovation, subject to some important and significant barriers. I will briefly summarize my findings here, but will note that all of my findings and assertions are researched and supported in my final paper for Professor Dolin’s class last semester.

I took as my baseline the chart from The Innovator’s Dilemma of the steel minimills’ progress over time. (Page 90 of The Innovator’s Dilemma, figure 4.3). To briefly summarize for those who have not read the book: The minimills, which are small steel mills, at first could only produce rebar, the lowest quality kind of steel. The big steel companies were more than happy to get rid of this part of their business, since it did not do much for them. Eventually, the minimills learned how to make better and better steel. At each of these junctures, the big steel companies were not worried, because they were focused on what their customers wanted (namely, sheet steel). However, the minimills were eventually able to make this type of steel as well, and basically drove all of the big mills out of business.

In my paper, I found that LegalZoom’s capability can roughly track that of the minimills. The company started with simple documents, such as wills. BigLaw and even mid- and small- law was not too concerned with ceding this market, presumably because those who were using LegalZoom for wills at the time were not going to pay attorneys to draft one anyway.

LegalZoom quickly increased its capability, eventually being able to file patent applications, bankruptcy documents, etc. And, in the UK, LegalZoom now has an Alternative Business Structure license, allowing it to do the most complex type of legal work, as it can partner with (and own part of) a law firm.

However, unlike the steel minimills, LegalZoom faces serious governmental obstacles to performing increasingly complex legal work in the US. Specifically, this includes the ban on fee-splitting, and the Unauthorized Practice of Law regulations. I found that as LegalZoom begins to compete with more complex work–and thus bigger and bigger law firms–the firms, through the organized bars of each state, will begin to seek enforcement of these regulations. Since the “practice of law” is typically not defined well, LegalZoom faces litigation risk, and perhaps operational risk, from these enforcement proceedings.

Thus, LegalZoom’s trajectory is subject to an artificial ceiling from the government, whereas the steel minimills were subject to no such ceiling.

This is only a brief summary of a much longer paper, but I would be happy to discuss any of the foregoing with any of you!



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