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Problems worth solving, Part 1
My attempt to articulate a framework for how to choose opportunities by comparing two legal tech markets: law firm timekeeping vs. contracts
I recently met an engineer who was looking for a lawyer to co-found a legal startup with. “I’m going to build a startup and need to find someone who can handle go-to-market.” Although I wasn’t interested, I was very curious about what legal-related problem he wanted to solve with his technology.
“Timekeeping,” he said, confidently. “I’ve done a lot of research, and spoken with lots of lawyers. Every single one of them said that they hate keeping track of their billable hours. So that’s the problem I’m going to solve!”
Usually when someone tells me about their goals, I try to be supportive. I don’t want to be *that* guy who always shoots down ideas. But in this situation I felt like I had to say something. So instead of just smiling and nodding, I actually sat him down and tried to explain to him why he shouldn’t start a timekeeping company.
Honestly I was surprised by how confident I was. Silicon Valley is full of veterans who shoot down ideas only to find themselves eating their own words. The founders of companies like Zoom & Airbnb were discouraged from pursuing their ideas too—and they ended up building gigantic businesses. Who am I to speak so confidently about what is or isn’t a good idea?
It’s true that I could be wrong. So ever since I had that conversation, I’ve been trying to process my own reaction. Why was I so confident? How was I so sure it was a bad idea? To me, it was obvious that starting a law firm timekeeping company would run into a million obstacles. Digging deeper, I realized that I’d run the idea through a mental framework that I’ve become accustomed to using, when deciding what problems are worth solving.
That’s what I’d like to share with you all today. The framework. Going through the exercise of processing my thoughts forced me to articulate how exactly I select what problems are worth solving. What opportunities are worth chasing.
Before I get into it, I first I want to describe the reasons why I discouraged that entrepreneur from starting a timekeeping company. I think that’ll give you some insight into how I think about opportunities—and set the stage for next week, when I describe the details about my framework.
But first, let’s talk about why I believe law firm timekeeping isn’t a technology problem worth solving.
The challenges with timekeeping
At first glance, it appears to be a great problem for tech entrepreneurs to tackle. Every single law firm lawyer *hates* the process of tracking time. The applications are (generally) old, clunky and hard to use, and the process requires you to meticulously log every bit of work you do throughout the day. The misery surrounding timekeeping is so common that it’s become a popular meme:
So why is it not a great problem to solve? Well, because fixing the user experience through better software is only one small piece of the puzzle.
1. The frustration around timekeeping isn’t a problem facing the organization
It’s a problem facing the individual. So while all the lawyers complain, timekeeping challenges aren’t creating operational friction at the firm level. Firms are good at forcing timekeeping compliance, and to the extent the lawyers fail to meticulously track time, they can just fabricate entries.All of that means firms don’t need to upgrade timekeeping software—they can just use an old, legacy solution that’s merely good enough.
As a general principle, solving organizational problems are more lucrative. Because you can have a larger impact. Businesses are less price sensitive than individuals.Relatedly, this is precisely the reason why Biglaw headhunters, as an example, can make so much money for each placement. They aren’t solving the individual’s problem of finding a job—they’re solving an organization’s problem of sourcing a desirable candidate that will drive enormous amounts of revenue to the firm.
2. EVEN IF the firm wants to upgrade timekeeping software, budgets are limited
Generally, when it comes to technology, budgets are larger for software that helps the organization generate more revenue. Timekeeping software doesn’t do that—it just makes the annoyance of tracking time more pleasant. That’s why firms end up using “good enough” software that’s inexpensive and doesn’t eat up a lot of the software budget.
Having a large budget for what you’re offering is enormously helpful. This is why M&A lawyers can generate so much revenue—the underlying transaction is so big. So a small percentage of that transaction dedicated to legal fees still comes out to a big number. As I shared in Sell outcomes, not hours:
Wachtell on the other hand, focuses only on extremely high stakes matters. So their legal fee, while much larger than those from other firms, pale in comparison to what the client could lose if the matter is mishandled. When $44 billion is at stake, paying $90 million to the best law firm to represent you is a drop in the bucket
3. EVEN IF budget isn’t limited—law firms hate expensive subscriptions
There’s a serious lack of economic alignment. These days, software companies are valuable precisely because they have recurring revenue. Which requires large subscriptions. But law firms hate subscriptions, because they cut into profits that the partners are entitled to at the end of the year. Now if you charge firms on a pay-as-you-go method, and isolate usage by client, that’s a different story. Because then you can then pass on the software cost to the client themselves.
That’s what happens in legal research & e-discovery. So the firms aren’t actually paying for the software—their clients are.Doing the same thing for timekeeping is a tough sell though. For legal research & e-discovery, you can see how using that type of software helps create a “better result” for the client. With advanced timekeeping software, the value to the firm’s client is unclear at best. And if somehow, you can show that the software reduces hours billed to clients, the firm would never use it in the first place.
4. The market is already saturated with entrenched players
And selling software to law firms is incredibly difficult, with all of their heightened data security & confidentiality requirements. So it’s full of entrenched players with a tight grip on distribution to law firms. Even if you could overcome the first three hurdles, you’d spend a fortune on competing against everyone else.
Having said that, the existence of competition doesn’t mean you should necessarily stay away. It can be a good thing. It means there’s enough of an existing market of buyers. And plenty of markets that seemed “full” have been disrupted. Like when Zoom went after the video conferencing market. At the time, there were plenty of good enough solutions out there, some of which were free to use.
My point with this section is that when you combine the fact that there are so many competitors with the challenges described in sections 1-3, it just makes everything harder.
Counterexample: Contracts Tech
On the flip side, there are certain legal tech problems that are *so* worth solving that it makes sense to pile into an already saturated market. Contracts tech (CLM) is a prime example of this. In recent years there’s been an explosion of contracts-related startups. The most recent class of Y Combinator, the famed startup accelerator, included not one but two startups dedicated to solving contract problems. Add in all The Great Generative AI Hype Cycle Of 2023 and what do you get?
Why exactly is everyone piling into the CLM space? Part of it is, as many have pointed out, that investors are all trying to take a piece of this very lucrative pie, and have all funded their own “contract plays” in the space. It’s not merely irrational copycat behavior. It’s actually rational because contracting problems are so significant that it becomes super lucrative to try and solve.
Kind of like in poker, when there’s a big enough pot, it may make sense to stay n the hand—even if you have weak cards. Your lower odds of success are balanced out by the potential rewards of winning. Similarly, winning the CLM market is extremely lucrative, because:
1. Challenges around contracting aren’t just problems for individuals, they are problems for the entire organization
Not being able to find a customer contract, or having a slow process for approving business contracts is very annoying if you’re an in-house counsel or contract manager. But the problem extends beyond the individual because contract bottlenecks create real operational friction (and costs) for the organization at whole. Sales can’t close deals fast as they should and vendors auto-renew by accident, creating unforeseen costs. These are organizational problems that need to be solved.
2. Budgets to solve contracting problems are larger because they’re tied to revenue
If you can use software to solve bottlenecking issues around legal approval for sales contracts, that has a significant impact on revenue velocity. Also, for specific types of businesses (e.g. those that generative income from royalties or other kinds of revenue share) being able to track old agreements enables them to proactively squeeze more dollars out of their partners. Understanding where you are in the contract negotiation process also provides a more accurate forecast of revenue. As a result, contract software budgets can be tied to other revenue generating departments (e.g. sales) with significant budgets.
3. Companies (as opposed to law firms) like to buy subscriptions, which is aligned with the software-as-a-service model
This is why the vast majority of contracts tech startups have focused on serving in-house counsel, ie. companies, as opposed to law firms. Companies like to buy software subscriptions, and do so for all kinds of technologies. As a result there are generally no issues with isolating usage, or complications like passing off the cost to someone else. This makes CLM startup sales much simpler and cleaner, which enables them to optimize go-to-market easily.
4. Even though CLM is a super competitive & crowded space, generative AI may potentially disrupt the established order
When new disruptive technology, like generative AI, shows up—it can power new entrants in unexpectedly powerful ways.For example, some CLMs created their own proprietary AI to gain a competitive advantage by offering product superiority. They were “ahead of the game” at least compared to others who didn’t have any AI embedded in the product. Then OpenAI, GPT & LLMs burst onto the scene, seemingly out of nowhere. Suddenly any CLM could add on AI easily. Which obliterated any advantages that the AI incumbents had by developing their own proprietary tech.
All of these reasons played a big role behind why I decided to pivot to the contracts space in the first place, four years ago. Solving problems related to contracts seemed like a huge opportunity. As I explained in Why I Left E-Discovery For Contracts:
I also knew that contracts occupied a strategic part of the broader legal ecosystem. They were used by in-house lawyers—the ultimate end user / buyer of legal services. They touched all aspects of a company, from employment contracts, to sales contracts, to vendor contracts, and even to the company’s own commercial lease. It was just so broad especially compared to litigation focused e-discovery.
It wasn’t an easy decision. I knew I could earn more in the short run by staying in the e-discovery industry. I was trained as a litigator, had lots of doc review experience, and knew all the players in the space. I also had a lot of relationships and understood the tacit rules of the game. Leaving e-discovery felt risky. But I was confident about my assessment of the big picture. At that particular point in time, in mid-2019, CLM was simply just a better problem to solve.
At the end of the day, my approach is to run all of my ideas—all problems I can potentially solve—through a framework. You gotta weigh all the considerations against each other, and choose the best one. Because information is constantly changing, and the facts on the ground are also constantly shifting. That’s why having a framework for making decisions is more important than the decision itself.
So what exactly is my framework? In short, this is what I consider:
What budget exists to solve the problem I’m solving?
Who are the decision makers?
Is there economic alignment?
Is the timing right?
There’s a lot of nuance here, and I’d say all of this is more art than science. I’ve run out of space here, so I’ll explain more in Part 2 next week. Stay tuned, my friends.
This last point is controversial because you will never meet a lawyer who openly admits to fabricating entries and “overbilling.” Because it’s unethical, and can lead to a lawyer’s license getting revoked. But fabricating entries happens all the time. And the truth is, the clients usually don’t care. They just eyeball the overall bill to see if it’s fair, and if not, they can just pressure firms to “write off” the overbilled time. If a lawyer develops a reputation for putting out tons of fabricated time entries, it can become an issue. But the vast majority of law firm lawyers are savvy enough to avoid having it become a pattern.
Incidentally, this is part of the reason why instead of coaching individual lawyers on social media & business development, I much prefer to present a training session for a law firm instead. With a broader impact, you get much more ROI on your time and command higher rates. My solution for helping individuals is by, well, publishing this newsletter. Especially the premium section, where I share specific biz dev advice. That lets me leverage my time, and “productizes” my thoughts to make sharing it more efficient. I’ve also been experimenting with sharing advice via Slack which you can feel free to join here.
Part of this is that when you’re structured as a partnership, there’s less of an incentive to invest in improvements like technology. The older partners who are running the firm just want a cash cow that generates profits in the near term. They’re on the cusp of retirement so there’s less interest in investing (in technology, for example) for the long term.
Also, because the firms are organized as partnerships—even if you convince 99 out of 100 partners to buy your software—that single, lone holdout can block the deal from happening. Even if the firm desperately needs better tech, it can easily be vetoed.
So why don’t e-discovery and legal research vendors sell subscriptions directly to clients? Well, because litigation matters tend to be one-off in nature. For example, maybe a corporation gets sued once in a blue moon, so there’s no need for recurring costs that help with lawsuits. However, for the firm, they deal with lawsuits all the time, on a regular basis.
So selling directly to firms makes a lot of sense: (1) the software vendor can get recurring revenue from subscriptions; (2) the law firm gets access to the latest and greatest technology without “truly” bearing the cost of a subscription; and (3) the client only pays for what the firm uses for their matter. I saw this dynamic play out firsthand when I was an e-discovery salesman. Even then it was hard to structure the deals via subscriptions—the firms wanted to pay by matter. Eventually we re-structured pricing to make it matter-based, so we could keep our subscription model, while the firms could isolate usage. Having said that—we also did try to sell our software to certain clients that had regular, ongoing discovery needs, which worked on occasion.
I concede that this fourth reason alone isn’t enough by itself. The existence of lots of competitors can sometimes be a good thing. It means there’s enough of an existing market of buyers. And plenty of markets that seemed “full” have been disrupted. Like when Zoom went after the video conferencing market. There were plenty of good enough solutions out there, some of which were free to use. So I wouldn’t say this fourth reason is by itself enough to make timekeeping a problem not worth solving. The reason why I included it, is that when you combine a market full of competitors, with all the other reasons—it makes it super hard to break out.
As a startup grows, it inevitably has to hire outsiders and functional executives with experience outside of legal. CLMs are purchased in similar ways to other technologies, which means any software salesperson, marketer, or go-to-market executive, can fit into the company fairly easily. On the other end, a legal tech company that operates in a weird niche (like law firms) with all these complicated unspoken rules, will struggle to scale the team. Because they will always need to hire domain and industry experts.
It can also catapult established upstarts to the top. For example, for years Ironclad resisted creating its own proprietary contracts AI, choosing instead to focus on workflows. This strategic decision was based on a belief that a third party could create LLMs that were far more powerful than anything a legal tech startup could develop itself. At the time, most believed that third party to be Google, but as of 2023, it looks like that third party is Open AI. Regardless, focusing on the workflows as opposed to creating proprietary AI proved prescient. The combination of workflows, data, and superior LLMs, creates a moat that’s incredibly difficult for competitors to overcome. That’s what I’m seeing happen with Ironclad, in real time, in the CLM space.
To learn more, I highly recommend this podcast interview called Generative AI Moats in B2B that discusses LLMs, workflows, and Ironclad.