Innovation, Disruption, and Impact: Should We All Jump Aboard the Legal Tech Hype Train?
Digitalization has been an ongoing process for decades now. That carries innovative, as well as disruptive, potential for several industry sectors. Nevertheless, the “legal tech revolution,” as some call it, continues to get blown out of proportion. The status quo from the Central European perspective is that software solutions that some aggressively promote as “artificial intelligence” are, in reality, no more than conventional search engines with a fancy user interface and marketing label.
In other cases, some predictive analytics disappointedly work only in routine cases with standardized facts. Further, potentially promising solutions using machine learning are requiring upwards of a four-digit number of comparable cases to bring reliable results – more than the databases of what most jurisdictions can offer at the moment. To sum it up: Too many wizards! But where is the magic?
Chasing Buzzwords and Revenue: Putting Legal Tech into Proportion
“It’s not new. It’s only new for lawyers”, said Thomas Kohlmeier, the co-founder and Managing Partner of Nivalion AG, at the Berlin Legal Tech Conference 2018, reminding the audience, mostly lawyers and legal professionals, to choose a humble and modest approach to technology. This seems even more valid when the legal industry is put in proportion with its potential economic impact. The combined worldwide earnings of the ten biggest global law firms by revenue fail to equal the revenue of the smallest of the “Big Four” accounting firms, comprised of Deloitte, Ernst and Young, KPMG, and PriceWaterhouseCoopers. The combined revenue of the top ten global law firms by revenue was roughly $25 billion last year, according to The American Lawyer. In contrast, KPMG, the smallest of the Big Four, reported earning roughly $29 billion.
Reading through ALM Intelligence’s study “Elephants in the Room Part I” (2017), one would tend to believe that clearly the Big Four’s expansion into legal consultancy would become a far greater threat to the industry than all robo-lawyers, artificial intelligence, chatbots, due diligence and contract automatization tools put together. From a numbers perspective, the revenue of each Big Four accounting firm is still significantly less than the dinosaurs of other industries. For example, Walmart reports that it earned in $486 billion in revenue last year, while Apple reported earnings of $267 billion. These revenue differences call for the phenomenon to be put into perspective. The Big Four’s exploration of the legal business may not change the law firms’ universe at all in the long run, as cross-selling of legal services might not work, particularly if most clients hate it. Further, it is doubtful that using an accounting firm’s brand and partial infrastructure will be sufficient to lower access barriers for potential clients and to create the need for legal advice where there is none.
Momentum for innovation has, to a great extent, always come from the side of the clients and, from there, percolated into the world of lawyers. It is very likely that this trend will continue. Instead of chasing after buzzwords, whoever is ready to listen to what their clients believe, will change their businesses and will be in a good starting position. Hence, changes for clients are also likely to have a certain impact on their legal advisors. The legal business should concentrate on clients’ requirements rather than celebrate itself for what it supposes to be innovative.
Demystifying the Hype: Focus on the Impact Factor
While innovation is described as a greenfield novelty, the term disruption is defined as a change to the traditional way an industry operates, especially in a new and effective way, and as interrupting the normal course. The latter carries, to some extent, the element of destruction, or at least a major disturbance, of the old with it.
Neither innovation nor disruption has any effect unless combined with impact. Impact may derive from associated industries and vice versa, such as the innovation of Frederic Tudor, known as “the Ice King,” in 1806, namely an insulated brig for transporting lake ice to distant markets, which later brought enormous impacts for the world’s food industry and related supply chains, commodity futures markets, and patent litigation. Tudor’s innovation was disrupted by Jacob Perkins’ compressor chiller machines in the 1870s, which was disrupted by the household refrigerator in the 1920s.
While technological innovation is certainly a factor confronting the legal sector with considerable changes, the side effects of digitalization in other industries actually reflect on the legal sector being much stronger than its own innovations. To generalize these side effects as “legal tech” would mean ignoring from where the impact’s force came and where it hit. Technology is not automatically legal tech only because it is being used by lawyers.
A Look into the Crystal Ball: A Bold Forecast Is Justified
Judging from media and social media coverage, the hype around legal tech is clouding our judgment. What effects will digitalization, whether originating from the protagonists on the side of the law firm or from the clients, really have on the legal industry globally and locally? As Amara’s Law states, we tend to overestimate the effect of a technology in the short run and underestimate its effect in the long run. Under this principle, a bold forecast is justified.
Let us examine the number of lawyers per resident in the most litigious countries, an interesting statistical benchmark. According to Clements Worldwide, the United States has one lawyer for roughly every 300 people, compared to New Zealand, Spain, and the United Kingdom at one to 400, and France with one to 1,400. Will overpopulation of lawyers in some jurisdictions change as legal tech advances? Will legal advice become less dependent on particular features of the local turfs? Nobody can safely predict this. We believe that local competition in jurisdictions with a lawyer per capita ratio significantly below 700 will lead to an increasingly dynamic market, irrespective of technology that soon will be widely used and thus no longer represent a unique selling proposition.
Democratisation of Legal Knowledge is the True Disruption: With Little to No Direct Impact on Lawyers
Certain technological advances will give rise to substantial changes in the legal business. One area is small consumer claims, an area not particularly attractive for law firms because they are largely processed manually at the moment. These claims, however, will become interesting when handled by algorithms. The claims cover a broad range of activities, such as airplane passenger disputes, small investor protection, car accidents, small insurance coverage, and shipping damages. All of these claims, as well as claims clearings, currently are unlikely to threaten traditional lawyers’ businesses. Yet, the sheer number of small claims cases may result in a relatively reliable prognosis of the possible outcome of such disputes in the near future.
This predictive ability will have an impact on litigation and risk financing institutions, which consequently may face fiercer competition soon. Those engaging in such small claims cases will probably want to explore technology that helps to structure incoming communication and data, such as web-based client on-boarding systems, application programming interfaces (APIs) to existing law practice management software and case management tools, and chatbots to cover commonly asked consumer questions.
Just as most consumers are satisfied with having their routine legal questions answered for free by chatbots or question and answer websites on a “good enough” basis for their small-value disputes, the algorithms for risk assessment of standardized mass cases will very likely trickle down to the public, too. Small claims will be offered on peer-to-peer marketplaces for factoring at a discount, making litigation financing a commodity. The legal business’ elitist Hermetism will soon be over, when the veil of mystery is replaced by easily accessible knowledge.
Legal tech sheds a positive light on the future of legal services. Instead of eradicating lawyers’ jobs, legal tech will create a new business segment in a field that was, until now, more or less unattractive—small routine cases. In the traditional and high-profile segments, legal tech likely will not see a revolution. Instead, clients will pay less for standard routine jobs, and legal tech will simply help to rebalance the market, making a lawyer’s life a little less work-intense at the same time. Lawyers who wish to seize some of the opportunities that the megatrend of digitalization has only just begun to open up, will find a very positive environment for improvements to their daily work. Support and inspiration can be found in meetups, social media groups, and literature. Some case studies can be found in “Legal Tech: A Practitioner’s Guide,” authored by Markus Hartung, Dr. Micha-Manuel Bues, and Dr. Gernot Halbleib and published by Beck and Hart in 2018. As the case studies show, lawyers should start with a thorough analysis of their current traditional procedures and workflows. Optimizing your law firm’s output and efficiency using technology will bring benefits and noticeable progress, at least in the first steps and soon after finding out where the pain points are. A common pain point is work that clients neither consider useful for them nor wish to pay. Legal tech can help you focus on finding workarounds for those pain points, while allowing you to minimize your investment of personal time resources.
Views expressed are those of the author and should not be attributed to the Editor.
About the Authors Peter Melicharek is a lawyer and entrepreneur in Vienna. He studied law and economics and started his career in an investment bank in the 1990s, before he went to Baker McKenzie to become an M&A specialist and later a litigator, until he opened the litigation and transaction boutique Wiener Advocatur Bureau in 2008. Peter took his first steps in computer programming when he was as young as eight years old. As he kept up his interest in the IT world, he co-founded the multiple award-winning legal tech firm LeReTo in 2014 to do some pioneer work in the Austrian and European legal tech field. His team recently won the EU Datathon 2019 with “The Smartfiles Network”, a EU case law analysis and visualisation platform (http://smartfiles.net).
Franziska Lehner works as Legal Engineer and Product Owner at the Austrian Federal Computer Centre. Franziska has a demonstrated history of working in the legal services industry and developing legal tech and prop tech solutions. As the Founder of the Legal Tech Initiative Austria, she was awarded the “Woman of Legal Tech 2018” recognition.
Paul Bauer Photography