A natural aversion to risk and a heavier regulatory burden mean lawtech startups struggle to attract law firm customers and find it difficult to progress beyond the ‘innovation’ stage
One figure leaps out from last week’s Law Society research report on the ‘lawtech’ industry: City investors expect a startup in this sector to generate revenue of at least £70,000 a month to qualify for a ‘Series A’ funding round. In venture-capital speak, this is the first stage of serious funding, at which investors take a stake in a startup.
‘A lot of lawtech vendors are nowhere near achieving this,’ the study by IT market analyst TechMarketView observes. This is one of several indicators that the lawtech industry, for all the headlines about breakthroughs in machine-learning and digital encryption, is still in the baby steps stage.
‘Looking at the maturity of the lawtech sector as a whole, it is hard to argue that it is anything other than in the “innovation” or “early adoption” stage,’ the report concludes. ‘Lawtech is not yet fundamentally transforming the provision of law.’ This is in stark contrast to the equivalents in financial services and insurance.
Why is lawtech a laggard? There appears to be no shortage of innovation activity. Legal information firm Thomson Reuters reported last week that the number of lawtech patents registered had jumped four-fold in five years, with China filing just over half of the 933 patents in 2018. Examples of patents recently filed include a program to automate dispute resolution by analysing data and arguments between two parties and determining a suggested settlement.
For its research, TechMarketView says it identified more than 100 lawtech companies operating in the UK.
But when it comes to deploying innovations the research reveals gaps in expectations on both sides. Lawtech startups bemoan the difficulties of dealing with the long sales cycles associated with the partnership model and what they see as aversion to risk. One chief executive said: ‘It is very hard to find a partner within a firm that is willing to be the first to deploy machine-learning or natural language processing on a live client project for the first time… they just see the risk of it going wrong, losing the client and damaging the firm’s reputation.’
Another adds: ‘Some law firms are so slow at procuring. We have firms that are still trialling the product more than 12 months after they have told us they wanted it. Some law firms are still finding their feet in the way they procure emerging technology, and while they might be very good at procuring traditional IT, they don’t know how to adopt emerging tech.’
Frustration also emerged at the understandably high standards of security demanded in the legal sector. ‘We are just a five-person business but still have to invest heavily in ISO accreditation and spend lots of time focused on answering questions on [cloud security],’ one startup commented. ‘The money needed to invest in people and infrastructure to have security in place precludes a lot of business that might thrive in other sectors.’
Some law firms are still finding their feet in the way they procure emerging technology, and while they might be very good at procuring traditional IT, they don’t know how to adopt emerging tech
Anonymous chief executive
The research also identifies a regulatory issue. ‘One of the frustrations shared by a subset of lawtech vendors is the gap between the [SRA] and the emerging lawtech ecosystem.’ This contrasts with the ‘fintech’ sector which enjoys ‘a close alignment with the Financial Conduct Authority, where the involvement of the regulator has had the effect of dampening the hype associated with a lot of the innovation and making firms more realistic in promising what they can achieve. FCA approval provides a level of trust in fintech that some feel is missing from the lawtech space’.
On the customer side, law firms are suspicious of what they see as an industry more prone to hype than delivery. The report quotes a law firm executive: ‘I find startups hard to engage with. Some seem to be set up by a disgruntled lawyer who happened to go to uni with an IT guy.’
The executive was also sceptical about claims that the technology will be transformative. ‘Few of them are actually doing anything new and tend to fall into three main types: they’re generating documents; reviewing and analysing documents; or analysing management information such as legal spend or workflow. They are not necessarily reinventing the wheel but looking to provide a shinier newer wheel.’
Overall, the research concludes that the lawtech sector ‘is now ripe for a wave of consolidation and later-stage funding’. The worry must be that law firms will take that as an excuse to delay implementation decisions – making it harder still for the startup pioneers to reach that magic £70,000 a month in takings.
The Lawtech Adoption Research report can be found here.