Investing in innovation: a strategic imperative in uncertain times?

The global legal services industry is undergoing a period of historic change. The capacity of UK law firms to adapt to, and take advantage of, technological disruption is likely to determine long-term success both at home and abroad. This will be especially important amid the challenges thrown up in the aftermath of Brexit. With their traditional competitive position in international law called into question, UK law firms may be able to defend these advantages or find new ones by incorporating new tools and services into their offerings more effectively than global competitors.

Law tech and legal innovation come in all sizes

London is currently a prominent hub for legal technology innovation, alongside New York and Chicago in the United States.

Post-Brexit deregulation in certain areas could yield structural advantages for UK legal innovators

As illustrated in PwC’s Law Firms’ Survey 2017, improved use of technology is a major concern for large law firms in the UK, who are competing aggressively to be seen by clients as leaders of change. Investments are being made in a range of revolutionary technologies, including artificial intelligence (AI), roboticization, big data for predictive analysis, and blockchain and smart legal document creation – all aiming to improve client experience and drive cost efficiencies in an industry that has long been bound to traditional modes of doing business. The applicability of these technologies varies by legal service / department: AI and robotic applications, for instance, are being most widely explored and adopted for transactional legal services, while big data analytics is thought to be most useful to high value legal services and business support activities.

At the other end of the size spectrum, London is home to a nascent but fast-evolving law technology start-up scene. The existing ecosystem of start-ups (many founded by former lawyers) aims to disrupt huge swathes of the legal services industry. Thomson Reuters and Legal Geek, a law tech start-up community, broadly segment this universe into six categories based on the primary solutions or products that each start-up is seeking to provide:

• practice management
• marketplaces
• contract-related
• risk and compliance
• analytics and search
• ‘law for good’.

In 2017, the first three segments above incorporated 49 start-ups and 77% of the market. Around half of all of the law tech start-ups surveyed in 2017 had law firms as their main target customers, while a further 25% targeted corporations, 13% aimed to serve individual consumers, and 11% had small and medium-sized enterprises (SMEs) as their focus (Thomson Reuters and Legal Geek, Movers and Shakers: UK Lawtech Start-Ups (2017)).

The temptation to adopt a ‘wait and see’ approach is understandable

Between these two centres of innovation lie the UK’s small and medium law firms. While many of these firms are aware of the importance of better applying technology, proportionally they tend to invest less than their larger peers, due to lack of resources or capacity to take on inhouse expertise. The temptation to adopt a ‘wait and see’ approach – by following the lead of the biggest, deepest-pocketed international players – is understandable, given the cost of unsuccessful investment in new tools and services, especially if these require the acquisition of skills that lie outside a firm’s existing core competencies. Overly risk-averse firms may not just be passing up opportunities to partake in the benefits associated with new, strengthened competitive advantages, but may find that their traditional business models are rendered uncompetitive, as both customer expectations and the industry undergo a fundamental shift. Legal services such as smart contracts, automated document reading programs and virtual hubs to interact with customers can provide material cost advantages, particularly to smaller firms with limited human capital, and so investment must be regarded as a strategic priority.

For many such firms, investment is likely to involve partnering up with a law tech start-up, rather than extensive research and development initiatives, but those with niche expertise may be able to obtain value from targeted in-house development efforts. Both approaches require dedicating resources today with the understanding that such investments may take years to implement fully and profitably – a mindset which may be relatively new to many law firm managers.

What are the international implications for innovative firms?

The implications for effective legal innovation are far-reaching both at home and abroad. In an uncertain (and, likely, more complicated) environment for legal services after Brexit, harnessing London’s emerging status as a leading hub for law technology and innovation could be one route through which UK law firms can establish international advantages in terms of reputation, capacity and cost.

Overly risk-averse firms may not just be passing up opportunities, but may find that their business models are rendered uncompetitive

While the outcome of Brexit negotiations is still unknown, considering its implications must remain speculative. But if UK law firms can lead the market in improving client experience and cost effectiveness, they may establish an additional reason for international clients to continue to come to them for services. In due course, it is possible that post-Brexit deregulation in certain areas could yield structural advantages for UK legal innovators, relative to those in on the Continent. Following its departure from the EU, if the UK were to relax its data protection regime relative to the General Data Protection Regulation, for example, the creators of data-centric legal services applications in the UK might have access to information which their counterparts in the EU are unable to access.

This report has been prepared by Akoni, a leading UK based fintech company that specialises in providing cash management and export advice to SMEs. To learn more, please read our companion report on the challenges and opportunities currently facing legal services exporters, or you can find further discussion of these issues on Akoni’s website.