Law Goes Corporate: the Rise of B2B Legaltech
One of the slowest sectors to digitize is in fact coming online, driven by more advanced and operational corporate legal departments.
The Growing Power and Prestige of Inside Counsel
The 20th century saw the standing of inside counsel — lawyers employed by private business corporations — elevated from “kept counsel” or “house counsel” in the early-1900s to “corporate counsel” in the mid-1900s to “general counsel” in the late-1900s (Miami School of Law), and today many GC have even adopted more fiduciary titles like “Chief Legal Officer”. This represents the idealogic shift in law that GC no longer are limited to a reactive role overseeing litigation farmed out to law firms but instead are key members of the corporate decision-making team (Harvard Law Bulletin).
Advocates of this in-house trend point to key benefits: the economic cost-savings of insourcing, the substantive value of having more intimate knowledge, and the professional alignment of synergistic long-term interests — these tenets have become orthodox and GC have used them to grow in-house teams substantially, oftentimes rivaling the size of large outside law firms (Harvard Law The Practice).
This trend of unbundling and insourcing private practice parallels that of other professional services. For example, in medicine, the shift from fee-for-service reimbursements to value-based care — intended to address rising costs and combat a lack of focus on quality, preventative care, or of shifting to low-cost strategies — has accelerated since the passage of the Affordable Care Act in 2010 (Bloomberg Law), and correlates with a consolidation of private medical practices and an increase in the proportion of physicians employed by hospitals (AMA).
The initial goal of pulling back the curtain on black-box legal services created an opportunity for in-house teams to rise in prominence and size, and as the function grew, so did the need for non-attorneys to facilitate the operations of bourgeoning legal departments.
Legal Operations as a Strategic Advantage
GC have traditionally outpaced their counterparts from other departments in eluding company-wide efficiency or rightsizing initiatives. I experienced this first-hand as a management consultant working with large companies to systematically scour organizations for cost-saving opportunities; recommendations to reduce legal spend generally came up short because most of our standard levers were not applicable (e.g. competitive RFPs, volume consolidation, offshoring, tech advancement, etc.). Neither our confidence in achieving the cost savings nor its ease of implementation were compelling, plus legal spend is typically much smaller than that of other services like IT or tax/audit/accounting, so it was not a high priority for cash-strapped CEOs. Consequently, legal departments flew under the radar without pressure to modernize or digitize.
But, that is changing.
As GC become more strategic, they are delegating the day-to-day responsibilities to a new function: legal operations. These internal armies of consultants focus on using systems, tools, and processes to improve the operations of their legal departments, thereby exposing the org as no longer being ‘untouchable’ (Legal500).
In my opinion, the rise of legal operations groups within large corporates is the clearest sign of a ripening legaltech market. Just as the FFS model plagued innovation in medicine, outside counsel are disincentivized to adopt new ways of working that don’t contribute to the “people-hours = more revenue” model of billable-hours; it’s clear that innovation in law or legaltech will not be driven by law firms but by corporate legal departments, and the force behind in-house transformations is legal ops. (To this point, the “most innovative in-house legal teams” according to Financial Times were companies that scored high on “legal operations” much more so than on “legal expertise”, FT.)
And we are hitting an inflection point of critical mass in legal ops— after decades of slow growth as the nascent function fought inertia and sought incubation, it is gaining recognition as an important part of the legal department across industries, company size, and geography (Law.com). Corporates are growing increasingly reliant on legal ops as it becomes the connective tissue between legal and the business (Deloitte).
Now, with the credibility of being a formidable, strategic function, legal ops is taking control of the legal budget, thereby pressuring in-house and outside counsel to consider alternative payment structures (i.e. disrupting the billable-hour model), adopt rules-based standardization, consolidate outside counsel networks, improve triage via both insourcing and outsourcing, and, most importantly for investors, embrace technologies (Exterro). To put it another way, legal ops has moved out of daycare and into elementary school or even junior high.
Frontier of B2B Legal Technologies
The “modern GC” is a strategic business advisor to the CEO/Board and an innovator on legal service delivery, however, their priorities remain to (1) mitigate risk, (2) retain talent, and (3) drive process efficiencies — and in that order. The most compelling legal systems/tools will meet all three criteria, meaning they address areas with low liability implications and a high volume of repeat, mundane tasks.
For corporate legal departments, that means contract management. As companies grow and digitize, contracts are proliferating as well as getting less complex because of the simplicity standard set by tech/SaaS/cloud (which have much shorter contracts with fewer issues that need attention) — as one senior attorney put it, “once the space matures, at the end of the day there will be just eight issues that need to be caught.”
For newly minted legal ops teams, the immediate priority will be functional data loading to onboard and intake the huge historical piles of paper agreements into digital form. Implementation, in rough order, looks like:
- E-billing
- Document repository
- CMS (Contract Management System, i.e. an on-premise repository with simple functionality)
- E-signatories
- NDA portal/automation
- CLM (Contract Lifecycle Management to replace the CMS, i.e. cloud-based platform for collaboration, editing, tracking, third-party sharing, reporting, templates, audit trail, integrations, and more)
And once a company is using a CLM, workflow integrations and analytics tools for the 95%+ of contracts that are standard form become possible.
Double-clicking into contract analytics — the current frontier — there is a distinction between tech that:
- Understands text (i.e. search and due diligence) — buzz words include “uncover relevant information”, “point out anomalies”, and “provide statistical probabilities of losses”
- Generates text (i.e. drafting) — buzz words include “submit contracts and receive the redlined results” and “automate redlining”
While deep learning for NLP has progressed more on the former and led to a proliferation of search-based contract tools (that operate like ‘Ctrl+F on steroids’), there is less activity in the latter for AI that can review and write contracts in lieu of manual negotiations.
But while legaltech has experienced a proliferation of early-stage providers there is little perceived differentiation, and true breakout players (like Docusign or LegalZoom) are few and far between.
The Hyper-Importance of Change Management
Corporate legal ops departments are overwhelmed by vendors reaching out, but even so, the difficulty is not in choosing a tech partner (“that’s the easy part”) as much as in implementing and getting cross-functional internal adoption of and compliance/adherence to the tool (“which will actually move the needle”). Teams are emphasizing a need for change management, e.g. preventing workarounds and choosing products that are user-friendly and seamless with existing workflows (including with upstream processes like accounting).
The providers that will emerge as winners will have:
- A strong wedge or specific use case — for contract analytics tools this would likely be a certain type of contract, with the best being those that represent large spend, are inefficient/time-consuming, are low-risk, and already have playbooked t&c’s (e.g. litigation-related docs like NDAs, SOWs, MSAs)
- Internal champions/evangelists cultivated outside of legal ops — for example, starting a contracts system implementation with the go-to-market/sales team first to prove the value of closing deals faster and getting seamless revenue recognition, then rolling out to procurement, IT, finance, etc.
- Defined metrics of quality — while the data exists to show a correlation between efficiency and quality, providers cannot truly claim an ROI until the legal ecosystem adopts a universal measure of quality
You would be hard-pressed to find a GC that actually likes their legaltech tools; a result of these frustrations, 80% prioritize “easy adoption” over all else (IproTech).
These hurdles are people-/process-related more so than tech-related, hence why organizations like CLOC are so crucial for the ecosystem to share best practices and raise the bar (pun!) for inside counsel operations, which will naturally lead to greater legaltech adoption.
“Never Let A Good Crisis Go To Waste”
Change happens gradually, then suddenly. What gets enterprise tech out of pilot purgatory and to a true sale is a sense of urgency, which we have seen when global events forced businesses to query their contract portfolios:
- GDPR — “Which contracts have data privacy statements and disclosure terms that are not GDPR-compliant? Where are there provisions for consumers to give legal consent?”
- Brexit — “Which party pays for any increased tariffs or transaction costs? What happens if the transaction no longer complies with local laws? Which contract references to ‘the EU’ should be updated?”
- LIBOR transition to alternative benchmarks — “Which contracts refer to LIBOR? What is their expiration date, fallback language, and amendment provisions?”
- COVID-19 — “Which contracts have force majeure clauses that include pandemics? How might any agreements with federal agencies affect the recipiency of government aid? What are the risk implications of any contractual restrictions on data collection, processing or dissemination associated with responding to the pandemic?”
These global crises contribute to accelerated legal digitization because of the privacy mandates they create that drive information governance, thereby generating momentum for new rollouts.
What is unique about COVID-19 is its universality; whereas with past crises the companies that adopted more advanced legaltech stacks were those with a better understanding of data privacy concerns (i.e. tech companies and banks), today’s remote-first requirements have caused even the most staunch senior attorneys to conduct business digitally (which, from the perspective of legal ops teams, is “completely unprecedented”). And surprisingly, the feedback is that legal work quality has not suffered.
Detractors are becoming adopters, providing more tailwinds to legaltech.
Reimagining Lawyering
What happens to all the lawyers when legaltech software eats the world?
“The first thing we do, let’s kill all the lawyers.” — William Shakespeare, King Henry VI Part 2
Just kidding!! The goal of legaltech is not to replace lawyers with robots, but to automate menial tasks so that lawyers can do what they actually went into law to do.
“And when the time comes, what would you like to be remembered for?”
“Someone who used whatever talent she had to do her work to the very best of her ability, and to help repair tears in her society.” — RBG
The trifecta of health, economic, and justice crises have set the world on fire, and David Wilkins, a Harvard Law professor, believes that lawyers are uniquely suited to facilitate the meaningful dialogue that will produce systemic change.
Amidst this “great reset” of capitalism (World Economic Forum), corporations will seek legal help that goes beyond service to help create solutions that integrate law into core business and strategic imperatives. Legal ops transformations, including via legaltech implementations, will be key enablements.
I wrote this post after spending time with heads of legal ops, GC, senior partners at Am Law 100 firms, and legaltech entrepreneurs. It was clear that while it will take more time and industry consolidation before we see broad legaltech adoption, an ecosystem shift is in fact happening as in-house counsels swell, legal ops drive new ways of working, and global crises catalyze urgency. It remains a fruitful and burgeoning space for early-stage investors to track.
