Fluidly Dynamic: Market Update on the Legal Innovation Landscape

The legal profession is generally slow to adopt innovation. However, there are some exciting developments led by the US and UK which have had some initial successes in Germany and Singapore; and there is promising activity in China. For example, China was a close runner-up to the US in the Thomson Reuters report on legal tech patents and the Hangzhou courts have adopted online dispute resolution and courtroom technologies in sophisticated ways. Technology advances do not drive innovation alone. Macroeconomic and regulatory changes have also shaped the legal innovation landscape over the past decade. New technologies are enabling better modularisation of certain legal services. Better metrics to monitor performance and applying data analytics to the delivery of legal services render alternative fee arrangements (“AFA”) more practicable. Even basic economic building blocks of the profession are undergoing reform.

As emergent legal service models (“NewLaw”) arise and venture capital is committed to this area, the legal services market worldwide is expected to experience exponential transformation in the next three to five years. Practitioners and in-house teams in large and small organisations should keep a close eye on the current market dynamics and legal tech trends to stay competitive.

What's Happened in the Past Decade?

On the buy-side of legal services, corporations and banks have been heavily scrutinising their budgets since the global financial crisis due to worldwide growth in regulatory compliance needs. All businesses working with digital platforms now face big data challenges associated with the "5-Vs": (data) volume, velocity, variety, veracity, and value. These challenges are amplified in legal proceedings. An investigation into three months of electronic communications of a single witness could easily involve the collecting and processing of 10 gigabytes of emails, chat records, and voicemails from mobile phones, laptops, and cloud-based accounts, possibly containing 100,000s of files. Without electronic discovery tools, it would be impractical and cost-prohibitive to retain a law firm to review documents and meet typically urgent and stringent legal requirements. In legal disputes, forensic preservation of the data and metadata is critical to avoid spoliation claims and evidentiary challenges later on. Using technology not only promotes efficiency, but also reduces inconsistencies and human errors. This latter point also applies to large-scale contract reviews, due diligence, and compliance audits in transactional and advisory practices.

Buy-side demands are evolving. In the last three years, many corporations and banks are adding to their legal and compliance teams with project managers, cybersecurity specialists, forensic auditors, data scientists, and those with interdisciplinary expertise. In the US and UK, fierce competition has propelled rapid innovation and legal tech developments. Some banks no longer pay for work done by junior associates and trainees of their panel law firms, and some small businesses and individual operators are leveraging off-the-shelf self-help tools (e.g. Turbotax and LegalZoom), to automate document assembly –completing common government filings and creating basic legal documentation. Generally, clients are increasingly tech-savvy, demanding greater transparency and choice in procuring legal services. They are progressively willing to look beyond law firms for solutions to maximise cost-efficiency and productivity.

On the sell-side, more and more product developers and providers are going to market with Artificial Intelligence (“AI”)-powered solutions to meet novel legal challenges of the era of big data and hyper-connectivity. The accuracy, affordability, and availability of data analytics today have resolved many long-standing operational challenges of legal compliance. Credit card and logistics companies handling high-volume transactions, for example, have invested heavily in automating detection of suspicious transactions. Similar applications by corporations with large retail customer populations to prevent data privacy breaches. Tremendous business savings from preventing misconduct are demonstrated, driving shifts in internal compliance culture and insurance practices.

Technology unlocks business and process innovations previously too difficult to implement. Document review in large-scale disputes and mergers could be unbundled from a law firm’s discovery or due diligence work and completed by legal services providers. Legal services providers lower costs significantly by adopting automation technologies, and by helping firms leverage labour arbitrage (e.g. reframing law firm workflows like an assembly line for paralegal teams onshore, near-shore, and offshore).

What are Law Firms Doing? What Challenges do They Face?

Law firms are examining earnestly what innovation means for their businesses, and executing a diverse range of strategies. Technology allows firms to offer services more flexibly, competitively, and with greater pricing certainty. The blossoming adoption of various types of AFAs by practices large and boutique reflect this trend. Some of these firms are developing solutions in-house, and some allying with software vendors and NewLaw providers to add value to their core practices. In early 2018, Dentons developed the “ERGO” employment law and occupational safety advisory portal for its Australia clients. In October 2018, Latham & Watkins and Clifford Chance launched with 10 other firms “Reynen Court”, a consortium to build an “App Store” platform for legal tech solutions. Virtually all Magic Circle and Wall Street law firms now have chief innovation officers, and have created many new roles over the past two years, such as practice technology analyst and litigation technology specialist.

The legal profession is not yet prepared for a rapidly changing legal services market and the growing influence of AI on the law. Recruitment, training, and the working environment likely necessitate fundamental rethinking and redesigning. On one hand, there are obstacles non-specific to industry –including the struggle to define "innovation" and what to do about it. Market incumbents resist change as they either ignore or downplay new business and technological trends, which could potentially disrupt existing business models and employment opportunities. They also tend to dismiss emergent lower-cost alternatives as producers of inferior solutions and operators in fields unappealing to established clients. These are well-studied characteristics of disruptive innovation, as popularised by Clayton Christensen, the acclaimed Harvard Business School professor.

On the other hand, there are several factors specific to the profession. Compared with a corporation, the law firm partnership model provides a weaker structure to incentivise investments in innovation, which, even if greatly successful, might only begin paying off in three to five years. There are laws and regulations that constrain legal innovation, directly and indirectly. The pace of reform requiring legislative and judicial endorsement is often glacial. The laws of privilege, client confidentiality, and data protection restrict the free flow of information (the basic currency of the digital era). Collaboration between legal practitioners and technologists is further hampered by how legal practice is sanctioned and the ethics codes on fee-sharing. The wide-ranging differences in laws and local legal customs have also decelerated the spread of innovation between jurisdictions. The challenges of innovation in common law and civil law jurisdictions are similar.

Conclusion

We are witnessing glimpses of seismic shifts in the legal services market. These present exciting opportunities and incredible challenges. Legal innovation needs appropriate conversations at the senior management and operational levels. It requires sustained commitment towards change management and a degree of soul-searching. It might even involve major organisational restructuring and legal reform. Finding the best course forward, nonetheless, begins with changing mindsets –encouraging lawyers to better manage expectations about innovation, become more comfortable with uncertainty, and ask for help –from experts in other industries who have done it all before. Innovation is not just a buzz word, it's a business imperative! 

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Co-Founder & Chief Operating Officer, DHB Global (Hong Kong, CHN)

Sebastian is a lawtech and regtech expert. He was formerly senior legal counsel and Asia regional head of e-discovery review at a global leading legal technology solutions company. Previously, he practised financial regulatory law and commercial dispute resolution in international firms. He is a community organiser of lawtech and techlaw events, including the first Access to Justice Hackathon in Asia. He is a member of the InnoTech Committee of the Law Society of Hong Kong. He holds degrees in science and law, including the Bachelor of Civil Law (Oxon), and is legally qualified in Hong Kong, New York and at the U.S. Supreme Court.