Who wins and loses as the legal industry warms up to tech, according to 6 top VC investors

  • The legal industry is seeing a drive for innovation by law firms, clients, and in-house counsel alike.
  • Business Insider spoke with 6 VC investors about how they think the drive toward innovation will impact the legal industry, from boosting efficiency to displacing some of the workforce.
  • “Software automation carves out the rote processes, allowing lawyers to focus on creativity, and redirect attention and resources toward value creation,” said Vas Natarajan, partner at Accel.
  • Visit Business Insider’s homepage for more stories.

While it’s hardly a secret that law firms are slowly adopting technologies to boost efficiency in the workplace — from contract analysis to automated timekeeping — there’s some debate over just how far legal tech’s reach can go, and what jobs will be displaced in the process.

23% of work done by lawyers can be automated by existing technology, McKinsey estimates in a study last updated in 2018.

In this context, skeptics of legal tech argue that automation will lead to skill erosion among lawyers, that a machine can’t replicate what a human lawyer does, or that firms simply don’t see a financial incentive to cut billable hours.

But most of the six VC investors that Business Insider spoke with agree that legal tech is here to stay — and can bring a wealth of long-term benefits to the legal industry.

The drive for legal tech comes from clients, law firms, and in-house counsel

The demand for innovation comes from three primary sources: law firms seeking greater efficiency, clients desiring better cost-management, and in-house counsel wanting to validate their work.

In-house teams are typically less risk-averse than law firms, explained Hannah Seal, principal at Index Ventures, and so tend to be early adopters when it comes to technology. A partner at a firm might then notice the software’s potential, and bring it to the firm.

Read more: Top VCs say these 9 legal tech startups are poised to take off as clients pressure law firms on costs

General counsel also use tech to track legal spend, which provide transparency into how a company’s money is being spent, and thus demonstrate their value to employers, said Philip O’Reilly, principal at Draper Esprit, Europe’s largest tech-focused VC.

The trend toward innovation is being accelerated by remote work

With most law firms continuing to work from home during the coronavirus pandemic, co-founder of Ulu Ventures, Miriam Rivera, thinks that technology that enables remote work will change how law firms think about staffing.

The economic crunch caused by COVID-19 has forced many law firms to pull the trigger on layoffs and pay cuts, and reconsider how tech is used.

Machine learning and other analytical software used at tech- and science-focused law firm Fenwick & West, in fact, have eliminated thousands of hours of work, Jim McKenna, the firm’s chief information officer, told Business Insider.

Working from home also slashes costs like rent and utilities, while allowing firms to continue to rake in money through billable hours, which haven’t changed for the most part, said Rivera.

A technology takeover? How legal tech impacts the workforce

There’s no way around it: As technology boosts efficiency and automates processes in the workplace, it’ll likely eliminate the need for certain jobs.

McKinsey estimates that nearly 70% of paralegal work and anywhere from 59-88% of administrative work can be automated with current tech.

But that doesn’t mean these jobs will be totally erased.

“Software automation carves out the rote processes, allowing lawyers to focus on creativity, and redirect attention and resources toward value creation for clients,” said Vas Natarajan, partner at Accel.

Older generations of lawyers also argue that it’s a rite of passage for junior associates to do the grunt work, and that automating these tasks will lead to skill erosion.

Read more: How top law firm Mintz is using AI to help reduce costs for clients and alleviate work for associates

Many VC investors, however, say that technology and skill development aren’t necessarily mutually exclusive.

“You can gain these skills doing high-value work rather than forcing yourself to do what a machine can do better,” said Index Ventures’ Seal. “And I think you’ll see an increasing move away from the mundane and into the more cerebral, value-add, trusted advisor-type role.”

By allowing young lawyers to dive into the more meaningful work they’ve spent at least three years studying for, legal tech is also a talent retention tool, said O’Reilly of Draper Esprit.

“It’s a win-win for everyone,” he said.

But an ‘antiquated’ legal industry may be resistant to disruption

Some VC investors, however, are more skeptical about the adoption of legal tech within an industry that is “a relatively antiquated one that’s incredibly hard to disrupt,” said Patrick Chung, managing general partner of Xfund.

Chung explained that as long as Big Law continues to operate as a large, “military” operation, there’s no financial incentive to shake up its business model, which is centered around the high value of human time (i.e., attorneys’ billable rates).

There’s also issues of trust and liability. “I wouldn’t want a contract completed by a robot. Both clients and lawyers don’t want that,” Chung said. “Law firms will want clients to sign a waiver acknowledging that if the technology screws up, they’re not liable, while clients will be averse to an ‘inferior work product’ as a result of AI, which will likely make mistakes in the beginning since it’s a machine learning process. No one wants to take that risk.”

But Merritt Hummer, partner at Bain Capital Ventures, thinks that if large law firms, which have more bandwidth and resources, lead the pack, the legal industry may be more open to innovation.

“Companies with unique access to a large number of contracts are likely to develop superior algorithms and therefore better products over time,” she said. These firms could set the gears of the machine learning process in motion.

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