Legaltech remains a buzzy subject. For some, it may seem like a new invention. For others it’s old news, and to be frank, quite boring. The reality is that legaltech is something old, something borrowed and something new.
Learn more below, including how legaltech became “cool”.
01. What is Legaltech?
Legaltech simply means technology that:
1⃣ helps facilitate the practice of law for lawyers in order to deliver better products and services for their clients;
and / or
2⃣ helps consumers access legal expertise, products, services or access justice directly and without the use of lawyers, or at least with reduced lawyer input.
Feel that 2⃣ is lawtech and 1⃣ is legaltech?
Don’t worry. We have it covered – see here for a more in-depth analysis.
And despite the hype…
02. Legaltech isn’t new
Generally speaking, legal technology traditionally referred to the application of technology and software to help individual lawyers, law firms, and in-house legal teams manage back-office business tasks.
Legaltech’s initial focus
Traditional legaltech use cases focused on:
- Practice management
- Document storage
- Electronic discovery (also known as eDiscovery)
- Legal Research
Of these, 1 , 2, 3 and 4 are tools to administer a legal business. In many ways they are generic to most businesses, centred around managing money, filing and other business admin.
Technologies 5 and 6 are different. They are tools needed to accomplish legal specific tasks, i.e. researching case law, legislation and commentary, and making sense of huge volumes of litigation data, in each case usefully informing what advice to provide to a client as to a course of action.
Legaltech goes “online” in 1979
Believe it or not, lawyers were some of the earliest consumers of early internet concepts.
No really, it’s true:
The above is the Lexis UBIQ terminal, released in 1979, two years before IBM® introduced its PC (1981)!
For once lawyers were ahead of the curve.
The UBIQ terminal took online legal research to another level. The UBIQ offered the first-ever desktop access, to Lexis’ full-text legal research database. As a result lawyers could retire cumbersome terminals operating on 300-baud modems (baud is a unit of transmission speed).
The advent of 1200-baud modems around the same time was another leap for law firms, quadrupling the speed at which they could search Lexis’ full-text database.
The UBIQ offered other conveniences (all of which remain staples of office work) besides desktop legal information access, including:
- The use of a centralized printer!
- The world’s first auto-dial feature.
- Function keys. Each key was labelled with exactly the function it performed, allowing lawyers – especially those who couldn’t type (more common then, given typing pools took care of typing for lawyers) – the ability to issue commands to the service with one keystroke.
The UBIQ reinforced LexisNexis as one of the earliest entrants into the online information world and a pioneer of electronic legal information. It’s no surprise they remain a market leader today, over 40 years later.
For a short video of the real thing see here:
And for any history buffs, this is a nice timeline of Lexis and its role in internet research innovation.
So we’ve been here before
In the run up to the millenium there was a growing use of word processing software, not just by typing pools but by lawyers.
In 1999 the BlackBerry was introduced, and through successive models was the first high adoption smartphone, catalysing the switch to mobile first 24/7 “always on” work culture among law firms and most businesses.
In many ways it laid the foundations for the world of mass remote working in which we find ourselves post COVID-19.
Into the early 2000s and 2010s internet technology adoption skyrocketed as email became the preferred mode of communication on legal matters for… well just about everything… and data began moving to the cloud.
And of course, with COVID-19, technologies that were nice to haves such as high fidelity video conferencing (that historically required telepresence rooms costing tens of thousands of dollars) were democratised via freemium apps on your smartphone.
But wait, aren’t these examples of general technology and not legaltech?
Yes and no.
They aren’t #legaltech specific, but applying the oft-cited definition of legaltech (see the intro to this article), all of these technologies fall within that definition.
In each case they are used either to:
1⃣ help facilitate the practice of law for lawyers in order to deliver better products and services for their clients;
and / or
2⃣ help consumers access legal expertise, products, services or access justice directly and without the use of lawyers, or at least with reduced lawyer input.
Legaltech, and technology generally, aren’t static. Nor are they particularly distinct. Legaltech is, after all, just tech.
And technology is constantly evolving, making it easy to overlook how much has changed and how much continues to change. Things that were revolutionary last year, become invisible the next.
Why are we pointing this out?
As is explained here, reading the legal and legaltech / innovation / ops press, “[y]ou would think legal technology had just been created and was only now about to disrupt legal services and needs millennials (who, of course, understand it in a way my generation never will!) to implement it. What nonsense. Technology is an evolving thing. Technology for lawyers is part of that evolution.”
As the author, Brian Inkster, goes on to elaborate, legal technology is a decade’s old and longstanding business necessity; an evolving space rather than an entirely new and novel domain.
03. But something changed
Since around 2011, legaltech has had increasing association with technology startups disrupting the practice of law, providing consumer access to (usually) online software that does or claims to:
1. reduce or in some cases eliminate the need to consult a lawyer; or
2. connect people with lawyers more efficiently through online marketplaces and lawyer-matching websites.
Note that we’ve deliberately included both pre and post-2011 vendors against each category to provide a representative, albeit non-exhaustive, overview (there are plenty of vendors we’ve omitted due to limitations of space).
Notwithstanding the above infographical caveats, and difficulty of drawing a somewhat illusory dividing line between pre and post-2011, the general evolution is roughly correct in terms of direction of travel and shift in emphasis.
The past decade has seen an explosion in the number and variety of use cases and vendors seeking to solve them. And in doing so, the emphasis is significantly tilted toward changing how lawyers deliver legal products and services, and how clients consume them.
The next question is…
04. So what changed in recent years?
During the past 10 years, and more particularly in the past 5 years, there has been been a burgeoning number of law firm innovation teams, in-house legal ops teams and legaltech incubators and law firm press releases.
Whether the chicken or the egg, there is surging client interest in these areas, and in particular what law firms are doing with legaltech and innovation to improve service design and delivery.
As with other client buying drivers, such as diversity and inclusion, environmental social governance and increasingly mental health and wellbeing, innovation (albeit an often nebulously defined term in such contexts) is a frequent feature of law firm RFI / RFP and panel decisions.
In other words, legaltech and innovation are now a formalised part of a legal buyer’s decision criteria.
It’s definitely something to be seen as doing, and better still, something to be actually doing.
Legaltech investment has soared in recent years. Between 2016 to 2018 investment skyrocketed from $224m to $1.66bn, with a 713% jump between 2017 and 2019.
2020 was a different story. Unsurprisingly, it was a difficult year for start-ups, including legaltech ones:
“…deal volume down nearly 30% and total deal value contracting by more than 50%. Meanwhile, the always-grueling sales cycle got longer as law firms and corporate legal teams functioned in firefighter mode through spring and summer. Widespread belt-tightening cut into budgets for new tech and austerity measured intensified demands on already-scarce time and attention of critical customer personnel in back-office functions”
However, as Jae Um later notes there were:
“a few bright spots in an otherwise dreary legal tech landscape from 2020, capped off by a rare 9-figure raise (and implied valuation) by Ironclad led by Bond Capital (home to the revered Mary Meeker of Internet Trends Report fame).”
(For the official Ironclad announcement on 14 January 2021 regarding that deal, see here.)
But the key point is this: for the time being, investment into this sector remains frothily attractive for entrants and investors.
Whether this money converts to high ROI and draws in even greater investment and interest remains to be seen.
There have already been some high profile failures, e.g. the winding up of Atrium after $75m in VC investment.
Time will tell whether these bets pay off, and for whom.
Legaltech career paths within law firms are becoming more common and gradually more well trodden, especially in BigLaw, but also firms with high volume / low margin business lines that simply cannot scale without operational efficiencies driven by excellent organisation of people, process and technology.
Unsurprisingly, there is a growing demand for Legal Ops experts, in some cases drawn from business operations roles outside of law.
Granted individuals in these roles have long existed, but probably not to the same extent in terms of profile and number.
The fact many of the largest firms actively and externally promote these teams (some of which have existed for many years without such publicity) demonstrates their growing importance to firm brand and to clients.
Private equity is also flowing into the sector.
For instance, HG Capital is busily rolling up various products and services into a singular legaltech offering spanning deal management, contract drafting and various other legal productivity applications.
And finally, it’s not just private equity trying to roll-up products and services into singular platforms.
Entrants to the legal services market such as DoNotPay – a self-service app aimed at solving consumer and basic business legal needs – is seeking to, “to roll up the universe of small friction points and consumer grievances that accumulate in life. While each grievance doesn’t merit lawyering up, DoNotPay is betting that bundling all those little annoyances into a low annual fee (currently $36 per year) will convince millions of individuals to pay them instead (presumably with all the money they #DidNotPay)“.
The takeaway is this: the number and variety of interested individuals is expanding all the time. Whether that continues remains to be seen, but for now, interest seems to be at an all time high.
05. Why did change happen?
There’s a lot of causes for the above evolution of legaltech, not least in perception and interest. Below are a few key drivers that correlate, and potentially contribute causally, to this shift.
A. Crisis, and the rise of Fintech
The 2008 financial crisis catalyzed change across the legal profession. Law firms and in-house teams suffered huge job losses, as did their clients. Usually recession proof, the 2007/2008 crisis proved otherwise for law.
The remaining vestiges of in-house teams were placed under greater demands:
- heightened regulation, especially for lawyers working with or in financial services businesses;
- cost-cutting, including reduced budget for outside counsel (i.e. law firm) services, requiring in-house teams to do more with less (a trend that continues into 2021+); and
- lack of standardization regarding high volume, low-risk legal processes.
Many of these challenges persist today, over 10 years later.
Law firms had their own challenges:
- a global recession, depressing the transactional market (e.g. for M&A and financings) and outside legal spend generally; and
- the rapid acceleration of client expectations driven by the shift to mobile working (via BlackBerries and subsequent smartphones), email, redlines and the internet.
These headwinds began the slowly accelerating pull toward digital transformations of previously analogue business models. Necessity being the mother of invention.
B. ABS (not the six pack kind)
In England and Wales, Alternatives Business Structures (ABS) were introduced by the Legal Services Act 2007, which came into force between 2008 and 2011.
The ABS was introduced to widen the types of individuals and organisations that can provide legal services.
Under the traditional law firm model, law firms are run and owned by senior lawyers, who climb the ladder via a lock-step system, becoming managing partners without necessarily ever having to develop real commercial acumen. Tenure is king. Commercial experience optional. Outside experience was sometimes actively avoided and often treated with suspicion.
This has been changing for some time, but vestiges remain for the most part.
The introduction of the ABS upset the apple cart, allowing non-lawyers to invest and become partners in law firms. That said, ABSs are overseen by the Solicitors Regulation Authority (SRA), which is responsible for judging applications from firms or businesses that want to use the structure and for issuing licences, including for individual lawyers. This is also the same regulator that oversees the general legal profession in England & Wales.
The ABS – and similar loosening of regulations outside of the UK for similar aims – is helping enable those equipped with IT and commercial acumen to offer legal products and services to those who would have otherwise needed to rely on traditional legal service providers.
In many ways the ABS and similar aim to lower the barriers to entry and open up an otherwise gated (and some say guild like) profession to a more cognitively and experientially diverse group of market participants.
The aim of the ABS was to create competition and widen access to legal services. So far, the distribution of that access remains uneven, benefitting mainly business-oriented legal services through the proliferation of ALSPs.
Tied to the introduction of the ABS, law firms have faced increased competition from alternative legal service providers (aka ALSPs).
What the heck is an ALSP?
Apart from being a tongue twisting acronym, ALSPs usually share the following characteristics:
- Specialist. ALSPs – often an ABS – specialize in high demand legal services such as document review, contract management, litigation support, eDiscovery and the general outsourcing of high volume / low-risk legal processes.
- Staffing. Human resources are typically diverse: a mix of lawyers in senior roles alongside legal technologists, analysts and project managers.
- Situation. Staff are typically located in lower-cost in-shore, nearshore or offshore locations. ALSPs leverage high use of standardized process and legaltech to automate or augment their services, along with fixed fee structures. Where possible they try to sell pre-packaged products vs. open ended service engagements.
- Captive or Independent. ALSPs can be either third party (e.g. Axiom / Factor) or captive (e.g. Lawyers on Demand was created by Berwin Leighton Paisner, which itself was merged with Bryan Cave in 2018 to form Bryan Cave Leighton Paisner).
The threat to traditional legal services
These alternative offerings have been steadily chipping away at legal work previously the exclusive purview of traditional legal businesses, including large law firms.
- 71% of corporate legal teams now use ALSPs for significant swathes of legal work.
- ALSP revenue rose from $8.4bn in 2015 to $10.7bn in 2017.
The home court advantage?
But… it’s not all bad news for law firms.
The Baretz & Brunelle report states that law firms have been fighting back, and may have what they define as a home court advantage (if they play their cards right).
Firms have been creating and expanding their own captive ALSPs, i.e. ALSPs directly or indirectly within their control and ownership.
These captive ALSPs have been selling their services externally to clients, but also internally to service internal demands. Sometimes the latter is disclosed to end clients, sometimes it is not. It depends on the firm.
Like third party ALSPs, the captive ALSP shares the same characteristics (except for law firm ownership or control).
Unlike the traditional part of the law firm business, the captive ALSP relies much more on technology, process-driven workflows, use of analytics, alternative staffing, separate operations, separate P&L, separate leadership and use of alternative fee structures.
Captive ALSP diversity and maturity is unevenly distributed
Some key takeaways from the Baretz & Brunelle report include the following:
- More US firms have ALSPs than non-US. 35 of the Am Law 100 and 13 of the non-US Global 100 have ALSPs.
- Those that have ALSPs, have branded them. Most firms have branded their ALSPs, e.g. 86% of the Am Law 100 and 92% of the non-US Global 100. Some branding is entirely separated from the mothership law firm, e.g. Reed Smith’s Gravity Stack.
- Captive ALSPs mainly do 3 things. Captive ALSPs mostly do: (1) eDiscovery, (2) contract reviews and (3) M&A due diligence.
- Captive ALSPs can be divided into 3 stages of maturity. Stage 1 (x 1 service, usually eDiscovery), Stage 2 (x 2 distinct services) and Stage 3 (x 3+ distinct services):
- US ALSPs focus on eDiscovery more than non-US ALSPs. Whereas 37% of Am Law 100 firms offer only eDiscovery services via their ALSPs this is true of only 8% of non-US Global 100 firms.
- Non-US ALSPs do more advanced work than US ALSPs. More than twice the percentage of captive ALSPs at non-US Global 100 firms perform “advanced” services, defined as contract review, IP services and M&A due diligence.
- Overall, non-US ALSPs are more mature. Overall 54% of non-US Global firms are in Stage 3 vs. only 26% of Am Law 100 firms.
- Separation is small but growing. Only 9% of Am Law 100 ALSPs use separate entities, whereas 15% of non-US Global 100 firms maintain a separation.
And this is not a new development, but an on-going one. For an excellent infographic of the history of captive ALSPs, see the below by Baretz & Brunelle who divide this evolution into four waves:
As is evident from the above comparison of captive and independent ALSPs, technology is at the heart of these new businesses, further driving interest in and investment into legaltech.
As with the switch toward online banking during the 2000s and 2010s, there has been a slower gestation of increasingly high profile online legal services aimed directly at consumers and small to medium-sized businesses.
In many cases, the delivery channels closely resemble those adopted by online banking, and in a minority of cases app-only challenger banks such as Revolut and Monzo.
This mirrors similar trends of adjacent industries, such as mortgage broking (e.g. Habito), whereby a traditional legal(ish) or legal adjacent service is being delivered by leaner, lower-cost professionals aided by standardised and often automated or augmented processes that streamline the overall process, lower costs and deliver great value and experiences for consumers.
Similarly, in tax there has been a sea-change driven by excellent tax filing software reducing the need for traditional accountancy services, instead driving a trend toward DIY tax (e.g. Xero).
E. And a general trend toward digital transformation
Together the above headwinds created a heightened need to innovate the business of law generally beyond back-office functions.
Since 2011, legaltech has grown to encompass, both software and technology tools that simplify and streamline legal practice for lawyers, but also client-facing digital products and services, including many that are delivered direct to consumer with no, or minimal traditional lawyer involvement.
In this way, legaltech is also the legal industry’s way of performing digital transformation: using technology to simplify operations, become leaner, and cater to modern customers.
Digital transformation has long been prematurely predicted by consultants, vendors, the media and think tanks.
However, a confluence of macro events, explosive data growth (via the proliferation of software and internet technologies) and the resulting inability to respond to modern business challenges via old means (throwing more people at the problem) have driven people toward technology solutions.
Examples include the massive repapering exercises to qualify and quantify the extent to which millions of contracts may or may not be impacted by macro events such as Brexit, COVID-19, LIBOR discontinuation and so on, together with increasingly expansive reporting requirements (particularly in financial services, e.g. the soon to be MIiFID trilogy of regulations).
In each case, largely paper-based paradigms are in need of an overhaul.
As Jae Um of Six Parsecs via Legal Evolution notes, 2021+ will likely see a massive surge in Ktech. That is, tech aimed at solving a wider range of contracting adjacent problems for a wider range of personas, an area itself part of an on-going evolution (contract lifecycle management).
This makes a lot of sense.
Contracts are the lifeblood of business, both products themselves (e.g. financial instruments) but also the record of obligations between commercial parties, which in either case, if mismanaged, can be costly to businesses and impact a variety of business users beyond lawyers (e.g. revenue assurance, customer renewals, compliance, sales and so on).
Legaltech isn’t entirely new and borrows a lot from other industries and technology generally. It is however, continuing to undergo great change as the wider legal industry (and its client base) evolves through alternative service delivery models and external competition guided by increasing demand for cost effective legal products and services accessed and experienced in line with other consumer and business products.
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