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Legal technology spend at $3bn and growing

Added on the 16th Feb 2016 at 12:26 pm
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Thanks to a confusing embargo I hadn’t planned to write about Mitratech’s new white paper on legal technology spend but the statistics proved too enticing.

“Catching the Wave: Legal technology spend at $3bn and growing” is the eye-catching headline, with the findings partly based on a third party survey of the U.S. legal technology landscape.

Surveys come in all shapes and sizes but this one, as you would expect from Mitratech, comes in well above the ‘what me and my ten mates think’ and has canvassed 353 law firms and legal department decision makers, to provide a break down of how much law departments and law firms spend on technology – and, more specifically, on what.

The research includes interviews with 15 leading industry experts and ‘overview secondary research’ to identify any trends of interest. At first, no offence, I thought ‘secondary research’ was just a bit of extra padding, but in fact the white paper’s ‘five key legal technology spend findings’ are underpinned by statistics from BTI Consulting Group, Altman Weil 2014 Survey, U.S. Census, Statista, Citi 2014 Law firms Survey, LexisNexis and American Bar Association.

The five key findings or market trends are: increasing number of attorneys; increasing matter volumes (more work); margin compression (for law firms); and the move from outside counsel to in-house counsel for corporations. Unless I missed something, which is always possible, that’s only four. I would add one more myself, which is the growth among alternative legal providers, especially legal process outsourcers, which according to a report and graphic in January by Thomson Reuters’ Legal Executive Institute now take $1bn of the $437bn US legal spend and are expected to grow by around 30%.

Given the focus in the Mitratech report on law department spend on tech, the most interesting market trend is the in-house versus outside counsel power struggle, and here Mitratech highlights the fact that in 2009 companies spent 66% of legal spend on outside counsel but by 2013 that figure was down to 59%.

Moving legal work in-house is said to be the primary method for reducing spend but 2013 is now a long time ago and it’s worth noting that in October 2015, BTI published the findings of an extensive survey that found $851m of in-house spending would move back to law firms over the next year, in contrast to over $8bn in legal spend moving in-house since 2011.

According to Mitratech’s survey, today U.S. corporate law departments spend almost $1.5bn annually on legal software. What we don’t have in the report is an idea of what that represents against the total value of the corporate counsel market, which according to the Thomson Reuters’ LEI graphic is around $160m (based on allocated budget, given that most departments don’t generate revenue.)

Based on its survey, Mitratech estimates that the total potential spend, or total addressable market (TAM) for corporate counsel is $6.5bn. While currently e-Billing and matter management comprise the largest spend on corporate legal software ($202m and $195m respectively in 2015), contract management looks set to overtake that spend over the next five years, with a growth rate of 17% to $346m between 2015 and 2019. Governance and compliance software is forecast to grow by 16% to $270m in that period.

Interestingly albeit not overly surprising, law department investment in tech changes significantly by size (see table 1 below), with 79% of the largest but only 20% of the smallest having matter management software. Among large law departments (40+ attorneys) 80% have e-billing software and here legal consultant and market commentator Ron Friedmann, writing his Strategic Legal Technology Blog observes: “Some 15 years after its advent, I thought it would be nearly universally adopted. What explains the 20% that don’t have it?”

When it comes to law firm software, Mitratech estimates that a further $1.5bn is spent by the private sector – bringing us to the $3bn in the headline. Here I’m with Friedmann, who says in his blog: “I would have guessed that firms spend far more than law departments.”

The TAM figure for law firms is estimated to be $9.4bn, meaning that combined with the law department figure there is a whopping $15.9bn to be claimed on legal tech.

The conclusions of the white paper? ‘The legal technology market is burgeoning and just at the tip of its growth over the next five years.’ I don’t think anyone would disagree with that. ‘Adoption of various legal technology solutions is still minimal, especially in smaller and mid-sized legal departments and law firms.’ Again, this is fairly well trodden ground but I would have liked to see the results that lead to this conclusion. ‘The forces impacting the market will require that both law firms and legal departments leverage technology in frequent and innovative ways in order to manage their increasing workload.’

The strength of this report is in the findings of its own extensive survey and I would have liked to see a bit more of those results, particularly with regard to the spending habits of law firms.

Table 1

Product Large departments (40+) Mid-sized departments (10-39) Small departments (1-9)
Number of departments 963 5,778 3,020
e-billing software 80% 48% 25%
Matter management software 79% 46% 20%
Contracts management software 42% 52% 43%
Governance & compliance software 48% 30% 27%
IP management software 42% 17% 16%
Legal hold software 65% 43% 16%
Document management software 74% 48% 52%
Legal project management software 51% 24% 11%
Knowledge management software 35% 22% 0%
Legal analytics 36% 22% 5%
Collaboration tools 58% 24% 34%

2015 Mitratech third-party commissioned report

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