What if Legal Tech ‘Has to Be’ Expensive?

OK, let’s look at legal tech pricing from another angle: what if most legal tech vendors operate in an environment that necessitates high prices for their products? And if that’s the case what does that mean for the future growth of the legal tech market?

On Monday this site asked the question: is legal tech too expensive and what would happen if prices were so low that pricing could never be a barrier? This led to plenty of great feedback and I’d like to thank Ivy Grey at WordRake and David Fisher at Integra in particular. So, now let’s look at this from the other direction, i.e. that legal tech needs to be expensive.

(And before we dig in, let’s just say that ‘expensive’ – which is of course a relative term – can be defined here as any software that is significantly above the per user price for the basic Microsoft 365 suite, e.g. Word, Outlook, Teams etc – which remains the software mainstay of the legal world and so is a useful benchmark. Moreover, most lawyers would agree that they need this suite of utilities, whereas many legal tech tools are optional, even if they would drive efficiency and remove process work, with all the benefits that brings.)

Reasons to be Expensive

One of the main challenges for legal tech companies is cost of sales, i.e. the investment a vendor has to make to get to the point where the buyer finally signs the contract and starts paying for the software.

  • Very few lawyers at law firms or within inhouse legal teams will simply scour the internet and download a tool to be used internally – and for good reasons, namely that the IT security and compliance folks would have a heart attack. The lawyers would also probably not be able to implement that tool on their own because of various security barriers within the organisation in any case. So, the bringing aboard of tech solutions becomes a formal procurement exercise and that slows things down. Slow sales cycles mean more cost of sales, as that process has to be staffed up by the vendor.
  • Moreover, selling legal tech is really slow! If you are asking a law firm to change the way it works, or even alter the way a practice group charges for certain parts of recurring workstreams due to the use of tech tools, then you are asking a lot of the buyer. Plus, as we all know, most lawyers are not desperate to change how they work (and the billable hour doesn’t help – but let’s leave that for once…). Selling legal tech is a bit like being a management consultant and advising on how a firm can improve key elements of their business. That is complex and long-term work. Cold calls and a couple of untargeted emails will not do it here. You need to build a relationship. And you also need skilled sales people who can span the worlds of law and tech. You’re not selling double glazing here. So, more time, more staff, more costs. And that has to be covered somehow, and the only way a vendor can do that is by charging enough to meet this. Or, they can just keep running a massive loss until they get enough scale (see below), but most legal tech companies don’t take this approach and opt for a small to medium loss while in the early growth phase as they don’t expect to scale quickly.
  • Then you have your pilots, trials, internal bake-offs and POCs. Even if a firm likes a product there will probably be a test phase. That needs a lot of support. You have to invest the team’s time to get these over the line. Showing indifference and not being available when a law firm is testing you out is obviously bad for business, but the more resources you put into passing through these gates the more cost to the vendor – and not every POC will end with a deal. So, there can be significant impacts to your cash pile.
  • There will almost certainly be higher security demands in the legal field than elsewhere – that demands extra investment to get stamps of approval, e.g. SOC II and the like. Then there will be demands from law firms for effective integrations. That also demands investment.
  • Once a tool gets adopted the story doesn’t end there, especially if the product is new to those lawyers using it. The vendor will have to provide plenty of ongoing support. Again, more cost. There are few products that are ‘fire and forget’.

This is a long way from an individual just going online, searching for a meetings app and downloading it in five minutes, then watching maybe a short video from the vendor on how to use it and that’s the sum total of the sales and support process.

Then we have the turbulent world of venture capital. Let’s say that X fund has given you a couple of million dollars to get going. They don’t expect big revenues yet, but they do want to see a promise of healthy revenue one day. A really low sales price – and given the costs above – means burning through your cash fast and even if you do bag some clients the income will be low in total. The VC fund may not be too happy to see how the money has been swallowed up for very little return.

If you are a consumer sector SaaS company and can grow the client base by 10 new customers per day at these very early stages, then the VCs will perhaps not mind so much, as you are showing great promise even as the cash burns away. Soon the 10 a day will be 100, then 1,000, and so on. That approach may also mean a lot of upfront VC funding to help you scale the sales team. But, because the product looks like it will scale really fast then it all works out (or not..). That’s also why many SaaS consumer companies either succeed or go bust fast – unlike legal tech companies which carry on for many years with relatively small client rosters.

There are plenty of legal tech startups that take more than five years to reach even 50 paying customers. If they are charging only a small amount then their balance sheet will look terrible and the VCs won’t like that at all, even if one could see this as a solid foundation for future growth….(or one could also say that what this shows is that the total addressable market is actually small and this product is more like a luxury that is sold to a niche audience….)

And one other key aspect is development costs. Some tools need way more money than others, e.g. if you provide case law you need to buy and make sense of all that unstructured data, and this is very expensive. While if you have a machine learning application then it may not initially so much be the money but time that is needed to get up to speed, and in turn lots of time means a high cost to the business.

Also, top level engineers are not cheap. The huge growth of SaaS companies in the last ten years has meant salaries have risen. You can easily burn through a few million dollars just on product development salaries when still at an early stage. (That said, the layoffs recently may be softening that part of the market).

And the last point is about scale. As noted, many legal tech companies start with a really small market. That means they don’t get to move rapidly to economies of scale, like Microsoft was able to do because it sold to everyone who had a computer. Without scale then prices are hard to reduce. But it also becomes a trap: high prices mean it is harder to sell into a very wide market, and given that that majority of all lawyers on the planet work in small law firms, even if 95% of the legal tech world is focused on Big Law or ‘Big Inhouse’, then you get to be part of a great and cash-rich niche, but a niche all the same.

In short: a small and tough market, high cost of sales, low growth rates, can stay operational for a long time, but hard to scale so prices have to remain high – unless you are willing to really burn a big cash pile and take a risk on scaling across a sceptical market with a massive sales push with prices that even small firms don’t mind. It’s no surprise that most vendors pick the first path.

What Does This Mean?

If legal tech products have to be expensive, and one could argue that they do, then as noted above, this will inevitably limit their global growth.

Once you get to law firms that have revenues below $20m, which is a lot of firms around the world, then legal tech costs really do get attention. I know this because over the years I’ve talked to a lot of smaller firms in the US, UK and across the world. Outside the scope of utilities such as MS Word and email, then partners of such firms really do want to evaluate what they are spending and they often tend to be dubious about anything that is not clearly a necessity.

By way of example, I gave a talk some years ago to a law firm network, i.e. a collection of smaller firms around the world that refer work to each other. They were interested in legal tech, but directly told me that cost was an issue for most of them. They asked whether a legal tech vendor would accept all of them pooling their resources together to buy one shared licence for a product that they could all use, as that would spread the cost. That was how much they were thinking about cost vs benefit and not seeing the new tools on offer as necessities. These were businesses that had revenues in the low millions.

Now, there are always exceptions to this. I have also met several new boutiques created by former Big Law lawyers, who are really into the use of tech – in fact for some leveraging tech allows them to punch above their weight, as it were. But these are not the majority by a long way.

So, if legal tech is ‘expensive’ by necessity, then does this mean that it will always remain a much smaller market than it could be? For now that seems to be the case.

When something is seen as optional and the old methods work OK, or better than OK, then driving change needs every bit of help it can get. While a giant like Allen & Overy, for example, has put huge investment into legal tech in multiple ways, most smaller law firms on the planet have not, nor feel they can for what they believe is an optional purchase – and an option they don’t know how to evaluate nor have the spare resources to even test out effectively.

To conclude, it looks like we have two choices: we stay as we are and the market remains small, or the vendors and their investors take a different approach to see if pricing can make a difference. Of course, some may say they’d rather have 100 top clients mostly in the largest financial centres of the world at a high price than 1,000 clients scattered all over the place that pay a low price.

The question is: will you ever really go beyond those 100 clients given that there are not that many large law firms in the world? While on the inhouse side, although there are many more corporates globally, how many have large enough legal teams to necessitate extensive legal tech spending in the next few years?

(To be continued.)

Richard Tromans, Founder, Artificial Lawyer, Nov 2022

1 Comment

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