Dec 09, 2022 How Will Big Tech’s Implosion Impact Legal Tech?
As Big Tech is battling with massive layoffs and having a “midlife crisis,” legal tech is unlikely to face the same fate, and companies that strategically chart a steady course will weather the coming economic storm.
By Meg McEvoy & Erin Harrison
Published in Legaltech News, Dec. 9, 2022
Derek Thompson recently wrote a piece for The Atlantic called “Why Everything in Tech Seems to be Collapsing at Once.” Thompson notes double-digit percentage layoffs at major tech companies like Amazon, Meta, Snap, Stripe, Coinbase, Twitter, Robinhood, and Intel, and wonders, “Watching this surge of mass layoffs in big tech companies, plus the lurid chaos unfolding at Twitter over the past few weeks and the spectacular ongoing implosion of crypto, the big question on my mind is: Why is it all happening at once?”
Higher interest rates have ended the era of “endless cash” from venture capital, Thompson points out, which has sunset companies’ laser-focus on growth and drawn attention to actual profits and returns. But, Thompson asserts, what’s happening in tech now isn’t a mere recession story: “The tech industry is experiencing a midlife crisis.”
What does this mean for legal tech?
Tech is between two epochs, according to Thompson, and certainly, a tighter capital environment is already affecting the legal tech sector, with recent layoffs and other cost-cutting measures putting these companies in a tough spot.
Roy Strom reported in Bloomberg Law that the top half of the AmLaw 100 has seen demand drop 1.1% through nine months, citing a Wells Fargo survey. Yet law firms are planning to raise rates by 8% next year, Strom reported.
In-house legal departments probably won’t similarly defy the laws of economics. Isha Marathe reported for Legaltech News that, according to a Lexion report, 38% of in-house legal respondents said their department had already or would freeze tech spending.
And while some legal tech firms have been impacted, does this mean the whole sector will have the equivalent of a mid-life crisis, with startups shuttering, large-scale layoffs, and use cases abandoned? That seems unlikely.
Legal tech relative to Big Tech is a little like the fable of the tortoise and the hare. While social media giants and crypto companies have been (one imagines) skiing on piles of cash, legal tech entrepreneurs lament agonizingly long sales cycles, slow adoption, and their plight selling to some of the most skeptical buyers on the planet. Yet these perennial legal tech shortcomings could be exactly what prevents the sector from, like its larger brethren, going full Thelma-and-Louise.
Legal is different
Lawyers are known to be risk-averse, and as an industry, legal laggards behind almost all other industries. It’s possible that the very things for which legal tech has been criticized—slow-moving, low adoption, and late to the party—may work out just fine for legal in the current tech implosion.
Here are a few more reasons legal is likely to avoid a true identity crisis:
- Legal’s stifling regulatory environment. The regulatory environment in which technologies like social media and crypto have flourished has been hands-off, to say the least. The CEO overseeing crypto company FTX’s bankruptcy, John J. Ray III, who worked on Enron’s dissolution, said that in his four decades of restructuring experience, he had never seen “such a complete failure of corporate controls.” Big Tech, too, has long operated on its own playground, with lawmakers only recently calling for inquiries and more serious checks.By contrast, legal tech has come up in the constrained environment of legal practice regulations, with far-reaching consequences for how tech companies can operate and get investment. Unfortunately, this has slowed legal tech’s growth. On the bright side, having the albatross of state bar ethics rules hanging around one’s neck does help with avoiding a meteoric rise-and-fall, a la crypto.
- Tough customers. As industry veterans know, selling into legal is a hard job. Mary O’Carroll, chief community officer of Ironclad, interviewed organizational psychologist Dr. Larry Richard for her podcast, and the two discussed the unique dispositions of lawyers. Richard’s research found that lawyers are high in skepticism, autonomy, and problem solving, but low in resilience, sociability, and cognitive empathy.The nature of legal buyers means that the easy cash that came with the post-recession boom wasn’t ever as easy for legal. It’s an industry that few outsiders understand, while selling to insiders often means selling to a tough room: lawyers.
- Legal is so behind, it’s…ahead? According to Thompson, the tech epoch we’re exiting is the smartphone-app-economy era, and tech is headed towards an AI phase. Whether because of risk-aversion, a misalignment of use cases, slowness, or otherwise, legal tech seems to have skipped both the social media and smartphone eras altogether, except for a handful of B2C solutions.
If the AI era is what’s to come, then legal is already focused on “what’s next.” Growing pains between wider tech epochs could be perfect timing for this slower-moving industry.
How to succeed in a downturn
Even if legal tech isn’t headed off a cliff, there’s still lots to navigate. In-house legal is overwhelmed with a role it hadn’t been called on to fulfill before: that of tech buyer. Legal tech companies need to cut through the noise and stand out in a sea of start-ups all saying—and promising—the same thing.
For legal tech to weather the current storm, companies not only need to reach buyers where they are, they need to prove how their tech solves widespread pain points for lawyers and those running a legal department. Legal tech buyers want to know how technology is going to save them—or make them—more money.
If we can learn anything from Big Tech, it’s safe to say no one can rest on their laurels. As we are seeing with tech icons Meta, Amazon and Twitter, among others, even the biggest legal tech companies will be called to change course and reinvent themselves as business challenges evolve and markets cool, and in some places, stall. Rather than entering a mid-life crisis, legal tech has reached young adulthood—maturation has led to standing on stable ground, but it’s still very much proving itself and has a way to go. All of this is to say that the industry’s slower, more judicious evolution —and adoption across the industry—has positioned legal tech on solid ground, while its big sister, Big Tech, must hunker down.
Legal technologies that solve material business problems versus those that are “nice to have” will edge out ahead of the pack. For those planning for the year ahead, it will be essential to show buyers a return on investment as economic pressures become a catalyst for increased automation. Telling these data “stories” to potential buyers is an opportunity for legal tech to prove itself. It needs to be a must have, rather than a nice-to-have solution.
During the downturn in 2008-2009, the legal tech industry saw an uptick in adoption, because law firms and legal departments had to figure out how to do more with less. History has a way of repeating itself. As these buyers again grapple with fewer resources and budget constraints going into 2023, legal tech has a chance to get ahead, perhaps having learned something from Big Tech’s 2022 calamities.
Meg McEvoy, account director at The Bliss Group and NextTech Communications, is a former Bloomberg Law analyst. Erin Harrison is SVP at NextTech Communications and a former legal editor at ALM.