Three LegalTech strategies for law firms to consider

[Australasian Law Management Journal,General Management,Technology,Uncategorized] August 23, 2018

As clients demand better technology-driven solutions, law firms will have to decide when and how to engage with LegalTech providers, writes Eric Chin.

Headline-grabbing articles such as “Machines are going to replace lawyers”, or “Robo-lawyers are here to take your jobs” have become du jour in the legal industry.

In the midst of the buzz and hype around LegalTech, I have put on my analyst’s hat to provide an overview of the market and explore possible strategies for law firms.

The LegalTech market is estimated to be a US$15.9 billion industry that is selling solutions to corporate legal departments and law firms. Some industry observers and commentators have been quick to prophesise the end of law firms as LegalTech firms take centre stage, but I believe the business of law is going through a natural evolutionary cycle as LegalTech becomes integrated into practice.

Many law firms have evolved from being sole traders to partnerships as they transitioned from time-telling [1] to clock-building [2] enterprises. Competition in the legal market has also led to a shift in the strategic efforts of law firm executives – from building expertise (as practice groups became the norm) to increasing scale (involving geographic expansion to globalisation) to fostering sector specialisation (as industry specialisation became a competitive advantage) and now to embracing business-model diversification (such as expertise-driven law firms, labour-driven NewLaw firms and technology-driven LegalTech firms).

When technology first touched the legal profession, codified legal knowledge in the form of regulation, statutes and precedents were locked away in leather-bound books in law libraries. Lexis (LexisNexis’ predecessor company) was founded in the 1970s and converted them into electronic forms, making it easier for legal research.

Today, LegalTech solutions combine data analytics and machine learning to equip lawyers with information about probable case outcomes based on case parameters, the opposing counsel and the presiding judge. There are also solutions that enable law firm managing partners and management teams to better manage legal operations through solutions involving knowledge management, matter management, contract management, practice management, billing, communication and collaboration.

State of the market

To truly understand the impact of LegalTech on the market, I have conducted an analysis by tracking LegalTech firms listed on Stanford Law’s CodeX Techindex and cross-referencing them with information on Crunchbase and Index.co. The research was conducted to shed light on the following questions:

1. Who are those LegalTech firms?

2. Where are these LegalTech firms based?

3. What corporate activity have those LegalTech firms recorded from a funding and mergers & acquisition (M&A) perspective?

4. Who is investing in LegalTech firms?

5. Which segments of the LegalTech market have been most corporately active?

The research was carried out at the end of February 2018 when the CodeX Techindex had 790 LegalTech firms listed, and each entry was reviewed and then cross-referenced with Crunchbase, Index.co and company websites.

The research and analysis reveal that 692 out of the 790 entries were verified LegalTech firms. The following chart is a geographic breakdown of LegalTech firms, with the US having 460 firms on the list, followed by Canada with 52, the United Kingdom with 35, Germany with 15 and Australia with 13.

 

 

Through this research, I was also able to trace US$2.49 billion invested into 200 LegalTech firms by 436 LegalTech investors globally. The following chart is a geographic breakdown of the funds raised by LegalTech firms globally. Reflecting the previous analysis, the five countries that have raised the most funding for CodeX LegalTech firms are the US with US$2.1 billion, followed by the UK with US$249 million, Australia with US$36 million, Canada with US$34 million and Germany with US$24 million.

 

 

The research also revealed that 44 LegalTech firms recorded 111 M&A deals. The most corporately active firms were listed companies such as Thomson Reuters and LexisNexis, with access to capital enabling these firms to fund growth via acquisition. The following chart is a geographic breakdown of those M&A deals. The US has seen the most consolidation, with 104 deals recorded.

 

 

Build, borrow or buy

In short, the LegalTech market is growing on the back of activity from startups, companies and investors. For firms which are just embarking on their LegalTech journey, what strategic options should they consider? In Build, Borrow or Buy: Solving the Growth Dilemma, authors Laurence Capron and Will Mitchell explore the three strategic growth paths for successful companies and their strategic considerations. Drawing on that work, here are three LegalTech strategies for law firms to consider.

1. Build – develop internal capabilities

Developing new capabilities such as LegalTech solutions can be a resource-straining exercise for law firms. For some, the absence of existing solutions combined with access to existing resources (software developers, data analysts and coders that currently work in different parts of the business) could create the perfect conditions for firms to explore this strategic option.

For some firms, it is possible to build internal LegalTech capabilities. Those that have chosen this path are either consuming the solutions they have built, or they are commercialising those solutions. Examples of firms in the latter category include Allens Linklaters’ with its e-Discovery service and Corrs Chambers Westgarth via Telesto, an  e-Discovery and forensic technology solution.

The caveat for firms to successfully commercialise internally built LegalTech solutions is that they have to ensure those solutions are managed as separate business entities. The LegalTech software-as-a-service (SaaS) business model is completely different to the law firm partnership business model, with different sales cycle and profit expectations and, therefore, different key performance indicators.

2. Borrow – get capabilities via contracting or alliancing

Once law firms have identified the need to engage external LegalTech firms, they must determine the kind of sourcing mode to use. The first is through licensing (the easiest way to borrow resources another firm has created) and the second is through strategic alliances (whether they are co-marketing partnerships, research and development partnerships or joint ventures).

For the majority of law firms, licensing LegalTech solutions is the easiest route as the onus is on the provider to be accountable for the software’s performance. Firms can leverage multiple LegalTech solutions to better manage their practice and better service their clients. In this case, firms become the consumer of LegalTech solutions.

For some firms, there are opportunities to engage in strategic alliance through equity alliance or joint venture to leverage the LegalTech capabilities to go to market. An example of this is the Corrs Chambers Westgarth and Canadian LegalTech firm Beagle’s 50:50 joint venture of Beagle Asia Pacific to provide artificial intelligence technology for contract review and analysis in the region. Another is Allens’ collaboration with Kira Systems and Neota Logic that combines legal expertise, machine-learning review capability and expert system software to automate lease review. Others include Norton Rose Fulbright’s alliance with LawPath to target the startup market.

3. Buy – acquire capabilities

If done properly, acquisition is a viable option for firms to integrate LegalTech into their practices. Successful deals are those where the solutions are geared towards solving corporate legal departments’ pain points.

Only a handful of firms have embarked on this strategy by investing in LegalTech firms directly or through an accelerator. Gilbert + Tobin’s equity stake in LegalVision is an example of firms investing directly in LegalTech startups to fund growth. Accelerators such as Dentons’ NextLaw Labs and Mills Oakley’s Accelerator are screening the LegalTech startup market for opportunities to take an equity stake in up-and-coming LegalTech firms.

The legal industry of the future will be shaped by law firms, NewLaw firms, LegalTech firms and corporate legal departments. As clients continue to vote with their wallet, it is imperative for law firms to make a conscious choice in their strategic efforts to integrate LegalTech solutions and better serve their clients. Some will be better served choosing one of the three strategies set out in this paper, while others could embrace a combination of the three strategies. Regardless, they should be wary of ignoring all three options.

Eric Chin is a consultant to LegalTech, NewLaw, BigLaw & Big Four firms on strategy, M&A and Asia. You can connect with him through LinkedIn or Twitter.

 

[1] ‘Time-telling’ companies are enterprises that are successful because of a great idea or because they have a charismatic, visionary leader. They do not survive beyond the presence of the single leader or through multiple product life cycles.

[2] ‘Clock-building’ companies are enterprises that are successful beyond multiple product life cycles and leadership changes. Their greatest creation is the company itself and what it stands for.