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Can Covid-19 Help Catalyze LegalTech Adoption?

Some have suggested that Covid-19 will prove to be a “seismic event” that “turbocharge[s] legal industry transformation,” steepening an otherwise arguably disappointing technology adoption curve.

There is some evidence of this trend already, as social distancing guidelines have necessitated conducting important court hearings and multi-billion dollar negotiations via audio calls and videoconferences. These developments illustrate technology’s potential to facilitate, rather than threaten, the practice of law — as well as the legal industry’s ability to adapt when needed.

Social distancing guidelines have necessitated conducting court hearings and multi-billion dollar negotiations via audio calls and videoconferences.
Social distancing guidelines have necessitated conducting court hearings and multi-billion dollar negotiations via audio calls and videoconferences. RichLegg via Getty Images

At the same time though, adoption of However, the long-term stickiness of these new trends is unknown, and may depend on the rate at which the economy reopens and attorneys are allowed back into their offices. Further, adoption of more sophisticated legal industry-specific technology, such as AI, analytics and automation tools, appears to be more uneven across the legal profession.

Taking a step back, the legal profession’s long-standing underinvestment in technology and innovation is driven by mydiad factors, ranging from culture to business models. While the immediacy of the Covid-19 pandemic may incentive more parties to overcome inertia for the sake of adaptation in the short term, these legacy factors are likely to largely remain after the pandemic has eased. Thus, in the long-run, an institution’s LegalTech investment and adoption may be a function of aptly navigating these historical constraints in order to deploy resources towards high-return projects that enhance its competitive position.

LegalTech During Covid-19

The unique working environment spurred by Covid-19 has forced the legal profession to metaphorically “rip off the band-aid” with respect to technology adoption – executing in days and weeks what otherwise may have been a multi-year transition.

At present, legal matters ranging from court hearings across the U.S. to cross-continental sovereign debt restructurings for Argentina and Lebanon are largely being conducted remotely. Aptly capturing the zeitgeist, Judge David R. Jones of the Houston Bankruptcy Court remarked, regarding a major insolvency being conducted via the videoconference application, “We’ll all be on videoconference and I’ll have a shirt and tie on and my pajama bottoms, but you won’t see those.” 

Other parts of the broader legal ecosystem also appear to be embracing technology in new or enhanced ways. Some law school deans, for instance, are positing that online legal education “is here to stay.” In a similar vein, marketing professionals are suggesting blogging and other digitally-oriented business development strategies that can be implemented during a period of mandated social distancing.

Despite these promising signs, it is important to note that the legal industry’s adoption of technology so far appears primarily focused on enabling the practice of law as it existed before Covid-19. While still a meaningful step forward, there does not yet appear to be a broad-based critical mass of adoption of more sophisticated tools, such as legal analytics or document automation, that would entail greater changes to the practice of law itself.

There are exceptions, however, with some early adopters suggesting that “we’re going to see a lasting impact and a lasting demand for automation in the legal field.” That proposition is supported by continued LegalTech investment during the covid-19 shutdowns, including a recent $20 million round for contract analytics platform LawGeex.

Legal Industry Adoption Constraints

While most theories regarding factors hindering LegalTech adoption focus on industry culture, a potentially underappreciated driver may be law firms’ business models and capitalization structures.

Law firms are somewhat constrained by the long-standing prohibition against non-lawyer equity ownership in law firms. As a result, unlike other organizations – including those with broadly similar revenue models, such as management consultancies, or enumerated societal obligations, like hospitals – law firms inherently have a limited pool of potential investors. Though law firms generally have more legal flexibility regarding debt financing, their asset-light, people-centric business model somewhat limits the range of options. Receivables financing is a notable but limited exception to this general principle. 

For purposes of this discussion, the law firm ownership limitation has two consequences. First, despite annual revenues well in excess of $400 billion a year and margins around 40%, law firms’ unique structure effectively leaves them with a limited base of permanent capital. Consequently, this model can render even very profitable firms somewhat capital constrained, complicating long-term technology investment, due to, amongst other issues, potential mismatches between a firm’s distribution needs and return profiles for otherwise meaningfully NPV positive projects. Second, given the economics of a law firm, prohibiting non-lawyers from owning equity may limit the universe of skilled technology talent amenable to working at a law firm, limiting both the opportunity set of potential LegalTech investments as well as the potential returns from individual projects.

Post-Covid-19 Strategies

In light of these constraints, there are certain steps firms can take to support and optimize long-term technology investment on the other side of the pandemic. 

First, during this recession, firms have increasingly utilized litigation funding to monetize receivables, hedge contingent risks and smooth firm revenues. Going forward, litigation finance can continue to be an effective solution for law firms, providing a measure of capital stabilization that can help alleviate potential mismatches between firm revenues and certain technology investments with complex or longer-term return profiles.

Second, firms can consider collaborating to share best practices, ideas and financial risk – particularly in respect of tools and projects with potential network effects. For instance, consortiums of financial firms have succesfully backed companies like Markit, which developed products to address pain points common across the industry and ultimately generated strong returns. For law firms, such projects could also help broaden the available technology talent pool as the investment project entities need not be law firms themselves, potentially allowing employee equity incentives that might not be possible within the law firm structure.

As McKinsey observed in its “Covid-19: Implications for Law Firms” report, “[d]ownturns accelerate long-term secular trends,” and, at least directionally, the trends suggest reason for cautious optimism regarding continued LegalTech adoption during and after these uncertain times.

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