Back to blog

LCN Blogs

Legal technology – question the hype

Legal technology – question the hype

Matthew Dow

20/02/2019

A glance at LawCareers.Net’s Commercial Question section confirms that technology is a central issue within the legal sector. Readers are updated about many current trends, including the gig economy, e-privacy, open banking, digital copyright regulations and cyber-attacks. Likewise, numerous articles address the developments regarding artificial intelligence (AI), regtech and blockchain. In legal practice, the interest in legal tech is widespread. Further, as a prominent feature in most legal firms’ sales pitches; tech has arguably reached buzzword status.

Therefore, a strong commercial awareness can be demonstrated by the candidates if they can show a basic understanding of the productivity improvements that legal tech offers to their chosen law firm. Some examples of reform to consider include document disclosure during litigation, due diligence in M&A, contract automation, redacting and legal research. Further, software innovation has provided modern lawyers with better matter management systems and remote working opportunities.

Nonetheless, applicants should not assume that legal tech products are relevant to every firm, practice area or lawyer, nor should they accept that legal tech adoption will be ubiquitous, quick or sometimes anything other than a waste of resources for some of their interviewers.

The most useful services to law firms are chiefly still provided by long-established partners like Everlaw, HighQ, Opus 2 Magnum and iManage, rather than the latest science project turned start-up. The truth is that there are still tangible challenges that prevent the reality matching the hype. Below are some arguments against legal tech that are often raised.

Only needed for low-margin, high-volume work

Businesses invest in their technology because they believe that their productivity or competitiveness will be enhanced by doing so. Consequently, if the costs of departing from the status quo outweigh the perceived benefits – then it is unlikely to be full steam ahead for the IT team.

For context, a legal tech product may require extensive employee training, huge upfront expenditure and considerable in-house development time. This means that the firm’s return must justify the effort exerted in development. Marginal gains for overcoming an infrequently encountered problem are not going to convince partners to reach into their pockets.

Technology provides the greatest return to lawyers when it improves their efficiency on constantly repeated actions. In this way, such products elevate that firm’s proposal above their competitors who are undertaking similar projects.

For example, technology can add value in the handling of thousands of similar low-value insurance claims. Alternatively, consider the impact of chatbots that can answer the majority of questions posed by clients or the automation of standardised contracts.

With fixed-fee arrangements in place for this type of recurring work, the billable hours inefficiently spent on automatable tasks rapidly become time burdens, rather than chargeable assets. Therefore, a technology assisted and streamlined process is desired.

In addition, employee salaries and benefits are usually a law firm’s largest overhead. Therefore, there is a business case for reducing headcount across an international office structure.

For example, if the work done by those individuals is not dynamic or does not require custom solutions, then economical technological substitutes are worth considering. This robotic replacement is obviously not suitable for clients who have a unique issue, which requires trusted advisers with experience and specialist knowledge to assess the best way forward.

Legal tech will have less of an impact on the professionals that are explicitly marketing expertise, rather than a generalist service. For example, FTSE 100 corporations during M&A or regulatory advisory choose a partner specifically for their relevant experience. They want bespoke advice on a nuanced legal issue; an inexpensive, cookie-cutter solution will not be sufficient.

A natural counter-argument is that there are now sophisticated legal tech tools that meet this market demand. Indeed, many companies claim to perform complex analysis and outclass leading lawyers. However, the cost of implementation is unlikely to convince the many partners that feel that they have mastered their practice area. For the lawyers in this fortunate position, legal tech investment is frequently deemed to be an unnecessary cost that reduces profits.

For example, the high margin for US firms has partially developed from a commitment to a business structure that puts faith in leanness, which leaves little room for noteworthy, but non-essential innovation. Moreover, a rival firm’s acquisition of an AI product is unlikely to inspire instant competitor copycat adoption. When it comes to one-off high-value work, clients remain more comfortable relying on the firms with an established specialist reputation, not those which utilise the latest digital equipment.

Caution for early adopters

The early bird may get the worm, but the second mouse gets the cheese.

Lawyers are reluctant to gamble on the legal tech future when the sector is still incredibly decentralised. Investing considerable sums to discover that your preferred legal analytics provider has just collapsed or is incompatible with upgrades to your business elsewhere, is a risk not worth taking.

Many firms prefer to see a platform become established following pilots by similar clients. Then, when they are confident that a platform works, an investment makes business sense. Despite all the talk of innovation, it is not in the nature of law firms to test and learn as tech companies do – lawyers are not inclined to move fast and break things. Until there is a reliable, full-service legal tech offering that can integrate across different areas of a law firm, adoption will be slower than predicted or desired.

Leveraging existing technology

When asked what their dream legal tech product could possibly be, one panellist’s popular answer was ‘Excel for lawyers’. The truth is that the mastery of existing platforms could help most lawyers. Simply making document text digitally readable through optical character recognition has been a game changer when searching for answers during litigation for example.

Traditionally, lawyers have not really been keen to embrace technology. Fears over data breaches and confidentiality concerns have prevented many from following advised practices, such as storing data on the cloud. Alternatively, the need for meticulous record keeping has meant firms rely on having their numerous paper copies locked away in filing systems, rather than putting their faith in simple and effective encryption techniques.

Therefore, law firms are not really looking to invest in the next big product like Facebook or Google. Innovation elsewhere is unlikely to change a firm’s fundamental approach, but it will modernise its tactics.

For example, finance lawyers may consciously pitch for fintech clients or initial coin offering work. Alternatively, subscription models popularised by Netflix and Amazon Prime may become more likely. Increasingly, support may be given to popular legal practice management trends.

Partners are utilising innovation to maximise their existing legal practices and not to profoundly pivot the business of law around a novel trial prediction tool, legal analytics money-ball strategy or seemingly infallible AI legal advice. 

Ownership structure

Most law firms still operate on a partnership basis. Therefore, an increase in costs will directly reduce the collective profits of the partners. In contrast, tech CEOs often rely on repeated rounds of external funding to help stimulate the growth of the company’s new visionary product. Further, the development and increase in costs usually does not lead to the generation of positive and immediate revenue. Technological investment is often legitimised with the following argument: ‘we are not making a loss, we are just pre-profit, I promise!’

Therefore, for partners, legal tech implementation must deliver positive financial results relatively quickly. The modernisation of outdated software will not be agreed to merely because it improves life for business services. Realistically, any recommended improvement must positively affect the fee earners to be given serious consideration.

The cynical demographic argument has also regularly been made. Imagine that you are doing rather well and are a few years from retirement. Most lawyers in this position would be reluctant to approve a proposal that will dramatically raise their personal contribution without providing them with any noticeable future financial benefit. Legal tech can take months and years to become fully compatible with existing systems. This decision-making barrier may slow down progress despite obvious tangible benefits to the firm.

Finally, although alternative business structures are a feature in the United Kingdom, in many jurisdictions law firms must be owned by a lawyer. Although easily circumvented, this may prevent big tech from seamlessly merging and disrupting legal practice as easily as is suggested.

Exits

The possible return that a venture capital firm could make from a successful legal tech investment could be colossal. However, at this current juncture, despite all of the hype legal tech genuinely does not have the exit potential of a lucrative fintech opportunity.

The legal tech sector does not have numerous billion-dollar companies (unicorns) galloping around inspiring venture capitals to invest. Put simply, the legal sector is just a lot smaller. This factor affects how much capital can be put into the risky failures that help drive a sector’s innovation.

Money matters because building a technology company that can really disrupt an industry costs a fortune. The investment will only be provided to a promising start-up with a clever product if there is a prospect of the investor seeing a large return on their commitment. Established legal tech companies are unlikely to put all their eggs into a completely unproven and unknown basket for the same reason.

In legal technology, the risk-reward ratio is far less generous for an investor – especially one appearing at an early stage. However, the sector will undoubtedly grow and disrupt how we practise law. However, it would be unwise for any applicant to unquestionably assume that legal tech companies are guaranteed to mirror the rapid success that has occurred elsewhere in other professional service sectors.

Conclusion

Despite the arguments outlined above, I am still positive and optimistic about legal technology. When used right and marketed effectively many products have the potential to improve efficiency and reduce client fees and transform the ingrained unproductive legal practice systems as a result.

I accept that there are strong counter-arguments to all the points above. For example, the growth of in-house incubators at leading law firms is changing the debate regarding leveraging existing technology. Elsewhere, cheaper online legal advisory offerings already provide access to justice for thousands of people – which is changing the way that local law firms operate.

I am not suggesting that you should ignore legal technology. Rather, I am trying to highlight that when applicants are addressing the popular topic of legal tech, there is an alternative interpretation, which is definitely less enthusiastic. To impress in an interview, candidates must navigate beyond the regularly promoted advertisements and arguments and seek to understand how legal tech fits within the business of their future employer.