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Digital Transformation in the Legal Sector

Authors: Analyst Team

2022


The Essentials

The legal sector is being compelled to adopt – and adapt to – new technology as clients demand faster, cheaper, and more transparent work. The need for greater technological utilization was accelerated by the pandemic shift to remote work and is largely embraced by the digital native millennials who are beginning to take on more senior-level positions. However, due to the nature of their work, law firms and legal departments need to change slowly, so as not to take on too much risk, and the challenges they face in transitioning to tech are different from those in other sectors. This Brief looks at the changes occurring in the world of legal technology, as well as the opportunities and challenges for buyers and vendors in this market.ext


The Four Stages of Technology Change in the Legal World

Making a significant change, or “pivot,” is challenging in the legal world, and its adoption of technology such as artificial intelligence (AI) and machine learning (ML) reflects this. Due to the nature of their work, in which mistakes can be extremely costly, law firms and legal departments face many challenges that businesses in other sectors do not and therefore can’t make sudden and dramatic changes.

What’s more, the areas that are most ripe for benefitting from automation technology are different in the legal sector than in other businesses. At Deep Analysis, we typically advise organizations outside of legal to address their data and information governance issues and bring order to information chaos before attempting any major change or transformation. The legal world, by contrast, typically has a handle on information management; their files, data, and documents are usually in good order. This means their starting place is different. For most legal professionals, the launching point for change is enabling remote working and access to information sources, be that between attorneys and their staff or attorneys and their clients.

Today, after two years of the pandemic, most firms have assembled a stopgap system of tools and processes to manage remote working (Stage 1 in Figure 2). Most typically rely on standard collaboration software like Microsoft Teams and Zoom and on an increased use of email to share information. The use of file-sharing systems such as Box and Microsoft OneDrive has also increased, and indeed the use of cloud-based file-sharing systems is likely to continue to grow substantially in the legal sector over the next few years. Although adapting to sudden change does not come easily to the legal sector, on the whole it has handled the imposed changes from the pandemic era well.

However, using a mishmash of technologies and approaches does expose a legal organization to risk in terms of both security and dismantling decades of detailed information curation. As per ABA Formal Opinion 477 (among other restrictions), all legal work needs to be conscious of security, privacy, and confidentiality. Yet today, many legal staff are using unencrypted and unsecured tools to work remotely, and that situation needs to change. Hence, we recommend a focus on information security and encryption to be Stage 2 of the digital priorities that legal organizations need to address.

Figure 1
IT Spend by Percentage of Revenue 2022

Trends in Legal Technology Spending
Spending on legal technology as a percentage of sector income has grown at around 30% year-on-year over the past four years but lags average IT spend across industries quite a bit. Across industries, average IT spend as a percentage of income is 8.3%, but in legal it is only 4.2% according to data and research from ILTA, Gartner, and Deep Analysis (see Figure 1). Given its fast growth, we expect legal tech spend to align more closely with the industry average within the next few years.

Figure 2
The Stages of Digital Priorities in the Legal World

Once secure and remote working is enabled, legal firms can then address the automation of mundane and repetitive tasks (Stage 3). Some firms may address these stages in parallel. As illustrated in later sections of this report, there is a drive to transform and, where possible, automate tedious document-related tasks such as creating closing books. This shift is driven both by client expectations that relatively simple work needs to be completed more expeditiously, and by juniors and rising partners who come from a digital-first generation and demand change.

Finally, at Stage 4, legal organizations are exploring technology to automate, or at least accelerate and augment, more complex legal analysis work such as reviewing complex long-form legal documents or searching for and analyzing multiple sources for supporting legal insights, typically using advanced technologies such as ML & AI.

Ironically, though, the pandemic and the enforced shift to hybrid and remote working have changed legal digital transformation priorities, as remote communication and file-sharing would likely not have been such a priority without these tragic few years. Similarly, many critical files are now stored locally and haphazardly on laptops and private file shares after decades of well-ordered onsite information management. Ultimately, it’s a case of two steps forward and one step back. The generational shift underway in the legal sector is a true force to be reckoned with, and change was in the cards regardless. 


The Legal Tech Buyer’s Perspective

Legal tech has undeniably entered a new and innovative phase. In fact, we can go as far as to say that legal tech appears to be “crossing the chasm” and engaging with more and different kinds of technologies than ever before. During the pandemic, not only did law firms adopt technology at an unprecedented rate, but surveys indicate that many intend to continue integrating new technologies into their practices even as the pandemic wanes. For example, 61% of respondents to the Clio 2021 Legal Trends Report said they intend to invest more in hardware and software solutions in the coming years, despite already spending strongly in those areas.1 This new phase has been ushered in by a number of factors, some long expected and others that only recently emerged due to the pandemic (see Figure 3).

Generational shift

It is estimated that by 2025 millennials will make up 75% of the general workforce, a massive generational shift that the legal sector has long anticipated.2 As it stands today, millennials who entered the legal world in the late ‘00s are beginning to establish themselves as partners and GCs, and older staff are beginning to contemplate retirement. Millennials are a largely tech-first generation. They are not only ready and willing to embrace technology in their practices, but eager to do so in order to move away from the tedious paper-based document processes and reviews of the past.

Hybrid working is still attractive to many in the field, particularly those who began their careers during the pandemic and consider remote working as normal. Not only will hybrid work options be key to retaining young talent, but clients have also come to accept and even expect hybrid options when working with lawyers. As of 2018, only 23% of consumers were open to working with a lawyer remotely. This number has increased dramatically: according to the Clio 2021 Legal Trends Report, more consumers are open to working with a lawyer remotely, and 79% of those surveyed said the option for remote work was an important factor when choosing a lawyer or law firm (although it should be noted that most preferred lawyers offering both remote and in-person services).3 Hybrid working is seemingly not going anywhere, and neither is the pandemic-influenced drive for secure and accessible remote file and document management systems.

Figure 3
Factors in Legal Firm Tech Decisions

Hybrid working

Since the start of the pandemic, hybrid working has become standard practice in the legal sector. During the shift to hybrid legal work, file and document management systems that allowed for easy and secure remote access became a key focus of the legal tech sector; however, after two-plus years, many firms continue to struggle to ensure easy and secure remote access to files as many older document management systems are now dated and were not designed to provide remote access. Online legal resources will likely remain in focus as hybrid work seems unlikely to go away even as more firms have workers return to the office.

Client expectations

In addition to seeking out lawyers offering services remotely, clients have changed their expectations about timelines and cost over the past decade. Clients have come to expect legal work to be completed more quickly and at a lower cost than ever before. They are also less likely to remain loyal to a single firm and will instead shop around for firms that meet their expectations. Clients are aware that document reviews and other legal processes can be automated, and they expect labor costs and processing timelines to reflect that. Although client expectations can be unrealistic, general client awareness of available technologies to streamline legal processes has increased pressure on firms to meet such expectations and remain competitive.

Figure 4
Client Expectations vs. Legal Firms’ Traditions

Cost management

It is important to note that the cost of digital transformation in the legal sector must be managed carefully. Although the legal sector is generally seeing higher revenues, the increased pressure for lawyers to move away from the traditional billable hour system and to embrace fixed-fee and retainer-based engagements must be considered in this transition.

Overall, the legal tech sector is likely to see continued growth as younger, more tech-oriented law professionals emerge as leaders in the field and increase their use of time- and labor-saving technologies to adapt to changing client expectations (see Figure 4). Although many of the changes currently underway in the sector were anticipated in some form pre-pandemic, the pandemic has hastened the legal sector’s enthusiasm for new technological solutions.


The Technology Vendor’s Perspective

Although there is a growing and engaged market for technology in the legal sector, the sector is, by default, generally risk averse. Many firms continue to use technology that is outdated rather than risk replacing or upgrading to newer technologies. For example, many firms have been reluctant to take advantage of available cloud-based legal technologies, believing the risks of transitioning from their on-premises systems to cloud-based ones are too great. According to the American Bar Association (ABA), around 60% of legal professionals have utilized cloud-based software for work. However, even those who utilize such software say that confidentiality and security remain major concerns.4

Despite skepticism, however, the current generational shift in the legal field means there is a growing subset of legal professionals who are eager to embrace technology and move to the cloud, and indeed see it as the future. These largely millennial professionals are enthusiastic about automating the costly and time-consuming paper-based work that is still largely standard in their field.

Despite growing acceptance of technology, many potential buyers currently run dated systems in-house that can be difficult to integrate, replace, or upgrade. Because of this, many vendors are repositioning, and rather than building new products from scratch they are adding limited machine learning capabilities to their older products. These products are then rebranded under “Powered by AI” style marketing (see Figure 5). With this kind of marketing, vendors run the risk of overselling and under-delivering on the promises of automation and AI. Although automation could and should be used more widely in the legal sector (the McKinsey Global Institute estimates that 23% of a lawyer’s job could be automated), almost all legal processes have exceptions (the McKinsey Global Institute also estimates that only 5% of a lawyer’s job could be entirely automated). 5 This can render tools like robotic process automation (RPA) somewhat useless. Although AI has great promise and has seen rapid development in the past five years, long-form complex legal documents are still difficult for “AI” style products to analyze accurately and effectively.

Figure 5
Factors in Legal Tech Vendor Positioning

Price pressure is another challenge for legal tech vendors, which have long been able to charge a premium for their specialized tools. Vendors are coming under pressure to justify these prices as more legal firms go digital and begin questioning pricing models that charge on usage or have steep tiers when scaling up to more staff. This is driven in part by the generational shift driving acceptance of tech in the sector as millennials take senior positions within law firms. Millennials – as digital natives – are more inclined to shop around, compare alternatives, and utilize more generic technology at lower price points than to engage with premium legal tech vendors.

Because of this increasing price pressure, many specialist legal technology firms are finding it increasingly difficult to differentiate themselves and justify their costs compared to commodity technologies. For example, a legal firm could use the secure cloud content management system Box instead of one of the many specialized legal matter management systems. Though Box is not a legal application per se, it provides much if not all the same technology at a lower price point.

Similarly, advances in search (enabled by the increased use of AI) and the addition of bundled legal hold functionality from firms such as Microsoft are (arguably) on a par with many mid-tier eDiscovery and legal research tools. To be clear, highly specialized legal technologies may at times be better suited to do legal work, but the continued advancement of features and functions in regular workplace applications is encroaching on this territory.


Call to Action

After decades of sluggishness, the legal sector is moving quickly to embrace new technologies to manage evolving staff and client expectations about efficiency and cost-effectiveness in legal processes. As older members of the profession reach retirement, the new generation is taking the lead and finally pushing for modernization in the sector. The next three to five years are likely to be characterized by major market growth, and in some cases major disappointment as oversold technologies fail to deliver on exaggerated promises. Rather than simply replicating existing and well-established manual processes in a digital fashion, those in the legal sector will need to rethink and reimagine how they work to gain the full benefits that technology can bring

Advice to Legal Tech Vendors

Selling into the legal sector has always been difficult due to slow sales cycles and legal teams that are resistant to change. However, as more millennials step into leadership roles in the sector, and as law firms’ clients demand a move toward fixed-fee engagements while expecting more efficient and less costly services, the market for legal technology is growing.

This shift is not without its challenges, though, and vendors would be wise to find ways to address concerns such as these:

  • Emerging leaders in the legal sector may question the need for specialized legal tech as opposed to non-sector-specific technology available at a lower cost.
  • Many in the legal sector seem to be overestimating the power of AI while underestimating the commitment required to supervise and train these systems over time.

Advice to Legal Tech Buyers

Tech buyers in legal departments and law firms must tread with caution when evaluating products. We advise you to thoroughly test any software you are considering before buying it, ideally using your own specific data and files within your usual operating environment. Although software can undoubtedly increase the efficiency of work in sales demonstrations, such software can be challenged when it comes to meeting the specific day-to-day needs of legal professionals.

That said, good technologies are available now to take on much of the drudge of costly document review and assembly work. New features and functions that can be utilized quickly and easily are also being added to common work systems such as those provided by Microsoft, Box, and Google at little to no extra cost. Specialist legal software will always be required for some tasks, such as for eDiscovery and forensic work, but the standard activities of searching for and managing legal files is becoming a commodity.

Finally, it is important to note that though the use of AI is growing fast in the legal technology world, not all of it works as well as one might imagine. AI depends on close supervision and high-quality data; for it to work well for your specific purposes, you need to invest far more time and effort in training it than you probably expect.


Endnotes

  1. “2021 Legal Trends Report,” Clio, https://www.clio.com/resources/legal-trends/
  2. “Legal Department 2025: The Generational Shift in Legal Departments,” Thomson Reuters https://legal.thomsonreuters.com/content/dam/ewp-m/documents/legal/en/pdf/reports/s039305_0915.pdf
  3. “2021 Legal Trends Report,” Clio, https://www.clio.com/resources/legal-trends/
    “TechReport 2021: 2021 Practice Management,” American Bar Association, https://www.americanbar.org/groups/law_practice/publications/techreport/2021/pracmgmt/
  4. “Harnessing automation for a future that works,” McKinsey Global Institute, https://www.mckinsey.com/featured-insights/digital-disruption/harnessing-automation-for-a-future-that-works

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