If “Money makes the world go ‘round,” then the legal world is
spinning as never before. Law has been big business for decades, but only
recently has significant venture capital, private equity, and entrepreneur
money been pumped into the legal sector. Last year saw an eye-popping 718% increase in
legal industry investment, and this year’s capital infusion through
the third-quarter has already surpassed last year’s $1 billion total and could
well double it. Capital is turbocharging customer-centric providers that are
leveraging technology, process, new skillsets, and data to transform the legal
function and the delivery of legal services.
Why the sudden legal investment boom; what’s changed; and what
does it portend? Short answers: legal delivery is ripe for scaled
transformation; legal buyers are driving change and have disaggregated legal practice from
the delivery of legal services; and the lawyer-centric,
labor-intensive, fragmented legal industry is ripe for tech and process-driven
consolidation. Technology, process, labor arbitrage, an agile workforce, the
proliferation of cross and multi-border business, automation, products replacing
services, platforms, automation, data, and incipient regulatory reform are
transforming the legal sector—just as they have others. Capital is
accelerating, scaling, and consolidating the industry.
Legal Delivery Is Not Unique—It’s Tech And Business Driven
Legal practice may have its own practice rules, but legal
delivery is now operating by business standards. The practice of law has not
changed much, although what is now deemed practice is a
shrinking subset of what it was even a decade ago. The delivery of legal services,
however, has undergone a dramatic transformation during this same period. Law
firms have lost their hegemony over legal delivery. Their market share is
eroding. A growing number of corporate legal departments and customer-centric providers with
corporate structures, economic models that reward output (results) rather than
input (hours billed) are reshaping legal delivery. They deploy business
process, project management, and fiscal responsibility, new tools, new skills,
data-driven, multi-disciplinary workforces, and a customer service mindset
necessary in the digital era.
Law is a Trillion-dollar global industry with
no Goliaths. The legal industry is fragmented, growing, has a huge untapped
market for its services, and is ripe for digital transformation.
Lawyers long peddled the now debunked myth that legal practice is bespoke and
unique. No such claims can been made for legal delivery that has the same core
ingredients as a slew of upstarts that have disrupted other industries. That
list includes customer-aligned, tech and process-enabled, differentiated
models; technology platforms that integrate internal resources, align with
others in the supply chain, and provide easy access to clients; upskilled
workforces; cultures of constant improvement; a re-imagination of the customer
experience; and capital to scale. These are among the reasons why capital is
pouring into the legal delivery (a/k/a legal tech).
Law’s
Shifting Focus: From Lawyers To Customers
Law has long been inward-facing. Its focus has been on
input--hours and billing-- not output--results and customer satisfaction.
So too has profit-per-partner, not net promoter
score been law's Holy Grail. Lawyers, not clients, long
called the shots. They defined what a legal matter was; used self-regulation to
parry competition from other professionals; carved out territorial practice
boundaries to discourage competition from “outside” lawyers; and retained
near-exclusive access to legal source materials. Law firms sold one thing:
legal expertise, and they cornered the market. Firms dictated the terms of
engagement to clients—what they determined
was best; the value they ascribed to a matter; what was necessary to achieve
what they deemed the best possible legal work; who performed it and how much
time was required; how and when work was delivered; and at what cost. Clients
were generally compliant because law firms had a uniform modus operandi. Law was
a guild.
All that has changed. Now firms face competition. The cognitive bias among
legal buyers to engage traditional partnership model law firms has eroded. The
global financial crisis and its reboot of the buy-sell dynamic of goods and
services; globalization; astonishing advances in technology; and digital
transformation have convinced legal buyers that legal practice is no longer
synonymous with the delivery of legal services. These factors, coupled with
unmet market need, are the fertile soil that new providers have cultivated.
Capital is now scaling their harvest.
Clients—not lawyers—are now calling the shots and driving the
transformation of the legal industry. Lawyers long controlled the delivery of
legal services because legal expertise was its sole ingredient. Those days are
gone—both for lawyers as well as allied legal professionals who, with machines,
are now integral components of the legal workforce and supply chain. Legal
delivery has morphed into a three-legged stool supported by legal,
technological, and business expertise. Legal expertise is no longer, to borrow
from Reggie Jackson, “the straw that stirs the drink.”
It’s The Model That Matters
Smart money is betting
that lawyers can function far more efficiently outside the traditional partnership
model. It’s also betting that elite legal talent can, as
necessary, be dislodged from traditional firms. There’s good reason for them to
think so-- peripatetic partners (“laterals”) have swapped firms for decades. That means that money--not the firm--is the glue
that binds.
If lawyers can jump firms, so too can they jump delivery
models—for a price. The Big Four and other
legal providers have already cherrypicked elite legal talent from top-rank
firms. This means that practice expertise—even at the elite level—is available.
Powerful, scaled legal delivery providers like the Big Four, UnitedLex, and
others with global reach, multidisciplinary workforces, models aligned with
business, deep war chests, and digital transformation expertise can readily
meld legal expertise with delivery capability to provide end-to-end enterprise legal services.
Law firms continue to provide single-point, practice-centric solutions. Law
firms were once sole-source suppliers. Now, they are a diminishing segment of a
legal supply chain where differentiated legal expertise is part of a larger
whole.
Capital And Scale
Legal providers must deliver at scale to be competitive in
today’s emerging global marketplace, and that requires capital. LegalZoom
recently received a $500M round of secondary funding at
a $2Billion valuation—almost 500% more than what it was in 2014. That brings
the company’s total capital haul to approximately $800Million. UnitedLex, a
leading enterprise legal services company
took in $500M from private equity powerhouse CVC Capital Partners to
capitalize on a “multi-billion dollar opportunity.” Axiom, the leading agile
legal talent management provider, recently received a “very substantial”
investment from Permira, another
private equity heavyweight. This was not Permira’s first foray into the legal
vertical; it had previously made substantial investments in LegalZoom and Duff and Phelps. Bob Ambrogi, a legal industry stalwart,
provides a fuller 2019 investment scorecard here. The list includes
investment in artificial intelligence (AI) and other tech plays that are
rapidly transforming the legal function and its delivery.
Then there’s the Big Four whose
presence and imprint in the legal sector is receiving heightened attention. The
Big Four are formidable players. They have deep C-Suite ties; multidisciplinary
expertise and cross/multi-border transactions; global footprints; digital
transformation prowess; commitment to constant improvement; significant
investment in technology; and are doubling-down on enterprise legal services.
Their annual revenue is approximately twelve times that of the largest grossing
law firms. All this positions them to be major players in the current
global legal landscape.
Teaser alert: what’s to prevent Amazon, Google, or some other
tech giant from entering the legal space, creating a global platform, injecting
billions into infrastructure and talent, creating a global legal services hub
that connects consumers with global legal delivery sources as never
before imagined? Short answer: the inclination to do so.
Big Money Has Been Watching From The Sidelines—Until Now.
Big money has closely monitored the migration of work from
firms, changing consumer attitudes, an evolving regulatory climate, and the
deployment of technological advances to legal delivery. They recognize the
lawyer-created barriers that balkanized legal practice do not apply to legal
delivery. Technology, process, data, and other essential legal delivery
components transcend geographical boundaries and can be scaled around the
globe. The commonality of delivery challenges—contract management, knowledge
management, data collection and mining, morphing services into products,
automation, and other delivery elements-- far outweigh the differences. There
is enormous opportunity for consumers to benefit from a mature global legal
marketplace where a myriad of local solutions are replaced by scaled, global ones.
Capital is required
to scale legal services; to keep pace with the warp-speed of business, to
attract and retain top talent, to invest in upskilling , and to
promote a customer-centric, diverse culture of constant improvement. Capital
can, of course, come from a variety of sources—going public (permitted
in the UK, Australia, and a handful of other jurisdictions), institutional
capital, self-funding, and collaborative ventures. The common thread is that
legal industry investment is focused on providers offering new delivery models
that are aligned with the needs of consumers, not the maximization of
short-term lawyer profit.
Conclusion
The recent infusion of capital into the legal industry is the
best evidence that a tipping point has been reached. The hegemony of the
traditional law firms is over, and the partnership model will
experience further consolidation and a thinning of the herd. This process
is well underway and
will accelerate.
It’s not simply how and by whom legal services are delivered
that’s changing. The legal function is being recast. The
legal industry would be wise to note what’s different about the models,
skillsets, workforces, diversity, cultures, technology, processes, and customer
service of well-capitalized providers. That’s what the smart money is doing.
