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Legal tech raised a record $1.2 billion this year, but it may not be all well spent. Industry observers say there's too many products offering similar solutions, which leads to a crowded, indistinguishable marketplace. Observers say that's partially the reason legal tech spending has declined in recent years.

A recent HSBC UK survey found 27% of U.K. law firms were investing 5% of their revenue in tech, a steady dip from 2018's 44% and 2017's 75%. Corporate legal departments' tech spend is also declining, according to a Reuters survey. Only 27% of respondents to the "Legal Tracker LDO Index" report said they would increase their tech budget, compared to 34% last year. 

Hogan Lovells legal project management head Stephen Allen noted some legal tech requires higher capital investment and clients can defer payments for an agreed upon yearly cycle, which could lead to a decreased budget spend.

But the spend decline isn't entirely pricing model-based, Allen added. "Part of that is a timing issue, and the cycle of where that is spent—but that being said, there are a lot of products that do very similar things and not all of them will be winners."

The significant similarities between various products also isn't helped by legal tech vendors not understanding lawyers' specific professional challenges.

"Legal tech vendors aren't terribly good at selling exactly what lawyers are looking for," said  legal operations adviser and consultant Mitchell Kowalski. "In other words, they don't understand enough of what the needs are of their lawyers to position their products much more interestingly and excitedly to lawyers."

Mixing lax market research with an indistinguishable product could be business-ending, Kowalski said. "I think it's a two-part situation: You have a market that has far too many players in it and a consumer of the product that is very slow to adopt those products. The combination of the two is deadly."

With some legal tech companies garnering investments, indistinguishable products could trudge along before eventually dissolving or being acquired, said David Holme, co-founder and CEO of legal service provider Exigent.

"There's not enough money to make them money, that's what we are facing. Some people in the U.K. are calling them zombie companies, in legal tech we will have a lot of zombie companies." He added, "A good interest rate would wipe out some of these platforms."

Indeed, Kowalski said there could be a legal tech bubble similar to the early 2000s "dot-com" burst. "This [legal tech market] will burst. There will be a number of players that are left standing, and the market will settle done and be better off for everyone."

However, most legal tech observers contacted by LTN said they didn't foresee a legal tech bubble. Instead, they saw an upcoming wave of vendor consolidation as similar products are combined to create a stronger tech infrastructure that addresses the needs of a legal department's and law firm's broader organization challenges.

Holme said companies are more intrigued by tech that can improve the entire organization's analytics and efficiency, not just in the legal department. 

"I think they are missing a trick because they can't see legal data is actually a contributor [in a company]," he explained. "Corporations are not investing in a single silo,"

Alex Smith, iManage RAVN's global product management lead and Reed Smith's former Innovation Hub manager, said lawyers are now attempting to bring legal tech solutions to scale to address wider organizational challenges.

"What I found in my time in a law firm is they are good with technology and creative with the open scale platforms," he explained. "We went from point solutions—you could call them single-use tools—to now we need tool kits that are within the corporation or the law firm that can be used across different practice groups."

 

Editor's Note: This article has been corrected to provide accurate figures for the HSBC survey.