On 10 February, Gartner (NYSE: IT), a global research company, published a report called ‘Predicts 2021: Corporate Legal and Compliance Technology’. This report is for Gartner clients only. Researchers found that by 2024, corporate legal departments will replace 20% of generalist lawyers with nonlawyer staff. This will allow legal departments to do more with scarce resources.
From 2018 to 2020, the percentage of legal departments with a legal operations manager (responsible for technical staff) grew from 34% of legal departments to 58%, with much higher use of the role among Fortune 500 companies.
Legal technology spending has increased 1.5 times from 2.6% of in-house budgets in 2017 to 3.9% in 2020. Gartner predicts legal technology spending will increase to approximately 12% of in-house budgets by 2025, a threefold increase from 2020 levels.
At the same time, some departments at large enterprises are increasing the percentage of in-house specialist full-time employees (FTEs) to replace law firm expertise and control costs.
Haven’t we heard all of this before?
So this comes down to clients saying they are going to reduce their legal spend by embracing automation of legal processes, hiring non-lawyers that do work that does not require the attention of a trained lawyer and at the same if needed, hire additional lawyers to do part of the work that is today outsourced to external law firms. If all of this would really happen, this would certainly impact law firm revenue. The question is: will it happen?
In 2018 while working on my book ‘Data & Dialogue’, we did a detailed data-analysis on how companies spend their legal budget. We used about a million itemized data on individual fee-earner level and we found that the average Fortune-500 company could easily save about 25% on external legal spend, without changing law firms or renegotiate rates.
The 25% savings could be achieved by better preparing the documents and information law firms need, in combination with a more efficient communication. Just providing the law firm with all information at once in a structured and accessible way, not changing the scope of work and having an efficient and streamlined communication, would reduce cost by 25%. That is a lot, but still it did not happen.
Ever since the Financial Crisis of 2008, companies have been vocal on the need for law firms to become less expensive. Regardless, rates have consistently grown over that same period. It seems that companies don’t put their money where their mouth is, so why would it be different this time?
This time it will be different
As we all know, the Covid-crisis has tremendously accelerated the speed of development and adoption of new technology. Satya Nadella, the CEO of Microsoft, famously stated that he had seen more innovation in the first three months of the crisis, than in the whole three years before. Not only the speed of development changed, but also the speed of adoption. With lockdowns disrupting supply chains, and work-from-home orders preventing employees to gather in an office, companies have been making huge investments in automation, as being less dependent on humans makes work processes more robust. Automation, this time is no fluffy future vision, but is already being implemented in the real world. It is already happening, also in the legal department.
The graph above represents the TGO Value Matrix©. It shows that for a company the willingness to spend money on a lawyer will depend on A) the anticipated Return on Investment (will it help the company make money or prevent a loss) and B) on the availability of lawyers with the right experience in that market.
As the TGO Value Matrix© shows, there are actually two different ‘legal markets’ that each have their own dynamic. Top left is the market for strategic work, where there is high Return on Investment for the client and a limited availability of lawyers with the right experience.
Bottom right is a totally different market, where the ROI is low or not there at all, and where lawyers with the required experience are readily available. It is this second market that is going to be noticeably affected by companies (clients) investing in automation and in taking more matters in their own hand. This is the area where traditionally the mid-tier law firms are operating.
Winners and Losers
I have no reason to believe that the trends Gartner is reporting are not realistic. My own observations and conversations corroborate most of what is in their report. The larger inhouse legal departments are increasing the use of clever software and are actively taking more work in-house. This is already being noticed by law firms in the market. In 2020 in the ALM 100-200 law firms performed considerably less well than the ALM 1-50, compared to 2019.
This trend will continue and spread. The winners will be the elite law firms who focus on the strategic work (upper left in the TGO Value Matrix©), the ‘losers’ will be the ones that largely or completely depend on work in the lower right corner of the TGO Value Matrix©. Step by step the pressure on their revenue will increase as the workflow partly starts to dry-up. If your firm is heavily depending on this segment of the market, the time has come to recalibrate your strategy before the market will do it for you. Unless you don’t work or want to work for Fortnune-500 companies or other large clients that is.