Innovate or be left behind: law firms have heard the message

Legal innovation which combines technology with new business practices and role for lawyers, is the power behind new growth.

Legal innovation is becoming an established part of the business of law says Eric Chin, a director in the NewLaw practice at PwC. Picture: NCA NewsWire / Nicki Connolly

Half of Australia’s top law firms have made formal commitments to legal innovation, a seven-fold rise since 2015, driven by technological advances that have intensified competition in the sector and by globalisation.

Legal innovation is about more than automating functions to generate standardised documents such as nondisclosure agreements, or using artificial intelligence to penetrate legalese and extract sections of text relevant to cases or contracts, says Eric Chin, author of a new PwC Australia analysis that has taken the first census of innovation activity at the top 50 firms.

It covers any new combination of technologies, strategies and labour to maximise efficient service to clients while minimising costs to law firms and legal departments.

It assumes an acceptance that the labour-intensive ways of the past are an unaffordable drag on the bottomline, and that equipping lawyers to embrace innovation is essential to effective change.

It sits with NewLaw – the outsourcing of legal services to third parties – and LegalTech, a sector that has risen to meet the specific technology needs of law firms and legal departments.

“Law firms are looking seriously at leveraging legal innovation efforts as part of the competitive arsenal to differentiate themselves in the market,” Chin says.

The analysis shows the commitment takes various forms, such as innovation committees, the use of consultants and specialists, folding responsibility for innovation into the chief information officer roles or assigning it to senior partners. Some international law firms have been able to leverage resources from their overseas offices.

“You can start to see a legal innovation maturity road map,” says Chin, a director in the PwC NewLaw practice led by Mick Sheehy.

“The earliest stage is likely to be setting up an innovation committee or using an external consultant, followed by a more active stage when a CIO takes the lead.

“It goes through more defined stages in which the chief financial officer or the chief executive officer take responsibility but the ultimate – the performing stage – is when an innovation specialist is appointed to manage the function.”

Chin coined the term “NewLaw” almost 10 years ago, and at that stage used it to describe new firms whose service delivery model was centred on labour arbitrage: minimising costs and maximising efficiencies by outsourcing legal processes such as document review, or using lawyers as required from lawyer secondment firms, or using fixed-fee legal services firms.

This activity was in contrast to traditional firms whose business models were based on the value of their expertise to clients, accounted for by billable hours.

These days NewLaw has a broader definition, so for example at PwC it is summarised as providing strategic consulting, technology and outsourcing solutions to law firms and legal departments.

Among those in on the ground floor of legal innovation were King Wood Mallesons’s executive director of innovation Michelle Mahoney, legal technology consulting firm ESPconnect director Beth Patterson and Allens’ head of technology and client solutions Graeme Grovum.

When Chin talks about the Australian legal services market he notes its particular disposition.

“It’s a profession that’s built on precedent,” Chin says, describing the recent evolution of legal services in Australia.

“So once the top-tier firms have set the precedent, basically, the rest will follow.

“Since I entered the law 13 years ago, the question in law firm boardrooms has been ‘how do we grow, and how do we grow sustainably?

“Then, the answer was by scaling, and that really meant practice specialisation.

“That changed really quickly to geographic expansion.”

Firms based in Sydney and Melbourne staked new territory in the other capitals, but from about 2012 onward, eyes turned towards globalisation.

“That opened the door to legal process outsourcing, which the corporate world had been doing since the early 2000s as a means of cutting costs,” Chin says.

“That was the first iteration of NewLaw, followed by the rise of super-temps where lawyers switched from traditional career paths to contract work.”

Legal process outsourcing offered a cheaper and more efficient alternative for corporates who did not want to pay law firms’ rates for repetitive tasks such as document review or eDiscovery and to law firms themselves.

Chin wrote his first blog post about NewLaw in 2013, in reaction to a media story predicting what the future legal services industry would look like.

“No one was talking about legal process outsourcing, or secondment based firms, … this new segment of the market that was actually shaping how legal services were being consumed,” he says.

Technology compounded the game-changing quality of this set of innovations: costs were decreasing, computers were becoming more powerful, cloud computing was on the rise.

Now, the global market for NewLaw services is estimated at $US14bn annually (2019 figures), with a 15 per cent compound annual growth rate.

Then came legal operations, the application of business principles to the running of legal departments.

The introduction of strategic planning, financial and project management and technology expertise freed legal experts to concentrate on providing legal advice.

A 2021 study by the Association of Corporate Counsel found 60 per cent of legal departments worldwide have at least one dedicated legal operations professional, up from 20 per cent in 2015.

A further development, caused by the unrelenting pressure on legal costs, was the appearance of “law firm panels” in the 2010s, to tighten up the procurement of legal services.

”For example,” Chin says, “legal process outsourcing makes more sense for grunt work, and with in-house lawyer salaries making up more than 70 per cent of legal departments’ internal legal budgets, having the flexibility of contract lawyers can help legal departments scale their workforce accordingly.

“It helps legal departments and law firms tap into a capability and capacity that is not within the organisation on a contract basis.”

Alongside NewLaw has grown the LegalTech industry, with firms that specialise in technology services customised for lawyers.

This growing market dates back to LexisNexis in 1970 and the global annual revenue is estimated at $US18bn.

The adoption of legal technology was given a rocket boost by the exigencies of the Covid pandemic with the pivot to working from home, something early adopters among law firms and departments were prepared for, while the rest played catch-up.

“To do all of this really efficiently, you really need to leverage the lawyers and the professionals who work within legal departments to work in an optimised process that is also enabled by technology so it brings the people process and technology pieces together,” Chin says.

“That’s what we’re seeing in the market right now.”

”It’s a very exciting time in the sense that in the legal market, traditional career paths have expanded rapidly.

“So new roles like legal innovation, legal technologist, legal analyst, legal project managers, legal design thinkers, legal operations specialists, new business transformation specialists and many more have been created just over the last few years.

“We’ll continue to see new roles being created in the new market.”