The Economics of Legal Tech

People are getting excited that more lawyers are now making use of e-signatures because of the Covid-19 lockdown. But why? For some, they’re just glad to see further adoption of digital tools in the legal sector. But why is that change important?

The only answer that really counts is: economics. Without taking into account the economic aspect of technology’s integration into legal services, such changes lose a lot of their meaning.

For example, digital signatures reduce the time burden on clients and speed up deals. That’s an economic benefit. For law firms it reduces the time their own staff spend on low- or zero-value work, allowing them to focus on higher value inputs, and overall use their time to handle more matters in total (i.e. because administrative work that lawyers really should not be doing in any case has been removed from their day) – which again is an economic benefit.

Why Economics Is Central To Legal Tech

The above example is one of the few open and shut cases where there is little dispute as to the benefits. And perhaps this is because it’s a very clear, simple, and precise use case.

Go much beyond this in terms of complexity and things are less clear. Yet, without an economic rationale, legal tech of any type doesn’t make much sense, no matter what the application.

We often associate technology with convenience, e.g. it’s so much easier to send an email than a letter, or it’s so much simpler to search for information online rather than in a library of books.

But, the law is not a leisure activity. The vast majority of legal services providers are businesses that operate for a profit, in most cases with their owners as the main managers and leading advisers, i.e. equity partners. In short, decisions are taken in a business context. And if such business decisions cannot be made, then often no real action in a certain area actually happens.

The lack of a ‘why will using this tech help the business?’ rationale is one reason why adoption is so slow, why tech’s impact is still minimal across broad swathes of the industry, and why we still have plenty of examples of law firms that have bought in plenty of excellent new software tools, but rarely make full use of them.

When you introduce technology to a law firm structure you inevitably alter the economic functions of the business. You may reduce costs for operational support that you cannot bill to the client (at least not directly). You may reduce production costs in the billable work you do, and depending on how this is structured this can protect margins, or risk reducing them, (in the latter case a key reason for a lack of adoption).

Technology may greatly improve your practice management flows, your contract management, your ability to build a knowledge base and then access it easily and quickly. Those things have economic benefits in several ways:

  • first, as such operational tools become standard, to not have them puts a firm at a competitive disadvantage;
  • there is a direct cost pay-off as well, through the reduction in lost time of paid staff,
  • and hopefully better client service and work products that in turn please clients and generate long-term goodwill and hence, a better economic outcome for the firm.

And then, of course, is the cost of deciding where you need to change and improve things (i.e. handing over time to employed internal teams and/or paying for external consulting input), the choosing of the tech and the (re-)designing of the processes and workflows (again a ‘consulting’ cost, whether handled by internal or external resource), and then the implementation. Plus the long-term running costs.

All of this has to be balanced, and it’s not a simple equation. There are a lot of moving parts here.

All of this connects with the overall business goal of a law firm – which is to make as much money as possible for the equity partners (i.e. shareholders), while in return providing the clients (in its particular market segment) with the service and outcomes that are expected.

If tech’s implementation burdens or side-effects (e.g. undermining hourly billable models), don’t balance well against the profit-making goal, then there is a problem and things stop. Sometimes partners say: no! But, more often they just let projects die off through a lack of explicit support.

Or, as is the most common case, law firms don’t even go down that road in the first place because the partners can sense something is amiss and fear there could in fact be a threat to the bottom line.

And they are right to do that. Why should any business, in the legal sector or otherwise, actively seek to make less money, to reduce profits, albeit in the name of greater efficiency?

So, change is often dependent on clients who may push providers to cut costs and reduce inefficiency, which in turn drives two responses:

  • The opportunistic response – the firm sees that most rivals are slow to respond, if change is coming it’s better to be a leader there and build goodwill, so they charge forward and make the changes that are necessary to keep up profits, and perhaps even increase total workflow inputs with a more advanced business model.
  • The defensive response – the firm would really prefer not to change the status quo, which generates a healthy profit – at least it used to. But, there is now an overwhelming need to change. They can take comfort that if they’ve lost some margin on certain products so have all their rivals. They will also look to their rivals to see what ways they can build in new revenue and hopefully push up those profits again. Again, they will follow the norm of the group, not lead.

The majority, as in all markets, take the defensive route and change to adhere to the evolving norm. This also undermines the economic discussion, as once you get to the point where you have to do something, it becomes a hygiene issue and the economic debate is now moot.

So, for those of us who are interested in the intersection of economics and technology, it’s going to be the opportunistic, the explorers, the adventurous, and the ambitious who are focusing on business rationales when it comes to new tech adoption. That is where there are excellent discussions to be had and new ground to be ventured onto.

In The Shops, But On The Shelf

As of today, there is more than enough technology available in the market to have a profound effect on the way a law firm or inhouse legal team operates. Everything from the latest iterations of contract management platforms, to doc automation, to NLP-driven KM, extraction and review systems, to no-code workflow builders, and a dozen other varieties of application. It’s all there, ‘in the shop’, if you want to go and buy it.

Lawyers know and have learnt over time, what legal arguments work, what clauses are effective, what negotiation strategies get the deal done. I.e. as any business would, they’ve studied closely what works and what doesn’t in terms of pleasing clients with the outcomes they want, and in turn will generate a good return.

They have also figured out how to use leverage. In fact, today’s law firms were built on the rapid expansion of leverage, and increasing the associate to partner ratio as much as the clients would accept – which it has turned out is: a lot.

But, they’ve also figured out how to protect profit margins with their own process centres in places such as Belfast, and by working with LPOs/ALSPs/Law Companies.

In short, law firms are actually very good at thinking about the economics of why they do things – when they want to. But, this doesn’t seem to be translating into heavy adoption of new legal tech across the whole market, especially the tech that changes billable workflows. Again, maybe this is because too many firms just don’t want to go there, or don’t feel motivated on the economic side, i.e. to unpick their business model and see how tech fits in there.

The Clients – The Great Hope

If legal tech’s selling efforts to law firms are not translating into the outcomes many desire, much will depend now on how client pressure evolves during the Covid-19 downturn, which could last into 2021.

That client pressure could come in the shape of a GC and their team sitting down and really analysing the cost and process of making everything their internal client needs from them, whether it’s manufactured inhouse or outsourced. That then results in a root and branch rethinking of the procurement process and what is required to get the same results for a lower cost to the business. (As businesses should look to save money to maximise profits….right?)

But, it may equally be the result of ‘blunt force’, i.e. CFO asks GC to please try and reduce spending a bit, especially now that the economy is nosediving into a recession. That translates to some ‘trimming’, although perhaps not done in a methodical way.

Either way, it results in cost pressure, the former in a more precise and thought through way, the latter is still effective sometimes, but likely to revert to the old normal once the pressure is off.

Cost pressure drives in turn a re-thinking inside the law firms, and as many have already squeezed out many of the cost savings via a range of leverage alterations, e.g. process centres, better use of technology is the only remaining game in town.

And as noted, the opportunistic will move first, think it through and act, the defenders of the status quo will move when they have to, maybe without even thinking it all through.

Conclusion

Clearly this is all a work in progress, and as an industry the integration of technology that not just supports core operations, but actually changes the productive process and reduces client costs, is still in its early stages.

Artificial Lawyer is going to keep coming back to this subject area, and will be exploring many more aspects in the weeks ahead. Because, as said at the start of this piece, without the economic rationale, legal tech adoption really doesn’t make much sense.

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By Richard Tromans, Founder, Artificial Lawyer + Tromans Consulting (May 2020).

If you found the above interesting, then come along to the new online event – Legal Innovators Online – on 19, 20 and 21 May, each afternoon UK time.

1 Comment

  1. Well researched & thoroughly explained, Richard. It was an insightful for Legal Tech industry during this COVID era. Being into the legal solution provider (zelican.com) I enjoyed reading it. Thanks.

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