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Law Firms Are Investing in Tech Before It Overtakes Them

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Illustration by Matthew Daley[/caption] In most contexts, the story of Silicon Valley’s Venture Law Group is a cautionary tale. Founded in 1993 by Craig Johnson, previously a leading partner at Wilson Sonsini Goodrich & Rosati, VLG made a meteoric rise representing and investing in the likes of Yahoo, Cerent, Hotmail and plenty of other long-forgotten dot-com darlings. The firm scratched at a place in the Am Law 200 a mere seven years into its existence. Three years later, it merged into Heller Ehrman, its fortunes having faded when the dot-com bubble burst. Among the innovations that did not hasten the firm’s decline, however, was a client-facing software suite and deals database developed in-house by a team led by Jackson Ratcliffe. A computer scientist with a degree from Duke University, Ratcliffe arrived at VLG by way of what would become a familiar loop in his professional career: After working at a law firm, Simpson Thacher & Bartlett, from 1988 to 1993, he spent two years in a technology consultant role before being drawn back to a law firm. What he built was branded “the VLG Advantage.” It amounted to an online data repository for a company’s contracts and legal documents, accessible by client and firm alike. “It worked really well, and it was extremely popular,” Ratcliffe says. “I thought the records management software thing was going to take off.” Maybe it will this time. In July 2017, Ratcliffe was again lured back to a law firm and away from his own consulting firm, this time by Orrick, Herrington & Sutcliffe. His mission is to help the firm build something like the VLG Advantage 2.0: a centralized repository for the firms’ lawyers and clients to place documents. But, this time, each document will also be a sortable data point that will allow the firm to understand its work in ways never before possible. Want to find all the nondisclosure agreements Orrick drafted between certain dates with a specific troublesome provision? Ratcliffe can help with that. Ratcliffe’s data push is part of a broader movement at some law firms that are aiming to tie their fortunes with legal technology by investing in tech companies, influencing the development of startup platforms and selling their own legal tools, among other methods. The trend toward melding tech into law firms’ core business comes as both a response to a shifting legal market, where firms’ traditional business is coming under increased competition, and as a realization by firms that they are well-positioned to capitalize on the demand for tech and data-enabled services. And it is fundamentally altering what it means to be a law firm in the 21st century. [caption id="attachment_11420" align="alignleft" width="115"]

Ari Kaplan of Ari Kaplan Advisors.[/caption] “The current climate of investing is part of a redefinition of the law firm model, where law firms are ... leveraging an intuitive understanding of business to both support innovation and reimagine the law firm of the future,” says Ari Kaplan, a legal industry analyst and founder of Ari Kaplan Advisors. The push into technology is a recognition that the market for legal services is changing and that, in the near future, the winners will increasingly be legal companies—law firms or alternative service providers—that can deliver efficient solutions. Many predict law firms, as currently constructed, will lose ground to “new law” providers. U.S. legal spending directed to law firms is expected to shrink between 2015 and 2025 from $300 billion to $265 billion, while the share of the market for “new law” firms is expected to grow from $2 billion to $55 billion, according to a 2016 study by Thomson Reuters and Adam Smith Esq., a law firm consultancy. Another study, by the Georgetown Center for the Study of the Legal Profession, says the market for alternative legal service providers is already $8.4 billion annually. And 40 percent of law firm managing partners expect to compete more directly with those firms in the near future. The study says the biggest threat for law firms may be that advances in technology will enable alternative providers to move up the value chain and provide more-complex advice to traditional law firm clients. In many ways, law firms investing in technology are seeking to head that off. To be sure, the number of law firms moving to enter the tech business is, for now, limited. But in the U.S. and U.K. markets, the trend is prominent, with some of the largest law firm players looking beyond traditional legal services for innovative revenue streams and greater influence. AI in the U.K. The old adage that U.K. law firms are more advanced than their U.S. counterparts when it comes to innovation is true in many respects, except when it comes to AI-driven legal technology, several U.K. firms say. But some of the U.K.’s biggest law firms are on a mission to change that and, in the process, gain a competitive advantage in a difficult local industry. TLT’s foray into the tech world, for example, began when it set out to help some of its biggest clients find a technology solution that could effectively manage and extract insights from contracts for negotiation purposes. The Bristol, U.K.-based firm, however, “couldn’t find anything from the main providers in the U.K. market,” recalls James Touzel, partner and head of the technology, media and telecoms group at the firm. “But we did come across LegalSifter” in the United States. An AI-powered contract review platform that can learn to identify clauses and risks within large data sets of contracts, LegalSifter offered a new level of automation for an industry still accustomed to manual review. TLT didn’t see LegalSifter as a threat to its core services. “We see it as an additional service; it doesn’t cannibalize anything we do at all,” Touzel says. “For this type of work, clients want self-help … and a good portion of those contracts probably aren’t reviewed at all.” What the platform represented, the firm soon realized, was an opportunity to expand its business. TLT entered into a strategic partnership with LegalSifter, investing an undisclosed amount in the AI contract company to bring its platform to the U.K. market. As Touzel notes, “they brought the market-leading AI; we brought the legal clients.” Under the partnership, TLT became the exclusive licensor of the technology in the U.K., offering the tool either as a standalone solution to clients or as part of a bundled service that includes access to the firm’s commercial lawyers. TLT also took a hand in LegalSifter’s development, helping improve its functionality and broadening the range of contracts it could review by teaching it to recognize U.K. contracts. For the firm, partnering with LegalSifter was a novel way to stand out in a crowded market. “The U.K. market is fast-moving and law firms are looking for opportunities to differentiate,” Touzel says. But partnering with LegalSifter was also a recognition by the firm that it could offer its clients more than just legal advice. “We do find that clients come to us principally for our legal advice, but they are also asking us to help with their legal operations,” Touzel says. And Touzel believes law firms are in a better position than legal outsource providers to help with legal operations because clients usually want to work with one provider for all their needs—the ever-desirable one-stop shop. Of course, TLT isn’t the only U.K. firm investing in AI contract technology. In 2016, Slaughter and May invested an undisclosed amount in Luminance, an AI contract review platform used by Cravath, Swaine & Moore, Corrs Chambers Westgarth and a host of other firms around the globe. Rob Sumroy, a partner at Slaughter and May and head of its technology and outsourcing practices, says the firm is “at the forefront of teaching the AI software.” “We’re not software developers, but the market intelligence and machine learning has been driven by us,” he boasts. For Slaughter and May, however, it’s not just a one-way street. While the law firm provides subject-matter expertise for Luminance’s development, it can also tap into the Luminance team’s knowledge and experience to further drive innovation in its own offices. “There is a lot to be said about learning from experts in other industries, both in terms of what they do and how we can harness their expertise to improve our business,” Sumroy says. The firm is looking to improve not only through technology but also through “process improvements, agile resourcing models or, more generally, finding new creative solutions to our clients’ business problems,” Sumroy adds. But it is still keeping a watchful eye on technologies that will provide real benefits for its attorneys. “AI, along with blockchain and data analytics, is one of the key areas of focus now and definitely provides lots of opportunities,” Sumroy says. Tapping Into Data A handful of firms, including Orrick, Winston & Strawn and Littler Mendelson, have made strides in the use of data analytics to provide new insights into the practice of law and law firms’ business. Littler Mendelson has been a pioneer on that front, thanks in large part to its CaseSmart system, which has been tracking employment disputes handled by the firm’s lawyers since 2010. But other firms are looking to build similar systems that capture their data across practice groups. Orrick’s work led by Ratcliffe is a prime example of that. By building proprietary software hosted on a commercial cloud, Ratcliffe is attempting to solve a data problem that has vexed many firms: The information they gather is stored in separate systems. Documents are in emails or matter management systems; time entries are somewhere in the accounting department. Merging those data sets into a single platform will allow Orrick to have an aggregate view of the work it has done, how long it took and how much it cost. “I’m really trying to make something that is a workflow, an environment, where people will go, and by going there everything they do is organized and tracked and makes everything easier both on the micro level—for that specific client and transaction—but can also be better rolled up into aggregate analysis tools,” Ratcliffe says. [caption id="attachment_11421" align="alignleft" width="115"]

Peter Geovanes of Winston & Strawn.[/caption] Peter Geovanes, head of data science and analytics at Winston & Strawn, has taken a somewhat different approach to a similar task. He’s combined the firm’s internal IP litigation data with U.S. litigation data provided by the Federal Judiciary Center that reveals case outcomes. With all the data in one place, Geovanes can compare Winston & Strawn’s results to other firms’ outcomes. “Being able to tie all that data together and understand our experiences, all that is a real game-changer for a law firm,” Geovanes says. “And it’s not easy, because it’s all siloed.” Geovanes has also applied newer analysis tools to the data, including natural language processing, which allows Winston & Strawn lawyers to get answers from simple questions. They can push a microphone button on an iPhone and speak into a mobile app, Geovanes says. The search function is a product of a data analysis tool, AnswerRocket, that the firm has used to gather insights from its database of federal court cases. Asking, “Which IP cases are the most profitable for the firm?” comes back with an answer: cases handled by the firm’s Houston office in the Eastern District of Texas. “We’re trying to give our lawyers that scouting report and insights so they have knowledge about the venue, the judge, the opposing counsel, historical precedents. And we’re also doing some advanced analytics to do some prediction in the future,” Geovanes says. “It augments their own experience and legal reasoning by having this information available to them. And the hope is that, by arming and advancing them with these tools, we are representing our clients as the strongest advocates that we can be.” On the data analytics front, U.S. firms have a leg up on their U.K. counterparts. That’s because the U.K.—like most jurisdictions outside the United States—does not have a system like PACER that provides relatively inexpensive access to court documents. In the absence of that, a slew of U.K. firms have begun building their own capabilities to mine their caseload for insights. Three insurance-focused firms stand out: BLM, Clyde & Co and Kennedys CMK. BLM, for example, announced in February a partnership with the London School of Economics that will bolster its effort to become a leader in advanced data analytics. Three professors from the school—experts on decision mapping and machine learning, and an actuary—will work with the firm’s proprietary data to better understand the costs and outcomes of its cases. Andrew Dunkley, BLM’s head of analytics, says lawyers’ ability to predict legal outcomes will only get better with the addition of data analysis. Down the road, he says, the winners of that competition will shake up the legal industry. “I’m reasonably confident that give it 10 years and the market will not look like it does today,” Dunkley says. The Incubators While some firms are looking to tie their fortunes to a particular legal tech product, others are seeking to influence the development of legal technology on a far larger scale. Through launching tech incubators, they aim to nurture a host of tools they believe will take off in the legal space—and give them an early advantage in the market. The most well-known of such innovators is Dentons, which in 2015 launched its incubator, Nextlaw Labs, and its parallel investment vehicle, Nextlaw Ventures. Currently, the incubator has 10 startups, all of which Dentons has invested in. John Fernandez, Dentons’ global chief innovation officer, says the goal of launching Nextlaw was to provide economic returns for the firm and encourage innovation around the legal industry. Along with investment dollars, Dentons provides its startups with “access to a tremendous amount of subject-matter expertise and potential partners in our clients to help shape the market for these young companies,” Fernandez says. [caption id="attachment_11422" align="alignleft" width="115"]

John Fernandez of Dentons.[/caption] Dentons, however, doesn’t look to completely own any one of Nextlaw’s startups, instead opting to become a minority equity shareholder in each. But the firm does leverage its startups’ tools internally. Fernandez notes that Dentons is either currently using or exploring use cases for each of the technology platforms Nextlaw invests in. And this is no coincidence. Nextlaw specifically looks to invest in companies that “align with our law firm in terms of the clients we serve, our scope and the global nature of our work,” he says. But Dentons also makes sure the startups it brings into Nextlaw can be financially viable and beneficial to its bottom line. Such considerations have become increasingly important for Dentons as the firm moves to expand Nextlaw Ventures by opening it up to outside investors, turning it from an entity funded solely by Dentons to a much larger pool funded by multiple partners. Currently, the 10 startups in Nextlaw Labs cover a wide range of legal services, from qualitative metrics provider Qualmet to compliance management platform Libryo and transaction management tool Doxly. While some of the startups are fairly mature when they enter the incubator, others are nascent operations. Haley Altman, CEO of Doxly, recalls that the first time she met with Dentons attorneys connected to Nextlaw Ventures, the company was in its early stages. “We had wire frames of what we wanted to build,” she says. The attorneys helped vet the idea that eventually became Doxly, offering useful feedback and ideas for selling it. For Altman, who was a former partner at Indianapolis-based law firm Ice Miller, having a law firm incubator vet her idea was a significant advantage. Having attorneys lead the way in legal tech is critical for the industry, she says. “In the past, the technology has been created by people who don’t understand the intricacies of our practice,” she says. While Dentons focuses on intertwining its business with legal startup companies, U.K.-based Allen & Overy is taking a different tack. It launched its Fuse incubator for legal and regulatory tech companies in September 2017 and now supports eight startups. The incubator focuses on fostering innovation rather than cultivating investments. “Taking equity, in some ways it just introduces complexity, because the real reason we created Fuse is to bring in the most interesting technologies in the context of what we and our clients do,” says Jonathan Brayne, partner at Allen & Overy and chairman of Fuse. Allen & Overy has invested in one of its Fuse startups, Nivaura, a platform that uses blockchain technology to streamline the issuance and administration of financial instruments. “We invested in them because they are strategic,” Brayne says. “We have a very big debt capital markets practice.” Though most Fuse startups won’t get similar investments, each can still take advantage of Allen & Overy’s office space and have direct access to the firm’s attorneys and clients for advice and support. The firm chose the eight startups in Fuse from a list of dozens of tech companies by focusing on whether each product will “have a positive impact on the way we work or the way our clients work or the type of service we would offer our clients,” Brayne says. “We’re not in this for technology’s sake,” he adds. “We’re in this to solve problems.” [caption id="attachment_11424" align="alignleft" width="115"]

Jonathan Brayne of Allen & Overy.[/caption] For Allen & Overy, however, launching Fuse was about more than getting early access to novel technologies. It was also about instilling a tech-focused mindset in the firm’s attorneys. For Brayne, there is no better way to get attorneys to think of ways to use technology in their work than by having them interact with these startups. Allen & Overy encourages its staff and clients to engage directly with its Fuse startups, holding meetings where show and tell is the standard format, Brayne says. In the first five months after Fuse’s launch, clients and attorneys made over 3,000 visits to the incubator. Fuse also provides Allen & Overy with a direct line to the tech world. Brayne likens it to a “technology radar,” explaining that, because of the reputation the space has built, “instead of us having to go out and find the technology, companies are coming to us and finding us.” Not all incubators are as large in scope as Fuse or Nextlaw. Like Dentons and Allen & Overy, Reed Smith is also helping to direct the development of legal technology, though it is focused on just one startup: AI contract review platform Heretik. Heretik doesn’t work in Reed Smith’s offices or receive capital investments from the firm. But it is still welcoming the firm in to take an active and vested role in its future development. “We are trading ownership percentage for a certain amount of training hours and access to [Reed Smith’s] data,” says Charlie Connor, co-founder and CEO of Heretik. For Reed Smith, the partnership is an opportunity to create a tool that addresses the specific types of contract tasks the firm handles. “We were really talking through the various issues clients were coming to us for and trying to map out a solution together,” says Bryon Bratcher, director of practice support for the firm’s global offices. Bratcher, who praises Heretik as being “less smoke and mirrors than some of the others” in the AI contract review space, believes that, because of law firms’ intimate knowledge of legal processes and client demands, they can be essential partners for legal tech companies looking to make a difference. “If you’re trying to develop something, partnering with a law firm to use them as a focus group or a development partner is going to give you much more of an advantage than building it yourself,” he says. And, of course, law firms benefit by having a solution that is specifically geared toward addressing some of their own challenges, and a stake in the growing legal tech market. “Law firms are definitely missing the point if they are not jumping on the boat with partnerships,” Bratcher says. The Law Firm Tech Provider Over the past few years, it has become increasingly common to find firms building their own technology solutions in-house. For the most part, such tools have been used internally, to bring efficiency to a process or provide insight into firm operations. Perkins Coie, for instance, recently created a platform to allow the firm to better manage and arrange its patent prosecution work, while DLA Piper launched an analytics project that tracks certain actionable metrics to predict client retention rates. Some expect law firms to soon begin turning this innovation outward, developing tech solutions directly geared toward their clients and others in the legal industry. “There are a lot of law firms out there that have thought about this, but not taken the next step,” says Zach Abramowitz, a former associate at Schulte Roth & Zabel and co-founder and CEO of ReplyAll, a website that publishes conversations by legal and tech professionals. What’s pushing law firms toward tech, Abramowitz adds, is the recognition of just how well-positioned they are to join a market that has until now been dominated by tech professionals. “Law firms realize they have three things that technology startups do not: They have resources; they know the pain points of the legal industry; and they have access to clients who already trust them,” Abramowitz says. “I believe the next generation of legal technology companies will be spinoffs from law firms.” His prediction may already be coming to fruition. Robins Kaplan, for instance, has moved to provide services similar to those of a legal outsourcing provider through the creation of two proprietary intellectual property tools. The first, Pinpoint IP, is a patent analysis and management platform that reviews a client’s patent portfolio to show its strength and how it compares to competitors, explains Chris Laurus, a partner at Robins Kaplan and chair of its IP and technology litigation group. The other is Sentinel IP, a tool designed to help clients protect their trade secrets by monitoring patent filings around the world and providing clients with alerts if infringing applications are filed. The tools are not pieces of software that clients themselves download, Laurus explains. Instead, they are used internally by the law firm on behalf of its clients. Robins Kaplan chose a managed legal technology services offering because the firm believed it would be far more attractive to in-house clients that are already struggling to install and learn the standalone legal technology they have. “The feedback we generally receive is that it’s easier for our clients if we use internal experts to operate these technological operations and provide the client with the outputs,” Laurus notes. The two IP tools, which were built with AI, were developed by Robins Kaplan over the course of two years by a team that included in-house experts with technical software and statistical analysis expertise. The firm also had to work with consultants on some of the coding and AI tactics and strategies, “but it was mostly developed with internal resources,” Laurus says. For Robins Kaplan, the need to create such a tech-centric service was entirely market-driven. Laurus notes that the firm works with innovative companies, “so the expectations for being technologically savvy are very high and those clients are very attuned to searching for legal service providers that can deliver unique technological offerings.” So while the effort to develop such tools was a substantial undertaking, he says, they were necessary for the firm to differentiate its services and live up to client expectations. Back at Orrick, Ratcliffe has found success delivering his new records database tool to the firm’s digital technologies practice. It may be a natural fit. Startup lawyers have been focused for years on delivering efficient service to young companies that sometimes struggle to pay lawyers. To that end, Orrick was one of the first of many firms that now offer a free online database of documents to help startup clients incorporate or issue stock to new owners. In a nod toward the broader acceptance of the need for efficient legal services—and technology’s role in making it possible—Ratcliffe says almost every practice leader has expressed interest in a records tool tailored to their group. He’s currently working to deliver one for the litigation department. The level of interest surprised him. He once vowed never to work at a Big Law firm again after tiring of their slow adoption of new technologies. “There are tons of partners who would look at what I’m doing and say, ‘Why would you do that? That’s going to reduce billable hours. Why would you want to be more efficient?’” Ratcliffe says. “But here, it’s just been the exact opposite cultural response to that issue. [Firm chair Mitchell Zuklie] has said, ‘Change is coming, we need to be ready.’ It’s a question of seeing the future.”