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The Next Legal Tech: Who Will Pay?

2011 September 16
by John Wallbillich

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.)

Legal Tech?  Here is some legal tech...

4 Responses Post a comment
  1. September 16, 2011

    Interesting and timely thoughts – thanks for sharing. I look forward to your next installment. I’ve seen a great deal of chatter lately on alternative fee arrangements and the increasing risks introduced by all of the latest cool devices and apps for lawyers. I’ve written about legal technology for many years, and the hottest topic I’ve covered recently seems to be anything to do with the iPad. One popular article addresses the use of iPads by law firms:

  2. September 16, 2011

    This is a good and interesting post.

    Firms that bill mostly fixed-fee should behave with regard to tech like the LPO providers you discuss. I agree that hourly-billing firms, to the extent they have to pay for advanced tech themselves, are unlikely to spend big on tech in these times. Especially when the tech has the potential to increase their efficiency, meaning reduce the number of hours it takes them to do tasks. The alternative is to bill clients for tech as a disbursement. A prime example of this is Lexis or Westlaw charges, which are essentially research tech spending. I think (and have written an extensive blog post on why) clients should welcome being billed for law firm tech spending through disbursements, in that some of this tech can help clients drive down overall legal bills. Clients who feel they are paying high enough hourly rates to not also have to pay for disbursements miss that (i) disbursements are a small part of overall lawyer bills; (ii) there are other ways to drive down disbursement costs beyond making firms take them on; (iii) reducing the amount spent on legal fees is the key to significantly driving down overall legal bills; and (iv) some legal tech can make lawyers more efficient, which could reduce overall legal bills–forcing firms to cover disbursements (as you point out above) disincentivizes firms to invest in efficiency tech.

    For what it’s worth, I’m a former Biglaw associate now running a legal automation software company, which aims to make legal due diligence faster, better, and cheaper.

  3. Jeff Carr permalink
    September 17, 2011

    John — dead on, as our the comments by Noah Waisberg. If you find any validity in the four box construct that I’ve laid out elsewhere (see the discussion of the “Four Boxes of the Apocalypse” on Legal On Ramp and the ABA Legal Rebels website), that all legal services fall into one of four boxes in a 2×2 matrix — process, content, advocacy and counselling, I think the point is even more compelling.

    The application of technology streamlines and leverages the activity process and content boxes significantly. It makes little contribution to the advocacy and counselling boxes, however.

    Some might take issue with that point arguing, for example, that graphics help trial presentation, AI/context search engines assist e-discovery, and expert systems can be a force multiplier in counselling.
    While this may seem accurate and indeed compelling at first blush, upon deeper analysis, when one disaggregates these activities, they in reality fall in the process and content boxes. Here, again, the application of technology can markedly improve accuracy, effectiveness and efficiency.

    As Noah correctly points out, however, the traditional law firm revenue model is built on the back of inefficiency — in the form of billable hours — so there is really little, if any, compelling interest in killing the goose that lays the golden egg.

    Of course as more and more clients demand value in the form of effectiveness and efficiency, firms will need to reassess their delivery systems to focus on profitabilty through reduced costs as opposed to top line revenue growth. Application of technology is the key to those cost reductions — coupled with reduction in the law firms’ most signficant cost — personnel wages (either in the form of salaries to associates and non-lawyers or partner compensation). This does not, of course, necessarily mean lost jobs — if the firm can reduce the unit costs of providing services, it can then leverage those reduced costs to take market share from other higher cost providers or to demand that has been unmet due to prohibitively high costs of service. The question of course, is whether those markets actually exists.

    We live in interesting times — it’s just unclear to me if most traditional firms actually know that.

  4. Malcolm Pearson permalink
    October 4, 2011

    Very good article, and comments.

    The old traditional firms a already feeling the pinch, but I agree, they don’t realize that their profits are getting further and further out of reach as they expect the good times with miraculously return.

    Disbursements are a great way to improve your efficiency, without incurring too much extra cost, but I have to wonder if they too will disappear in the near future. Other business do not disburse their technology costs, so why should legal firms? I think when law firms get really competitive, the technology will just mean they will be able to tackle the same job at a smaller cost, and those who are willingto fight for the business will drop the smaller disbursements.

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