The real value of LegalZoom

Having scheduled its IPO for 2 August, LegalZoom’s recent decision to postpone has led to suggestions that its valuation was too high.

Some may see this as evidence that there is no business case for online legal services while others will undoubtedly examine the financials and start to question the viability of such enterprises.

For those of you who do not know, LegalZoom is the top US online legal document service platform and posted a $156m turnover last year.

It is difficult to draw accurate conclusions around the market size of legal tech enterprises.

For example, in the LegalZoom Securities and Exchange Commission (SEC) filing, it estimates that the legal services market in 2010 was worth $266bn. That’s a big number. It then goes on to qualify its market as the small business and consumer space at a value of $97bn. Smaller but still very large. How do they arrive at this number? Do they separate out, or distinguish between the many practice areas of law, such as family, corporate, real estate, litigation, corporate commercial litigation, collections, personal injury? Furthermore, is high-fee work grouped in with low-fee work, skewing the estimates of the market size?

There are two things that suggest that even this $97bn estimate is too high. The online legal document generation market will likely be low-fee, low-margin commodity-type work.

Furthermore, LegalZoom is prohibited from practising law and providing legal advice, which is really the lion’s share of the legal market. If you look at the numbers on LegalZoom in its SEC filing, it stated that they posted a $156m turnover, and a profit of $12.1m. These aren’t great numbers, especially for a company 10 years out. Is the future brighter?

Viability

I think their business model faces several challenges. First, they will have to improve their cost per acquisition (including delivery costs) and improve customer retention. Second, they will have to have a better way of capturing some of the legal work that is currently out of reach and must find a means to capture a piece of the $97b legal services market.

To do so, they will need to be able to either provide legal services, or share the billings with lawyers. Another challenge LegalZoom faces is the cost of acquiring, serving and retaining customers. Online legal services are not good at creating relationships with their customers. The web tends to be impersonal, lacking the human touch and connection that individuals may look for with respect to the law.

Rarely are people loyal to a particular web brand. If there is another lower priced service, they may just use that service. If it’s free, even better. LegalZoom’s SEC filing says that over half of its costs were spent on delivering the service to the customer.

This suggests that they actually do not have a lot of back end automation. A significant threat to LegalZoom’s business model will be sites offering free forms, and those who have greater back end automation. It is coming, and it will eat into LegalZoom’s online legal document service market and their future prospects.

LegalZoom is spending tons of money on marketing their services. They use television ads, Google AdWords and many other advertising methods. Traditional business models rely on repeat customers to justify the spending on marketing.

Let’s consider the buying patterns for legal for a moment. Many times people see legal as a nice thing to have. These same people rarely have matters that require legal assistance. So they come to LegalZoom’s website, and create a will, or prepare divorce documents. Once that document is prepared, they rarely have a need to buy another document. Not surprisingly, with very little customer loyalty and little repeat customer business, you will need to constantly market to acquire clients. Contrast this with TurboTax, filing your taxes online, which has a high recurring annual income.

Referral services

LegalZoom’s business model also includes subscription legal plans which connect customers with lawyers, who have to meet LegalZoom’s stipulated quality standards. This is a classic referral model. LegalZoom gets a lot of web traffic, people visit their site for many reasons including legal information, and legal questions. After someone begins a document they may want to convert to a lawyer. The challenge with the referral model is controlling the quality of the product sold, the price the product is sold at, and the client relationship. It tries to address this with a stated requirement to “satisfy certain quality standards established by us and be highly focused on customer care”.

In practice, it is going to be difficult to have true control over the quality of services delivered, while at the same time claiming separation between the company and the lawyers. To conflate the two would again bring LegalZoom into the area of unauthorised practice of law. Coupled with the fact that lawyers tend not to be good at customer relations, this will pose a challenge for this part of LegalZoom’s business model.

Nevertheless, it has the biggest opportunity. Lawyers are still figuring out online marketing. Companies like LegalZoom can provide lawyers with its expertise, and provide them with connections to clients in a different way to directories or websites. These lawyers will want the business from LegalZoom and are willing partners. This is actually a good revenue source for LegalZoom and legal tech sites in the long run.

Even if we say the market is overstated, and there are challenges in the business model, I do believe there is a role for LegalZoom and similar websites moving forward. Generally, there is a gap between what is currently being offered and what people can afford. Technology solutions can help fill that gap. The real changes and disruption will occur only when lawyers adopt technology and make their practices innovative. As long as they continue to take a backseat, which they are, there will be an opportunity for LegalZoom.

Legal tech companies provide a baseline that will be used to measure the cost of other services. They introduce competition into a market that has been characterised by monopolies and protectionism, and that in itself will create financial pressure on the profession.

The trend of using online services and purchasing services online is unrelenting. Whole business models have been disrupted by the web; just consider the demise of book stores in the US or music stores, and the rise of Amazon and iTunes. People will want to connect with lawyers online, or will want to have different ways to communicate with them or consume their services.

Monica Goyal is a Toronto-based lawyer and founder of My Legal Briefcase (www.mylegalbriefcase.com)   |   Twitter: @MonicaNGoyal