Legal tech start-ups—shaking up the legal market?

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New legal practices, client expectations and technologies are all affecting business models across the legal sector. Nicola Laver examines what the rise of legal tech start-ups could mean for law firms. Evolving legal practices, client expectations and the latest technology means traditional legal business models are increasingly being ‘disrupted’. Today’s demand for online legal services and legal consultancy, and the rise in the unbundling of legal services and greater competition from accountancy firms, means the disruption of legal practice will continue.

Technology-focused legal start-up companies are now an increasingly emerging trend, with the likes of game-changer, Ross Intelligence (widely described as the world’s first ever AI ‘lawyer’), and DoNotPay entering the market. These tech start-ups represent a further disruptive force to traditional legal practice.

The technology trend

Calum MacLean, risk specialist solicitor at Locktons says technology is increasingly infiltrating into the way law firms operate. He explains:

This is evident in many guises—from the use of sophisticated case management systems which are enabling greater use of legal executives, and outsourcing of large swathes of legal work (in some case up to 80% of a conveyancing transaction is now completed online by teams in India) to the adoption of artificial intelligence to automate much high cost, high-margin work."

This, he says, is not limited to ‘disrupter’ start-ups. Established multinationals are already using artificial intelligence-enabled systems to automate aspects of due diligence, contract management, and contract review. Pinsent Masons, for instance, has developed its TermFrame system; Dentons has set up NextLaw Labs (which provides legal tech start-ups with access to IBM Cloud and the IBM Global Entrepreneur Program for Cloud Start ups); and Riverview Law has developed virtual assistant, KIM, which is run as a ‘stand-alone business’ and is expected to eventually launch its own products.

MacLean adds that the cost of justice will also put pressure on courts, and the practices that serve them, to adopt ‘e-justice’. He says:

While we are not going to see the elimination of the discretion and personal input from qualified legal advisers and judges entirely, it seems inevitable that outsourcing and automation will radically change the legal landscape in the next decade."

Paul Jonson, managing partner at Pannone Corporate, says:

It seems that the large London and international firms are investing in this area for their well-resourced clients. Automation at the other end of the spectrum (lower value claims, for example, or residential conveyancing) also has its place; and given the review of the court structures recently in which the digitisation of the court process for small claims was heavily promoted, it seems that technology will begin to drive legal process more heavily. It is just question of when this happens on a scale that the consumer of legal services really sees the extent of the change."

Jonson says that in between these two extremes are a plethora of middle size firms with mid-range cases and transactions where the case for AI is not so obvious. He comments:

The investment, both in terms of time, costs and upheaval, requires serious returns which may well only be delivered by high volume at the “bottom” end and high value at the “top” end. That said, the courts have at least twice (to my knowledge) supported the use of AI methods in disclosure exercises."

He comments that the continually increasing focus on costs being proportionate to the sums involved in litigation means that firms must explore efficiencies wherever possible. Firms cannot ignore AI, ‘but it requires very careful consideration and, very possibly, staged investment to ensure resources are not over-committed’.

Degree of disruption

The question is: what level of ‘disruption’ do legal tech start-ups pose to law firms? MacLean comments that traditional firms, particularly smaller high street firms, are already facing the pressure of increasing regulatory burden, upward pressure on costs and downward pressure on fees. He says:

The combination of the changing competitive environment following the Legal Services Act 2007, a price-sensitive consumer driven market and increased commoditisation, will mean that the traditional model of high net-margin work and hourly pricing models will fall away in all but the most complex work. Larger firms will get larger and streamline, while smaller firms will gradually be consumed—most likely by branded, technology led firms."

In terms of legal tech start-ups challenging the work that law firms have traditionally undertaken, Jonson says,

It would seem the direction of travel is more towards partnering lawyers in client work and, if positioned well, the partnership demonstrates the firm’s enthusiasm for progress and innovation."

Risky business?

So what are the risks inherent with legal tech start-ups? MacLean says that start-ups relying on a high-technology model have particular risks:

Clearly, there is increased exposure to system errors and failures. In order to compete with established firms, total people costs are usually cut, and the cost of premises is also frequently reduced. Systems-based supervision can be excellent, but unless actively policed, it can allow warning signs to go unnoticed, particularly in ‘virtual firms’ where there is little or no shared working space."

Although complex case management systems enable less qualified people to complete a far greater percentage of work than traditional practice models, MacLean warns that they typically either do not flag enough “danger” points, or include referral controls—or are so tied down as to become counter-productive. There is no one system that can make up for quality of training, experience, and adequate supervision.'

That said, MacLean believes none of these risks are insurmountable. He says: ‘High-tech start-ups with well qualified, well paid staff, strong management, and robust business continuity and cyber risk controls should be well positioned to manage the risks associated with legal practice better than many traditional firms.’

Jonson adds:

The quality control and the overall insurance position if something goes awry would be an obvious one. If a provider of the AI fails for whatever reason, the parameters of responsibility need to be clear."

He comments that while there is clearly a place for more automation of activities and tasks which might be characterised as more administrative, firms and clients alike need to be aware of the limitations of the AI and the human element cannot be eradicated. He gives an example:

Predictive coding when searching disclosure documents is only as effective as the initial review of sample documents undertaken by a real life person."

The disruption to traditional legal practice from legal tech start-ups is apparent—but it does appear to be limited. Though the legal tech market is thriving, technology can never replace the ultimate need for human lawyers.

The views of our Legal Analysis interviewees are not necessarily those of the proprietor.

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