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The disruptive future of legal tech comes into focus

Could this be the year that digital disruption comes to the UK’s legal services sector?

The Law Society thinks so: it has recently launched a partnership with the online equity crowdfunding platform Seedrs to connect its members to innovative legal technology start-up businesses. The initiative reflects a conviction in the industry that legal tech is set to have a significant impact on the profession in the months and years ahead.

If so, that will be a step-change from where we stand today. While it would be unfair to characterise legal services as determinedly old-fashioned, it’s fair to say that technology has yet to have the transformational impact seen in other industries.

 

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Certainly, the UK’s legal tech innovators have been slow to attract funding. In the US, venture capital investors pumped $150m (£107m) into legal tech start-ups during 2017 – and that was a marked slowdown on 2016’s total of almost $250m; in the UK, by contrast, investment reached just £16m in the 18 months to June 2017.

That is reflected in broader take up, with research suggesting almost two-thirds of law firms are currently spending less than 4% of total revenues on technology; that’s less than half the 9% allocated to tech by, for example, the typical financial services business in the UK.

So why should this year be any different? Well, there are several good reasons to think legal tech may be about to come of age in the UK:

  • Legal services profitability is declining. Around half the leading law firms in the UK saw their profit margins decline last year, as fees continued to come under pressure from clients - in particular through a shift away from hourly rates to fixed fees - and staff costs continued to increase. With those twin dampeners on margins likely to persist – and Brexit also hanging over the industry – law firms must now find innovative ways to improve profitability. Legal tech offers a means to reduce cost, particularly through greater automation and improved efficiency, and to grow revenues through new service offerings and enhanced competitiveness.
  • The technology is improving. Whilst legal services are often depicted as tech-reticent, the truth is that leading law firms have been investing in enterprise technology for a number of years, driving efficiency through better practice management systems and case management tools. Recent technological developments offer potential beyond data and relationship management or simple automation.  Advances in areas such as e-discovery, driven by machine learning and artificial intelligence, provide one good example, with some firms substantially reducing the work required to extract key information from large quantities of documents. Analytics tools that leverage competitive advantage from the growing data pools to which law firms now have access are another area with exciting potential; this technology could, for example, provide firms with much greater insight into the potential outcome of any given case, based on a myriad of data about how similar cases have progressed in the past.
  • Clients are more demanding. The legal services market is changing, with both consumers and business clients increasingly expecting to be able to access legal services through a broader range of channels. New technologies will accelerate these trends, as consumers look to online services such as Legalzoom, for example, while corporates exploit platforms such as HighQ and Peppermint to do more of their own work in-house or through alternative providers.

 

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These signs are not being ignored by the legal profession. You just have to look at Allen & Overy’s Fuse, a tech innovation space where it is able to collaborate with legal tech developers and clients, or Mischon de Reya’s MDR Lab, an accelerator space for legal tech start-ups, to see the direction the industry is headed. And as firms are recognised for new innovations, such as the praise Pinsent Masons has attracted for rolling out a series of risk management tools built on AI technologies, others will soon follow. 

The pressure, in other words, is very much on. Digital disruption provides law firms with new opportunities – but also the risk of competitive disadvantage for those firms slow to rise to the challenge. And the window of opportunity is narrowing; as industry pressures mount, legal tech hype will move much closer to reality.

 

We're well invested in both the legal and tech space so if you'd like to know more about how we could help your business, please contact investments@livingbridge.com.

 

 

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