Legal Technology Journal

The lowdown on everything a law firm managing partner should know about online services and where the money should be going.

Let’s wind back the clock to 1998 and the dotcom boom. Every day, we saw online businesses formed, and fortunes won and lost. Businesses that had been successful for hundreds of years began to question their future. Even if they knew how to navigate the ‘information superhighway’, would they be able to deal with the consequential system integration issues? Law firms launched a whole range of online offerings. As a first wave we saw extranets, dealrooms and portals, as well as highly engineered real advice tools.

Some law firms claimed they were going to put all their know-how into online systems. There was the battle of the dealroom – which law firm’s dealroom would dominate the market – and seven-figure investments were talked about. The dotcom boom ended with dotcom bust. Many of these initiatives came and went and there was, in fact, no dominant dealroom.

Faced with these dilemmas, what should a managing partner have done? More importantly, what should they do going forward? Should they invest in online legal services and e-business, or not?

In this article I am going to:

• set out where the market is now;
• articulate some of the key criteria in any decision to invest in online services; and
• try to set out what the future looks like in this area.

My hope is that, by the end of this article, we will all have a better understanding of the online legal landscape, have happier clients and have more efficient, more profitable businesses.

Where is the market now?

If market penetration is a measure of success, it makes sad reading. Literally millions of pounds have been invested in developing online services in many of the top UK law firms. An assessment of the results is shown in the chart above right.

We have a very high degree of penetration in relation to e-client services although these may be ill-suited to a panel supply model with multiple firms. The reality is that all too frequently these services are rendered at no charge, or for a very small sum, and so high penetration is not surprising.

Looking at paid-for online services, a trawl of the top 30 law firms’ websites will show you a range of offerings. Clearly you need to define what represents any given market, but overall market penetration appears disappointingly low. Clients often talk openly to me about the great things different law firms are doing. Sadly, I barely recall a mention of paid-for online services. Equally, I have never come across any published figures that really prove the investment and income cases in this area.

The B2B space should make better reading. Law firms have clever people and clients are becoming more comfortable with online environments. However, they struggle to find good law firm examples of true B2B services. Instead, most offerings are paid-for online services.

B2C should be a much more prolific market. There are millions of potential customers, but the levels of penetration seem relatively low even among small firms focused on the consumer marketplace. Susskind talked about a latent legal market but are these consumers coming forward? One might imagine that a business with the brand, scale and acumen of Tesco or the Halifax might change this. Time will tell.

Key criteria in any decision to invest in online legal services

There are a variety of factors affecting this market. I will try to set these out below with an emphasis on paid-for online services and B2B.

The analysis

Building any form of online legal service requires a simple analysis. Is it a product people want to buy? How many people want to buy it? How much will it cost to build and maintain? All too often the market has been littered with examples of the ‘field of dreams’ approach to IT – ‘if we build they will come’.

The numerical analysis makes grimmer reading. If a firm comes up with the most fantastic idea for an online product, IT and fee-earner time may for example mean that it would cost £1m to produce and £250,000 a year to maintain. There are 14,000 in-house lawyers in the UK. It would take significant market penetration (probably well beyond the in-house lawyer base) and a huge market share for the product just to break even.

Real numbers v Trojan horses

Some might challenge me on the scenario above and say this is the wrong analysis. By producing a product ‘we will improve our brand’ and ‘will win work from clients that would not otherwise deal with us’. I have heard this referred to as ‘fluff’ – a justification that is all too frequently used when, for whatever reason, figures and market analysis aren’t available. Such claims may be true, but this cannot be the rationale for products of this nature. Financially they should be able to stand on their own and be profitable in their own right.

The nature of the products

From a review of the major products, I think in some cases there may be a slight mismatch between what clients want and what these products can deliver. The nature of some online tools (eg those providing advice or producing documents) is that they deal with very specific facts. They are normally based upon fairly intricate or complicated pieces of law, ie if you enter certain data, you will get a factual answer and/or a document.

Increasingly, in my experience, less and less legal work is of this nature. It is comparatively rare for a client to seek advice on what the law is. Normally they will want some advice on what they should do or need additional resources or expertise in carrying out a particular project. Do these products therefore actually go to the root of what clients actually want?

I also think there is a slightly bizarre contradiction in this area. If you can produce an online product, by its very nature it will be for an area of work that can be commoditised. Do clients want to use tools like this and spend time entering information, or should law firms themselves use these tools to improve efficiency? Is the investment going to the right place for the client?

Competing with the publishers

When developing online products you have to ask why would you want to do this if it means you will be competing with publishers. There may not be a competing product now, but will it only be a matter of time before there is? Historically, publishers may have focused more on ‘dry law’, ie legislation and factual commentary.

However, they are now moving more and more into other areas. PLC Magazine focuses heavily upon the methodology of doing work; LexisNexis, Walters Kluwer and Thomson are all purchasing IT systems that give them a platform to potentially leverage their content. PLC has also produced its FastDraft tool, a maintained high-quality document assembly product.

In the future, legal publishers will no doubt be supplying legal IT systems to law firms and clients that will integrate contextual legal know-how with products. They also have much lower operating overheads. If a publisher entered into this market, would a law firm be able to compete? Are publishers the natural buyers of ailing online legal service products? A law firm supplying an online service might say that it is the only firm with the expertise to do this. This may be right in some cases, but equally, if it can be commoditised, are we kidding ourselves about the uniqueness of the expertise?

Freeware

It is claimed that many online products are profitable, but seldom do we see factual evidence of income. Increasingly, there is an expectation on law firms to provide added value to their clients. All too often, huge investments in online products are classed as free added value. On the other hand, some clients accept that an online product will save them money and accordingly are willing to pay for it.

I think this brings you into the area of proportionality. If an online product costs, say, £1m to develop, is it disproportionate to give it away for free? Increasingly, there is a danger of law firms becoming busy fools by simply increasing their own overheads and putting huge amounts of effort and resources into these products only for them to be given away. In the longer term, this prejudices clients by impacting on fee rates.

Priorities

Each area within a law firm has its own demands for resources and there is also a limit to how many projects staff can absorb at once. Every firm has to prioritise time, money, resources and the impact on its people. Within law firms, professional support lawyer time is also at a premium.

In looking at the overall ‘benefit spectrum’ to the firm and clients, where do online services fall? For me, other things would take priority – disaster recovery is key, as is risk management, client management, efficiency and productivity. IT investment in productivity impacts at a macro level (automating firmwide processes), a market level (developments such as e-conveyancing and e-disclosure) and a micro level (improving the efficiency of individual teams). Certain clients will also have very specific requirements and these are absolutely essential to how the relationship works. Some might argue that online services are in a lowly position in this pecking order or even that they are an unnecessary distraction.

Dangers of distortion in return on investment

Often claims of ROI are radically distorted. Even if people do get their initial calculation correct (see above) they can ignore shifts in the marketplace. Today a Nissan Micra is relatively more affordable than it was ten years ago, but it has a vast amount of additional equipment compared with predecessor models. The reason for this is simply the demands of the market. The value of online products will diminish with time. If it really is a fantastic idea, other firms will copy it. Quantities of free information on the web will also increase, challenging these products.

B2C rather than B2B

I have often heard people say that the reason there are virtually no examples of pure legal B2B products is that it is the wrong market. There aren’t enough customers, whereas the B2C market will boom and this will really accelerate under Clementi. Is this right? Law firm offerings in this sector have dwindled, although one might question whether any of their brands were big enough to make this happen.

Conflicts, too, could be an issue. Major corporate entrants may not struggle with these issues, but the success of these products is not a given. Do people still want to go to a lawyer to have a job done? Do consumers have as much time as we really think to read guides and to enter data into these products? I am not sure they do.

The ultimate effects of commoditisation

Basic economics teaches us that the more an area is commoditised, the more pricing is reduced. Ultimately, comparative pricing leads to a zero-price proposition. I am not saying firms should not commoditise online, I am merely saying that prices will inevitably fall.

Again this brings challenges to perceived ROI models. It also means that law firms may be committing to overhead increases in areas that are perhaps not as advantageous as they think. The real issue here may be scale. Is any law firm really big enough (both in terms of customers and brand) to reap the benefits of commoditisation in the short term, before prices dip?

The ‘abstainers’

Let’s pause for a moment to think of the abstainers. There are certain firms that have not really embraced online services. They have, however, been successful and have undergone significant growth. Is this achievable without online services? Is the perceived growth in ancillary revenue from online services really the result of market growth? How successful would these teams have been anyway?

Mavericks

At a recent online service conference it was commented how, even to this day, a large proportion of development of new online products is carried out behind the scenes. Some large high-profile projects were ‘black’ projects carried out in the backroom of an IT department. Susskind too has noted this phenomenon. If firms are so certain about the business merits of these products, why is this the case? Is it the fear of scrutiny or something else particular to law firms?

The latent legal market

Susskind talked about the internet opening up a latent legal market. Perhaps people will seek advice where they had previously not done so. The latent legal market might be less about producing online tools of the nature we have seen, but more about individuals gaining a better understanding of their rights on the web. They will become more litigious and as a result will generate more legal work for lawyers defending government and corporates. A simple example of this would be individuals bringing claims against banks in relation to charges. Online legal services may have limited relevance to this new market.

The future

Let’s look to the future. Is there anything that might affect our judgement on whether online legal services are a worthwhile investment?

The publishers

The publishers are gaining strength. Their products are becoming more integrated into legal work. Knowledge and technology are being leveraged together with lower overheads. Against this backdrop I think it will be very hard for law firm online legal services to compete, should the publishers really embrace this market.

The proliferation of technology

When you consider the amount of technological change we have seen in the past ten years, it is staggering. The technology available to most lawyers includes e-mail, Word, Excel, internet access, online knowledge, knowledge management systems, document management systems, document comparison and metadata e-mapping systems, case management, matter management, voicemail, e-mail, instant messaging, dealrooms, portals and more. The list is growing by the day.

Wikis and blogs are all the rage. Formerly deskbound lawyers can now do their jobs sitting in a car with laptops, mobile phones and BlackBerries. Technology will get cleverer and quicker. Technological fashions will come and go, and users will become more demanding and fickle. Against this backdrop I do wonder how quickly online legal services will become outdated. Will the financials mean that it is too difficult to justify an upgrade path? Will the additional PSL time prove prohibitive? Will online legal services become outdated and die?

The power of the computer

At the moment the human brain is barely more powerful than a computer. It is completely foreseeable that computers will begin to track human actions, including how they work on a particular type of matter. Process mapping will be driven much more by the electronic ‘memory’ of the computers that humans operate. Computers too will automatically generate the ability to action these processes themselves. The implications of this will be far-reaching. There may be a subsequent generation of online products that completely outpace our existing offerings.

Lower-cost economies

Even if you start with the premise that online legal services are viable, will this market become subject to an onslaught with lower-cost economies providing the same service but much cheaper? In any event, are these online legal services ripe for outsourcing to lower-cost economies?

Conclusion

We have seen some incredibly impressive work in the online legal services market. Mistakes have been made and lessons learnt. We will see more. When evangelising about technology, I really want to encourage innovation in this area, but unfortunately my conscience holds me back.

Outside the legal profession there are lots of great examples of online models working successfully in relation to products (eg Amazon and eBay). Converting a service to a product and then selling it online is, however, very different and to do this you need an impressive brand and real scale like businesses such as Halifax Legal Solutions and Tesco.

We need to continue to watch the market, but if I was a managing partner I would be very cautious about making large investments in this area. It would have to be something I was certain clients wanted (after discussing it with them) and that would be difficult to replicate (eg with high barriers of entry). I would also want to be confident that all other priority areas in my firm were well-resourced.

Notwithstanding the scepticism, I think there are opportunities, although they are small in number and not for the faint-hearted. 

Derek Southall is head of strategic development at Wragge & Co LLP.