“Disruptive”, “disruption” or “disruptive innovation” are buzzwords used by authors, speakers and even researchers when they want to point out that previously successful incumbents in a particular industry may stumble because of the changes invoked by a certain new technology, product or service. Clayton M. Christensen first described the effects of “disruptive technologies” in its seminal book “The Innovator’s Dilemma” (1997). If we re-think his underlying ideas of “disruptive innovation”, we will see and understand that the word “disruptive” – at least in a way Christensen coined it − cannot be used for any breakthrough that might change a specific industry’s competitive pattern. Christensen links – and this is essential for an understanding of his theory − the term “disruptive” to a specific situation from which disruptive competition evolves.
What is disruption?
So what does “disruption” actually mean? In Christensen’s own words: “Disruption describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent business” (Harvard Business Review, What is Disruptive Innovation? December 2015, 4). This broad definition would still apply to many “common” situations where a new competitor challenges existing market players. Christensen, however, only considers a new competitor as “disruptive” if they successfully target segments which have been overlooked by the existing incumbents. Incumbents tend to focus on improving their services and products for the most demanding and thus profitable current customers, thereby failing to meet the needs of all their potential customers. As a result, some segments may be underserved or underdeveloped. The disruptive innovator targets those segments by delivering more suitable functionality with a lower price tag.
In other words, a disruptive innovator needs to originate in low-end or new-market footholds; disruptors start by appealing to low-end or unserved consumers. Low-end footholds exist because incumbents tend to overlook certain less profitable market segments with less-demanding clients. If a company unlocks this overlooked market with a “good enough” product, this is disruptive. Another situation would be a disruptor creating a market that did not previously exist. The disruptor turns non-consumers into consumers. A company only disrupts if it starts in those low-end or new markets and then migrates to the mainstream.
The disruptive market entrant will not be challenged by the existing incumbents in the first place as they are not interested in the market segments currently served by the disruptor. This is why the disruptor may move upmarket relatively unchallenged, and is then able to offer products and services that are required by the incumbents’ mainstream customers while maintaining its competitive advantage. When mainstream customers start to adopt the services and products of the market entrant in volume, disruption (in a Christensen sense) has occurred.
Drawing on this definition and framework; is, for instance, UBER disruptive? UBER is undoubtedly extremely successful in terms of growth, funding raised and customers served and has clearly transformed the taxi business all over the world (when it’s not inhibited by regulation). But this is not enough to qualify it as disruptive under Christensen’s definition. Only if UBER had originated from a low-end or new-market foothold could it be considered a disruptor. However, UBER did not serve low-end customers or unserved consumers. It simply developed a better, cheaper solution to an already widespread customer need. This is not disruptive, but – to use another buzzword – “sustaining”: UBER makes a good product better and cheaper. Conversely, disruptive innovators initially offer products and services which are initially perceived as inferior by most customers For example,the first digital camera was initially inferior to all existing analogue cameras. UBER’s service was, not perceived as inferior, but as more effective and considerably more convenient.
Is Legal Tech disruptive?
Drawing on Christensen’s definition, the answer seems clear: it depends.
In my opinion, many of legal tech companies only offer sustaining innovation. They make current legal services better, faster, cheaper and more convenient without originating in low-end or new-market footholds.
However, some business models do seem to qualify as disruptive. For instance, many people who look for legal advice are currently unserved because legal advice is too expensive or too difficult to obtain. Small claims with low volume, such as compensation for flight delays, have been rarely pursued in court because the time, money and nerves required are usually too high for customers. This is why many potential customers are currently unserved by traditional lawyers or law firms. Companies such as Flightright or WirkaufendeinenFlug turn non-consumers into consumers.
Online Dispute Resolution (ODR) providers like Modria also tap into unserved customer markets. The company helps to resolve customers’ complaints (for instance, after a purchase on eBay) which hardly ever go to court. Even when they do, they produce disproportionately high costs for customers as well as for dealers. A closer look reveals that ODR providers aim at two unserved customer groups: customers and dealers. The traditional judicial system is not capable of competing with these new forms of resolution in terms of speed and costs. The U.K., however, contemplates to revolutionize its court system and to introduce new forms of “online courts”.
In my opinion, there are many more possibilities for low-end market footholds in the legal industry: “less-demanding” customers look for legal advice which they cannot currently afford. They are usually satisfied with a “good enough” product which serves their needs without being too expensive.
Why does it matter?
You may be still wondering whether it makes any difference whether an innovation is labelled as “disruptive” or “sustaining” in practice. Christensen claims that it does make a difference (HBR, What is Disruptive Innovation? December 2015, 6 f.). Christensen’s conclusions may lead to some interesting insights for the evolving legal tech industry:
1. Disruptive innovators are usually overlooked by incumbents. If incumbents and newcomers are following the same “game plan” and targeting the same customers, it will be easier for incumbents to fight back. If a newcomer tackles an incumbent head-on, the incumbents will accelerate their innovation to defend their business. Studies show that sustaining entrants rarely manage to succeed. However, incumbents would find it very difficult to compete with a disruptor because their business focuses on different customer segments and the current business model is hardly suitable to tackle low-end or new-market footholds. Disruptors would, therefore, be able to grow their business in a relatively unchallenged environment. After successfully taking a foothold they can move upmarket. It seems worthwhile for legal tech founders to carefully consider which market segment or customer group they want to tackle first.
2. In order to find the appropriate “niche”, disrupters often build business models that are very different to those of the incumbents. This implies the need to re-think the value chain of legal services, and to find new solutions to longstanding problems without merely tweaking the existing business models. However, the legal industry seems to be – advantageously for legal tech founders − unusual in this regard: like the taxi business, market entry and prices are closely controlled in many jurisdictions. Consequently, taxi companies as well as law firms have rarely innovated in the past. In addition, due to regulation, individual drivers and lawyers only have very limited options for innovation. As UBER’s success shows – in highly regulated markets – it is sometimes possible to compete with very similar business plans, i.e. sustaining solutions, as incumbents only have limited “innovation capital” to fight back. This may also be true in the legal industry.
3. If companies focus on disruptive innovation, they must bear in mind that disruption takes time. Often disruptors are disruptive by virtue of the path they followed from the fringe (the low end of the market or a new market) to the mainstream. This means disruption will take time. While moving upwards to the mainstream, incumbents will be creative in defense of their existing business model. Legal tech start-ups will need some stamina before they can reap the harvest of their hard labour. It would be counter-productive to expect short-term gains or to judge the business success of a disruptor in a short time-frame. The gains are high with a disruptor, but patience and long term thinking are necessary.
To summarise, Legal Tech clearly has the potential to be disruptive. There are, as shown above, some low-end and unserved markets which could be targeted to provide a unique opportunity to grow and develop business models without actual competition by incumbents. However, targeting those markets also means taking the time to eventually move upmarket and compete for more demanding and hence more profitable clients. Due to the highly regulated market environment of the legal industry, “sustaining technologies” might also be an effective tool to assert competition on existing players and gain market shares quickly. Thus, being “disruptive” or “sustaining”, Legal Tech will significantly change the legal industry and create a new playing field for innovation and competition.
Opinions are my own.