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.
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.