Legal Tech

Legal Tech Market Report



By Kirk Mahoney

We define Legal Tech as organizations that provide software and tech-enabled services to the legal vertical (including law firms and internal counsel) as well as tech-enabled legal services delivered to businesses and consumers.

Law Firms Today vs. Tomorrow

As the rest of the business world has adopted technology to create more efficient business models, law firms have been slower and more hesitant to change. Chief Legal Officers have rated law firms a median score of 3 out of 10 every year from 2009-2016 in the question of “law firms’ seriousness about changing their legal service delivery model.”[1]

  • Law firms are not meeting their clients’ demands for faster cycles and data analytics driven analyses, largely due to their static business model and slow adoption of technology.
  • Meanwhile, internal legal departments have adopted technology at a much faster rate.
    • 80% claim they have achieved above average value from use of technology tools.
  • To better accommodate market demands, many non-traditional legal service providers (tech-enabled firms, software automating legal work, non-traditional law firms etc.) have emerged.
    • 82% of law firms name “competition from non-traditional service providers” to be a permanent change to the legal service market, up from 70% in 2011[2].

Source: Boston Consulting Group

  • Legal departments are in-housing their third party legal service work.
    • More Chief Legal Officers are decreasing their outside counsel budget (32% increasing vs. 41% decreasing) while increasing their internal budget (50% increasing vs. 27% decreasing); this trend extends back to 2011.
    • In-housing legal work is the number one tactic CLOs use to reduce costs.
  • Unbundling of legal services:
    • Internal legal departments are unbundling legal services into smaller services, then either in-housing or outsourcing the commoditized work (document preparation, legal research, etc.) while relying on outside counsel for bespoke services.
      • Law firms can no longer rely on time-consuming tasks to drive utilization rates and instead must provide increasingly specialized advice and opinions to justify their fees.

Massive Legal Services Market, ~2% of US GDP

Market Size

  • US Legal Services: $437bn in 2017; ~2% of US GDP[3]
    • Corporate Legal Departments: $160bn
      • Small (<10 attorneys): 10% by department count
      • Mid-Size (10-39 attorneys): 59% by department count
      • Large (>40 attorneys): 31% by department count
    • Law Firms:
      • Small (<29 attorneys): $108bn
      • Mid-Size (30-174 attorneys): $73bn
      • Large (>175 attorneys): $95bn
    • Legal Process Outsourcers (“LPOs”): $1bn; growing 30% annually
    • There are ~50,000 law firms in the United States[4], most which are solo practices
    • 10,000 legal departments[5]
    • 1.33mm lawyers in the United States, grew at 1.5% annual rate from 2007-2017[6]
  • Total Global Third Party Legal Services: ~$650bn[7]

Law Firm Economics

  • Revenue Considerations
    • Billable hours – Firms agree with their client to a rate per lawyer hour and then bill at the end or during a project based on that rate and the actual number of hours worked.
      • On average, law firms collect ~80% of what they quote (i.e. their “standard rates”)[8].
    • Alternative fee arrangements – Any other means of charging besides billable hours including fixed fees, subscription fees, and success fees
      • The frequency of alternative fee arrangements has been increasing over the past few years especially in certain services easily productized (M&A, immigration, etc.).
    • Capacity
      • Associates at big law firms are effectively hired approximately one year before beginning work, after their summer associateship after their second year in law school.
      • Law firms often use “contract lawyers” (temporary attorneys hired on ad-hoc basis) to flex capacity.
      • Forecastable (seasonal) and unforecastable (cyclical) fluctuations in demand for services reduce law firms’ ability to staff accordingly therefore lowering utilization rates.
    • Other law firm economics considerations:
      • Costs
        • Compensation and benefits (for both support staff and attorneys) typically make up the largest cost for law firms.
      • Leverage (attorneys per partner)
        • Leverage has trended down over time[9]; fundamentally, this is the result of incremental automation and outsourcing performing tasks that used to require junior attorneys and paralegals.

Substantial Legal Tech Market – $16Bn TAM

Market Size

  • $16bn TAM
    • $9.4bn TAM selling to law firms
    • $6.5bn TAM selling to corporate legal departments
    • Actual spend of ~$3bn reflects <20% penetration
    • Largest areas of spend today include Enterprise Legal Management, Contract Management, and eDiscovery.
    • Fastest growing areas over the next few years include Knowledge Management, Legal Analytics, and Contract Management.

Key Market Considerations

  • The Artificial Intelligence cluster of technologies (AI as well as machine learning, natural language processing, machine vision, etc.) are especially applicable to the legal services space.
    • AI has been proven to be most useful / profitable when:
      • Fed large volumes of data (e.g. legal research archives, eDiscovery electronic stored information “ESI”)
      • Automating time-consuming formulaic tasks (e.g. screening research, filling out legal templates)
      • Used to save otherwise expensive person-hours (in the US, lawyers are 2-5x as expensive as the average worker)
    • Legal Research:
      • Referencing non-word files (audio, pictures, etc.)
      • Using predictive analytics to filter and recommend relevant documents
      • AI-enabled virtual assistants and chatbots performing research tasks on parity with a paralegal
    • Contract Management:
      • Automatically produce customized templates based on limited input
      • Review documents for key and nonstandard clauses
      • Organize and classify volumes of contracts (e.g. during due diligence for M&A projects)
    • IP Management:
      • In the near term, IP management professionals will benefit from the same incremental improvements AI is providing in the legal research space.
      • In the intermediate term, machine learning will enable the automation of the entire IP infringement detection process.
    • Automation & Analytics:
      • Analyzing bodies of historical legal decisions to predict the outcome of ongoing litigation
      • Enabling clients to assess the performance of their counsel by reviewing their history of outcomes
      • Assessing arbitrators, jury members and judges for objectivity
    • eDiscovery:
      • Progressing from screening for keyword to predictive coding in which algorithms use predictive analytics to determine the most relevant documents based on search
  • Positive demand trends:
    • 53% of law firms indicated that they were increasing their technology budget (compared to 9% that planned on decreasing their budget)[10].
    • Opposition to putting data / applications in the cloud, which in turn was largely driven by fear of security breaches, has largely diminished over the last few years[11].
    • The potential for AI / machine learning / machine vision in legal is immense and law firms are beginning to strategize and purchase AI solutions.
      • While only 2% of law firms are using AI (largely IBM Watson), 11% are evaluating an AI strategy.
    • Entrepreneurs and early-stage VC’s have gotten in front of the positive tailwinds and are starting and investing in more legal tech companies than ever before.
      • The number of legal tech startups listed on AngelList has increased from 15 in 2009 to 400 today[12].
    • Negative demand trends:
      • Lawyers / Law firms are natural late adopters:
        • Conservative / Staid culture – Don’t want to change things, reliance on precedent
        • Billable hour revenue model – Misaligned incentives as time-saving automation / software lowers billable hours
        • Partnership model – Lack of budget
        • Attorneys make purchasing decision – Not tech savvy
      • Most law firms don’t have CTOs driving tech strategy
        • Mitigated by 80% of law firms using some sort of outside tech consultant
      • Sales dynamics:
        • Peer recommendations drive sales
          • 62% of lawyers indicated that “peer recommendations” was in the top five reasons for making a technology purchase.
          • Technology sales to law firms are typically comparable in scale to SMB / mid-market corporate sales.

Potential Investment Opportunities in Legal Tech

Attorney Suite – Technology enabling attorneys’ legal work

  • Legal Research – Technology that enables the process of identifying and retrieving information necessary to support legal decision-making[13]
  • eDiscovery – Technology that facilitates the identification, collection, preservation, processing, review, analysis and production of electronically stored information (ESI)[14]
    • $2.9bn global software market[15]
  • Contract Management – Technology that enables the management and automation of legal contract creation and review
  • Document Management – Technology that organizes and manages documents
  • Analytics & Automation – The emerging class of technology that leverages big data, AI, machine learning and other technologies to perform predictive analytics and automate legal work

Law Firm Management Suite – Technology to enable law firms to manage their practice

  • Practice Management / Case Management Platforms – Practice management suites include both case management software, which are digitalized case files, and law firm practice management, including ERP, calendaring, billing, workflow management, CRM and any other business processes
  • Law Firm Management Point Solutions – Includes legal CRM & marketing, time & invoices, case management, hiring, payments, collaboration tools and other point solutions sold to law firms

Enterprise Legal Suite – Corporate technology to manage legal departments and matters

  • Enterprise Legal Management – Includes eBilling and matter management software, which together enable corporations to manage internal legal processes and external legal matters
    • ~$450mm market growing 7%
  • IP Management – Software used to research, manage and protect intellectual property including trademarks, copyrights, trade secrets and patents
  • Tech-Enabled B2B Legal Services – Service providers leveraging technology to perform legal services to businesses

B2C Legal Tech – Technology delivered to the legal consumer market

  • Tech-Enabled B2C Legal Services – Service providers leveraging technology to perform legal services to consumers; includes legal marketplaces and DIY legal templates
  • Litigation Finance – Litigation finance enablement tech, in which lenders provide credit to plaintiffs in need of capital to pay for legal costs
  • Continuing Legal Education – Continuing legal education (“CLE”; legal study done after passing the bar) enablement technology

 

[1] 2016 Altman Weil Chief Legal Officer Survey

[2] 2016 Altman Weil Law Firms in Transition Survey

[3] Thomson Reuters Legal Executive Institute

[4] American Bar Association

[5] Mitratech Legal Tech. Market Trends 2015

[6] American Bar Association 2017 National Lawyer Population Survey

[7] Legal Services Market Global Market Report 2017, Business Research Company

[8] Thomson Reuters Peer Monitor; Q4 2016

[9] 2012 Survey of Law Firm Economics ALM Legal Intelligence

[10] 2016 ILTA Legal Tech. Purchasing Survey

[11] Clio

[12] ABA Report on the Future of Legal Services in the US – 2016

[13] Lexis Nexis

[14] Gartner

[15] Radicati Group; eDiscovery Market, 2014-2018

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