The legal services profession is slowly but surely waking up to the potential of new technologies to disrupt and transform, says Katie Chung, assistant director at private equity firm Dunedin.
In a profession characterised by tradition and convention, change may feel uncomfortable. But law firms able to harness the benefits of new technologies now have an opportunity to secure competitive advantage.
It’s fair to say law firms have so far been slower to adopt potentially transformational technology than other sectors, particularly financial services. There are some reasonable explanations for that, concluded the Law Society in a recent paper on legaltech. Legacy systems are a potential barrier, it warns, but so too are the profession’s traditional charging model – based on billable hours, this model doesn’t encourage efficiency savings – and concerns around compliance and security.
Still, change is coming. Tough pressure on costs, from clients and the competition, is forcing law firms to consider radical new options beyond the set-up of operations in lower cost locations. Even in traditional firms, younger lawyers, often more open to new technologies than previous generations, are now reaching partnership level.
Moreover, legaltech providers are proliferating, offering a range of innovative new tools with the potential to deliver significant benefits. The competition run last year by the Government’s Industrial Strategy Fund, offering grants to developers of AI- and data-enabled solutions in the accountancy, insurance and legal professions was fierce. Independent research suggests more than 250 start-up and scale-up legal businesses have raised more than £300m of capital over the past six years, with investment increasing exponentially from 2016 onwards. International comparisons show what is possible: in the US, legaltech investment hit $1 billion last year.
Nevertheless, the legaltech industry is at an earlier stage of the maturity cycle than, for example, fintech. For those businesses able to combine the right technical solutions with the right model – and harness the support of investors and advisers – the field is open.
Certainly, the new strand of legal services firms offering more flexible resourcing models now look well-placed to thrive, particularly where they are built on bespoke technologies with the agility to support their development. Propositions such as Axiom and Halebury, which supply specialists for a range of assignments and project work, leverage ideas such as lawyer matching platforms to automate the hiring process.
One key factor driving the supply side of these platforms is the changing demographics of the profession. Many lawyers are demanding a more flexible and balanced way of working, to the extent that the traditional career goal of partnership at a top law firm is becoming less aspirational to many. That is already beginning to translate into growth in online service delivery, in areas such as dispute resolution and open-source legal documentation.
Elsewhere, the focus is on what new technology might achieve for law firms seeking to work more efficiently and productively, driven by the need for new fee models and greater transparency, as well as the ongoing trend of consolidation, particularly in the mid-market. As legal services firms increasingly look to unbundle their services, unpicking higher-value work from more commoditised tasks, space is opening up for innovative technology providers and technology-enabled service providers.
AI-powered contract review services such as Uhura and Luminance, which have received substantial backing from high-profile investors, are attracting significant attention, for example. The acquisition of AI innovator RAVN by document management specialist iManage underlines how this niche of legaltech is developing; Kira and ThoughtRiver are also making waves.
In the litigation field, meanwhile, businesses such as LitiGate want to help law firms assess the chances of success – or risk of failure – in any given case. Their technologies, based on applying AI to case documents and external data, including everything from the success rate of the parties in previous litigation to how judges have reacted to particular documents, seek to mechanise what has until now been a human skill.
Nor is legaltech the preserve only of business-to-business services. The potential for new technologies to open up legal services to a consumer audience previously priced out (or intimidated) out of the market is exciting. The Law Society points to services such as Rocket Lawyer, which enables individuals to compile their own legal documents, and DoNotPay, which helps people appeal parking fines.
Across the market, in other words, legaltech is now poised to change the legal profession. The level of disruption seen in other markets may not yet be coming into view, with legaltech more often than not focused on enhancement rather than transformation, but the direction of travel is increasingly clear.
However, technology providers will need help to break through. Dunedin’s detailed assessment of opportunities in the legal sector suggests innovation must go hand in hand with commercial pragmatism. For example, which areas of legaltech offer the potential for first-mover advantage? Already, areas such as document automation are crowded by competing innovators while others have yet to be targeted. Compliance and risk management could be an interesting area of opportunity, given the increasing regulatory burden placed on law firms in areas such as client onboarding.
International expansion will be an important part of the story. In particular, for UK based start-ups, the large US legaltech market is highly attractive, but firms will need financial and strategic support as they seek to credentialise themselves internationally. This is particularly important when considering the competition, namely the Goliaths of the global legal technology market – Thomson Reuters, LexisNexis and Bloomberg. These organisations have armies of salespeople and customer success teams, not to mention powerful brands. They also have a voracious appetite for technology solutions which can plug the gaps in their product portfolios, the most recent example being Thomson Reuters’ acquisition of London-based HighQ in July 2019. For a legaltech business which is successful in achieving a certain scale, these firms are often the inevitable home. The Goliaths have their own challenges too however, principally in their inability to drive innovation within such large organisations.
Stepping back, legaltech firms will need balance and strength to build out their products and services – and the networks required to win new clients. In a sector where law firms are often conservative in their procurement, the sort of financial strength and referral network that a private equity firm can provide could prove invaluable. All the more so in an industry where the prospective client base often expects and demands references from their peers.
Consider infrastructure too. Innovative technology businesses in many sectors have learned to their cost that greater professionalism in functions such as sales and marketing may be just as essential to commercial success as a winning technical solution.
Nevertheless, while there are practical challenges to confront, the legal tech opportunity is enormous. Given the pace of change in the sector, this may be a marathon rather than a sprint – but the legaltech starting gun has been fired.
Katie Chung joined Dunedin in 2015 and became assistant director in 2018. She is part of Dunedin’s investment team which sources and transacts deals across the UK.