Observations on the last 1000 days of LegalTech
In many ways, Hyperscale Group entered the market at a hugely exciting time. We launched at a time when the legal tech market was undergoing exponential growth and the increase in investment figures (713% plus) speak for themselves. In many ways, it was “feast to famine”. It used to be difficult to find tech to solve problems. Instead, now teams will be confronted with a wide array of start-ups which can do virtually anything anyone wants and people are literally spoilt for choice and are often overwhelmed.
We also entered the market at what will historically prove to be a defining period. The $850bn legal industry has always leveraged technology. Virtually all of this technology has been information management technology i.e. managing finances, documents and emails. In the last 5 years, we have seen a new wave of technology hitting the market which helps with the “delivery of law”. For the first time the delivery of law is moving from analogue to digital. The quantum and consequences of this change cannot be underestimated. Historically the ability of a law firm or in-house team to deliver legal advice will have been constrained by having the right number of people with the right skills at the right time. Now these constraints are minimised. “All bets are off”. A smaller law firm or in-house team has the ability to scale and build capability in a way which has never been previously possible.
In other ways, the timing was not so great. Ironically, at a time where we are seeing a vast number of solutions hitting the market, we have seen people rebel against the point solution. Often they can’t cope with the volume of products and providers and have seen the cost of integrating multiple projects and managing large numbers of vendors. We have seen a diminution in the tech stack with a desire from most clients to move away from point solutions. We have probably also seen the worst of the Gartner curve. We have seen huge expectations about new technologies such as AI, they have created huge excitement. Law firms, in particular, have spent a lot of time and money only to find themselves in the classic “trough of disillusionment”.
We have seen the “Rush to Innovation” with every firm dreaming of launching the next Facebook or Uber for Law with the proliferation of never seen before job titles and appointments heralding huge promise. Without doubt, we have seen some great people enter the market, but equally, we have seen some without any real experience or knowledge promising the world on a stick and then failing or eventually gravitating to basic business transformation or developer type roles which could have easily been delivered elsewhere in businesses. It has felt a little like the ‘dot com’ boom in the late 90s where markets were “investing in dreams” and businesses were taking on talent wherever they could find it – where new roles are being invented you can’t find people with track records.
Sometimes people have thought the “Innovation Gig” would be easy, whereas the exact opposite is the case. You are tackling the problems no one has ever been able to sort out, and you need to do this with a model which addresses multiple practice areas and often with little or no resource. The demand is often piecemeal and problem statement led, but to be successful, your solutions have to incrementally help to develop your target operating model. They need to be sustainable and scalable in their own right but also from a technology perspective, as without this, it won’t be in the long term interest of the business.
This is definitely not easy territory, and so, here are a few observations from across the market, broken down into 10 key points:
1. Unprecedented Change
We are in no doubt we are going through an era of unprecedented change. There have always been threats to the legal profession but seldom have there been so many storm clouds at the same time, whether it be the big four, ALSPs, cyber security, AI, Start-ups, Blockchain or the automation of law. Legal Tech systems have evolved too slowly over the last few years. Due to this, the Operating Mode of law firms has not altered materially. Most law firms have operated with the same principle systems for the last 30 years; namely a PMS, document and email management system and potentially case management or CRM. These are core foundational systems, but this operating model alone can no longer be fit for purpose. The market is demanding a different approach.
2. Office 365
We often see great products, but Office 365 is becoming a real game changer for both the legal and many other industries. Yes, this has always been anticipated, but with over 200 million global users and an increase in monthly user rates of 3 million per month, the effect is huge. Also, as corporates are adopting Office 365 it is giving rise to an acceleration in the diminution of the tech stack. It acts as a catalyst to reduce the number of products used, meaning some traditional legal tech vendors are sometimes finding it harder to get traction with their products.
Only products which are in the stack/their ecosystem pass muster and most organisations are keen to get the most out of Flow, Teams, Power BI, Power Apps et al. Piece by piece, Office 365 is also chipping away at the incumbent legal tech market (as well as many others) with capabilities in relation to Disclosure, Digital Dictation, Process automation, Reporting/Dashboards, RPA, BOTs and AI. With a turnover of $125bn and a profit of $46bn what investment do we all think Microsoft will be making in AI? Plus, they have an unprecedented amount of data and will hold it all in a platform where we can apply the AI? I am speculating but I struggle seeing how Microsoft won’t be a major player in the AI market.
3. Law Firm PMS’s
There still seems to be some dissatisfaction in the Law Firm Practice Management System (PMS) market. Yes, there are some solid capable products, but some products seem very expensive on a ROI model and have perhaps not evolved far enough over the last few years. As one managing partner put it to me “this seems like a very expensive database that will deliver very little to how we service our clients or the revenues we earn”. There also seems to be an emerging shift with people realising that lawyers don’t perhaps want to spend the time in PMS systems and from a cost of ownership perspective some have realised that combined systems, although in some cases less sophisticated or scalable, are perfectly adequate and are more palatable from a price point perspective. Some people want to move away from the best of breed model and comment on the unforeseen operating costs. The market is evolving too with new players and ERP systems gaining traction.
The world of innovation has been interesting. It’s clearly important that law firms and in-house teams continue to progress but many of the models that people are putting in place are not necessarily delivering the results people want. For a full-service law firm in particular, given that innovation really requires you to get under the skin of the delivery of legal work, it is very hard to deliver the breadth of improvements which people really need. Also, there is a huge difference of opinion about what innovation means – is it really business transformation? Is that what we are really seeing? Are there truly many examples of real innovation? I would be delighted to see law firms launch more products, but again there are not as many examples as you would think. One thing that has surprised me in the last 1000 days is that some of the firms that seem to be really powering ahead on innovation are perhaps small to medium size firms rather than some of their larger counterparts. It perhaps is reminiscent of Joshua Browder producing the first ‘Do Not Pay’ chatbot from a dorm at University ahead of the IT Departments of most large law firms.
On AI, as discussed above there have been some inroads but there has been a lot of disappointment. Those people who have engaged have learnt that to make something work well requires time, effort and dedication. It also requires a good corpus of documentation. Many of the AI vendors have fallen victim to the same issues that legal IT vendors have suffered, namely that most people have been selling toolkits rather than solutions. My well-worn example is that if I want to fly to China I book a ticket online and go to the airport and fly. The equivalent in the legal IT market is that I am shown to a hanger with boxes of components and a manual on how to build a plane, and then an option at extra cost to learn how to fly it. Very few law firms and teams have the resource to make this model successful. They could have bucked this trend by supplying turnkey solutions but in most cases have not done this. That being said we are seeing the emergence of productization in AI in at least two ways.
First, we are seeing people focus specific products on particular tasks. The Big 4 did this with IFRS16 data extraction tools, suppliers are doing this with subject access requests, and we are seeing the emergence of products such as Avail which is focused specifically on the extraction of data points from real estate leases. Several products too have embedded AI enabling them to mark-up incoming documents (e.g. Legal Sifter, Doc Juris, Blackboiler etc). Other tools are identifying repeat work product. This is a real positive and I am hoping to see some similar developments in the next thousand days. Also don’t discount Microsoft (see Office 365 above) and what people will do with their product set.
The Alternative Legal Service Providers or Law Companies as they are sometimes known have become a key feature of the market in recent years. They have changed from the new kids on the block to established players and now have a well-deserved place on every major corporate panel. They have a very different way of doing things and are building impressive capabilities. They are growing faster than virtually any part of the market at an estimated 25% to 33% per annum and are actively partnering with a number of larger law firms. Unlike most law firms they have been able to put in place contracts for five to seven years and operations such as Riverview Law and Pangea Three have been purchased by the big four (EY). In some way it is still only a $10.7 billion market which is small compared with a $850 billion global market, but this is clearly a segment of the market to watch. Clients like what they see and their propositions are appealing, which is why some law firms too have moved into this space.
7. The dominance of the client
The power of the client in the client/law firm relationship is continuing to increase. Simultaneous with this there has been a threefold increase in the number of in-house lawyers. For years there was a missing piece of the jigsaw in that clients struggled getting their hands-on technology. There were several reasons behind this including the fact that often in organisations they were the poor relations and law was not seen as something requiring technology in the same way as Finance or HR departments. Things have changed now. There are a range of reasons for this such as the move to the Cloud, Office 365, finance functions and HR functions winning large budgets for transformation / system implementations and the increase in regulatory risk (and the technological firepower of regulators) – the business case has been made easier. Also, technology hitting the market such as AI is more suited to those organisations with many similar documents such as in-house teams. I could go on. Alongside this there has been a huge growth in Legal Operations and the development of organisations such as CLOC. Some of the metrics and financial information available to clients (e.g. via Apperio, Pursuit, Alacrity Law and Repstor) now surpasses that available to many law firms. Expectations are also altering with client’s increased knowledge of the benefits this new breed of technology can bring. When you can automate a large proportion of the task yourself, it will affect what you will want a law firm to do. Buying patterns are altering and clients are getting much more challenging about what technical capabilities they want their providers to have and who will do what work.
We very much see this as an era of capability. We all need to ask ourselves what capabilities we will need as businesses now and in the next 5 years. We then need to look at what we have and incrementally find ways of building those that we don’t have. This needs to be a gradual process though supported by strategy. In this way you end up with sustainable innovation, you save money and you are constantly building a stronger and more modern operating platform.
9. The Death of Legal Tech
I am not going to repeat what I have said in my previous article, but it’s worth a read!: https://www.alternativeinsights.co.uk/2019/11/26/the-death-of-legal-tech/
10. The Rise of the Platform
In many industries we have seen the emergence of dominant platforms. It has been talked about in Legal before and in the late nineties and early 2000’s, there was talk of the “battle of the dealrooms” and who would own the desktop. The gauge has moved though. We are now genuinely seeing a few contenders to become the platform or one of the platforms in legal. Our analysis (mainly focussed on the UK, US and Europe) has shown there are potentially over 20 contenders. We don’t know who will take the trophy (okay I admit we have views), but we suspect the next thousand days will see some platforms getting real traction. Tied into this there are a few systems looking to become the “missing middle” of law firm and in-house systems. i.e. middleware allowing low / no-code automation, orchestration of other technology products, integration with MarketTech and more. The effect of these platforms and middleware cannot be underestimated and obviously Office 365 will be in the fray too, and I am not sure you would bet against it.
In conclusion, we feel blessed to be part of this market and we have loved our first thousand days. It is hugely exciting, and we are going through what is perhaps the most profound period of change the Legal Industry will ever see. We will see winners and losers and are hugely grateful to the clients we are working with. We feel very lucky to be engaged with such talented people. Perhaps the message of these times needs to be “Doing” is easy but “Doing the right things” is much harder and so it is a time to really pay attention and engage with the best people and suppliers. We all need to be circumspect and take time to understand where this market is going and build for the longer term where possible. We need to make the smart moves and not be busy fools by confusing action with progress. We need to be constantly mindful of the new competitors entering the market with totally different approaches.
Some people see this era of change as a threat but quite simply it is a huge opportunity. It is also probably the biggest opportunity we will ever see in Legal, and so we intend to spend our next thousand days helping our clients to make the absolute most out of it.
Hyperscale Group deliver a range of services in relation to Innovation, Digital, Futures, Strategy, Operational Excellence and more. They work for corporates, in house legal teams, software companies, venture capitalists, SMEs, start-ups, law firms and other professional services businesses.