Decoding Digital w/ Jack Newton

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Jack Newton: [0:05] When you go deep on a vertical, there is huge opportunity to expand wallet share and expand your average revenue per customer over time. Furthermore, what's become clear over the years is that you can drive much more efficient customer acquisition economics in a vertical play versus a horizontal play.

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Dan Saks: [0:27] That's Jack Newton, co founder and CEO of Clio, a company that's pioneering SaaS for the legal industry. Jack is a cloud visionary. He recognized the importance of vertical SaaS early on and went all in on building the legal tech sector. Now, 14 years later, Clio is a market leader, and in April of 2021, the company became a newly minted unicorn with a valuation of $1.6 billion.

[0:59] CEO of a billion dollar company is just one of Jack's accomplishments. In 2017, he was named Ernst & Young's Software as a Service Entrepreneur, and in 2020, he was named one of Canada's most admired CEOs. He's also the author of "The Client Centered Law Firm," a top 20 legal book on Amazon.

[1:18] Today, Jack shares his insights on what it takes to build a successful software company and how to drive SaaS adoption, especially in a sector like the legal field, which has been slow to change. This is Daniel Saks, co CEO of AppDirect, and it's time to decode vertical SaaS.

[1:36] Welcome to "Decoding Digital," a podcast for innovators looking to thrive in the digital economy. I'm your host, Daniel Saks, and I'll sit down with other founders, CEOs, and changemakers to decode the trends that are transforming the way we work. Let's decode. Jack, welcome to Decoding Digital.

Jack: [2:06] Thanks for having me.

Dan: [2:07] For sure. Before we dive into the interview, I want to congratulate you on your recent funding announcement. Big news, Clio reached a $1.6 billion valuation, giving you unicorn status, so big congrats.

Jack: [2:18] Thank you.

Dan: [2:20] I know you were one of the first founders to have a vision for the potential of vertical SaaS. Clio is specifically focused on the legal sector. Obviously, vertical SaaS has become a huge category, and there's a huge transformation coming about in bringing the legal industry to the cloud. Tell us what the founding story was and how you got Clio started.

Jack: [2:42] Way back in 2007, and that is truly the early days of SaaS in general, Salesforce was still early in it's growth journey back then, and what my co founder Ryan Gauvreau and I saw at that moment was the fact that the cloud was going to change everything.

[3:02] What was really obvious to us was that, this was a once in a lifetime kind of opportunity to catch a wave of digital transformation that you're lucky if it comes along once, or maybe twice, in your lifetime, and that it was going to radically transform almost every industry out there.

[3:22] With that conviction, we became what I describe sometimes as a, two hammers looking for a nail. What we really understood deeply was the transformative impact that the cloud was going to have, and then went and turned our attention to what industry do we think we could apply this transformation to and have some really profound impact.

[3:41] We were looking for an industry that was not just a great business opportunity, but that we thought there would be potentially a great mission driven opportunity to help drive transformation in that industry, as well.

[3:52] Thanks to some work that Ryan was doing on the legal side, we pretty quickly homed in on legal as being one of those industries that was ripe for transformation, and was in particular ripe for transformation by being transformed by the Internet.

[4:10] If you look at the legal industry I think this was very true in 2007, and frankly it was still mostly true in the year 2020 as well the legal industry is one of the last major industries to be fundamentally transformed by technology. Furthermore, one of the last industries to be fundamentally transformed by the Internet.

[4:30] If you look at the way a lawyer was practicing law in the year 2020, it wasn't all that different than the way they were practicing law in 1980. With the benefit of 40 years of technology and transformation in other industries.

[4:46] What we saw pretty quickly, and honed in on the legal industry as an opportunity, was let's catch this massive technology opportunity in the form of the cloud, and bring that to legal. With the underlying thesis that what would finally unlock the massive opportunity to transform legal with technology, was the ease of accessing cloud based technology.

[5:09] That the traditional, on prem, server based software distribution model was so high friction, that it never caught hold in legal, but with the benefit of the cloud and that lower barrier to entry, both from a deployment standpoint and a cost standpoint, would we potentially be able to unlock that opportune in the legal industry.

[5:32] We started building Clio in 2007. I'm a computer science guy by training. Ryan had a background in technology, and was working on his MBA when we founded the company. We rolled up our sleeves and started doing everything. In building the software, doing the marketing, doing initial sales, and launched the product officially in 2008.

[5:53] Cut to 13 years later, and Cleo is an almost 600 person organization, growing extremely rapidly. Operating out of five offices worldwide, as you mentioned, just achieved unicorn status with this new 1.6 billion US evaluation, and some pretty amazing investors coming onboard to support us on our next stage of the journey.

Dan: [6:19] It's incredible. I remember in 2009, when we were starting AppDirect, one of the first things that we did was create a list of the SaaS companies we could find out there based on category.

[6:27] I remember it had everyone from Box, or Dropbox, or DocuSign, MailChimp, FreshBooks. They were all in their infancy. The common thing was that they were all horizontal. The aggregate market value of that list then was maybe sub five billion dollars. It's now probably over half a trillion.

[6:45] It's funny because I think you were ahead of your time. Did you see it at the time, and saying "look there's going to be SaaS for every vertical, so I'm going to pick legal because that's the best vertical," or did you solve a pain point that you identified for the legal industry, because it was slower to transform and adopt technology?

Jack: [7:00] Yeah, it's a great question. I do think we're really early to the vertical SaaS party. It's so interesting even looking at those first years of fundraising in 2009, 2010. I could tell in the first 10 seconds of the VC meeting, whether this was going to be a no, or a yes and let's learn more.

[7:21] Back in those days what was an immediate end of the discussion for a lot of VCs was the TAM. We've got a million lawyers in the US. There's five million lawyers worldwide. For a lot of VCs, when you walk through those numbers, like I said, you could almost see some glaze over 10 seconds into the presentation, because they've immediately got TAM concerns and they're out.

[7:44] What we found fairly early in our journey it was around 2013, 2014 was that there was a growing number of VCs that were building conviction around the fact that vertical SaaS had, not just an ability to build a meaningful market, but when you go deep on a vertical, there is huge opportunity to expand wallet share, and expand your average revenue per customer over time.

[8:12] Furthermore, I think what's become really clear over the years, is that you can drive much more efficient customer acquisition, economics, in a vertical play, versus a horizontal play. I think those are some of the things that, way back in 2007, 2008, Ryan and I understood intuitively maybe.

[8:30] That we could go really deep on a vertical like legal, and even though on the surface it looks like a niche opportunity almost. If you provide true and deep value to that vertical, you're going to have an unreasonable right to win categorically, in that vertical.

[8:48] I think in many verticals that we've seen other companies, like ServiceTitan for example, really prove out this hypothesis in a big way in the field services industry. I think we've seen Clio prove it out in legal.

[8:59] You can point to examples in almost every other vertical, is that customers really want a vendor of record. As much as possible, they want to be able to buy all of their technology, all of their services, from one vendor.

[9:13] That was an early bet we made on with Clio in the legal vertical. This bet that there's a strong preference on the customer's side to have a single vendor and a unified experience.

[9:25] Even though integrations between products are possible, at the end of the day there's very few customers that want to figure out how do I cobble together 15 different products into one through a number of integrations, and maybe a bunch of duct tape, when they can have one cohesive experience in one product?

[9:44] That's really the heart of our thesis for what ended up being the huge legal opportunity. I believe the other hypothesis we had, that ended up proving correct, was that the cloud was, in fact, an enabling technology to unlock this previously very low technology adoption industry.

Dan: [10:05] Clearly, digital transformation is hard, you had this vision, but take me through what the lawyer's life was pre Clio, and then the effort that you had to go through to get them on, and now their life today.

Jack: [10:17] It's a great question. This was the challenge in 2008, and it's still the challenge today, but there's a lot of lawyers that will use pen and paper. They will use some aggregate of Microsoft Outlook, Excel, and Word, to manage every day to day aspect of their law firm.

[10:39] They'll take time records, time slips, that they've literally recorded on pieces of paper, input those into Excel, take the Excel sheet, go and try to input it into Microsoft Word, and create an invoice for their client.

[10:52] We talked to some law firms that literally spend four or five days at the beginning of every month, where their law firm basically grinds to a halt collating all of these paper documents, going through this Excel based process, putting these invoices in Word, going through the iterations of the pre bills, and finally getting these bills out the door.

[11:14] It's just mind blowing, the amount of manual effort that is going on in the industry. We're still early innings in driving this digital transformation in legal. There's still a lot of law firms that operate that way. Really it's a matter of getting in front of these customers and letting them know there's a better way.

[11:32] You need a distributive way of working. You need to leverage the cloud. We'll talk to these stakeholders, and it could be the receptionist, it could be the paralegal, it could be the lawyer themselves, we explain what kind of value Clio can provide to them, and you just see the light bulb go off.

[11:49] You can hear the excitement in their voice when they understand the kind of value that Clio can offer their law firm.

Dan: [11:55] It's very powerful, and I know that buyers see you as a thought leader, educating them on how to make this digital transformation. I know last year you published a book called The Client Centered Law Firm. Can you give some more context as to why you wrote the book, and some of the takeaways?

Jack: [12:11] Around 10 years into this journey of building Clio, I started to feel like I've had thousands and thousands of conversations with legal professionals at the best run law firms in the world, and started to feel like I had the kind of perspective that maybe a McKinsey consulting or Boston Consulting group has on businesses, where they talk to the best of the best.

[12:36] They start to understand what the best practices are, and what set them apart from their peers. I felt like this perspective I was starting to form on the legal industry and the opportunity was similar. My takeaway, what I've extracted from those thousands and thousands of conversations was a few things.

[12:54] One, lawyers go through law school and learn how to become amazing lawyers, but over the course of their three years of law school they learn virtually nothing about building a business or being an entrepreneur.

[13:08] They don't learn how to develop a product. They don't learn how to market. They don't learn how to even manage cash flow.

[13:18] There's a huge risk for the average lawyer, that if they graduated from law school, and they go out and hang a shingle, and run their own law firm, as a solo, as 50 percent of all lawyers do, or they go form a small law firm with a handful of other colleagues, that's around 80 percent of the legal market, as either solo or firms of less than 10 lawyers, they're going to be set up to really struggle.

[13:40] Only if you're joining a big firm and benefiting from the machinery of that big firm, will you be set up in a way that your pure legal knowledge will help you succeed.

[13:51] This key insight for me was, lawyers need a bit of a handbook on how to thrive as a lawyer, and how to be a successful entrepreneur, but unfortunately, precedent is also applied really strongly in the business of law, where lawyers feel like the only way you can run a law firm is in the same way it's been ran in the past by other lawyers.

[14:12] You look at the pervasiveness of the billable hour model, for example. Something as straightforward as that. Most lawyers charge for their time by the hour. On the other hand, there's virtually no clients that want to buy legal services by the hour.

[14:29] Other professions like accounting have shifted fulsomely away from billable hour to value based billing, and fixed fee billing, and billing based on outcomes. There's been an enormous amount of friction in that shift in legal partially because of the inertia that this precedent thinking drives in the legal profession.

[14:50] What I tried to distill in my book is a way of proposing a pretty radical shift in how lawyers think about delivering legal services. Instead of thinking about delivering legal services in the traditional way, which I would describe as a lawyer centric way of delivering legal services.

[15:10] Even if you look at something as foundational as the billable hour model. I think it's a great example of a very lawyer centric concept. It's good for lawyers, it helps protect lawyer's profitability, it helps protect lawyer's downside risk, but it's not at all good for the client. It is not client centered.

[15:27] What I posit in this book is there's a whole new way of thinking about legal services, in a way that is client centered.

[15:35] If you embrace this client centered thinking, you embrace this new way of thinking about the way you can design, price, and package your legal services, there's an enormous opportunity to drive massive competitive differentiation, and to tap into what I describe as the latent legal market.

[15:53] A latent legal market is what I've refereed to as a portion of the market that is not able to access legal services. Around 77 percent of consumers that have legal issues any given year do not see those legal issues resolved by a lawyer.

[16:11] You've maybe heard the term "the access to justice gap." That's really the access to justice gap, in a nutshell is, there's a very small minority of legal issues that actually see resolution through lawyers and the legal system, 77 percent of legal issues are not resolved by lawyers. That latent legal market is something that can be unlocked through client centered thinking.

[16:36] This book, The Client Centered Law Firm that I wrote, is really a handbook and a playbook for how to think innovatively about designing your legal services. How to think like an entrepreneur. How to build empathy for your clients.

[16:50] How to rethink legal service delivery in a way that is better for consumers, helps consumers see better legal outcomes, is better for lawyers, in that it helps make lawyers more successful and more profitable.

[17:05] Better for access to justice, in that if we actually execute on this vision of the client centered law firm, we're going to help bridge that access to justice gap, and we're going to help deliver legal services to that vast latent legal market that is currently underserved.

Dan: [17:21] Let's shift to your personal psychology, because you've said that the legal industry is the last major industries that resisted digital transformation. That must mean you get a lot of no's, and a lot of people who say you're crazy. How do you deal with them?

Jack: [17:36] For one, I describe myself as a pathological optimist, so even if I hear no all day long, I'm still going to be optimistic that there's a yes right around the corner.

[17:46] I think that resilience is really important, and that embedded optimism is important in navigating all the knows you're going to hear. It's been said and commented on many times that many of the best startup ideas sound crazy to start, and some investors talk about using a yardstick now, how crazy does the idea sound?

[18:08] If it doesn't sound crazy enough, they're almost not interested in it, because it's not transformative enough. Certainly back in 2008, when I was walking around these legal conferences, talking about the idea of storing your data in the cloud, it was a polarizing concept.

[18:25] I had deep conviction about back in 2008 and still have today is the idea that the average solo or small firm lawyer is further ahead storing their data in the cloud than they are trying to manage their own on premise system and trying to keep that system secure and up to date. That was a controversial opinion in 2008.

[18:50] I actually think it's probably almost generally accepted wisdom today. I caught a lot of flack for that perspective of that opinion back in 2008, 2009, 2010. I had lawyers calling me and Ryan and Clio outright irresponsible for even allowing lawyers to store their data in the cloud. How dare we kind of conversations?

[19:12] To navigate all of that to your question around mindset I think, number one, you do need to have optimism, you do need to have deep conviction that you're right. You also need to be able to persuade us not just hearing the know and then walking away.

[19:29] We listened to the reasons that people supported the no with and then thought how do we tackle these? How do we block by block, unpack this resistance and get to yes? I'll give you a really concrete example of that. The number one thing we heard over the course of 2008 and 2009 was this concern about, is it ethical for lawyers to store their data in the cloud?

[19:55] Is this even allowed from a compliance perspective from the State Bar, for example, that they're licensed to and we realized quickly that we can either get dragged along by this discussion, or we can try to lead it?

[20:09] We said, if we can lead it, we're going to be able to lead the discussion to where we want it to go, which is this conclusion that storing your data in the cloud is more secure than storing it on premise.

[20:21] What we started doing was educating the industry. We started writing white papers. We started giving talks at every conference we could get a speaking slot at. We started lobbying directly with the State Bar associations to get ethics opinions that were positive and affirmative about the fact that storing your data in the cloud was ethically acceptable.

[20:43] We started to see a huge amount of success there and became, over time, thought leaders on this topic, where we're invited to speak at the biggest conferences in legal about the security and ethics of cloud computing for lawyers, and around why this was acceptable.

[20:59] In hindsight, now we're referred to as the people and the company that helped drive this transformation in legal, and the adoption of cloud technology in legal.

[21:09] I think listening to the no, and having conviction that that person is wrong, is really important, but then the onus is on you to almost persuade them that they're wrong, and that might be a very long game to get there, but that's the long game we played, and like I said, 13 years later, in the legal industry it's finally generally accepted wisdom that the cloud is acceptable for lawyers to use.

[21:35] We're even shifting into a new world where it's almost viewed as a competitive disadvantage if you're not leveraging the cloud in some way as a law firm.

Dan: [21:43] I definitely think you pinpointed one of the key things that we observe, which is, change is constant and people need to adapt, and if they don't they're going to have a challenge in the digital ride.

[21:53] That became very prevalent in COVID, with examples like restaurants, or other establishments. If you didn't have delivery or digital footprint, then you'd struggle and you'd be forced to immediately digital transform.

[22:04] With Clio, did you have a similar impact in COVID? how did COVID impact your business and the legal community in general?

Jack: [22:12] Great question. Like many other industries we saw a pretty profound and a pretty rapid shift in how lawyers needed to run their practice as soon as COVID hit. What we've seen with COVID is 10 years of digital transformation in legal, or more, I would argue, compressed into 10 or 12 months.

[22:35] It's really been that scale of change. Our product roadmap, for example, is the product roadmap we would've been thinking about in the year 2030 really. Now it's a product roadmap we're thinking about for the year 2020.

[22:48] These kinds of changes especially in an industry like legal that is fairly slow to evolve they wouldn't have played out over the natural course of events. We really needed this crucible that ended up being COVID 19, to catalyze a lot of this change. I think it's a net positive change in a lot of ways, despite the obvious, huge human toll, and economic hardship it's caused for many.

[23:16] For the legal industry, it is going to emerge, I believe, better positioned to thrive, and better position to actually deliver legal services to more people thanks to the transformational change that COVID has helped drive.

[23:30] A big part of that is around technology adoption, and being able to lower the barriers to accessing legal services, and from the lawyer's side, being able to lower the cost of delivering legal services.

[23:41] To give you a really concrete example of what that looks like, one of the largest structural overhead costs any law firm has beyond it's human cost of labor and staffing the law firm is the physical space. The often expensive AAA downtown office space that law firms invest in to, most of the time, impress clients.

[24:05] What we've seen with COVID is that, a lot of clients, a lot of law firms, have realized, we actually don't need that expensive office space anymore. We can deliver legal services just as well. In fact, by a lot of measures, better, over the Internet.

[24:19] With our clients sitting at home in their home office, with our lawyers sitting at home in their home office, and everyone's got the convenience of instant access to that legal advice and legal resource, without all the friction of a meeting in that bricks and mortar office.

[24:34] That's a pretty exciting time to be innovating in legal, because it's a brave new world that's going to, I believe, help open up that latent legal market over time.

Dan: [24:44] You talked about the last 10 years accelerating, let's fast forward 10 years to 2030, what conviction do you have today similar to the conviction that you had for cloud that's going to be equally as transformative 10 years for your customers?

Jack: [24:59] The conviction I have for the year 2030 is that the vast majority of legal services will be delivered in that cloud based way. That's a technology shift that Clio's hoping to enable. The second piece that is more aspirational, that I would love to help drive into legal industry as well, is a shift to a more client centered way of delivering legal services.

[25:26] That's both a technology problem and a mindset problem. We need the mindset of the legal industry to shift to this client centered way of thinking. The way I think about it is that I want the book, and other educational materials to help drive that mindset shift, but I also want Clio the technology platform to automatically encourage lawyers that are using it to operate in a client centered way.

[25:52] I want it to almost be, call it the default way of operating a law firm. If you adopt Clio, is to be a client centered law firm. We make it easy and frictionless, and the software's almost opinionated in how you do things.

[26:06] Opinionated in the sense that, the way you think, you should be a client centered, and we're going to make it really easy and frictionless for it to be client centered. By the way, the benefits of that as a law firm are that you're going to be more profitable. You're going to have happier clients. You're going to have better outcomes for your clients.

[26:23] You're going to see faster growth because they're feeding into this flywheel of growth for your law firm, by leaving positive reviews, by referring friends and family to you. We want to make that almost an automatic side effect of using Clio, is being client centered as well.

[26:39] So the year 2030, I hope will be a year that I can look at and say "We've made a huge amount of progress in making the legal industry both cloud based, and client centered."

Dan: [26:50] What exciting times ahead, really believe in that mindset change, and we look at leaders that are transforming the economy, we call them digital heroes. I think you exemplify those characteristics. Congrats to you and your recent success, and all the opportunity you have in the future. Thanks for joining Jack.

Jack: [27:07] Thanks for having me.

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Dan: [27:08] On the next episode of Decoding Digital.

Eric Siu: [27:13] I think it's really easy to compare your chapter 1 to someone else's chapter 25. I think there's a comparison game we all play. It's just human psychology, it's human programming, right?

[27:23] It becomes overwhelming when you compare yourself to someone else, so it's just easier to do you versus you, one percent better every single day.

Dan: [27:30] CEO of ClickFlow, and host of the "Leveling Up" podcast, Eric Siu.

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Dan: [27:36] Thanks for listening to Decoding Digital. Make sure you never miss an episode by subscribing to this show in your favorite podcast player. To learn more, visit decodingdigital.com. Until next time.

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