How Will Covid-19 Impact the Legal Tech Sector?

The UK Government estimates that the peak of the Covid-19 virus will occur in the early summer (i.e. 10 to 14 weeks from now), the same may be true, or occur a bit earlier, for other countries with a similar infection profile. What does this mean for the legal tech sector and how can it respond?

Aside from the obvious impact on many people’s health and the need to socially distance ourselves to prevent infection, the other main effect on society is clearly going to be economic.

I have worked through two other major economic downturns, the dot.com crash of 2000, and the 2008/9 financial crisis that saw Lehman Brothers collapse and the global banking system pushed close to breaking point. In both cases the vast majority of stakeholders in the legal market carried on, albeit having to experience a bumpy and sometimes scary ride.

The dot.com crash was relatively short, saw a lot of over-priced publicly listed web-based companies implode, and then the world moved on. The 2008/9 crash was something else. That was systemic, with the banks – the heart of the economic system – effectively having a mass coronary that demanded taxpayer bailouts. (Luckily, the financial services sector is in much better shape today than 12 years ago and is ready to experience a serious ‘stress test’.)

But, in both prior cases, we got back up and carried on. The fundamental reason why things recovered is that these downturns are time-limited. The same will be true for the Covid-19-induced downturn.

The next question then is: if the global economy is heavily disrupted for the next three months-plus, how will the legal tech sector fare?

Impact and Response

The legal tech sector is naturally dependent upon law firms, ALSPs and inhouse teams buying and regularly using its software to generate revenue and to keep it going. The commercial legal sector in turn is dependent on the many thousands of medium to large businesses needing its services. If that need drops, then there is a follow through.

That said, law is always ‘a lagging indicator’ when it comes to slowdowns. This is because crises create new legal needs. Only a major lack of any activity kills off law firms. (Or the law firm has borrowed way too much money and its partners decide they don’t want to get saddled with the debts and so jump ship, but that is rare.)

So, first things first: will legal services demand drop?

In the very short term the answer is that some service lines will see a spike and others will see a rapid fall. For now, they will likely cancel each other out.

For example, many businesses, from airlines to hotel chains, will need help with matters such as re-financing and debt-restructuring. Some companies may need to be bought out to survive and that will drive some additional M&A. But, some less urgent transactions and IPOs may also be put on ice, as share prices are so volatile and the world looks unpredictable.

The bigger firms in some ways are better protected than the smaller commercial law firms as the giant corporations will still need tonnes of BAU legal help. Also, a $1bn M&A deal could take a year to complete, and if they see an economic downturn lasting about three months or so, they may well just carry on, working on the basis that by the time the deal is all set we will have reached stability.

Also, for companies involved in massive disputes, life carries on. Some court cases can take years to be resolved and the lawyers involved will in many situations just keep going, even if they don’t attend court.

More medium size and smaller firms, whose client bases are also smaller companies, may be more affected. If you service a small retail or hotel chain, such businesses will probably put on ice any transactions they have planned. They will also seek to keep hold of their cash reserves and so put off any costly dispute resolution, if they can. Though, they may also need debt restructuring / new finance help.

High Street firms will no doubt witness a drop in house sales – a mainstay for many – and advice for SME expansion will also drop off in the short term. Some of these with debts and weak cash flow could go bust.

The Impact on Legal Tech Companies

For companies that have sold long term licences, e.g. a one year licence for a doc automation system, then it’s likely they would not be impacted, whether the legal sector stays robust or not.

For companies that live by client usage levels of their software, i.e. software fees that are based on rate/volume of use, the next few months will be stressful. As noted above, while some deal work will cease, new crisis-driven deals may take their place. Disputes work may also keep going.

Probably the most contentious area is winning new clients for your software. Here’s some thoughts on that:

  • The buying cycle for certain types of software can be as long as 18 months. As Artificial Lawyer always says to legal tech providers, this is all about consultative selling. CTOs don’t usually just see a new product and buy it that day. It takes months of reading about it, maybe looking at white papers, listening to webinars, then pitch meetings, then doing tests versus other products, and also pilot schemes, before finally signing a long-term deal. This is especially so for tech that may change how lawyers work. In short, keep going, as the pipeline is long and can take many months to progress. The final signature could well take place when things are in a much better scenario than today. But, you have to start somewhere to get to that point.
  • Will law firms delay buying decisions? That is a fair question, but why should they? Internal tech teams know that the buying process takes ages, why wait? Only if law firms cut budgets would there be a reason to halt things. And at present there are no signs that large law firms are cutting their tech budgets.
  • Many decisions on tech also cannot wait, no matter what happens. If a client is pushing a firm to help with a massive M&A takeover deal, perhaps driven by the crisis, but wants you to use software that will speed the process, then you have to jump.
  • It looks again that it is the larger law firms that are more likely to carry on as usual when it comes to tech investment. And they will also more likely feel continued pressure from clients to utilise tech to provide more cost efficient services.
  • Remember, it was the 2008/9 crisis that led to the ‘New Normal’ among big companies that pushed law firms to become more efficient – and that helped drive interest in better use of legal tech and also ALSPs.

Overall then, if this stays at around a quarter or so of impact, most of the legal tech world should bounce through it, especially those serving the AmLaw 100, Global 100, UK 100 and similarly positioned firms, and larger inhouse legal teams.

Impact on the Law Firms

In many ways there is only one key point here: working from home.

Will everything grind to a halt because lawyers and the professional support teams are at home and working via a laptop from their kitchen tables? Nope. The legal sector is better prepared now to work from home than ever before.

Moreover, can a CTO or head of innovation for example, still engage in a sales talk/demo of new software if they are working in their kitchen? Absolutely.

This site conducts the majority of its software demo views via online meetings. In fact, going into an office to see someone open a laptop and show you something that can be demonstrated via a screen share is very rare for this publication these days.

Probably the only thing you miss is the benefit of meeting someone in person. But, that’s not always essential. There are people that Artificial Lawyer converses with around the world who have never been met in person. Would it be nice to meet? For sure. But, we can still communicate.

So, if much of the legal world does have to work from home it’s not the end of the ability to engage with potential buyers, or existing clients, either.

One last point: when it comes to marketing, clearly conferences* are off the menu for the next few months. However, legal tech companies can still reach their clients and potential new clients via thought leadership articles, white papers and webinars.

Conclusion

If the scientific advice that has been given so far is correct, then we are looking at a ‘short sharp shock’, rather than the epic and long term crash of 2008/2009.

Larger firms especially are more likely to see sustained demand for their services, in part because their very large clients will need continued high level support. That in turn means they will stay active and hopefully sustain their use of current software and need to bring in new products as well.

Overall, we’ll get through this. Stay safe everyone.

All the best, Richard Tromans, Founder, Artificial Lawyer


[ * The Legal Innovators conference in San Francisco is scheduled to take place on June 18, however we’re keeping a close watch of the situation in California and will postpone the event to later in 2020 if necessary. We will keep you all posted on any changes well in advance of the conference, which remains over three months away.

P.S. The Legal Innovators conference in London, which is on two days, 7 and 8 October 2020, is very much still scheduled to take place. ]

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