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The Law Firm Disrupted: What SpaceX's Success Can Teach the Legal Industry

In today's edition of The Law Firm Disrupted, we look at how Elon Musk's SpaceX drastically altered the economics of rocket science and ask whether a similar approach could be used to cut costs in the legal industry.  I’m Law.com reporter Roy Strom. Tell me this is nonsense at rstrom@alm.com. ➤➤ Would you like to receive this weekly briefing straight to your in-box? Sign up here.

What the Legal Industry Can Learn From SpaceX’s Approach to Rocket Science/

At the Kennedy Space Center in Florida on Wednesday, billionaire Elon Musk’s Space Exploration Technologies test fired for the first time its large rocket system known as "Heavy." Whether or not that rocket will be the vehicle to put men on the moon again, as some experts predict, 12-year-old SpaceX can already claim one victory: It has drastically altered the economics of rocket science. If successful, Heavy will cut in half the per-pound payload price of sending objects into low-earth orbit. Ambitious as they are, no legal entrepreneur has similarly revamped the economics of legal services. The "More-for-Less-Challenge," as Richard Susskind calls delivering a broader array of legal services for less money, remains largely unsolved. Toward that end, at least two lessons can be gleaned from SpaceX’s approach. The first is that, in important ways, the market for rocket launches is different than the market for legal services. The second lesson is a warning for those still clinging to the billable hour. The economics of launching rockets has historically been based on a government contracting system that, like the billable hour, discouraged companies from cutting costs. SpaceX took advantage of that and built a company focused on rigorously cutting costs, something most visible in its innovative approach to landing and re-using rockets. SpaceX’s Heavy rocket is priced at $90 million per launch. The U.S. government contracts launches from an alliance between Boeing and Lockheed Martin that cost $380 million each, according to a 2012 report by Air & Space Magazine. So let's look at the differences between the market for rockets and legal services. While rocket science is complex, SpaceX is a manufacturer of a specialty product with relatively little competition. It makes one product (now two) that are largely the same every time they’re built. The inputs are known and the outcome is not contested: There is no adversary shooting down its missiles, at least not yet. Law firms and others in the legal market are providers of an array of services. While they have made progress on creating some products, much of their work is different every time they do it. Their inputs aren’t as well-known or defined and their outcomes are usually contested. All of this makes pricing difficult. While firms have made progress on flat fees for less-complex matters, Patrick Johansen, a pricing specialist and former director of client value at Reed Smith, said the competition among law firms for the most complex work makes it difficult to accurately price that work on a fixed fee. “When you get to those more complex things, I don’t think there is enough of them handled by a single law firm to be able to create a critical mass of understanding like SpaceX has been able to do over the last 12 years to say we can do that complex matter for X dollars,” Johansen said. “And I think that goes back to competition. There is too much work spread out.” Despite those differences, legal service providers could no doubt take more creative approaches to cutting costs. And on that front, SpaceX is a pioneer. A study by NASA and the U.S. Air Force cited by Air & Space Magazine said it cost SpaceX about $440 million to go from a blank sheet of paper to the first Falcon 9 launch. NASA’s study said it would have spent three times as much to accomplish the same feat. SpaceX uses one type of engine, whereas some rockets are powered by three different types, which Musk has said triples the costs of maintenance and operations. This “commonality” is key to the business Musk described to Air & Space Magazine. Furthering that theme, the company is the first to land and re-use first-stage rockets; which SpaceX claims cuts the cost of that portion of the flight by 30 percent. And when it ran into technological roadblocks, SpaceX had the in-house capability to develop its own solutions. For instance, the company developed the material to protect its rockets from re-entry heat at one-tenth the cost of what was previously available. The material, known as PICA-X, can also withstand more re-entries, a crucial factor in re-using rockets. SpaceX executives told Air & Space Magazine that the company makes roughly 80 percent of the components for its rockets and space capsules in-house. While Musk didn’t anticipate that level of in-house manufacturing, it was a response to the high prices that vendors charge in the space and aviation industry. That speaks to perhaps the biggest similarity between the markets for legal services and rockets: Purchasers of both have not historically rewarded efficiency. Before SpaceX and private space launches, rockets were made for governments that valued reliability over price. To purchase the best rockets, they paid high prices to defense contractors who priced their margins into the bid. As Musk told Air & Space Magazine, this didn’t incentivize low prices. “If you were sitting at an executive meeting at Boeing and Lockheed and you came up with some brilliant idea to reduce the cost of Atlas or Delta, you’d be fired,” Musk told the publication. “Because you’ve got to go report to your shareholders why you made less money. So their incentive is to maximize the cost of a vehicle, right up to the threshold of cancellation.” Billable-hour skeptics can certainly spot the similarities. “That’s the billable hour model,” said Justin Ergler, director of alternative fee intelligence and analytics at pharmaceutical giant GlaxoSmithKline plc. “You have zero incentive for efficiency. Every hour worked is another hour of revenue.” Ergler, whose legal department has used reverse-auction contracting to move further than most from the billable hour, said some law firm practice groups have begun to rethink their costs in order to provide more efficient services. But is there a firm or legal services provider that has successfully cut the cost of its services? “Not in a lock-stock-and-barrel fashion,” Ergler said. “I would not say there’s a law firm that has bucked the trend and said we can do things smarter and faster and we’ll undercut you on price, because we can and we’ll still make a great margin on it.” One person who advocates drastically cutting the costs of the legal market is Gillian Hadfield, a professor of law and economics at the University of Southern California. Hadfield proposes ways to look at laws and rulemaking entirely different and comes to the conclusion that “we have to start over.” In many ways, that is what Musk did with SpaceX, said Kenneth Grady, an adjunct professor at Michigan State University College of Law and a member of the LegalRnD Faculty who also has studied Musk’s approach to entering new businesses. “The first stumbling block in law is: How do I get from $230 an hour to $30?” Grady said. “That is what Elon Musk says he does. And what we’re not seeing is somebody in the general area of law approach this by saying: “My target price is $23 an hour. How do I deliver high-quality, efficient and good services for $23 an hour? That requires someone to approach the problem from a completely different perspective than how we currently approach it.” Grady points to studies from McKinsey that say available technology today could eliminate 25 percent of the tasks lawyers do. If that were taken to the next step, and someone asked, “Do we need to do this?” Grady says another 25 percent of lawyers’ work could be replaced with something more efficient. “It’s not the can’t, it’s the won’t that is our barrier,” Grady said. “That has been and continues to be the issue. And the next question is when will that drop and how. But that is our current state of the art: a stalemate.” For its part, SpaceX is now competing with Boeing and Lockheed Martin to win manned-mission contracts from NASA, including a contract to send American astronauts to the International Space Station. The upstart company's long-term goal is to send people to Mars. While no other-worldly prize awaits a truly disruptive legal service provider, thinking big is another lesson to learn from a master of the universe like Musk.

Roy’s Reading Corner

On Big Law Adopting Technology: Law.com reporter Ben Hancock spoke with Scott Reents, lead attorney for e-discovery and data analytics at Cravath, Swaine & Moore, about how law firms pick up, albeit slowly, new technologies. In the podcast, Reents said: “While I don’t think lawyers are technophobic, I do think there needs to be structures and methodologies in place to help them understand, test out and develop protocols that will actually work in a legal case.” He added: “No lawyer and certainly no client wants to be told that your case is the guinea pig we’re going to try this on. That makes it challenging, I think, to use new technology in a legal context.” On Automated Legal Services: A class at Brigham Young University's law school lthis week launched an online portal to help people respond to debt-collection suits. SoloSuit, designed by the legal design lab at BYU, aims to help some of the 330,000 defendants named in debt collection actions in Utah during the past five years. More than 98 percent of those sued don’t hire an attorney, which is one more reason that lawyers should work toward lowering costs. There is a vast un-lawyered population out there waiting to be served. More On Automation: Ian Lopez at LegalTech News writes about Littler Mendelson and ComplianceHR launching a free tool for companies to interpret Donald Trump’s revised travel ban on countries such as Chad, Iran, Libya, North Korea, Somalia, Syria, Venezuela and Yemen. The tool, built on a Neota Logic expert system platform, is a “time-saving mechanism” for clients, said Jorge Lopez, chair of Littler's global mobility and immigration practice.

That's it for this week. Thanks again for reading The Law Firm Disrupted. You can check out other new briefings from my Law.com colleagues and sign up here. Please reach out with comments and critiques at rstrom@alm.com.