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.

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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.

Ari Kaplan of Ari Kaplan Advisors.

“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.

Peter Geovanes of Winston & Strawn.

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.