Will A Recession Reduce Legal Tech Spending?

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Will A Recession Reduce Legal Tech Spending?

Given the current economic situation that we are navigating it seems appropriate to ask: ‘Will a recession reduce legal tech spending?’ Here is what a range of experts from across the market said, with responses divided between ‘Yes’, ‘Yes, But…’ and ‘No’, with plenty of nuanced points made as well.

YES

Tara Waters, Chief Digital Officer, Ashurst

Most businesses will already be looking carefully at their budgets and where they can curb costs. I would expect that this will lead to an overall reduction in budgets for legal tech (and other presumed discretionary) spending in the near-term. In-house teams especially will be challenged if they do not have their own allocated budgets for spending.

However, some legal technologies can help to drive significant cost efficiencies; if the on-boarding teams can demonstrate these benefits with hard(er) metrics then savvy businesses will continue to invest prudently.

Haley Altman, Legal Tech Founder and Strategic Advisor to Litera

I’ve talked to a number of different firms and vendors about the impact of the downturn on tech spending. While many firms are pushing off budget decisions until 2023 to better assess impact and thereby lengthening vendor sales cycles, others are continuing to engage in buying decisions for value-add technology. Vendors will need to further demonstrate clear ROI for new projects. It does seem likely that spending could be further impacted in 2023. 

Noah Waisberg, CEO, Zuva (and founder and former CEO of Kira)

A recession would almost certainly pause and reduce spending by law firms. In 2020, we saw nearly all firms try hard to reduce their discretionary legal tech spend. Most memorable, to me, was a tech-sector-focused law firm that was killing it financially, but still was concerned that bad times might be imminent. Typically, renewals were no big deal with them; the managing partner got involved in 2020. The renewal worked out okay for us in the end, but drove home how financially conservative law firms tend to be. 

Inhouse is probably less certain – will perhaps pause spending, and then reduce it at companies (1) where their business has dropped off or (2) where the ROI isn’t strong. Overall, I expect more heterogenous behaviour than with law firms.

YES, BUT….

Richard Mabey, CEO, Juro

Any recession or economic downturn can lead to reduced spending on technology. Legal tech is no different. However, in-house legal teams should be looking not so much at absolute spend but at what is the cost of not automating routine processes.

For example, in the context of contract automation, if an in-house legal team decides against improving their contract workflow (whether through existing tech or by buying something new), but the company is still growing, then their contract volumes will still increase. That increase in admin work has to land somewhere – which either means more admin work and less selling for the sales team, or more headcount or outside spend in legal to handle the paperwork. 

If a specific legal tech solution doesn’t provide an upside that contributes to growth or reduces costs, then there’s no doubt it will have a harder time finding customers willing to pay for it. That said, so much of the market growth in automation solutions has been driven by the fact that it’s cheaper to automate processes than to endlessly hire people to grind through them – and that situation might even be more rather than less acute in a downturn.

Casey Flaherty, LexFusion CSO and Co-founder

Depends on how narrowly you define ‘legal tech spending’. In the narrow sense and in the near term, yes, we predict pure legal tech spending will be down – like any form of spending where delay is an option. But, overall, we predict the downturn will accelerate legal innovation, which will continue to capture a higher percentage of mindshare and, ultimately, walletshare (if episodically, unevenly, and more slowly than any of us would prefer).

To deploy an example Artificial Lawyer previously covered: if the downturn activates a savings focus that convinces in-house departments to move more quickly to using New Era ADR, does this constitute spending more on legal tech? It is not a tech line item. And total spend decreases. Yet the change is fundamentally tech enabled.

We expect similar dynamics to lead to more immediate eagerness to explore tech-enabled managed service relationships and revisit line items that have long been on autopilot (e.g., ediscovery, court reporting).

More broadly, we suspect this downturn will serve as another reminder that adding headcount is a linear solution to the nonlinear problem of exploding legal complexity. Throwing bodies at the problem is insufficient generally, and then functionally unavailable when times get challenging. As both law departments and law firms pay the interest on their debts from the recent talent wars, perspectives should shift on how to better meet current, and especially future, business needs. The inescapable conclusion that digital transformation is inevitable (as much as we try to deny/avoid/delay it) suggests that legal tech will bounce back sooner and more strongly than other areas of the market.

NO

Shilpa Bhandarkar, CEO CreateiQ, Linklaters

I don’t think spending will necessarily reduce, although how the budget is used might look a little different. I’m sure legal teams – private practice and in-house – will undoubtedly continue to scan the market for products that make their work more efficient (all the more need to do that in a recession). However, they will likely also increase their focus on adoption, training and integration rather than only onboarding new tech, which is where much of the focus has been over the last few years.  

Joe Cohen, Head of Innovation, Dentons

I don’t believe that legal tech spending will decrease in the event of a recession, if anything the commitment is only likely to grow over the coming months as both law firms and clients search for ever greater efficiencies. Many firms massively increased legal tech spending during the early parts of covid, and I would like to think that will hold true now as well.

Tom Dunlop, CEO, Summize

Our expectation would be that there should be no decline in legal tech spend where there are proven efficiency gains. Legal software is designed to provide efficiency in the P&L and ultimately help surface or manage risk which is particularly important in a recession. CLM specifically can make it possible to identify missed revenue opportunities (e.g. upcoming renewals) to protect the bottom line, as well as speeding up the path to revenue and making operational efficiencies in the legal team that have a direct impact on the business. In fact, research shows a clear link between poor contract processes and lost revenue – so in a period of recession, these investments are more valuable than ever.

Bill Piwonka, Chief Marketing Officer at Exterro

On the contrary, based on my experience and what Exterro is seeing in the market, I would expect spending on legal technology to increase during economic downturns. Technology enables organisations to manage their business processes more efficiently and cost-effectively.

There tends to be less scrutiny of productivity during strong economic periods, but that is certainly not the case when margins are under pressure. Historically we’ve seen strong, market-leading software companies increase share and come out of downturns even stronger, as companies turn to them to help optimize business processes and drive efficiency.

Jorn Vanysacker, Co-CEO & Founder, Henchman

Today, we do not see any slowdown in legal tech spending within law firms. Moreover, the market pull for Henchman increases month over month. From a corporate legal department perspective, in some industries, we feel there is top-down pressure to save costs where budget freezes are a reality. 

At Henchman we are bullish on the legal tech spend in the future, as legal tech will help legal professionals and firms to prevail, both in a bear and a bull market. We do believe a recession will weed the ‘must have’ from the ‘nice to have’ legal tech tools, and will favour the tools with a quick Return On Investment vs. long implementation cycles.

David Carns, Casepoint, Chief Revenue Officer

Legal tech’s purpose is to make legal teams more efficient and effective: ‘Review more documents with fewer people,’ ‘streamline the contract approval process to keep headcount low,’ and ‘manage matters in a central way for better tracking and reporting,’ are all promises that legal tech delivers on today. 

Given that track record, I would argue that an economic recession would put greater reliance on legal tech since, sadly, recession does not extinguish the need to continue to manage internal investigations, litigation, or compliance. Will legal tech spend grow during a recession? Probably not. But I doubt we will see a reduction in legal tech spending anytime soon…especially during a recession.

Stuart Whittle, Partner, Weightmans 

I would very be surprised if the spend reduced given I anticipate that suppliers will seek to put up their prices and clients will increasingly expect more technology-driven innovation.

Jonathan Patterson, Managing Director – Innovation & Ventures, DWF

Based on what we are seeing so far I don’t think an economic recession automatically results in reduced spending on Legal tech. However I do think it will force law firms and in-house legal teams alike to develop more robust investment cases and commit to hitting clearer targets for the return on investment. Budgets will be tighter so there will be more competition for every pound invested, so Legal tech has to show how it will deliver real cost savings or support profitable revenue growth. Overall spending might dip, but it will be a great opportunity for the best performing legal tech tools to show their true worth.

And also:

Elliot White, Head of Innovation & Legal Technology Operations, Addleshaw Goddard, took a different approach and focused on how a recession may impact the legal tech teams inside law firms, as well as the wider market. He also is clearly in the ‘No’ camp.

Weathering the storm

Firms offering a wider range of legal services that help them weather these market conditions will be well aware of the previous client pressure to increase efficiency in the delivery of their legal work.

We anticipate that through these challenging economic times it is highly likely that these same requests will resurface, and firms with the right teams in place to support their fee earners will thrive.

Innovation investment

Armed with that previous knowledge rather than slowing down on hiring Legal Technologists / Legal Engineers I would anticipate that firms will press ahead with hiring these key roles to helps deliver legal work more intelligently as requested by clients. For some it will be a scramble to create an officially recognised Innovation team that they may have previously been able to do without, or expand the existing teams beyond 1 or 2 people.

Currently we have no plans to cut investment in our staffing numbers, if anything we still expect these to grow.

Our technology investment is also forecast to grow as we increase the usage of existing technologies we have in place to support our approach to offer law, plus more to our clients finding the smartest ways to deliver the biggest business impact and efficiencies expected by them. We will also continue to invest in new technologies that can improve the solutions we deliver for our clients as well as improve our internal fee earners day to day experience.

Legal Tech Market

Whilst this isn’t the end of investment in Legal Tech startups, I do expect where and what money is invested to be scrutinised more than some of the free flowing cash of the last 5 years. We’ve already seen some companies coming to the end of their investment runway which have been allowed to fail rather than being able to raise further funds.

The knock-on effect will be that we may see less new players in the market during the recession as well as some further failures and stressed acquisitions. I’d also expect acquisitions to slow down and the revenue multiples to fall back to something more sensible and actually be related to the revenue of those companies being acquired.’

Conclusion

This isn’t a scientific study, but based on the responses then the majority feel that legal tech spending will not noticeably drop, and interestingly legal tech vendors and law firms were in both the Yes and No camps, so this is not just a case of software sellers saying everything will be fine. I.e. buyers also said they see no drop off in spending.

One thing that is clear however is the need to really prove value. For example, a law firm during a recession may perhaps not significantly cut tech spending, but those in charge of making buying decisions will likely be under more pressure to show the positive reasons for their choices, e.g. how does this tech ‘help the lawyers through these tough times’. And there will be room here for both economic and human-centric reasons.

And, it’s worth noting that some of the experts here go as far as to say that a prolonged downturn may even accelerate legal tech spending as it will actively help the lawyers to deal with the pressures they and their clients will face.

Of course, it would be best if there were no recession at all in any country, but if there is, on balance, there is plenty of optimism that the market will stay robust. That said, several experts noted that it’s just common sense that there will be some cutbacks and they could be right. Perhaps we will see a varied response, with some firms cutting back while others actually increase spending…?

Overall, the more optimistic view wins out here, but we will see…!

Richard Tromans, Founder, Artificial Lawyer, October 2022

Legal Innovators UK Conference – London, November 10 + 11

If you found the topics covered in this article of interest then come along to the landmark two-day legal innovation conference in London. Day One: Law Firms and ALSPs, Day Two: Inhouse and Legal Ops. We have a fantastic line-up of speakers from across the legal and legal tech ecosystems for this event focused on learning, sharing and networking. See you there! 

Tickets and more information can be found here.