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2022 Business Planning. The 12 “Must-Haves” for a Digitally Savvy Law Firm

2021 is coming to an end. On 31st Dec 2021, we will have seen 652 days since lockdown was first announced by Boris. (A few reflections at 500 days can be found here). Thankfully despite lockdown being tough with a horrendous first three months most firms have had a much better year than they expected. For some their best financial year ever. This year it will be business planning against a very uncertain backdrop though. With infection rates rising we are far from being out of the woods and as we all know the financial ramifications will be here for years to come.

 In relation to business planning, we all need to recalibrate, look at our operating models and continue to improve our efficiency. We need to refocus our approach.

On a positive though, for many firms technology has probably enjoyed its finest hours. Many firms were able to adjust to lockdown homeworking successfully. Zoom and Teams are now household names and technology has allowed firms to remain operational in a way that would not perhaps have been possible had the pandemic hit 10 years earlier. Ironically though this success has led to an increase in expectations and the acceleration of everything. Most firms seem to have gone from furloughing to staff shortages with some poaching lawyers from cities they would not normally hire from, by leveraging homeworking technologies.

The world has changed forever and law firms who recognise this (and recognise their businesses need to change) now need to approach business planning in a very different way. The nature of our engagements with digitally savvy clients is changing and changing for good reason. From what we are seeing the 12 must-haves for any firm need to include the following (all of which are driven by very different needs). We looked at this area last year having had literally hundreds of discussions with clients. The good news is that “the direction of travel” is still very similar (and we appear to have been on the money last year). Accordingly, we have updated rather than rewritten our thinking and have included a couple of extra areas of focus:

1. Cost Control/Budgets.

We live in strange times. On the one hand, there are really strong reasons to invest in tech and so legitimately budgets should increase:

  • Increased security spend
  • Increased automation
  • New market tech products
  • Increased innovation spend
  • Dual running of systems at home and in the office
  • Reduced real estate costs

That being said cost control is becoming increasingly hard and unpredictable. This year we have heard of vendors increasing costs by over 200% and Microsoft themselves by 20%, albeit there had been no increase from them for some years. The fundamental reasons for this are as follows:

i) Cloud computing allows vendors to increase cost and without taking your data back/unravelling a time-consuming implementation it is hard to control. See here for more information on this.

1) We are buying more IT and have more vendors to manage (although MS365 is providing a good opportunity to reduce your tech stack).

2) Things are becoming more complex. Security aside even tools like MS365 require new skills.

3) Legal IT is now increasingly moving under the skin of legal work. Projects of this nature are much more complex than just delivering say a DMS or objectives system.

This is a really hard area where technology buyers seem to have got themselves into a difficult situation but there are some tactics to mitigate this. Every business needs a cost-containment strategy. In our experience clients increasingly want to invest in tech but that can’t be at any cost and with above inflation year on year increases.

For more on cost per user see point 11.

2. Data is King

We are entering an era where data and understanding data will be key. Many firms now have a strong understanding of financial data but beyond this (and documents and emails) often firms will have little more, those firms running case and matter management being an exception. Ironically at a time when firms want to increase their data quality and understanding, we have seen a huge growth in collaboration platforms meaning their data is becoming more out of their control. In addition to Teams and HighQ we have identified around 20 collaboration platforms in legal. Despite the fact, there are admin controls the ability to control and manage data and bring it back into core systems is not as developed as many would like, which compacts this problem. We are also seeing the growth in law firm collaboration platforms such as www.lupl.com which perhaps offer greater interoperability.

In short, firms need to develop a data strategy. They need to regain control and work out their strategic objectives in this area. With the growth in MS365, AI and data-driven services will all data and documentation be available in a machine-readable format. Is their scope for the firm to seek funding for data-driven projects from organisations such as Innovate UK.

3. Understand MarketTech

As you will have read in the Death of LegalTech, for most firms LegalTech has not been pushed out. To this day most LegalTech is tech with no legal in it (e.g. PMS, DMS and CRM). Whilst LegalTech has failed to expand we have seen the growth in PropTech, ConstructionTech, DisputeTech, IP Tech, DeathTech and more. Some of the solutions in these areas are game-changing. I know already of IP teams who are leveraging the leading IP systems and platforms in many areas of work. https://www.exizent.com/ for example shows great promise to completely transform the probate market. Some of the leading litigation firms are really leveraging some of the great DisputeTech products. My point here is simple. Any lawyer in any of these practice areas needs to understand these tools and what is happening in their market. These tools are now part of the market ecosystem – they need to be able to articulate a strategy for both efficiency and their strategy for interfacing best with these systems. If they don’t understand what is going on in the areas relevant to them they need to learn quickly or perhaps surround themselves with people who do, as this is business-critical territory that needs to be taken into account in their strategic planning. The savvy firms we are working with increasingly are using the technologies to wow their clients. We are also seeing property technologists appear in real estate groups etc. You need to ask do these technologies affect how you develop products and pitch to clients? What is your competitive play and how does this alter your cost of delivery? Increasingly we are being asked to challenge business planning as this knowledge is simply not optional anymore.

4. Your Operating Platform and the Missing Middle

Firms need to focus more on their operating platform. The demands we are seeing for automation, risk management and reporting are on the increase. Also, firms will increasingly need to collaborate with clients and third-party organisations as well as the multiple platforms we are seeing in PropTech, ContractTech, IP Tech and DeathTech – the list goes on. If in two years’ time all real estate transactions are done on two blockchain platforms with algorithmic valuations and auto-settlement how will your technology interface? If you have to automate the workflow in 60 teams in 10 countries how will you get the resource to do it? To us two things are certain:

1) A standard PMS/DMS setup won’t cut it alone. This operating model is 25 plus years old and simply won’t cope with the plethora of demands being thrown at it;

2) Firms need something more to help with this – some sort of no/low code orchestration layer which will allow firms and fee earners to build solutions and integrations quickly. We refer to this as the missing middle, but technologies have now emerged to help fill this gap. Without this firms will struggle to deal with demand, day to day operational costs will grow and dissatisfaction will rise. Understanding data will become increasingly key. Without addressing this what granularity of data will you have simply from word documents and email?

5. Tenders 4.0

We are lucky to work in a range of areas within the legal marketplace. Often this is for in house clients and we run tenders and form part of assessment teams. We have 20 years plus experience in this space and what I can tell you with absolute certainty is that the nature of requests from clients and law firm’s offerings is very different to say 5 years ago. Clients are getting much savvier and the requests are getting more specific and sophisticated. No longer does a marketing department cutting and pasting an answer from a year ago cut it. We are seeing some firms put forward new operating models. They are demonstrating a deep understanding of the technology in particular markets and have appointed senior experienced people to implement and manage solutions. No longer is it a side job. One commercial partner blew me away as his knowledge of a product when questioned at length would have put many IT professionals to shame – this is the new standard. Lawyers need to learn how to talk like this and not just in pitches too. Pitch documents I have seen from the Big 4 and ALSPs also take things to another level. My message again is simple. To win work and market share (see 10 lessons for recessions) firms not already doing this absolutely need to raise the bar in their client offerings and how they present them – their lawyers need to walk the talk and increase their knowledge to enable them to have intelligent day to day conversations with their clients. There is nothing wrong with HighQ as a product (and indeed it is very good) but the days of just saying you will just “use HighQ” as your answer to a sophisticated client have long gone – you need a better understanding of how you will use it, what other tools you will use and what systems client themselves have. The classy operators too are recognising that to perform in this new era means “thinking solutions” and truly embracing multi-disciplinary teams on pitches that include “non-lawyers”. We have three examples of clients who have achieved superb results in this space over the last 12 months with our help. There is a great opportunity to level the playing field as these technologies are often not expensive.

6. Microsoft 365 Strategy

The latest stats indicate there are now in excess of 260 million users of MS365. Some have wrongly assumed that MS365 is just an online version of Office. Those looking at it properly (including many of our corporate clients) have appreciated that it has huge capability. It has digital dictation, an e disclosure system, workflow, embedded RPA, translation services, telephony and video services, reporting and analytics software, apps, power apps and bots. The investment in AI is huge with projects like Project Cortex in the wings. There are several key points here including:

1) MS365 is huge and for many of our corporate and law firm clients there are now options to retire off legacy products by leveraging the 365 stack whilst reducing cost;

2) There is really no limit to what you could use it for but as a business what is the right thing for you? What do you want to use and not use it for? You need to decide and perhaps redevelop your target architecture – if not people will make their own choices and it will cease to be in your control;

3) How does this affect what other products you buy? Should you favour application layer products that configure MS365?;

4) What will your team need to look like? There is a rush to recruit subject matter experts. A Power BI expert is different to a SharePoint expert though and so may need several. Whatever you decide our prediction is that firms will diminish the number of products in their tech stack and cost for “operational tech” if the corporates we work for are representative.

7. The Shift to Capability

We have all seen the tsunami of solutions hit the legal market in recent years. More has happened in the last 5 years than the 20 before. Some of these are great and others less so and in fairness many start-ups have tried to really get under the skin of the delivery of law which many tech vendors have not been able to do in the past. Let’s face facts though:

1) Every solution like every asset adds to risk, maintenance obligations, complexity and increases the total cost of ownership;

2) No firm in the world has the bandwidth to manage and implement multiple solutions in multiple areas – firms have a large number of teams focussed on a wide range of offerings;

3) IT can be personal and so everyone will have their favoured solutions. In short, to buy everything would need every firm to have infinite time and money which they simply don’t have. Sensible choices need to be made – the model we have implemented which works well for this is to stand back and decide what capabilities a firm will need both now and in the next 5 years to run their business and serve their clients as efficiently as possible. You ignore product but focus on what teams need. You then prioritise and test against your tech stack (inc MS365) and then form your budget, cost per user run rate and timeline. This also helps you communicate and avoids random innovation-led products appearing. You move forward more efficiently and spend less money. In a tsunami, there is no other choice but to work and plan in this way as if not you are likely to get swept away.

8. Product Strategy

Law firms typically only get paid for their work once. Fees are linked to hours worked or outputs. By contrast software companies now “rent” their software. Year after year they get paid for the right to use the software and any enhancements and upgrades. This is a very nice commercial model in that they get an annual recurring revenue and every new sale is additional annual recurring revenue. This combined with the ability to scale without regard to headcount is why software companies become so profitable and why private equity houses like to invest in them. Law firms have no ARR which is why by contrast venture capital investment is so hard despite the relatively high margins. Many firms have realised this and are increasingly launching projects. Some could be described as software houses and one (who shall remain nameless) turns over £20mil in ARR every year. Imagine at the start of your financial year knowing you have a £20 mil guaranteed income – in short, you can. Law firms are adapting like never before. They are launching products, reselling products and are launching Alternative Legal Service Providers (the fastest-growing segment of the legal market albeit some firms have launched ALSPs and have shut them down following a change in strategy). Any firm interested in making money and providing a holistic service needs to decide if they want an ARR and if so, what their product strategy is? If they don’t, they will need to accept they may get left behind and won’t enjoy the financial benefits and broader service offerings of some of their competitors. Some of these products may become essential capabilities in the future too.

9. Partnering Strategy

Running a law firm used to be pretty simple. It was a cost-plus model with high margins. Success depended on having the right number of people with the right skills at the right time and matching them with client demand. Sadly, things are now much more complex. Law firms are experiencing unpredictable (see a conversation with a carpenter and a conversation with a postman) and multifaced demand. Clients want services delivered in new ways, they want new offerings and prices to be lower. They also want firms to be more global. On top of this, as mentioned above, law firms need to understand and leverage market tech more and importantly, they need to build capability (see above). Very few firms can do this on their own – the investment and change are simply too much and too capital intensive. Increasingly firms are realising they don’t necessarily have all the skills they might need to. Digitally savvy firms (and even the Big 4) are increasingly realising they need to partner and form alliances. We have seen it with ALSPs as well as service providers and software businesses. Firms like Hogan Lovells have been vocal about this and we are even seeing “Alliance of the Year” awards springing up at the annual awards dinners. The important thing though is the building of capability. Collectively we need to remember that our job is not to do things but more to “make the right things happen”. This does not mean you need to invest in, buy or do everything yourself. Given the multifaceted nature of many law firms, you may need someone senior to be responsible for these deals and this is likely to become an increasingly strategic role.

10. R&D Strategy

Many businesses have a formal R&D programme and investment budget albeit many of these will be very focussed on products – the ability to launch a new product is linked to their ability to make a profit. Law firms are obviously knowledge-based businesses but historically they are different in this regard – they sell experience and knowledge and have been less product focussed. They also have invested in R&D by employing Professional Services Lawyers and buy-in intellectual know-how from the publishers. Also, in recent years we have seen investment in Innovation people. The challenge though is that as an industry we have not got this area bottomed. I don’t think many firms could say R&D is “sorted” and they have a clear plan, and the reality is that the bulk of profits are paid out every year. This is also in an era where we are seeing more automation and productization and when a firm’s ability to succeed will be intrinsically linked to increasingly focussing their efforts on a proper R&D strategy. Areas that many firms seem to need sorting still include:

1) Tensions between innovation and IT people;

2) Legal Engineers feeling they know all legal areas when they only have experience in one;

3) Salary changes or failure to change packages when a fee earner moves to a non-fee earning role which may command different rates;

4) Incentivisation models for fee earners spending time on non-chargeable work;

5) the shifting demands of IT teams and the make-up of their teams;

6) the lack of scalability in many of the models and the piecemeal delivery of some innovation-led solutions;

7) the changing role of the PSL;

8) Proper benefits realisation;

9) Career paths for those involved in this area; and

10) Proper assessment of maturity and capability. As an industry we need to professionalise R&D. We need to recognise it is here to stay and build a sustainable model. How will every group support this area as R&D and innovation can’t be “done” for them as they are experts in their areas? This may require a firm-wide reorganisation and long-term views rather than annual budgetary cycles – perhaps like some of the Big 4. As a final point, our people need a much better understanding of legal ops to support this R&D push. They need to understand what is possible and to be able to have intelligent discussions with clients, some firms are launching training academies whereas others are leveraging tools such as www.theprofessionalalternative.com. However, a firm delivers the knowledge, their people need to understand more.

11. Cost per User

For years we have seen the percentage of turnover on IT figures and the latest being quoted is 4-5% on P&L and 1-2% on capital depending on size.  For reasons previously explained these are not helpful as they skew actual investment figures and can cause firms to take the wrong decisions – the only metric that makes real sense is cost per user as it represents real spend irrespective of profit model. A high percentage of turnover figure may for example cause a firm to reduce spend meaning they become less efficient, whereas the differences are caused by different profit models. It is now the time to focus on IT investment more and to really decide what your firm wants to be. There are many competing dynamics here:

1) Cloud systems can give rise to short term cost savings but become more difficult to control in the long term;

2) MS365 can make a big difference in reducing legacy spend and capability;

3) Spending on innovation (Products and People) is not free but should reduce costs in other budget areas but where does this sit?;

4) Tech spend now has the potential to reduce real estate spend but again is this efficient displacement expenditure rather than an increase in cost per user;

5) Some spend on areas like AI can reduce the cost of delivery of jobs and people cost but will simply add to overhead if not priced correctly – does a team get the benefit for reducing headcount whilst an IT team gets additional cost or is this a completely new metric for innovation people by creation of a virtual P&L;

6) Best of breed systems and multiple products can give higher total cost of ownership figures than say combined all in one systems and so much depends on what you actually need. My point is that you need to understand this area and take conscious investment decisions which are balanced given the overall changing dynamics of your business – cost and benefits realisation needs to be understood to ensure displacement savings are properly understood and more mature cost allocation models developed.  Three exemplar firms spring to mind for wider work they have done on costs management too. One is a small but fast-growing elite firm who are using a new breed of systems combined with MS365 to deliver a market-leading cost per desktop and are working with us focussing spend on more innovative projects. Another large firm has used non-legal industry systems to deliver a great, but again, market-leading cost per desktop but with greater capability – they don’t have a “missing middle”. A third has hugely reduced the cost of its day to day IT infrastructure and has diverted the funds and team (with some additional investment) to deliver revenue-generating products for its firm. So, I am not saying spend less – far from it. More understand the market dynamics and look at the detail of what your firm wants to do – really think about how you spend your money.

12. UI is the New Culture

I am not going to repeat what I have said before but suffice it to say the world has changed forever. We don’t know the full stats yet, but we are going to see a material increase in home and agile working and most firms seem to have settled on a 3/2 day split in the working week. Organisations will have to be bi-modal with more than one operating model. People will interface with technology more than ever before and it is vital that we optimise the interface, both from an efficiency perspective but also from a well-being and talent attraction perspective. Given the current talent shortage, firms will need the very best technology and to have strong flexible working capability. The casual conversations in the lift will be rarer as will be the ability to walk over to people’s desks when you see them looking upset. Knowledge will need to become much more accessible. The operating platform will become more important than ever before and firms will need to work hard at it and we are seeing a real uptick in demand in this area (for good reason) – to quote the above article:

“In the past culture has never been about technology – apart from perhaps in the sense that individuals may want to work for an organisation which prioritises how they leverage technology. The world has changed now though. In lockdown, technology has become much more important and a greater proportion of our working day. It has gone up the pecking order. Screen time and engagement levels with technology have seen massive increases – daily Zoom sessions have scaled from 10 million per day to 300 million. Meetings have been replaced by Teams and Zoom, as has supervision and social. Where technology is great it stands out a mile – where it is not the cracks show much more readily given people’s exposure and reliance has increased so dramatically. For many (and despite the well-intentioned efforts of some organisations to engage with people) technology, together with its strengths and weaknesses, has become the face of organisations – their most dominant touchpoint.

The key point is therefore that technology has become much more important and is a much greater part of people’s experience of an organisation – it is what they live and breathe. If the IT interface or support is poor this will reflect a much greater extent than before and vice versa. How can an organisation be regarded say, as supportive or caring, when information technology just focuses on the technology and not the underlying information or processes leaving people to fend for themselves? How will an organisation know when someone needs help, is struggling or stressed if the technology and processes do not provide methods of surfacing this – surely any platform should minimise any stresses and strains?  How capable is the online platform from which you operate and how well does it support the different levels of fee earners and support staff? What do your people think? If a firm has just pushed out their previous on-prem processes and technology to an online format it is probably not enough as the needs of people (and how they judge your organisation) will be very different”.

To conclude, we all know there is no certainty in life but a firm that has clarity in relation to the above points will be well placed to succeed.

Hopefully, the points above will help you formulate your own plans. Personally, I think we will look back at this period (and Covid-19) as a time of real threat and opportunity – it will though be the era when the successful firms of the future will have made their key moves whilst others perhaps get left behind. We are definitely seeing some firms showing real ambition and innovation in their strategies. We are working with a number of them and are impressed daily. Firms are starting to stand for very different things with very different capabilities.

We hope you have found this article helpful – for more information and up to date benchmarking we would recommend the following from Harvey Nash/KPMG and PWC.

https://home.kpmg/xx/en/home/insights/2020/09/harvey-nash-kpmg-cio-survey-2020-everything-changed-or-did-it.html

Annual Law Firms’ Survey 2021 – PwC UK

Derek Southall

Derek Southall

Hyperscale Group
Derek Southall, founder and CEO is a high profile and very well connected figure in the legal technology, innovation, knowledge management and digital marketplaces. Derek has spent nearly 25 years in a range of leading strategic roles for a top 50 global law firm, for most of this time as a Partner and Head of Strategic Development and subsequently as Head of Digital and Innovation. During this period Derek oversaw and helped drive growth from £27 mil TO to in excess of £425 mil TO as well as driving and supporting numerous mergers and international expansion to 18 offices in 10 countries. Derek was ranked by the FT as one of the top three most innovative lawyers in the UK in its first study into the legal market. Derek also led the firm’s technology team to become ranked as the most innovative in Europe and subsequently the firm to ranked as the second most innovative firm in Europe as well as picking up a range of other awards. Derek has been the relationship partner for a long list of major household name clients in a range of sectors including Automotive, FMCG, Financial Services, Food and Drink, Fashion and Construction and has a strong track record in sales and product delivery. Derek has been ranked three times in the last three years as an Acritas Star for outstanding client delivery (based on independent feedback). Derek chairs and was one of the founders of the Legal IT Innovators Group (www.litig.org) which has 80 or so of the top 100 firms as members and which plays a key role in driving ahead technological thinking and change for the good of the legal profession. In this role he has worked alongside the United Nations and a range of other large organisations. www.hyperscalegroup.com recently joined forces with two other leading advisory businesses in the fields of technology, operations and financial management to create the www.intuityalliance.com which has been referred to as the “Holy Trilogy” of Legal IT. Its purpose is to pool experience and intellectual knowhow to ensure we have a more holistic approach to how they give advice. Derek also serves on the advisory boards of several start-ups and has recently been appointed to the advisory board of the Global Institute of Innovation, which brings together around 400 academics to solve some of the world’s biggest problems.