Size Matters for Legal Innovation (Toronto Edition)

The median number of equity partners in an Am Law 100 firm (ranked by PPP) is 170. The number is arbitrary, but it probably isn't random.

W.L. Gore & Associates, the maker of Gore-Tex, is known for a "radically nonhierarchical management structure." One aspect of the Gore approach that makes the company so radical is the limitation on office size to 150 workers. When a branch exceeds 150 employees, the company splits it and builds a second office. As discussed in Gladwell's The Tipping Point, self-governing communes of the Hutterites do the same thing--divide into separate communities--at the same number. For related reasons, hunter-gatherer clans tend to splinter after reaching 150 or so members. A similar numerical sensibility has long been applied to military organization:
recent studies have indicated that humans are best able to maintain stable relationships in a cohesive group numbering between 100-250 members, with 150 members being the common number (see Dunbar’s number). Again, a military unit on the order of no more than 100 members, and perhaps ideally fewer, would perhaps present the greatest efficiency as well as effectiveness of control, on a battlefield where the stress, danger, fear, noise, confusion, and the general condition known as the “fog of war” would present the greatest challenge to an officer to command a group of men engaged in mortal combat. Until the latter half of the 19th century, when infantry troops still routinely fought in close order, marching and firing shoulder-to-shoulder in lines facing the enemy, the company remained at around 100, or fewer, men.
Dunbar's number is a fascinating sociological theory. We can be acquainted with many people (see Facebook) but we can only maintain a finite number of deep, stable interpersonal relationships. Dunbar's number has all sorts of implications for group dynamics. In short, size matters.

Communities smaller than the number are able to enforce informal rules (norms) through informal means (gossip, shame). Communities that exceed the number have to rely on more formal rules (laws, regulations) and enforcement mechanisms (hierarchy, legitimized violence). For enterprises, increased size introduces diseconomies of scale like communication overhead, duplication of effort, office politics, and the tendency for larger organizations to become top heavy.

But size has its own virtues. There are the traditional economies of scale and scopeWeak ties can be an important factor in success. And we should value social learning to avoid of echo-chamber effects and remain cognizant of the benefits of diversity in driving the wisdom of crowds. Dunbar's number is usually treated as a cognitive limit of individuals and a functional limit on units (military companies, Gore offices), not a cap on organization size.

Optimal size is task and context specific. There are, for example, many theories on appropriate team size that are much lower than Dunbar's number. Amazon's Jeff Bezos has promulgated the two-pizza rule: never have a meeting where two pizzas couldn't feed the entire group. Harvard Business Review runs articles like "Smart Innovators Value Smaller Teams Over Better Processes." The associated research reaches conclusions such as, "As group size increases, the difficulties of agreeing objectives, ensuring appropriate participation in decision making, achieving consensus on what constitutes high quality, and eliciting unanimous support for innovation, all increase."

Goldilocks is a fickle....person. While there is no exact science of size, size does matter. Structure should follow strategy. But, often times, the reverse is true. Strategy is constrained by structure. Being the optimal size to pursue a particular objective is sometimes a matter of happenstance.

That is a long way of saying: I ♥ Toronto. I'm inspired to mention this fact because Ryan and I will be there this week to speak at #LexTech16, a conference created by MaRS LegalX cluster and McCarthy Tetrault.

From my perspective, Toronto offers an almost ideal mix of size and geography when it comes to innovation in the legal space. Toronto is the 10th largest financial centre in the world (big but not too big). Canada's four biggest banks are the country's four most profitable companies. The bank headquarters are also a five-minute walk from each other. By comparison, the four most profitable companies in the United States are located in Cupertino (CA), Houston (TX), San Francisco (CA), and Redmond (WA). And the geographical dispersion of the 50 other U.S. companies that would also qualify for the top four Canadian slots is even greater.

Unsurprisingly, Canada's 10 largest firms all have their largest offices in Toronto and are all (as far as I know) within the same five-minute walk radius as the banks. The 105 American law firms with domestic operations as large as Canada's tenth largest firm (423 lawyers) are, literally, all over the map.

There are substantial economies of agglomeration that accompany being able to get a nation's most powerful clients and law firms together without anyone needing to do much more than take the lift downstairs from their office. Every time I travel to Toronto, I am struck by how much everyone talks to one another. Everyone seems to know everyone (Dunbar's number). The extensive communication, cooperation, and collaboration is not only among clients and among firms but also between clients and firms.

As someone who spends too much time thinking about collective conversations, both formal and informal, the issues of size and geography loom increasingly large in my mind. Despite my love of digital mediums, I have to remind myself that only seven percent of word of mouth happens online. Seeing people and interacting with them in meatspace remains essential.

It's not just money and institutions that are concentrated in Toronto. Also technological talent. Many of you may have seen Canadian Prime Minister Justin Trudeau lauded 35-second explanation of quantum computing. Lost in the coverage is that Trudeau was announcing an additional $50M government investment into Perimeter Institute for Theoretical Physics, which is just one piece of the Toronto-Waterloo Innovation Corridor that boasts the most artificial intelligence PhD's and second highest density of startups in the world.

The focus on innovation is making its way into legal with companies like KiraROSSBeagle, Law Scout, StandIn, and ClauseHound, as well as the aforementioned LegalX cluster (an approach to legal R&D that deserves its own post) and the Legal Innovation Zone.

The Canadian Bar appears to be also moving in the direction of increased innovation with its fabulous Futures Initiative. And while I am loath to comment on the regulatory landscape, I am quite intrigued by the fact that Deloitte formed an alliance with Kira (Toronto-based machine learning for legal documents) and then a week later announced its affiliation with Conduit (Toronto-based NewLaw outfit) to "offer outsourced lawyers to support in-house legal teams, meet business needs on-demand at law firms, and deliver short-term projects or special engagements." Let the hand-wringing about the encroachment of the Big 4 on legal services in North America commence, if it hadn't already.

I don't really have a compelling conclusion beyond the observation that the Toronto legal market is extremely dynamic and worthy of attention. Indeed, I hope someone is working on a long-form piece that brings together these various strands (economic heft, geographic concentration, technological innovation, regulatory opening) into something coherent and captivating.

CAVEATS: Apologies not only for rambling but also for all the things I missed. I am not a Toronto expert. I've just been very impressed with what I've seen thus far. Apologies, too, to the rest of Canada. I'm a huge fan of Fred Headon (Montreal, immediate past President of the Canadian Bar, driving force behind the Futures Initiative), Clio (Vancouver, major player in the legaltech space), and many other sources of innovation that do not hail from the Canadian city with NBA and MLB teams. Candidly, I don't know enough about the other markets to even fabricate sweeping generalizations.

Further, I concede extreme bias. I have vested interests. I owe considerable debts. My company is proudly part of the LegalX cluster, and I have the good fortune of the attendant guidance from Aron Solomon and Jason Moyse. I'm also on the advisory board of NextLaw Labs, which made the wise decision to invest in ROSS. When I first started reading about innovation in the legal space, I was immediately taken with the content from Mitch Kowalski, Peter Carayiannis (founder of Conduit), and Jordan Furlong. Then, when I decided to interject some of my own thoughts into the conversation, it was the redoubtable David Allgood (then of RBC, now of Dentons) who, as Chair of the Association of Corporate Counsel, was responsible for getting me a perch at the ACC Docket. And it was his lieutenant, the remarkable Emily Jelich (then of RBC, now of TD Securities) who introduced me to the Toronto legal market.

Nor do I deny that innovation is happening everywhere. My affinity for CLOC, for example, is well documented. And I am convinced that the group's origin among clustered companies in the Bay Area is a major source of its coherence and ability to affect the conversation. But it is a testament to CLOC members that they have been able to meet as regularly as they have for as long as they have. Leaving aside their expansion throughout the U.S., CLOC members based in the Bay Area have offices that are often one to two hour drives from each other. And I think they made the right choice in organizing their upcoming Institute to really expand the conversation to the remainder of the ecosystem. While it would be just plain silly to downplay the agglomeration effects of Silicon Valley (ROSS joined Y Combinator for good reason), it is sometimes easy to forget how many of the largest U.S. companies are not based there (only 9 of the Fortune 100) or even in the tech sector (only 8 of the Fortune 100), let alone how few of the largest US firms (3 of the top 100) are headquartered in the Bay Area. I would never limit CLOC's potential. But in marveling at what they accomplish, I maintain a healthy respect for the logistical hurdles they overcome.

Toronto seems big enough (from a financial perspective) to have an impact, compact enough (from a geographic perspective) to have a high incidence of informal cooperation, and consolidated enough (from the number of players in the market) for innovations to diffuse quickly. Goldilocks would like it there.

Casey Flaherty is the founder of Procertas. He is a lawyer, consultant, writer, and speaker focused on achieving the right business outcomes with the right people doing the right work the right way at the right price. Casey created the Service Delivery Review (f.k.a., the Legal Tech Audit), a strategic-sourcing tool that drives deeper supplier relationships by facilitating structured dialogue between law firms and clients. The SDR is premised on rigorous collaboration and the fact that law departments and law firms are not playing a zero sum game--i.e., there is more than enough slack in the legal market for clients to get higher quality work at lower cost while law firms increase profits via improved realizations.
The premise of the Service Delivery Review is that with people and pricing in place, process offers the real levers to drive continuous improvement. Proper collaboration means involving nontraditional stakeholders. A prime example is addressing the need for more training on existing technology. One obstacle is that traditional technology training methods are terribleCompetence-based assessments paired with synchronous, active learning offer a better path forward. Following these principles, Casey created the Legal Technology Assessment platform to reduce total training time, enhance training effectiveness, and deliver benchmarked results.
Connect with Casey on LinkedIn or follow him on Twitter (@DCaseyF).

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Addison Cameron-Huff said...

For anyone looking for info on other Toronto legaltech startups, here's a list of 41 of them: http://www.cameronhuff.com/blog/toronto-legaltech-startups/index.html. List includes their affiliation with local legaltech incubators LegalX and LIZ.


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