Click to enlarge / Match the data-enabled deliverable, service or product to stakeholder needs.

How should legal teams get started with data?  Here’s a prescription, along with a #RealTalk diagnostic.


In Post 066, I shared that law firm and law department leaders often ask me how to get started with data analytics. I also shared that I usually respond by asking about their most important strategic objectives.

For today’s post, I will play doctor and take a cut at a framework to serve as a prescriptive roadmap. The above graphic is the result. It visualizes a practical framework to think structurally about high-value applications of data.


To Design a Value Proposition for Data Analytics, Start with Clear Thinking Around Needs

As with any new idea, tool, service or product, the key to designing a successful value proposition is to think deeply about the needs of the intended end-user.

Decision support, when applied to sufficiently high-stakes contexts in both the business of law (e.g. new business models for legal service delivery) and practice of law (e.g. litigation finance), likely offers the highest probability of generating material economic returns or a strategic leap forward for the sponsoring organization. Of course, identifying the decision opportunity and shaping the analytics approach requires a high threshold of domain knowledge as well as technical expertise across both data engineering and data science competencies — hence the need for a multi-disciplinary team.

Execution support. That said, for the time being, the most widespread data efforts in the legal market probably still focus on fairly familiar products around business intelligence, operational dashboards and financial reporting.  While there is plenty of opportunity here for useful deployment of data-informed decisions and actions, the pace of innovation here is unlikely to hit a drastic inflection point due to the heavy burdens around process improvement and change management for data handling, on an organization-by-organization basis.

Persuasion. Broadly in the world, the art of storytelling has gotten almost as much adoration as data science in recent years, but this is one area that hasn’t gotten much traction in legal. (Let’s see if 2019 brings us a bit more ✨ sparkle.)


Common Complaints, Pain Points & 😱💀 Horror Stories 👻🤡

As with many other topics about new and evolving capabilities, dialogue about data in the legal industry can be confusing and contradictory. There is a material level of hype (Big 📊 Data 🤯 disrupting 🤯 Big ⚖️ Law!!) – paired per usual with the requisite cynicism and skepticism (LOL 😆 lawyers can’t speak data 😖😰🙄).

In the abstract, I 💖 data. Full stop. 😍

Out in the real world, however, my adoration for data has many disclaimers, disclosures, and exceptions — particularly when it comes to the legal industry.  In this section, I address a few of my misgivings about the current state of data usage in the legal vertical, drawing not only on my own experiences but also the most common complaints I hear in my travels.

1. We Have the Data Sets We Deserve (but Not Always the Ones We Need 🦇)

This is often how it starts. Because most legal organizations are in possession of some data assets, and because data-informed or data-driven methods are all the rage these days, many organizations embark on directionless and costly exercises to squeeze insights from the data they already have.

Common scenario, full of traps.

Conversations that begin this way are hugely concerning to me.  What I hear in this exchange is “sure, I’d love to see something interesting or cool because it sounds like it’s free.”  That’s not a cost benefit equation with a high probability of a happy ending, for two reasons:

  1. Overvaluing existing data assets without regard to data quality or sufficiency (more on this a bit)
  2. Underestimating the cost and effort required to extract business value from those assets

On the business of law side, both data sufficiency and data condition are material concerns. A point worth noting here is that much of the existing business data in the legal industry oriented around cost to the buyer: most of the readily available data sets across law firms and law departments tend to come from time-and-billing systems and provide the history of transactions, essentially as accounting events. Of course, these data sets often suffer from material quality issues that require time and money to resolve.

Very few law firms and law departments have comparable depth or volume of data oriented around value delivered. In other words, there are precious few readily available and reliable systems of record that capture the history of legal events through which the service provider created and delivered value to the buyer of legal services. On a per-organization basis, more practice management or experience database solutions are emerging to help create this record, and in very few cases correlate those events directly to billing data. However, in 2018, such efforts are relatively nascent, particularly relative to the time-and-billing systems that have served law firms as their primary mission-critical system for many decades.

In such instances, the upside potential of the project often has a hard ceiling — yet issues with data condition can mount, not just in hard dollar expense but also time lag and overall drag on the organization. Particularly in projects without a sharp focus on the end-goal, those costs and subsequent adverse impact on the organization can be significant: not least, the potential for change fatigue and mounting resistance to future endeavors involving data.

In short, designing an analytics program at scale represents a material investment of organizational resources.  To secure sufficient ROI on such an effort, analytics must meet a higher bar than simply being interesting — analytics must be useful. And the overall utility and value proposition of the data effort should, whenever possible, be articulated at the outset, not while a costly effort is in flight.

2. Mostly Neglected Everywhere: Assessments of Data Sufficiency

My favorite question format on the GMAT is unique to the exam: data sufficiency. (Yes, it is weirdly 🤓🤓🤓 to admit I have a favorite question type on standardized tests. For inquiring minds, I 💕 logic games on the LSAT and analogies on the SAT.)

I provide an example below:

Source: PrepScholarGMAT

For everyone whose eyes glazed over, that’s OK. Data sufficiency enjoys a flavor of notoriety even among the b-school crowd. The question doesn’t directly test for quantitative problem-solving aptitude; the provided problem (in the example above, the ratio of full-time to part-time employees in Division X and Company Z) is usually asinine and beside the point.

Rather, data sufficiency questions test aptitude for metacognition: how to 🤔 think about 🤔 thinking. Correctly answering a data sufficiency question is at its core an exercise in logical reasoning, in addition to a test of content understanding of number properties and statistics. More precisely put, this question format demands rigorous and structured thinking about the underlying method of problem-solving, and most importantly the ability to correctly identify the factual inputs required to generate insights relevant to the problems or objectives at hand.

This represents hard work for our brains that feels unnatural, because the exercise of evaluating data sufficiency requires that we focus on the white space — something beyond reacting to or dealing with the facts and numbers that are right in front of us. This question asks us to think categorically and descriptively about whether we might need facts and numbers that are not readily available.

This is a very specific type of thinking that we don’t often practice in the legal industry. We ought to.

3. Data Sets Have Origin Stories, but We Often Ignore Them

Most data sets don’t simply appear out of thin air via immaculate conception. In some way shape or form, most data sets are generated by people.

In most brick-and-mortar businesses and product-heavy sectors, sensors do much of the work around collecting and gathering data, often unobtrusively in the background. The same is true for high-tech platform plays where data on user behavior turns out to be the core product to be monetized.

That said, the legal services market is still a services-first category, and our industry still relies heavily on manual data inputs. As a result, busy and stressed people are clicking buttons or filling out fields to generate many of our data sets, particularly in intra-organizational initiatives in knowledge management and practice data maintenance. This type of data work demands accuracy and precision, which are two areas where humans tend not to excel. These tasks also tend to comprise the more tedious and soul-crushing components of anyone’s job: data upkeep/maintenance is usually the “one last thing” on the checklist or to do list before quitting time, and on most days, these tasks probably don’t get done. 🤷‍♀️

Particularly because we tend to function in environments that produce low-fidelity data, understanding the means and mechanics of data collection is a critical prerequisite to defensible analysis and interpretation. Too many teams working with data in law firms and law departments function as database (or spreadsheet) administrators, overwhelmed with the mechanics of data collection and cleaning without a serious attempt to engage with the content of the data sets — i.e. what the data says and what it all might mean.


The Root Cause Diagnostic: New & Different Methods Require More & Different Skills (but Not in One New Super-Lawyer)

Out in the real world, using data to actually solve real problems is much 😓 harder and more 😩 effortful than a day of GMAT prep, and the requisite skills are both valuable and rare. The ability to identify the needed inputs and assess the best method of obtaining them are skills we don’t associate directly with data analysis. These upstream competencies in fact-finding and fact collection are skills taught in research, investigation and intelligence work — across academic, enforcement, military and corporate traditions.

In practice, work to assess and achieve data sufficiency tends to look both non-linear and messy, because it is. In addition to a firm grasp on the mechanics of research design, the team must bring to bear some depth of domain knowledge (content understanding of the specific facts and data points relevant to the problem at hand) and environmental familiarity (the ability to navigate the available universe of sources and to assess each information source for reliability). Lastly, this type of work benefits from a few specific attributes: intellectual curiosity, resourcefulness, and tenacity.

Often, generating original and useful insights requires multiple cycles of hypothetical reasoning followed by factual investigation. Formulating smart and specific questions to explore requires creative and open-ended thinking rooted in meaningful understanding of the problem, and actually going out to verify what is happening out in the real world requires a willingness to engage in legwork.

All this is a tall order. In 2011, McKinsey predicted that “by 2018, the U.S. alone could face a shortage of 140,000 to 190,000 people with deep analytical skills as well as 1.5 million managers and analysts with the know-how to use the analysis of big data to make effective decisions.”  See “Big Data: The Next Frontier for Innovation, Competition, and Productivity,” McKinsey Global Institute, June 2011.  Fast forward to this year: big data and analytics has topped the skill shortage list for the 4th year running in the annual Harvey Nash/KPMG CIO Survey, and two-thirds of IT leaders say this shortage is “preventing them from keeping up with the pace of change.” See “Big Data Skills Shortages – and How to Work Around Them,” Computer Weekly, June 2018.

A 2017 analysis by PwC echoed McKinsey’s 2011 prediction, noting that the overall talent need will be “mostly for business people with analytics skills, not just analysts.” See “What’s Next for the Data Science and Analytics Job Market?,” PwC Research and Insights, January 2017.

The grid above sets forth their recommended skill inventory mapped to jobs across two categories: analytics-enabled business roles and more technical data science roles. This is an instructive model for legal practitioners and legal educators alike: increasingly, there is a need to rethink the boundaries of the legal practitioner role, either as “data-driven (legal) decision makers” or “data-enabled (legal) analysts.”

I particularly favor this PwC model because it sidesteps a couple of familiar traps. Once in a while, Law Twitter revives the debate over whether lawyers should learn to code (strong opinions abound). I’ve never been fond of how this question is framed. Firstly, I’m not sure it’s helpful to debate whether all lawyers should learn to code. Secondly, I think the question lacks nuance and specificity about what level of conceptual literacy or practical prowess “learning to code” would or should comprise. (As for my two cents on the “learn to code” debate, I agree 🙌 with Jason Barnwell’s hilarious tweet below.)

What the PwC skill grid accomplishes in one visual is to remind us that the full complement of analytics skills modern organizations need must be spread across several jobs. Analytics is a team sport. What’s more, the PwC grid also communicates very effectively that each distinct role demands a differing mix of skills.

Click to enlarge / Don’t try this at home alone 😱

Modern law, too, is increasingly a team sport. Legal teams are particularly challenged to field a high-performing team that brings together the full complement of necessary skills, for several reasons. In the current state, the vertical not only has a skills shortage but no real pipeline strategy to attract high-caliber analytics talent. See Post 066 (talent shortage as structural barrier to innovation).  That talent shortage is exacerbated by the extreme fragmentation in the industry. See Post 051 (key graphic). Indeed, as a mental exercise, I’d be willing to lay 10-to-1 odds that there simply aren’t 200 qualified candidates to lead serious data analytics initiatives at each of the Am Law 200 firms.

The industry relies on pockets of brilliance for thought leadership (Dan Katz of Chicago-Kent & LexPredict and Evan Parker of LawyerMetrix come to mind). However, advancing analytics-enabled thinking at scale will require a much larger talent pool and/or a more creative market-making solution to help scale the limited supply of talent to a broader swath of demand.


A New Hope, Always: the Legal Industry Isn’t Actually That Far Behind the Curve

Before I close, though, let’s take a slightly different look at the state of data analytics in legal — because tech products represent one pathway to scaling the promise of analytics on a one-to-many model.  See Susskind, The End of Lawyers? (2010) (introducing one-to-one and one-to-many terminology). Certainly as of late, more and more legal tech and content players are focused on data applications with the potential to arm legal practitioners and business stakeholders to make better legal and business decisions faster: these efforts currently coalesce around natural language processing, from extraction to categorization and reasoning. Some of these component technologies are already baked into mainstream products in legal research and document intelligence categories:

Click to enlarge / Partial view of the Research and Document Intelligence categories

Many of these products are still likely enjoying success in early markets, but both categories seem poised on the cusp of penetrating mainstream markets. The Research category demonstrates an unsurprising level of consolidation given the longstanding oligarchy of incumbent content publishers. The document subcategories are still fairly crowded, particularly in the diligence engine subcategory: whether a clear winner will emerge, it is too early to say.

One last noteworthy point is that the legal vertical may represent a fairly optimal lab environment to test frontier technologies in the more advanced NLP subcategories like machine translation. In that sense, the perpetual notion that the legal industry is perennially behind everyone else may be a bit fatalistic — and signals in the marketplace suggest that there is likely sufficient interest from both capital and the buying market to drive those experiments forward, particularly in the upmarket segment of Big Law:

  • Eigen Technologies, which works closely with both Linklaters and Hogan Lovells, raised a $17.5m Series A round in June of this year, with Goldman Sachs as lead investor. See “Eigen Technologies Raises £13m,” finextra.com, June 11, 2018.
  • Luminance raised a $10m Series A round in late 2017 with Slaughter and May on its investor roster. See “Slaughters Ramps Up Luminance Investment in $10m Round,” The Lawyer, November 29, 2017.

So, is the legal industry really a decade behind everyone else in how we use and consume data to make decisions? While it probably feels that way to many market participants, I take a slightly more positive view. The advance guard is certainly charging forward. As for most of us in the middle of the pack, I’m here to tell you that many of our frustrations and complaints are commonly heard outside the legal industry.

What I do think we need to improve might be our attitudes: more willingness to invest in attracting new technical talent and more attention to developing the talent we already have by way of education and training would probably go a long way.


What’s next?  See Introducing contributor Dan Rodriguez (076)

Photo by Geoff Greenwood via Unsplash.  Rot Fai Train Night Market, Thailand / The legal market is just as fragmented and complicated, and more painful to navigate.

Legal markets are chaotic.  For innovators, that chaos can be a pit or a ladder – depending on how quickly they can find a market to serve.


We get it.  Legal innovation feels slow.  Very, very slow.

Continue Reading Legal Innovation Woes, Part II: TBD Markets + MIA Customers (063)

Photo by Jimi Filipovski on Unsplash

2018 has been a watershed year for capital flow into legal markets.  Will it be enough, at last, to push legal innovation forward?


It’s an age-old saying: money can’t buy everything.  The most common examples include happiness and love.  It’s time to add “legal innovation” to this lofty list.

In the past few years, we have seen unprecedented levels of capital flow into the legal space.  The partial views of funding activity we see from various sources imply an already high level of energy as well as money invested into legal innovation. Further, those investments (and one would presume, attendant efforts) only appear to be increasing:

Click to visit / “Legal Tech Startup Financings Take Off As Automation Hits White-Collar Industries” (Oct 2017)

And yet the market appears awash in disillusionment.  Many established thought leaders and influencers remain skeptical about the actual impact (or lack thereof) of these developments.  Pinpoint signals from corporate buyers indicate a glacial pace and highly uneven distribution for meaningful improvements in service experience and value delivered.  And the PeopleLaw sector remains woefully underserved, even as legions of practitioners outside the strongholds of Big Law struggle financially. See, e.g., Post 037 (presenting data).

So what gives?


A Roadmap to Innovation Woes: Key Innovation Drivers

In my first post on Legal Evolution, I addressed a few of the structural attributes that make legal a particularly unfavorable ecosystem for innovation. See Post 051 (legal innovation as an extreme sport). That discussion zoomed out for a broader view at the makeup and composition of legal service providers.

Now it’s time to zoom in.  This is Part I of a three-part series about systemic barriers to innovation maturity in legal markets.  In this series, I’ll pose a new set of hypotheses about the current state of our industry — to explore whether would-be innovators and visionaries have sufficient access to the ingredients that are necessary to make innovation actually happen.

Click to enlarge / Money can’t buy innovation, but it can and often does buy poor substitutes.

The above graphic lays out the roadmap, along with a brief description of the critical function of each component.

  • Part I (062) provides an overview of recent trends in capital investment into legal innovation. While several valuable directories, listings and analyses have already covered this topic from many different angles, the aim of this post is to explore why we are seemingly stuck in the “early days” of legal innovation despite an overarching trend toward expanded access to capital.
  • Part II (063) probes a critical problem facing all new offerings in every permutation of legal innovation: the difficulty of identifying and understanding the customer.  Part II summarizes the various customer roles in B2B service environments and the common reasons that new offerings fail to achieve problem-solution and product-market fit.
  • Part III (066) addresses the people side of the equation for teams and businesses trying to drive change to the status quo in legal markets. Whether the goal is (a) to drive incremental improvements to existing offerings or (b) to develop and bring to market a wholly new service or business model, legal evolution is a team sport that demands differing configurations of specialized skill sets.  Part III will summarize the necessary competencies and capabilities, with the goal of evaluating whether it is feasible for most legal businesses – whether incumbent or new entrant – to assemble a winning team.

Posts 062 – 064 are not intended to pose an exhaustive, definitive, or controlling theory of legal innovation.  Instead, the goal is to provide a useful framework, by endeavoring to draw attention and focus to factors that can be influenced and changed, once examined and understood, by economic actors in the marketplace.  As a counterpoint, I have previously criticized narratives that hinge on personality traits of lawyers, in large part because it is not a tenable proposition to ask a group of millions of adults to change stable aspects of their disposition. See Post 051 (“because lawyers … ” riff).

Here, the hope is to better equip innovators and change agents who find this analysis compelling and to enable them to perform more structured evaluations and make more rigorous decisions.  For everyone else, this series invites constructive dialogue.


Regulatory Constraints Affect Capital Flow (in Obvious & Non-Obvious Ways)

Like many other features of the legal industry, the flow of capital investment in this space is littered with idiosyncrasies.  The regulatory barriers to non-lawyer ownership has been debated ad nauseum elsewhere by wiser and more knowledgeable minds, but it bears one more mention here.  The blindingly obvious implication is that this severely limits the pool of available sources for equity capital into businesses that practice law.

The current regulatory scheme has three less obvious implications on legal innovation as well as the mechanics of how innovation efforts are funded and governed:

1. The Role of Incumbents (Yes, That Means Law Firms and Lawyers)

It secures for incumbents (law firms owned and largely operated by lawyers) a material role in deciding when, where, what and how the entire industry will change. This, of course, is a feature, not a bug: protectionism is intended to establish clear and insurmountable advantages for the artisan guild.

It is true that law firms have resisted change and thus bear full responsibility for the current state of the industry.  The fact remains, however, that incumbents must be included in any serious dialogue about legal innovation.  Regardless of their performance to date, law firms are both financial sponsors of, and direct participants in, legal innovation.

2. Practice vs. Business of Law

The requirement of lawyer ownership calcifies unhelpful divisions between the “practice of law” (the domain of lawyers, with limited access to capital) and the “business of law” (a set of enabling activities for legal practice, in the domain of… everyone else with varying non-lawyer titles). These divisions extend deep into our collective consciousness and they do serious harm not only to workplace cultures but also the rigor and clarity of our thinking about legal innovation.

This distinction creates an artificially binary model that fails to accurately represent the reality of how legal teams serve clients in the real world.  Ultimately, this type of thinking favors incremental improvements to the status quo and R&D based on misguided and antiquated assumptions. It’s akin to exploring a closet with the lights off.

3. Follow the Money

The requirement of lawyer ownership also diverts a great deal of available capital into non-core segments of legal services. This has a dramatic effect on the experience of the end-users and shapes their expectations and appetites. This is, at least in part, why “legal tech” receives a disproportionate share of both capital and attention in the legal innovation dialogue: A lot of money is going into a disproportionately small part of the value chain.

The aforementioned wiser and more knowledgeable minds continue to discuss the desirability and feasibility of changing the regulatory moat around lawyer ownership.  In the meantime, this discussion will remain premised on the status quo, in the spirit of focusing on factors that can be influenced by individual market actors.


Who Funds Innovation & Why?

Due to the idiosyncrasies of the legal markets, it is helpful to think about innovation in two simple categories: the typical/conventional financial sponsor vs. atypical sponsors unique to the legal innovation ecosystem.

Traditional Sponsors: PE Firms Are All About That Multiple 💰❌💰

The archetype for the traditional financial sponsor of a new venture is the private equity firm.  PE firms (inclusive of angels and venture capital shops) are themselves commercial enterprises.  Essentially, they offer specialized expertise in the strategic deployment of capital for wealth creation.  To put it as simply as possible, PE firms invest capital to buy part or full ownership of companies, apply their expertise to make those companies more valuable, and then sell those companies (hopefully at a higher price point than at purchase).

PE firms attract capital from investors (typically institutional or ultra-high net worth) with investment theses that communicate a unique viewpoint about market opportunities; they retain investors through sustained performance in generating high returns.  The below chart is an extremely simplified and theoretical comparison of PE returns against the S&P 500. See “Does Private Equity Really Beat the Stock Market?,” Wall Street Journal, Feb. 13, 2018.  There are many caveats about the difficulties inherent in comparing apples to oranges but suffice to say that the ROI expectations are high.

Source: Preqin via Wall Street Journal

Of course, the ultimate returns to investors are abstractions in that they aggregate the outcome of the PE firm’s many activities, both successes and failures alike.  To put this into more concrete context, it is helpful to think about private equity investments at the company level (again, a simplified, theoretical exercise).

  • Holding times. On average, PE firms hold portfolio companies for about 6.5 years, although early-stage venture capital investments will have longer holding periods (sometimes much longer).
  • Returns/exit multiples.  Target multiples are more difficult to generalize than holding times.  Venture capitalist Fred Wilson of Union Squares Ventures is famous for saying often that he looks for one investment that “will return the whole fund.”  This is a different way of indicating that VCs usually make many high-risk investments with the expectation that most will fail, with a few wins that will make the losses look minuscule.  Still, it’s probably a safe and meaningful rule of thumb to say early stage VCs will seek something in the neighborhood of 10x returns while mid-stage investors will be looking for a 3x to 5x range.

Funding innovation is both a means to effectuate and a happy byproduct of the PE firm’s raison d’être: generating returns for investors.  As we will see, things are not so simple in legal markets.

Simply put, most legal startups require a long bake for a relatively small pie. In addition, the vast majority of legal startups are point solutions targeting niche markets that are far too small to ever reach the size & scale needed to attract traditional venture capital interest — at least in part due to the highly fragmented composition of the legal services market, as well as the added layer of geographic silos imposed by jurisdictional differences, see Post 051 (legal markets are especially balkanized and opaque).

Big Law Both Funds AND Manages Innovation (And It Sometimes Works 😲)

The innovation theater that often happens (inadvertently or otherwise) across the law firm landscape is more analogous to the recent explosion in corporate innovation.  With technology driving a faster pace of change and startups eating into every major sector, mature businesses of all shapes and sizes have embraced the mantra: “what got you here won’t get you there.” This has fueled mystique around the “intrapreneur”, a rash of innovation “labs” housed within staid and stable companies, and the rush to co-opt startup-style innovation and strategy tools, all with mixed results.  (Enjoy a moment of relief and schadenfreude: innovation theater was not created by the legal industry.)

As always, there are lessons to be gained from the mistakes of others, even those outside our own domain.  Drawing from the hard-earned lessons of corporate innovation programs outside of legal, two reliable litmus tests emerge to gauge the innovation maturity of established firms:

  • Why?  Clearly articulated strategic objectives for innovation investments, tied to financial KPIs that measure the impact on the core business or progress toward profitable exit
  • How?  Process and governance around build, buy or partner decisions
A few bright spots exist

Yes, many law firms engage in some level of innovation pantomime for hype and awards, simply to keep up with the Joneses.  (Award submissions in 2018 that tout a successful migration from Office 2007 to Office 365 would fall into this category.)  And other law firms often get in over their heads in innovation endeavors that are beyond their core capabilities (more on this in Post 064).

But a few law firms do think and act with the recognition that they are future-proofing their businesses against emerging threats.  Allen & Overy is a good example of an outlier firm displaying both indicators of innovation maturity.  In 2016, A&O partnered with Deloitte to bring to market MarginMatrix, an “IT solution for compliance with the mandatory variation margin rules that now apply to the USD500 trillion OTC [over-the-counter] derivatives market,” now deployed for 8 global investment banks with over 20,000 negotiations completed. See Allen & Overy Annual Results Factsheet for Fiscal Year 2017.

MarginMatrix shows interesting signs of innovation maturity in that it is hyper-focused in product design and target market. The solution design also displays a high degree of customer-orientation, around which coalesces (a) complementary technology components (expert system, workflow, document automation) and (b) a managed services play that leverages (presumably) lower-cost staffing from Deloitte’s deep bench.

Most importantly, however, MarginMatrix makes strategic sense for A&O.  OTC derivatives are important to global investment banks (a key market segment for the firm) because the customization flexibility of off-exchange products provides banks with highly sophisticated means to hedge risk.  A&O also has comparative advantage to produce and maintain the high-value content that drives MarginMatrix: the legal analysis of multi-jurisdictional regulatory requirements imposed on OTC derivatives.

In the below visualization of potential strategic objectives for innovation investments, MarginMatrix fits comfortably into the “add new offerings box,” which enables the firm to anchor existing key accounts with a tranche of work offering relative revenue predictability.

Click to enlarge / Before innovating, firms should establish clarity on what they are trying to accomplish from a strategy standpoint.

The notion of packaging expert knowledge into a productized subscription model is not a new idea.  Many firms continue to flirt with this idea, and mapping some of those efforts to the above strategy matrix gives some sense of the variation in motivating drivers for innovation investments.

Apart from these examples, countless firms are now engaged in serious efforts to integrate process, technology and legal operations to both manage costs and improve service delivery.  But a sustained product/solutions focus to spin up new offerings to the market remains more the exception than the rule.

The wide variety of motivations for incumbents to invest in innovation explain, at least in part, why it is difficult to generalize about legal innovation.  Some of the variation can be explained by the extreme fragmentation of the marketplace and the resulting dispersion in market position and thus strategic opportunities available to each player.  The fact remains, however, that rigorous attempts to measure and compare innovation investments, maturity or performance will need to consider these differences.


Capital for Legal Innovation: Current State & Emerging Trends

A survey of the current market landscape as well as recent developments/dialogue suggests there are four key trends to watch in the next 3-5 year timeframe.

  1. Liquidity events suggest sorting/matching behavior by market participants
  2. Platform + bolt-on strategy by serial acquirers and mature scale-ups
  3. Smart money eyeing legal, to the tune of $500m+
  4. Capital gets creative: working around the regulatory moat

1. Liquidity Events: Not Necessarily a Silicon Valley-Style Bonanza

2018 has already seen a number of deals that have raised many questions (and inspired many hot takes).  The below graphic picks out a small selection of headliners. Given that financial terms are rarely disclosed, the LegalZoom secondary investment attracted a lot of attention by virtue of deal size and resulting valuation. See, e.g., “LegalZoom Gains $2B Evaluation in Funding Round,” Bloomberg, July 31, 2018.

Click to enlarge / Like Sean Parker said, a billion dollars is cooler than a million dollars, but it is also easier said than done.

Liquidity events have a generally pleasing air of a positive development; some of that may be due to the glorified stories of founder exits vaguely reminiscent of the trailer for “The Social Network.”  Certainly, liquidity events usually involve some people coming into a large lump sum of money.  Without raining on anyone’s parade, it bears mentioning that the overall texture of recent liquidity events in legal markets indicates that a few different forces may be in play:

  • The Avvo, BAL and Riverview Law deals give indications of a strategic sorting in which major players with strategic goals acquire specific assets; in contrast, the Lawyers On Demand and LegalZoom deals feel more like capital churn/injections that will lengthen the runway for these companies to prove out an independent scale/growth strategy that may still be in the works while providing liquidity back to the early stage investors.
  • Traditional PE exit strategies favor strategic acquirers and IPOs over financial sponsors, who tend to be more sophisticated and able to negotiate a lower purchase price.  Those dynamics may or may not hold in legal markets; the available data is too scant to speculate.
  • The exits by BCLP and DLA Piper raise an interesting question about the optimal role of most law firms in the midwifery and nurturing of new ventures.  For reasons we will cover in upcoming installments, law firms have unique assets that make it a fertile environment for experimentation and testing — whether they are well positioned to hold their equity positions to a late exit remains to be seen.

2. Platform + Bolt-On: Next-Level Serial Sorting

The activities of serial acquirers and emerging platforms deserves some mention.

  • Unsurprisingly, Thomson Reuters and LexisNexis remain most active acquirers as they supplement internal innovation agendas with strategic M&A. LexisNexis, in particular, has been aggressive in sourcing new product & service innovations through recent acquisitions of Ravel Law, Intelligize, and Lex Machina — all prominently on display at the recent AALL conference.  in contrast, Thomson Reuters’ recent launch of WestLaw Edge appears to be powered much more heavily by internal innovation and R&D.
  • Epiq, Consilio, and Mitratech are all PE-backed and have access to the capital to continue bolt-on deals to round out their market offerings.  Most recently, Mitratech acquired ThinkSmart for an undisclosed sum.
  • Relativity may emerge as a likely platform looking for bolt-on acquisitions: the company has invested in Heretik and HealthJoy, signaling financial commitment to extend its platform beyond eDiscovery into contracts and highly regulated data stores.
  • Earlier this year, Elevate announced that it had secured a line of credit from Morgan Stanley Expansion Capital to fund its growth. See Press Release. Elevate did disclose that the proceeds would be spread out across strategic acquisitions as well as investments in product and service expansions.

3. “Smart Money” from Silicon Valley Continues to Eye Legal Vertical

Independent research conducted by Six Parsecs indicates that “Smart Money” VCs (the Silicon Valley elite, as identified by CB Insights) have invested in almost 30 legal tech companies in funding rounds totaling over $500m.  This list includes some of the most recognizable names in legal tech, including Avvo, Clio, DocuSign, LegalZoom, and Ravel, as well as some newer names to watch like Atrium LTS, Casetext, Ironclad, Judicata, Modria, and SimpleLegal.  Famed Valley seed accelerators Y Combinator and 500 Startups have been fairly active as well, funding over 20 startups in rounds totaling almost $180m.

An interesting counterpoint to the “Smart Money” portfolio are the investments made by Ulu Ventures.  While Ulu’s legal startup portfolio is small, it includes Lex Machina and Ravel Law, both acquired by LexisNexis.  Ulu founder Clint Korver was part of an early cohort of VCs who were early adopters and customers of legal startups as an alternative to incumbent firms (and expressed intense skepticism about the waves of change washing over Big Law); that cohort included Foundry Group founder and ex-Cooley lawyer Jason Mendelson, whose claim to fame included, among other things, hating on startup lawyers.  See “These Venture Capitalists Skip Law Firms for Legal Services Startups,” ABA Journal, May 2014.  This raises some interesting questions about what legal startups might need more: capital to fund growth or advisors with a keen understanding of the domain.

4. Capital Gets Creative: Workarounds for Regulatory Barrier

While only orthogonal to this discussion, the emergence and growth of litigation finance must be noted.  Litigation finance is a rare bird in legal innovation that fits into Marc Andreessen’s “huge, if true” paradigm.  According to BTI Consulting, litigation made up nearly 30% of the demand for all outside counsel services in 2018; while a rough proxy, the share of litigation spend in all outside counsel budget still gives an idea of the significant addressable market size for litigation finance. See BTI Practice Outlook 2018 (forecasting market size by practice).  Since 2014, litigation funders have raised capital in excess of $3bn. See “Litigation Funders Face Their Hardest Sell: Big Law,” The American Lawyer, June 28, 2018.  While still in its early days, litigation finance has the potential to reshape the current landscape for a huge segment of the legal services market, and represents a creative channel for outside capital to influence and ramp up investment into legal data handling and predictive analytics.


Access to Capital: Could Be Better, but Not the Choke Point 

Research by Six Parsecs suggests that the total amount of hard capital invested into legal tech, legal services and adjacent spaces is in all likelihood much, much larger than the $998m estimate reported by CB Insights in 2017.  Further, is impossible to account for all of the soft investments made by existing players to fund strategic projects, initiatives, feasibility tests, as well as the ongoing payroll of the growing roster of internal innovation teams across the legal space.

The aggregate amount of capital invested in legal isn’t the issue — the more serious problem is the inefficiency in finding and funding the right opportunities.  However, emerging trends suggest that access to capital is getting and will get more efficient over time.

Upcoming installments will make the case that inefficient access to markets and talent are much more serious barriers to innovation maturity in legal markets.  That said, a rigorous look at capital flows in our industry is still important.

Why?  Because there is no better accelerant for #realtalk than the topic of money.  Discussion of capital must necessarily address the question of returns. Too often, we across the legal industry use innovation as an emotional lift: workshops and brainstorming sessions usually make us feel better and more hopeful about the future.  Where accountability mechanisms are absent, good feelings often provide sufficient returns for these costs.

To culturally co-opt an obnoxious catchphrase of one Ben Shapiro, “money doesn’t care about your feelings.”  Looking at the current state of the legal innovation landscape through this unforgiving lens can produce unexpected clarity.  For the industry to mature beyond isolated experiments at the edges, we must engage in more rigorous thinking about (i) what innovation experiments actually cost, (ii) what returns they generate, and (iii) how both sides of the equation fare as the endeavor scales.  Not all the inputs and outputs of innovation efforts will be quantified in dollars, but much of it can and should be.

The capitalists will enter the U.S. legal mainstream sometime between a few years from now and never.  But in the meantime, those on the inside could stand to take a page out of the capitalists’ playbook, starting with the notion that investable ideas must focus on value rather than novelty.  Not all new things are better than the status quo, and not all old things are bad enough to be discarded: much like handsome and stupid, innovation is as innovation does.

What’s next?  See Legal Innovation Woes, Part II: TBD Markets + MIA Customers (063)

The global law firm Gowling WLG has just launched a platform that automates document production for a private placement offering.  The video above does a remarkably good job of explaining how the product (called Smart Raise) works.  Far from scary and technical, the innovation comes across as simple and inviting. Quite an accomplishment in two short minutes.

Gowling WLG is a global law firm that operates in Canada, the UK, Continental Europe, the Middle East, and Asia. Although it doesn’t have a US office, US firms ought to take notice, as the Gowling’s rollout is a good illustration of two trends starting to take hold in the legal ecosystem:

  1. The use of complex technical sales methods that include market preparation activities as part of a long-term strategy;
  2. New pricing models that connect together commodity and bespoke offerings in ways that thin out weak competitors.

Complex Technical Sales

This sounds like an oxymoron, but complex technical sales is about simplification. For example, when a new innovation is launched, prospective clients don’t understand its technical aspects. Thus, they have a reasonable fear of making an expensive mistake.  Closing this knowledge gap is costly, particularly in the B2B space, because it takes time and cognitive effort.  Showing the product in action in often the best way to reduce this load. Cf. Post 008 (explaining how lower complexity and higher trialability and observability increase innovation adoption).

In contrast to the rest of Law Land, Gowling WLG has head start. Its Leader of Innovation Initiatives is Mark Tamminga (pictured right), a long-time partner who pioneered the use of practice automation tools in building the firm’s Recovery Services practice. Through automation efforts that began over a decade ago, Mark and his colleagues built a series of products and services that captured the Canadian market. The practice has become very profitable and highly defensible.

One of the things that Tamminga and his colleagues understand is that you start the sales process by emphasizing simplicity and ease of use rather than technical prowess. This is hard for innovators because it requires extra steps.  The natural tendency is to jump to the most advanced features in an attempt to impress prospective clients. The result is typically confusion. Yet legal entrepreneurs make this mistake over and over again. See Post 008 (discussing how immersion in technical details makes it difficult to see the world through the eyes of the end user).

Finally, a short video can be an extremely effective sales tool because it is asynchronous and puts the viewer in control. If it’s done well, qualified buyers find you.  I first watched the video via a LinkedIn post.  In the year 2017, LinkedIn is a very important “communication channel.”   See Post 008 (discussing knowledge awareness and the adoption decision; discussing how more and better communication channels speed up adoption).

Pricing

Smart Raise reduces the volume of hourly work. It then seemingly compounds the financial hurt by showing the ease of the new process. Skeptical lawyers are bound to ask, “How does this support revenue production?”

The answer is that it probably doesn’t, at least not directly or in the short-term.  Instead, it signals expertise.  If Gowling WLG is smart enough to automate a substantial portion of the private placement offering process, it’s likely they’re experts on the remaining complex issues.  “Perhaps we would give them a call.”  This is a market positioning strategy based on a realistic assessment of where the legal market is headed.  As Susskind has written, “If [cannibalization of legacy offerings] is going to happen, you should be one of the first to the feast.” See Tomorrow’s Lawyers 128 (1st ed. 2013).

What’s next?  See Innovation in Organizations, Part I (015)

modriatylertechEarlier this week, Modria (mentioned in Post 008) was acquired by Tyler Technologies, a publicly traded company that specializes in information management solutions to local governments. See press release.  Tyler Technology is headquartered in Plano, Texas and has 3,800 employees. It’s total 2016 revenues were $776 million. See 2016 Annual Report. Modria’s founders, management team, and employees will all join Tyler Technology.  Per the press release, they will help build out Tyler’s “portfolio of courts and justice solutions, particularly for its Odyssey File & Serve™ solution.”

The sale price of Modria was not disclosed. Although I suspect that Modria netted a decent return for its investors, I think the financial details are a lot less significant than what the acquisition means for the future of state and local courts.

For readers unfamiliar with Modria, here is the essential background. Modria is an online dispute resolution (ODR) company founded by the technologists who created eBay’s and PayPal’s ODR systems.  In these early days, ODR has been targeted at disputes where the amount at stake cannot support attorneys’ fees, court costs, or travel.  A credible, trustworthy, and efficient ODR is valued by customers.  It can also reduce the number and vitriol of negative online reviews. Thus, it is no surprise that merchants are willing to pay a company for an ODR solution (at roughly $4.50 per dispute).

Yet, the acquisition by Tyler Technologies suggests that the solutions that Modria has pioneered is likely to have use cases further up the food chain.  One of the problems that Tyler Technologies is trying to solve for small governments is cost-effective handling of disputes that involve self-represented litigants. Cf. Post 006 (presenting statistics in a National Conference of State Court report where 75% of cases involve a party not represented by a lawyer).

Modria was likely an attractive buy for Tyler Technologies because Modria was already white-labeling a dispute resolution system for property tax appeals for hundreds of municipalities. Through Modria, the municipalities shed the cost of running a tax appeals venue. At the same time, citizens were also happier with the speed and resolution of the appeals, and the municipalities fared better in total tax receipts.  Note that Tyler Technologies has 15,000 local government clients — that is an ideal sales channel for Modria’s ODR products.

In Tomorrow’s Lawyers, Richard asks the question, “Is court a service or a place?” Lawyers conceptualize it as place.  Yet Tyler Technology is likely betting it is a service that can be outsourced.  I believe that is where we are headed.

Update:

Gabrielle Orum Hernández, via LegalTech News, has written an excellent story on the value of the acquisition to Tyler Technologies.

Quoting their chief strategy officer, Bruce Graham:

‘What we expect [following integration of Modria into Tyler’s Guide and File platform] is that if there’s a dispute within [Guide & File]—for example, if they’re filing for divorce, maybe there’s an issue around custody—that’ll actually kick them into Modria. …

‘I had four different chief justices come to me and say, ‘You’ve got to do something about access to justice,’ Graham said, adding that online dispute resolution often topped wish lists for court leaders.

The American Bar Associations’ (ABA) Center on Innovation is also exploring ways to leverage online technology to assist with nationwide small claims needs. ABA president-elect Hilarie Bass previously told Legaltech News that online dispute resolution tools could help courts alleviate some of the strain on clients in small claims cases.

‘Our current system requires individuals to take a day off of work, most likely take a bus or transit system across town for a pretrial conference, at which time if they can’t resolve the issue, they have to come in for a second day,’ Bass said. ‘Why can’t we do that all online?’

On Modria’s company blog, the senior management writes, “We are incredibly excited about merging Modria’s cutting-edge ODR platform with Tyler’s powerful software for the courts. This combination will create a single system capable of supporting citizens all the way through their justice journey.”

What’s next?  See World Class Innovation and Efficiency, Billed by the Hour (010)