The Emergence of Legal Technology

Law firms can no longer afford to neglect technology. Well-managed technology will drive efficiencies and competitive advantages. AI is a new frontier, only lightly adopted by law firms to date, but offering significant future potential.

Technology and economies of scale

It is undoubtedly expensive to select, test, purchase, and support new technologies but firms that fail to invest will see their margins eroded, particularly in the highly competitive mid-market segment. Firms risk falling into a dangerous cycle of falling margins and insufficient reserves to undertake investment, which in turn weakens their competitiveness. Successfully implementing technology improvements will drive efficiencies and competitive advantages: this may be through sophisticated case management systems, automating administrative tasks, applying ‘smart’ research tools or facilitating agile working.

The resources required to keep up with competitors will stretch firms with weaker balance sheets, while the limited additional cost of applying technology across larger firms is likely to introduce economies of scale to a sector where none has historically been apparent.

Accordingly, we expect firms that have underinvested in technology to represent attractive acquisition targets for those with stronger balance sheets and scalable technology. While some firms may consider IPOs as a direct means to bolster their balance sheets for investment, the potential for mid-market consolidation — underpinned by technology — has already attracted capital: the investment propositions of the first three UK firms to IPO each include shared technology and centralised back office functions to drive swift integration of acquisitions and to benefit from economies of scale.

Artificial intelligence

When considering technology the legal sector is no different from any other: as computing power, data and connectivity expand, artificial intelligence applications will become more sophisticated and will have the capacity to bring rapid change to the sector. That change is already underway, supported by an inflow of capital from venture funds attracted by the possibility of widespread adoption and potentially huge returns. Insight Venture Partners invested $50m in legal AI firm Kira Systems while other notable AIpowered “legal tech” companies that have received funding include Seal Software ($30m raised), Eigen Technologies ($17.5m) and LawGeex ($12m).

Firms not actively seeking competitive advantages through technology (and especially AI) risk being washed up in the wake of the so-called “4th Industrial Revolution”. In the short and medium term, AI is likely to have a disproportionate effect on the smaller end of the legal market where repeated-task, high volume legal services such as domestic conveyancing and small claims work make up a higher proportion of revenue.

However, firms delivering complex services can ill-afford to put AI too far down their investment priorities. AI is already shifting the way in which legal services are delivered (for example: contract review, due diligence, legal research) and it is crucial that management continuously review and challenge how AI can be deployed to help their firm work more efficiently, deliver a better service and drive competitive advantages.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.