Will the legal industry finally emerge as a focal point of disruption within professional services? With growing VC attention and increasing competition among industry incumbents facing greater pressure from clients, the signals point to an industry ripe for change.
Together with firstminute capital, we brought together industry experts to discuss the fate of the slow-changing industry and the role of the (often maligned) lawyer. The panel included Sophia Adams Bhatti (Director of Legal & Regulatory Policy, The Law Society), Nick West (Chief Strategy Officer, Mishcon de Reya), Chris Wray (Founder, Mattereum) and Paul Massey (EIR, Founders Factory), moderated by Min Nolan (investor at firstminute capital).
Start-ups and investors are betting big on legal tech and believe there’s a significant opportunity to deliver a new ecosystem of legal services
Confidence that well-built legal tech propositions will re-shape the industry has driven a 731% increase in investment from $233m to $1.63b in 2018 alone.
What’s behind this newly-marked confidence? Three main factors are driving this change — notably a shift to in-house legal services, client demand for new tech-enabled practices, and a demographic change among decision-makers within the industry.
- The rise of in-house law is critical to the adoption of newly incubated legal technologies. In-house teams (a cost centre) are increasingly looking to leverage legal tech services to streamline their operations. 22% of solicitors in the UK are working in-house (a 2x increase since 2002), impacting the legal services landscape.
- The growth of more mature tech-enabled companies means more tech-enabled clients expecting tech-enabled delivery of their legal services. Established players, instead of relying solely on the brand equity of their firm, are under pressure to adapt their toolkits and working processes to clients who increasingly value synergy in working processes.
- Demographic change among decision-makers may ultimately act as the critical turning point for driving a tech-enabled revolution. Despite record equity profit per partner growth at 7.1% and billing rate growth of 4.3%, fewer partners are enjoying the fruits of the status quo. That said, 61% of the industry’s partners are expected to retire in the coming years and the industry is expected to usher in a new wave of partners with a stronger appetite to leverage technology as a means to both acquire and maintain client loyalty in a more competitive landscape.
The legal industry has yet to see major disruption
Rooted in a culture of the billable hour, the existing revenue model acts as a significant barrier to investing in new technologies that can drive cost-efficiencies. The result is a missed opportunity for law firms to focus on higher value-add services for their clients, while legal tech companies compete in the limited opportunity space of law firms that have both the budget and incentive alignment to internally disrupt their operations.
Where financial services firms have the revenue potential and reach to set a new standard in the market, few law firms have similar buying power. Only a handful of law firms globally generate above $2b in annual revenue whereas many financial firms boast annual revenues in the range of $25b — $150b. The paradox is that law firms, despite their smaller size, are less agile than their financial counterparts.
“Law firms don’t have the same turnover of activity [as financial firms] so the buying power is not there with the same effect… Big banks can move the market, law firms cannot”
Entirely predictably, given the purpose of the industry, law firms are significantly more risk-averse in their adoption of new technological standards than their counterparts in financial services. The result has been a very slow sales cycle where the threshold needed for an established firm to commit to change is disproportionately higher than in other sectors.
In order to capture the opportunities of legal tech, law firms need to build stronger platforms for innovation and investment
Despite the slow rise of legal tech, the law profession is not immune to the forces that continue to re-shape other professional services. As venture capital in the space picks up and the market begins to select winners, legal technology will gain more universal adoption.
A new wave of partners will take the helm in coming years and they will be under pressure to strengthen their value proposition in a more competitive landscape for attracting both clients and importantly, talent. Leadership in the form of partnerships and investments with the right legal tech partners will help build the foundations for law firms to operate in a more agile manner to capture the upside of this change.