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LegalFebruary 04, 2021

It’s time for corporate law departments to spend more on tech

This item originally appeared in Corporate Counsel Business Journal.

One of the most valuable, yet largely overlooked, insights from the CLOC 2020 State of the Industry Survey was about technology spend in corporate law departments (CLDs). According to the survey, “large” CLDs (defined as having more than $10 billion in revenue) spend an average of $600k+ on technology per year.

If that sounds like a sizable amount to you, you’re wrong. In fact, benchmarked against the best publicly available data, it appears woefully inadequate. Large CLDs spend, according to the CLOC survey, about $61.4 million per year on law firms and other vendors and about $38.3 million on internal expenses (mostly salaries, probably), for a total of around $99.7 million. That means they are spending only about 0.6 percent of total law department spend on tech. In contrast, the broader corporations’ CLDs are part of spend, on average, according to Deloitte, 3.64 percent of total company revenue and up to 7.88 percent, in the case of banks – on technology. That is significantly greater than the 0.6 percent CLOC says CLDs spend, especially since the CLOC number is calculated as a percentage of spend. (The CLOC number would be much lower if calculated as a percentage of revenue.)

Defenders of corporate law departments might argue that while the broader organizations spend more, that figure should not be used to suggest law departments are behind on technology. After all, the argument goes, what’s important is how much technology the law department is using, not who pays for it. Often technology, like Microsoft Office, is paid for by IT or other departments, but legal is still using it. Therefore, CLDs are not the presumptive luddites that tech spend statistics might make them appear to be. Although a valid argument, it doesn’t tell the whole story. More than 50 percent of technology spend now occurs in individual business units, versus the old model where it went through a centralized purchasing process. That means departments like finance, HR, and marketing are spending more and more money on technology out of their own budget, giving them more “say” and increasing the likelihood the tech purchased meets their actual needs rather than the needs somebody else thinks they ought to have.

The C-suite demands CLDs become true leaders

Legal should be right there with them. But per the numbers, legal isn’t doing that. Legal is behind.

For the most part, it is nobody’s fault, but the result of a complex constellation of inherited reasons that include the following:

  • Legal is small. The global legal industry recently grew to over $1 trillion in size and thinks it is big. However, that is only about 1.3 percent of the world economy, compared to about 10.9 percent for medical. It’s no surprise that money and talent prioritize markets that present the greatest opportunity, and where solutions can scale massively. Legal isn’t particularly attractive in this regard.
  • Legal is viewed as a “one-off” function. Unlike accounting, which operates on a monthly cadence that is highly routinized, legal is often viewed as a one-off. You only call legal when you have a legal problem. Now that legal is getting more attention, it turns out more legal work can be routinized than originally believed. But that doesn’t change the fact that, historically speaking, legal was viewed as a low ROI area in which to add process and technology. The industry is still suffering from that misapprehension.
  • Corporate law departments hire out of law firms designed to produce good lawyers, not necessarily good leaders or managers. Many in-house folks come out of law firms. Law firms bill hourly and therefore make money every minute their attorneys are advising clients and typing up legal documents; in contrast, they “lose” money every minute spent managing. That mentality can carry over into the legal department when law firm professionals go in-house. Many of them continue to function as individual contributors, potentially unaware of the opportunities (like tech) that larger, systemic ways of thinking would uncover.
  • Solutions that don’t meet expectations. The last couple of years have seen a trend of legal technology companies hiring lawyers not to be part of their legal department, but to help with product design. This gives them an insider’s perspective and lets those lawyers talk to clients and potential clients in a way that helps identify and solve client pain points quickly and easily. This is a great step but is relatively new in the industry. Many legal tech solutions brought to market have missed the mark on addressing law department needs because they were driven by developers that don’t understand the legal market. This has resulted in solutions that don’t meet the department’s needs, have low user adoption, and probably worst of all, reduce confidence in legal tech.

So, what is a corporate law department to do? As mentioned above, solutions are already underway. Despite the market being relatively small, investment has flowed into legal tech in the last few years, in part because it is seen as a “blue ocean” where there is less competition per opportunity than in larger areas such as medical. The rise of legal operations is dispelling the myth that legal isn’t susceptible to process and technology, and the C-suite increasingly demands that CLDs become true leaders and managers, rather than subject matter experts you only go to when there is a problem. Legal tech companies have started to recognize that they need to incorporate an insider’s perspective to build truly relevant solutions.

The biggest thing CLDs can do is acknowledge the problem. The perception is that law CLDs do not operate like other parts of the business units in most organizations, and often times for good reason – but this is really an opportunity. Be a lawyer for yourself. Gather exhibits like the benchmarking data above and advocate for more resources. Show that technology and process can create a win/win for everybody, but further investment is needed to make that happen. Only then will we see the technology investment percentage in legal rise to rival the tech spend of other business departments.

Nathan Cemenska
Director of Legal Operations and Industry Insights

Nathan Cemenska, JD/MBA, is the Director of Legal Operations and Industry Insights at Wolters Kluwer's ELM Solutions.

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