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Do open legal markets spur innovation?

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The Colombian case.

Twenty years ago, Colombian lawyers were still artisans. Most of them practiced law the same way their predecessors had a century before. The country has had a long and strong legal tradition, inspired by the formalistic Spanish and French systems.

This tradition has reinforced the view of a lawyer as the knowledgeable doctor of laws, possessor of an almost unattainable knowledge, writing commentaries to the Civil and Commercial Codes, lecturing at local universities. These artisans worked alone, at their desks and among books. There were few “large” law firms and the largest probably had around two dozen lawyers. In fact, except for a few pioneers, most lawyers thought the idea of a law firm as anathema to the way they saw their profession and their role in society. So, it is perhaps surprising that Colombia’s legal market today is one of the most dynamic and open legal markets in the Americas.

There is no great case study of how the Colombian legal market became an open one. There wasn’t a legislative commission studying the need for reform or a high-profile antitrust case that tore down the barriers of the profession. A managing partner of a Colombian law firm recently suggested to me the most plausible explanation: neglect.

By design or not, the Colombian legal market is an open one, where everyone competes freely. Unlike in Brazil, foreign law firms can practice Colombian law. And, in contrast to the US, Big Four firms can provide legal services. There is no restriction to non-lawyer ownership of law firms and no requirement that they organize as partnerships.

Has this openness resulted in more competition?

For sure. Competition is intense and legal service providers battle fiercely for market share. The openness of the market and the growth and increasing internationalization of the economy have created many changes in recent years. From 2006 to 2015, the legal market grew fivefold. The number of law firms increased threefold. In the past five years or so, international firms have started operating in the country.

They are now significant players in the market. Some of the Big Four firms have robust legal areas and are moving up the value chain. In recent research that Adam Smith, Esq. conducted, Colombian law firm partners told us they see the Big Four as the greatest threat to their business, more so than foreign firms arriving in the country.

Has this openness resulted in more innovation?

Not exactly. Proponents of open legal markets often argue that openness spurs innovation. Colombia is a case study of how this isn’t necessarily so. Absent other conditions, openness does not lead to greater innovation.

Before we continue, let me suggest a definition of innovation. Drawing from Peter Drucker’s work, I’ll define it as finding opportunities in change for doing something new or doing something differently, which clients find valuable.

Have Colombian legal service providers found those opportunities to do something new or different? The openness of the market, the resulting competition and changes in the economy have at least forced law firms to manage themselves differently. As Adam Smith, Esq. partner Janet Stanton says, sometimes “innovation” in Law Land is just applying standard business practices widespread in other industries. In addition to the few firms that pioneered the idea of the law firm in Colombia, many more have realized that they ought to manage themselves as a business if they want to survive. Several law firms have adopted standard, common-sense business practices. A select few have adopted practices that are exceptional even in more mature markets.

But don’t look to Colombia for transformative business models that are reshaping the delivery of legal services. New Law providers have begun to appear, offering online services and automated document creation. But they mostly follow successful business models implemented elsewhere. Even though most law firms are now organized as corporations (an innovation by U.S. standards!), they’ve mostly stuck to partnership-inspired structures and models. No law firm has seized the opportunities that the lack of regulation of legal services provides to present the market with a completely different approach to doing law.

Why hasn’t a more competitive legal market resulted in more innovation? Our recent research of the Colombian legal market offered clues. Some market leaders we interviewed blamed clients. Clients, too, are enmeshed in the traditional legal culture. They like to do things the way they’ve always done them. Sure, they may whine a little about fees, but overall, they’re not interested in experimentation. One respondent told us that for his firm to evolve, its clients would have to do so, too. The firm didn’t want to go too fast and have the client say, “Let’s go back to the way we’ve always done things.”

As Bruce MacEwen, president of Adam Smith, Esq., points out in his latest book, “Tomorrowland: Scenarios for law firms beyond the horizon,” re-conceiving how legal services are performed (creating a completely different business model) is hard because we find it challenging to “discard assumptions accumulated over the course of a professional career.” This is sometimes true of clients as well. They may recognize the need for best practices at their company and still hold an archaic view of lawyers and law firms. Lawyers and their clients alike are trapped in cultural prejudices of how legal services should be performed. It’s likely, then, that Colombian law firms don’t innovate because their clients expect them to be just the way they are, but a little cheaper. There are many exceptions, of course. There are sophisticated local clients and foreign multinationals that are relating to their outside counsel differently. But my point is that, despite the market’s openness, the local legal culture doesn’t foster innovation.

Another significant reason for the lack of innovation may be skepticism about its usefulness, wrapped around misconceptions of what innovation is. Let me explain.

Some leaders at elite law firms may see innovation as “technology” or as something only start-ups do. This narrow (and inaccurate) view leads them to think that innovation is useless for their type of firm. They advise clients in sophisticated, complex legal matters, not commodity “stuff.” Therefore, they think, they don’t need software that helps them create contracts faster or project management tools that help them manage M&A or litigation projects. Clients come to them for their expertise, not for their software. This view is reinforced by their success. “We’ve done very well for ourselves without so-called ‘innovation,’ why should we worry about it now?” Well, the future may bring them ugly truths about the real meaning of innovation (hint: it’s not software), and why it is important to explore today in order to be able to stay ahead tomorrow.

We interviewed some leaders who also said that low local fees may be to blame for the lack of innovation in the Colombian legal market. Because it is such a competitive market, in which legal service providers battle fiercely for clients, rates in Colombia are notably low. With expensive overheads to pay, there is little room for investment in innovation.

Lastly, some respondents said ignorance was the culprit for the lack of innovation. Law firm leaders are aware of the need to innovate. They love to talk about innovation. But they don’t know where to start.

These reasons are also evidence that law firm leaders may think of innovation narrowly as “technology” or something that only start-ups do and that requires huge investments.

A broader view of innovation would help them see the many opportunities in the Colombian market and the need to cultivate an innovative culture to maintain their market status.

In Innovation and Entrepreneurship, Drucker wrote of innovation as a tool that is “capable of being learned, capable of being practiced.” He called for entrepreneurs (understood, too, in a broad sense) to approach innovation purposefully and systematically. According to Drucker, “systematic innovation … consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation.” A purposeful, systematic approach to innovation may not require huge monetary investments or knowledge of exotic technologies. And it’s certainly not something only New Law start-ups do. As legal consultant Reena Sengupta said in a recent Thomson Reuters interview, innovation is “… constantly saying: How can I do better for our clients? How can I run our team better? How can we deliver legal advice better?”

Open legal markets alone will not create innovation in the legal industry. Fixed mental habits and cultural traditions of lawyers and their clients alike are an impediment to innovation. Prejudices about what innovation is also blind lawyers to opportunities to create more valuable products or services. Legal entrepreneurs must see past those habits, traditions and prejudices to find and exploit opportunities for innovation even in dynamic legal markets such as Colombia’s. And, they must patiently evangelize about the value of new models. Clients may like the old ways, but once they see the value in new models, they will not want to go back.


Meet the author

Antonio Leal Holguín is a director at Adam Smith, Esq. He is a lawyer and law firm consultant with prior experience working in the corporate and project development teams for law firms in New York and Bogotá. He is also a team leader at the global legal innovation think tank LawWithoutWalls. Leal Holguín obtained his law degree from the Universidad de los Andes in Bogotá and holds a Master of Laws degree from Columbia University.
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