Technology adoption among established law firms has for ages been a slow ascent, but things are different in China. Legal tech companies here are leading innovation and are taking a more direct and homegrown approach than their global peers, writes Mithun Varkey
The legal industry, finally, seems to be embracing technology. While the change was a long time coming, the pandemic has left little choice for legal practitioners but to accept it, even if grudgingly. The need for collaboration in times of social distancing has forced even the courts, those bastions of traditionalism, to allow themselves some tech disruption, which then meant lawyers had to follow.
It is not that the legal industry is led by luddites. The importance of conventions and the nature of the profession mean they are trained to adhere to time-honoured protocols. Also, because their business models remain unchanged, where clients are charged for billable hours, clocked in six-minute increments, there are few incentives to bring in massive efficiencies.
For the past couple of decades or so, globally, when law firms started investing in technology, it was primarily around e-discovery, contract management, billing management, and some online collaboration tools. While these were necessary steps, the core of a lawyer’s job remained relatively untouched by technology. In the past few years technology startups have tried to disrupt the way lawyers work and how law firms operate, which has led to a profusion of tech tools and solutions, and an explosion of legal tech companies.
However, things are a little different in China. While there is a lot of activity globally among legal companies, some of the biggest players haven’t really entered the China market because the needs here are different.
“To start with, the nature of legal work and legal systems is quite different in China, and the way the legal services market works,” observes Robert Lewis, co-founder and chief expert at docQbot, a China-based legal tech company.
“The US, Europe and other jurisdictions are litigation-heavy, and everyone’s charging by the hour, and they had to adopt legal tech like e-discovery in the early stages of tech adoption, which was not necessary for Chinese firms.”
As in other areas of technology, China is building and evolving homegrown technology companies’ solutions to cater to the local market. According to Thomson Reuters data, Chinese companies have been leading legal tech patents globally in 2018 and 2019, with as much as 51% of patents filed in 2018 coming from the country.
“A lot of legal tech solutions globally are focused on how to reduce the time cost, on an hourly rate basis, of expensive lawyers who are sorting through documents in discovery or in due diligence,” says Lewis. “In China, you just don’t have discovery in the same way, you’re not going to be able to go through reams of documents.”
Therefore, a lot of China’s legal tech innovation is more customer-focused and less about reducing inefficiencies, as is in many other markets.
“China is completely in love with AI [artificial intelligence], completely enamoured with the whole concept of how AI can apply in different sectors,” says Lewis, “but when you look at it in terms of what AI can do, it is a big data play. And if you look at the Chinese legal services market, there are some big data plays but no one’s so far been able to crack it.
“The big data plays were on all the published court decisions. They were going through this whole database. It’s all searchable and predictive, and that’s a pretty cool thing. I think it’s got value but I just don’t think it’s been done right yet.”
The growth in the Chinese legal technology sector is also driven by encouragement from the government, which has been driving court innovation, while AI maintains a significant role in legal tech software.
However, from law firms’ perspectives on technology, Chinese and international firms aren’t very different and are driven by similar challenges and needs.
Drivers of change
More broadly, most law firms have been mindful of the need to adopt technology, but the pandemic has accelerated this need and been the most crucial driver for tech adoption, bringing IT and in- novation teams at law firms to front and centre.
“Obviously, the pandemic has been transformative in so many ways,” says Andrew Klein, founder of Reynen Court, a legal tech aggregation platform baseed in Amsterdam. “On the one hand, an industry that had never supported virtual remote work, people not being in the office, and the deal documents not being in the conference room, had to change overnight.
“That was very positive for IT departments at the big law firms because they scored very high points, they did very well. They made that transition look very smooth, and I think with almost no real exceptions. They were very successful at becoming virtual. So the change is very real. It’s coming from clients who see opportunities to get more for their money and have the industry modernised.”
Ofer Bleiweiss, founder and chief executive officer of Everchron, a Los Angeles, California-based litigation management software company, says he has noticed higher legal tech adoption since the pandemic. “The need for effective remote collaboration has forced law firms to accelerate the transition,” he says. Chris Combs, co-founder and senior vice president of Business Development at Linksquares, a Boston, Massachusetts-based contract management and analytics platform, says there was a big trend leading up to the pandemic. “Companies were reaching out to us, saying they were interested in understanding how they could use AI, and that they had a budget set aside for that, which is something that has happened in the past few years,” he says.
“The pandemic drove a ton of new interest in usage because teams actually did need a cloud-based product they could access from anywhere, because many of them were at home. Then they were running into challenges that they had never seen before, the most obvious one being force majeure. So they needed to know which commercial agreements included force majeure clauses and so that was a big driver, which has continued and increased.” While the pandemic may have been the immediate catalyst, there has been a favourable trend in tech adoption, partly forced by the clients, and partly because law firms face immense competitive pressure to keep up with the times. The availability of new tools, the rise of younger and more tech-savvy firms, and alternative legal service providers all contribute.
“Law firms are feeling a lot of pressure from the outside − both from the clients as well as new market entrants,” says Mary O’Carroll, chief community officer at San Francisco-based contract life-cycle management company Ironclad. “There’s competition now from the big four, from companies formally known as alternative legal service providers, and even competition if you will from internal corporate legal departments that are starting to do some of that work themselves.”
Philipp Thurner, the CEO and founder of NEXL, a Sydney-based client relationship management software provider, says in-house counsel are getting smarter with tech. “They’re not willing to pay for inefficiencies,” he says. “They are expecting their law firms to adopt technologies to remove inefficiencies in their service delivery to help reduce their legal costs. I think this is one of the largest drivers for innovation, that in-house have more pressure internally, obviously from their business.
“At the beginning of my innovation journey law firms said, if you introduce these technologies and make us spend less time on matters, you are shaving off revenue. Why would we want to remove extra time we can bill to clients?”
Thurner says, back then clients were willing to pay for those inefficiencies. They didn’t have the pressure they have now from their CFOs. “They don’t have the funds available anymore and therefore it is important for law firms to adopt technology and help clients cut costs. If clients are not willing to pay as much, clients will be forced to either keep more work in-house or start using alterative legal service providers (ALSPs).”
Marianne Baroud, regional channel manager for New York-based legal practice management solutions provider App4Legal, says in-house legal teams are now the decision-makers when it comes to adopting legal tech. “Most often, they become advocates for legal tech because they can see the return on investment and how it improves the way they work, increases collaboration and efficiency, and how it is driving better results,” says Baroud.
Although in-house legal teams have been playing the role of tech evangelists in the industry, some feel that enough isn’t being done from their end.
O’Carroll, who until recently joining Ironclad was the head of Google’s legal operations team, notes that most of the corporate lawyers came from law firms. “They were trained at law firms, and so that’s the model that they know and understand,” she says. “So, for internal corporate lawyers to be the ones demanding that change, I don’t think that’s fully happening at the rate that we would like it to be, quite yet. And the bottom line is that law firms still have the same business model, and we haven’t really seen that changed yet, despite all the pressure they’re feeling.”
Others argue that law firms are more willing to upgrade now. “I think both things are true,” says Klein of Reynen Court. “A lot of the change has come from [in-house] legal departments and continues to be driven by expectations that the legal departments are going to demand modernisation,” he says.
“But it’s also definitely true that many law firms, I won’t say all the law firms, but many truly believe that innovation will be a defining competitive opportunity for them. In seriously investing in people and technology, they can bring ideas to their clients. They can win new clients and more business from their clients by being truly more efficient, more transparent and more committed to modernising.”
Jon Bartman, head of UK-based Jameson Legal Tech, says he sees the evolution occurring. “A year ago, it was very much that corporate legal teams were pushing for legal tech adoption from law firms, as many of these companies were going through a digital transformation in finance, in marketing, in sales, in everywhere else, so it only made sense to have a digital transformation within the legal team at the same time,” he says.
“But what we’re seeing in the past six months, however – this may well be pandemic-related – is that a lot of law firms are really stepping up their search for digital transformation. They have realised office-based work has changed enormously. We now need to work out ways and systems. We’ve worked out how we can work from home, which is a great thing.”
Baroud, of App4Legal, notes that law firms and all legal professionals are becoming more convinced about adopting legal tech. “However, we still face some resistance from those who believe in legacy systems and ways of doing things,” she says, “but the new generation of lawyers is embracing technology very well.
“There are many challenges that law firms face in adopting technology, and they vary depending on the country or region. Some of the issues include data privacy laws, technology infrastructure in the country they are in, budget and legal tech spend, market maturity and readiness, as well as clients’ needs.”
This rings true for China. “The data regulation in China, and for transferring data outside of China, is very, very strict,” says Thurner. “You have to set up your infrastructure there because they’re so strict about data transfer,” he says. “That makes it so difficult for a smaller startup to even enter that market, because we would have to kind of completely replicate our entire infrastructure onsite there again. So that’s why they’re creating their own little ecosystem.”
The buyer’s dilemma
Whether it’s by push or pull, there is no doubt that law firms are seeing the value in implementing technology. However, that presents its own set of problems for them, the first being the nature of decision-making at a law firm.
“Another thing we realised is that law firms don’t have proper processes in place to buy new technology,” says Thurner. “There is a big buying problem. Many law firms don’t know how to successfully buy and implement technology. One of the main reasons is the partnership structure. You have too many decision-makers who all have their own agenda. The more decision-makers you have, the more difficult it is to come to a decision. Usually, the easiest thing to agree on, as a group, is to not do anything at all.”
In China, the management models are fundamentally different from foreign or international law firms, which operate on the Western law for management models.
“Chinese law firms, with a couple of exceptions, are not integrated in terms of management systems,” says Lewis. “In China, even some of the very highly rated law firms, with exceptions, are all just a collection of sole practices. It’s a confederation. Some of these firms actually have trouble organising big teams to do things on an integrated basis.
“And so, the problem is that if you have a law firm built on that basis there is a huge deficiency in their ability or willingness to make significant investments in know-how. Partners view themselves as primarily their own individual profit centres.
They view other partners in many respects as either actual or potential competitors.”
Lewis says domestic work in China is by far the dominant source of business for every law firm, including the big ones.
“Now, if you take something like what we’re doing, it’s primarily for inbound, outbound or cross-border work. It’s not valuable for 100% of the partnership. It’s valuable for a maximum, even in the biggest firms, of say 20% of the partners, and even for some of those it can be valuable only some of the time.
“Because that’s not even the dominant part of their practice. If they see an expense that’s not benefitting them, they think they see the money coming out of their own pocket. They can actually calculate, ‘how much does it cost me, as the firm made this expenditure?’ There’s a lot of push back on that. Yet the dynamics are that you have individual partners who could use it, but they don’t know that they necessarily have the flow of work that’s relevant so that they can subscribe to it.”
Globally, larger law firms are becoming more sophisticated as they are hiring specialised people, says Thurner. “If you have a proper use case, which lists out the problems you are trying to solve – what the expenses are, the business impact – and assign responsibility, then you have a proper plan in place. Then it’s easy to actually implement software and get people to use it because they have a purpose for it. If there’s no proper use case, no proper process, then you implement something that is just floating around and no one will use.”
One of the big technology questions that law firms face, which has become starker, is whether to adopt cloud technologies or retain legacy on-premise servers. It is an argument that continues to divide opinions among law firms and technology vendors.
With the pandemic and work-from-home restrictions, the need to access documents from anywhere has become extremely important. But the sensitivity of documents that law firms handle, client demands and regulatory requirements all make it difficult for law firms to embrace the cloud completely.
Bleiweiss of Everchron also believes that “for many firms, the cloud is more secure”.
“Most firms do not have the IT resources to provide the security that a cloud provider can give. In fact, many legal tech companies are transitioning away from on-premise solutions and are embracing the cloud.”
Combs, of Linksquares, which is a cloud-only product selling to corporate legal teams that are comfortable with this, says: “I think it is 100% safer. What you have is large firms with large teams that are being paid a lot of money to run those internal servers and host them.
“As you can imagine, they’re not really that eager to completely give that strategy up. That’s going to be the long tail of the adoption cycle, but there’s no question that it’s the future and that it is, in fact, more secure because the security is centralised.”
Thurner says there is a much stronger push towards the cloud, which he applauds, but believes the process is still quite complex and complicated. “Law firm’s also have high security standards and for technology start-ups to go through the firm’s due diligence process takes a lot of time and effort.”
“It’s not just because law firms are trying to make it hard, it’s also the pressure they are getting from their clients,” he says.
“If they are working with banks, they have specific data security protocols to follow to comply with their client’s requirements. There are certain things that you’re allowed to do and you’re not allowed to do. How it integrates, where the data are stored, how it’s moved around, all have specific requirements. So, if you build a system and it doesn’t fit these requirements, law firms can’t buy them.
Thurner says a lot of startups don’t have a background in the inner workings of a law firm. “That’s why there are great solutions out there but firms can’t buy a lot of them, because they’ve built them the wrong way, which doesn’t fit with the firm’s infrastructure and is just not fit for purpose for them to be able to implement. And it happens a lot.
It’s a problem that Lewis of docQbot also seems to be finding in China. “A lot of the companies and tools are heavy on tech and much lighter on law,” he says.
“That’s the challenge for all law tech – from which direction you come to achieve a balance between the law side and the tech side. Both sides are important. If you’re coming from the tech side, you typically don’t have any good grounding to know even your partners on the legal side.”
Bernie Sugano, operations consultant at Jameson Legal, says: “In terms of impact, covid-19 has helped shift the view of legal tech from a far-off goal to a new normal that every laws firm and in-house legal team can adopt easily.”
The pandemic-driven adoption of legal technology seems like a big leap, but it is still only a first step. The real test, say some experts, may lie in changing the mindsets of law firms and prompting a shift in culture to one that embraces change.