Headline grabbing articles like “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’ve set out with an analyst hat to provide a strategic overview of the LegalTech market and to explore strategies for law firms.
The LegalTech market is estimated to be a $15.9 billion industry, selling solutions to both 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. As has been the case historically, I see the business of law is going through its natural evolutionary cycle as Legaltech is being integrated into practice.
Law firms as we know them today have evolved from sole traders to partnerships as firms transitioned from time telling[1] to clock building[2] enterprises. Competition in the legal market has also evolved the law firm executives’ strategic efforts from building expertise (as practice groups became the norm) to scale (geographic expansion to globalisation), sector specialisation (as industry specialisation became a competitive advantage) and now, business model diversification (expertise-driven law firm, labour-driven NewLaw firm and technology-driven LegalTech firm).
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 relevant case and probabilities of case outcomes based on case parameters, the opposing counsel and the presiding judge. There are also LegalTech solutions that enable law firm managing partners and management teams to better manage legal operations through knowledge management solutions, matter management solutions, contract management solutions, practice management solutions, billing solutions, communication and collaboration solutions.
State of the LegalTech market
To truly understand the effect of LegalTech and its impact on the market, I’ve conducted an analysis of the LegalTech segment 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:
- Who are these LegalTech firms?
- Where are these LegalTech firms based?
- What corporate activity have these LegalTech firms recorded from a funding and mergers & acquisition (M&A) perspective?
- Who is investing in LegalTech firms?
- 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 reveals 692 out of the 790 entries on CodeX Techindex in February 2018 were verified LegalTech firms. The following chart is a geographic breakdown of LegalTech firms showing markets at different stages of development. The countries with the largest number of CodeX Techindex population were the US with 460, followed by Canada with 52, the UK with 35, Germany with 15 and Australia with 13.
Through this research, I was also able to trace $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. Similar to the previous analysis, the five countries that have raised the most funding for CodeX LegalTech firms were the US with $2.1 billion, followed by the UK with $249m, Australia with $36m, Canada with $34m and Germany with $24m.
The research also revealed 44 LegalTech firms recorded 111 M&A deals. The most corporately active LegalTech firms were listed companies like Thomson Reuters and LexisNexis as access to capital enabled 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 as 104 deals were recorded.
Three LegalTech strategies for law firms
In short, the LegalTech market is growing, fuelled by mushrooming LegalTech startups, companies and investors. In a profession built on precedents, we have already seen firms rolling out on LegalTech strategies. Some are implementing LegalTech solutions, other are building their own LegalTech capabilities while a handful have acquired or invested in LegalTech firms.
For firms who 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 explored the three strategic growth paths for successful companies and their strategic considerations. Using the build, borrow or buy concept, here are three strategies for law firms to consider for LegalTech.
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Build: Develop internal LegalTech capabilities
Developing new capabilities like LegalTech solutions can be a resource straining exercise in law firms. For some, the absence of an existing solution 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 condition for firms to explore this strategic option.
For some law firms, it is possible to build internal LegalTech capabilities. Firms that have chosen this path are either consuming the LegaTech solutions they have built or are commercialising those LegalTech solutions. Examples of firms that are commercialising their LegalTech solutions include Allens Linklaters’ e-Discovery service and Corrs Chambers Westgarth’s Telesto.
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.
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Borrow: Borrow LegalTech capabilities via contracting or alliancing
Once law firms have identified the need to engage external LegalTech firms, they must decide 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 alliance (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 LegalTech provider to be accountable for the software’s performance. Firms can leverage multiple LegalTech solutions to better manage their practice and better serve their clients. In this case, firms become the consumer of Legaltech solutions.
For some firms, there are opportunities to engage in strategic alliances through an 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 example is Allens’ collaboration with Kira Systems and Neota Logic to combine legal expertise, machine learning review capability and expert system software to automate lease review. A third is Norton Rose Fulbright’s alliance with LawPath to target the startup market.
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Buy: Acquire LegalTech capabilities
If done properly, acquisition is a viable option for firms to integrate LegalTech into their practice and business. Successful deals are those where the LegalTech 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 like 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 wallets, it is imperative that law firms make strategic decisions in their efforts to integrate LegalTech solutions that better serve their clients. Some will be better served to choose one of the three or a combination of the three strategies set out above.
Note:
This post was first published in the Australasian Law Management Journal: http://www.lmhub.com.au/three-legaltech-strategies-law-firms-consider/
[1] “Time telling” companies are enterprises that are successful because of a great idea or have a charismatic visionary leader. They do not survive beyond the presence of the single leader or through multiple product lifecycles.
[2] “Clock building” companies are enterprises that are successful beyond multiple product lifecycles and leadership changes. Their greatest creation is the company itself and what it stands for.
