Law & Reorder: the emergence of the UK Legaltech sector
The UK legal services sector is a £26bn market, employing thousands and serving a vast range of customers, from domestic consumers to international business corporations. Like the country's financial services sector it is highly-evolved and world-leading in many of its practices but, aside from the adoption of administrative technology by the larger legal services firms, it has until recently been slow to embrace in its core business model the transformative power of technology-led innovation.
This slow uptake is in some ways surprising as law is fertile ground for the use of technology: it is inherently rules-based and logical in its nature. This blog firstly discusses the market dynamics driving the growing adoption of nascent technologies in both new service offerings and increasingly sophisticated, pre-existing solutions, and then considers the potential impact of the market's growth on future M&A activity.
Put simply legal technology, or legaltech, is technology used to solve legal problems. Solutions are offered to both B2C and B2B customers, the latter including law firms themselves. Legaltech services are provided by new market entrants disrupting long-established business models and by incumbent legal services providers transforming their operations to maintain profitability and relevance.
Supportive regulatory environment
While previous waves of legislative change have de-regulated the legal services market , the Administration of Justice Act 1988, for example, enabled licensed conveyancers (non-lawyers) to supply conveyancing services to homebuyers, the enactment of the Legal Services Act in 2007 was a particularly significant development. It introduced the concept of Alternative Business Structures (ABSs), companies owned and controlled by non-lawyers, permitted by approved regulators to provide professional advice previously reserved for qualified solicitors.
Familiar names, such as BT, Co-op and the Big Four accountancy firms have all capitalised on this change to obtain ABS licenses and enter the UK legal services market (some more successfully than others). A wide range of other, less well-known companies , including many legaltech providers , have also taken advantage of this de-regulation.
On top of this underlying legislative change, the UK's largest legal sector regulator, the Solicitors Regulation Authority (SRA) , is actively seeking to promote accessibility, affordability, transparency and best practice in the market, and is concurrently pursuing a pro-technology agenda. In 2016, it launched the SRA Innovate scheme, focused on providing resources to innovative firms, positively reforming the regulatory model, and encouraging the use of ABSs. Since this point, it has instigated its 'safe space' initiative, inviting legal services providers to apply for waivers to bypass rules that may be stifling innovation and, in October 2018, received ring-fenced UK Government funding to support the use of artificial intelligence (AI) in transforming the legal services market.
The need for certainty
Clients of legal services providers are outcome and cost focused: they want to achieve outcome X at a cost of Y. There has been a growing demand for transparency and certainty, particularly so in the B2B sphere following the recession of 2007-09. The traditional legal services business model, based on billable hours, is progressively moving towards a fixed fee or value-billing' approach. As Arrowpoint Managing Director Jeremy Furniss discussed in his recent article, digitisation and the application of technology have enhanced productivity in the consultancy sector. This has become ever-more important under fixed fee structures, achieving efficiency through technological innovation is essential as firms seek to maintain profitability.
Simultaneously, there has been huge inflation in the number of documents lawyers must review for their clients and a growing compliance burden from external factors such as regulatory change (e.g. MiFID II and GDPR). This has further pressurised the cost base. By way of example, in terms of gathering case evidence in legal disputes, the growth of email volume has exponentially increased law firms' review requirements, in turn spurring increasingly sophisticated predictive and prescriptive e-discovery solutions.
Demand for improved consumer service
The Competition and Markets Authority's (CMA) 2016 study into the supply of UK legal services found that competition in legal services for individual consumers and small businesses was not working well and that the market lacked price, service and quality transparency, recent research conducted by the Legal Services Board found that only 17% of legal services providers publish their prices online. The CMA made a number of recommendations to the UK Government to address these issues, including revision of regulatory requirements/guidance to ensure a minimum level of transparency and improvements to the quality and prominence of information on providers' websites.
There is no shortage of evidence of technology transforming price, service and quality amongst other sectors historically associated with offline or analogue supplier-customer relationships: real estate agents, car dealerships, taxi operators and banks, to name a few. With B2C legal services representing almost 50% of the total UK market (c£12B), there is significant opportunity for suppliers with an attractive consumer-centric proposition. In 2016 only one eighth of legaltech startups focused on B2C services, but this is starting to change.
Take conveyancing , the most commonly cited 'most recent legal matter encountered', which has experienced a cost rise of 37% over the last decade, compared to equivalent compound inflation of 25%. Spotting an opportunity, vendors have taken case management, supplier-customer interaction, and completion processes digital, the first e-conveyancing transaction in the UK was concluded on 6 April 2017 at 3.59pm with the use of an electronic signature to exchange contracts.
The delivery of core service propositions electronically, through web-based platforms and mobile apps, improves service quality and drives down prices through supplier cost efficiencies, for example by negating the need for regular, and therefore costly, client updates by phone and email.
Evolving customer attitudes towards technology
According to recent research by Salesforce, 56% of customers, including 66% of B2B buyers, actively seek to purchase from the most innovative companies; 59% of customers say companies need cutting-edge digital experiences to keep their business.
While consumers have, for a number of years, been willing to buy goods and services electronically, they have become increasingly willing to engage in non-face-to-face transactions involving significant cost and complexity. Furthermore, corporate purchasing decisions are no longer made only by in-house counsel and legal teams but also by legal ops and procurement teams. These often employ digital-native millennials who are more likely to seek technology-enabled, efficient offerings.
Law firms mostly operate under traditional partnership structures, which are generally risk averse and typically run by non-digital-native partners. As discussed above, cost pressures are encouraging firms to adapt and become ever-more receptive to consuming legaltech services. As this trend filters through the larger legal services firms to local law firms the addressable market will continue to grow.
Advances in capability of underlying technology
Rapid advances in software capability/functionality, e.g. in natural language processing (NLP) and machine learning (ML), and data processing power mean technology solutions are increasingly able to carry out aspects of routine tasks previously reserved for paralegals and junior lawyers, such as contract drafting, legal research, and contract review. Such use of legaltech simultaneously drives cost efficiencies, reduces human error and frees up highly-trained employees to focus on the activity most valued by their clients: applying human knowledge and judgement.
While the debate rages around the impact of legaltech on job losses in the industry, its growing prominence is already creating new roles for lawyers and developers. In a first for the industry, in August 2018 Clifford Chance announced a legaltech graduate position, which will mirror the structure of a regular training contract but will see trainees given time away from fee-earning to gain specific legaltech exposure.
New opportunities to access the market
The application of technology has presented existing and new market participants with the opportunity to achieve scale through new channels and new products. In the B2C space, a further example from conveyancing demonstrates this opportunity: April 2018 saw the launch of online marketplace easyConveyance, a business backed by Sir Stelios Haji-Ioannou. It offers customers quotes from over 200 firms of solicitors and licensed conveyancers across the UK and provides its suppliers with access to a huge number of potential customers far outside their local geography.
These opportunities and rewards are equally pertinent in the B2B space. Lexoo, an example of a growing community of data-driven marketplaces, allows its clients to compare and hire lawyers who bid competitively for their work by submitting fixed fee quotes. It has landed significant corporate clients, winning roles on the legal advice panels of both Vodafone and Travelodge.
The ability to commoditise services and offer a consistent and standardised product, often through cloud-based delivery, creates further revenue-generating opportunities for providers. For example, UK-based B2C startup DoNotPay automatically generates standard-form documents for its customers, allowing them to easily initiate legal action, for example contesting parking fines.
Readily available investment and support
Securing growth funding is a crucial part of the lifecycle for new entrants to a market. Across 2016, there was c.£10M of venture capital (VC) investment in UK legaltech startups, compared to c.£600M in UK fintech startups. There has since been a rapid uptick in investment, adding further fuel to a hot market. Some examples from the last 18 months include:
- October 2018: Lexoo, a data-driven marketplace which allows corporate clients and in-house lawyers to rapidly identify boutique firms from a global, trusted network, secured £3.4M of investment.
- August 2018: Apperio, a technology company that provides clients and their in-house legal teams complete visibility of their legal spend, raised £7.7M to help expand in the US and other international markets.
- June 2018: Eigen Technologies, which analyses unstructured qualitative data sets to pull out specific pieces of data its clients need, secured £13.0M of investment.
- April 2018: Juro, which applies ML to help businesses speed up the authoring and management of sales contracts, secured £1.5M of investment
- November 2017: Luminance, which provides AI technology that reads, understands and learns from the interaction between lawyers and documents, and applies ML algorithms to generate an immediate and global overview of any body of legal documents, secured £7.7M of investment.
- May 2017: CrowdJustice, a platform for crowdfunding litigation including such high profiles cases as the People's Challenge to Brexit and a challenge on Trump's immigration ban, raised £1.5M to help expand in the US market.
In addition to VC funding, startups in the sector have a further, diverse and growing range of resources available:
- Legaltech-focused startup collaboration hubs have recently been launched in London, with Allen & Overy opening Fuse in Shoreditch in September 2017 and UK-based global bank Barclays opening a legaltech-focused Eagle Lab in Notting Hill in April 2018.
- Other accelerator programmes include Dentons' Nextlaw Labs , launched in May 2015 alongside its sister company, Nextlaw Ventures, a fund focused exclusively on early-stage legal technology startups, and Mishcon de Reya's MDR LAB. Slaughter & May recently announced its plans to follow suit.
- The Law Society has partnered with the SEEDRs crowdfunding platform to connect its members with innovative legaltech startups looking for investment.
- CaseCrunch , provider of a Facebook messenger-hosted legal chatbot that uses predictive analytics to calculate a user's chance of success in winning a legal claim and then refers them to a network of law firms best suited to deal with their claim, previously announced it was considering an initial coin offering (ICO) to raise growth investment, demonstrating the less traditional fundraising options available (for more on the ICO funding model, read Joe Barnett's in Financier Worldwide)
Intensifying M&A activity
The UK legal services market is highly-fragmented but over recent years has shown signs of steady consolidation. M&A rationale often focuses on geographical expansion and extending market specialism coverage: February 2018's mega-deal between US law firm Bryan Cave and UK-based Berwin Leighton Paisner created a combined entity with $900M of revenue, 32 offices across 11 countries, and broader and deeper legal services coverage. As the legaltech market matures, technology is likely to become an increasingly important catalyst for deals, as well as a critical enabler for successful completion and post-acquisition integration.
When considering the impact of maturity, it is valid to draw parallels with UK fintech, which has grown to become an estimated £6bn+ market, experiencing 140 M&A transactions in the first half of 2018 alone. Clearly, the legaltech market is far less mature: there are no reliable estimates for market size, while only one third of UK legaltech startups have been in business for over three years. But shoots of UK M&A activity can already be seen:
- August 2018: HighQ Solutions, a cloud-based enterprise collaboration, project management and file sharing software provider, acquired US-based competitor AMS Legal (value undisclosed).
- July 2018: Bloomsbury AI, which uses NLP technology to help machines answer questions based on information gleaned from documents, was acquired by US-based Facebook (value undisclosed).
- July 2018: Seal Software, provider of an AI-driven contract analytics and e-discovery software platform, acquired US-based partner Apogee Legal (value undisclosed).
- May 2017: RAVN, which uses AI software to automatically sort and summarise legal documents, was acquired by US-based iManage (value undisclosed)
Though these acquisitions involve tech-focused acquirers and targets, as the market grows and legal technology develops and disrupts, we should expect to see an increase in acquisitions by law firms striving to maintain relevance and by private equity houses seeking to cash in on high-growth, tech-enabled businesses.
- City AM: Fintech M&A deals swell to $40bn in first half of 2018, October 2018
- CMA: Legal Services Market Study, December 2016
- EY: UK Fintech on the cutting edge, February 2016
- Legal Geek: Movers and Shakers: UK Lawtech Startups, July 2017
- Post Office Money and the Centre for Economics and Business: Legal Services Research, December 2016
- Salesforce: New Research Uncovers Big Shifts in Customer Expectations and Trust, June 2018