The Next Legal Tech: Who Will Pay?
The corporate legal market is being buffeted from the inside and outside. (No this does not mean that Warren Buffet will take a preferential equity position in some new legal services entity. Yet.)
From the outside, it is the the global economy, as the Eurozone in 2011 tries to avoid a repeat of the banking crisis the United States saw in 2008-2009. Yesterday was the third anniversary of the failure of Lehman Brothers, by the way. The corporate legal market was already in the early stages of flux in 2008, as forward-thinking general counsel saw that the trend of legal spend could not continue. Today, cost control and spend management are well underway, as GCs move past merely looking at what law firms charge per hour, and focus on improving core legal processes.
What does this have to do with legal tech? Well, technology has been one way for the modern corporation to meet the challenges of global competition. For some companies, it is essential, allowing revenue and earnings per employee to increase over time.
I think it is fair to say that legal tech is still in its infancy. Using Word to prepare an appellate brief was legal tech back in the day, but not anymore. Many companies are entering this market, some with a very good chance at success. It is in a sort of ad-hoc mode, with numerous solutions for discrete problems. One thing you have to say about Microsoft Office and its impact upon the law: it was big, it worked together, and it had a substantial company behind it.
Of course law firms adopted technology over time. It’s a tough slog for the sales teams of the new entrants: lawyers are generally too busy to care, and you ping-pong back-and-forth between them and IT groups who often don’t rate highly in the eyes of some managing partners.
This is because it almost always gets down to the real questions after the cost: who is going to pay? Historically, when law firms were raising rates 5-10% per year, the answer was: who cares? The tech demands were minimal, and law firms could have old-model computers stuffed with prior versions of software, and they could still get the work out the door.
But here is the real truth: clients were often paying for tech. If some new database software or discovery tool was needed for a matter, it was baked in to the hourly rates. Sometimes it would be a direct charge, but in my experience that was rare.
So technology sales to law firms hav always been difficult, even when they were essentially spending other people’s money. How is it working now?
It’s really tough, as law firm technology committees see an increasing need for the right legal tech, but they balance this need against the reality of losing long-standing clients and in-demand partners. You ask the partnership to take less this year to be better prepared for next year. No thanks, you first…
Contrast this with the Legal Process Outsourcing industry. They understand that technology is at the core of what they do. Cheap labor is an advantage, but often a transient one. The companies who rise to the top in the LPO market will use available tech better than others. Those who win will likely develop their own.
Law firms thought they were in the people-by-the-hour business. Now they are increasingly in the legal solutions for a fixed-fee business. And non-lawyers can play in that game, particularly when they use technology better.
The combination of how law firms made money and who was really paying for their technology had one other consequence: law firms missed the opportunity to develop legal tech themselves. I know this would have been a long-shot for most. But they had industry knowledge, market influence and an existing customer connection. Those are three things that new entrants into the legal tech space would die for.
Alas, most law firms were too profitable in the short-term to see an opportunity in the long-term. Now clients won’t pay for tech, they will pay for services from law firms that buy the right products themselves and use it better than others.
Next week, we will look at why developing and successfully selling legal software presents different challenges from those posed by general business software used by other enterprise customers. We will also speculate as to how legal tech will drive new law firm business models.
(I remember when this was legal tech: an IBM Selectric with a Mag Card Composer. It was awesome, and the unit on the right would keep your coffee warm, too.)