Investing in Tech Is Just One Piece of ‘Big Law’ Puzzle (Perspective)

Editor’s Note: The author of this post formerly chaired a major law firm.

It’s budget season in Big Law, and firms face the always challenging need to make long-term investments. One such investment — and a hot topic in Big Law these days — is the emergence of advanced technology such as artificial intelligence and its potential impact on the practice of law. It seems as if the discussion is all A.I., all the time.

Despite the conversation, the reality is that Big Law — both law firms and legal departments — are laggards in the development and implementation of technology designed to enhance the delivery of legal services. In their annual U.K. survey, PWC observed that “few firms are using … technology to create new services or business models which suggests that law firms are not leading the wave of disruption that could affect the industry.” This data led PWC to observe:

One issue law firms can’t ignore is the need to invest heavily in

technology, both to replace old systems and invest in emerging

technologies such as Artificial Intelligence.

While the survey was written based on data on the legal industry in the U.K., it rings even more true for the U.S. There are reasons, however, why law firms lag in the utilization of emerging technologies, in addition to a core reluctance to change. The truth is, even if there were general agreement in the industry about the shape of technology-driven change, the call for the industry to “invest heavily” is much easier said than done. For law firms that wish to respond to the call for additional investment in cutting edge technology — and there are a number of them — they need to deal with a number of issues. Two come immediately to mind.

How Will the ‘Heavy’ Investment Be Paid?

In the U.S., law firms operate on a cash basis. The ability to easily accrue earnings for research and development, common in other industries, does not exist in the legal industry. To accomplish this in a cash-based accounting system, firm management must explain to partners why they are incurring a tax bill without the cash payment necessary to cover that bill. Few law firm leaders have a desire to have that conversation.

Therefore, the costs associated with long-term investments need to be paid out of current cash flow.

This dynamic is nothing new — Big Law leaders have been managing this issue in a variety of ways forever. What is different, however, is the pressure on the process. The budget squeeze for 2017 is likely to be quite intense for most law firms. The industry continues to operate in a low-to-flat demand cycle with increasingly high pressure on the revenue side of the ledger.

At the same time, overall cost pressures continue to escalate. In any budget process, the various operational stakeholders always push for additional resources for their particular area. After years of belt-tightening, they may well be right. In addition, there are cost factors over which law firm management has only limited control — occupancy costs, core technology support, benefit costs, etc.

Finally, changes in attorney compensation — largely but not exclusively associate compensation — add further budget management challenges.

Against this backdrop, the desire to invest in developing technologies requires quite a high-wire act. Management must balance upward cost pressures with downward revenue pressure while trying to achieve the yearly profit return necessary to keep the partnership stable. This does not make it impossible, of course. Firms with true long-term vision and recognition of the need to differentiate their service delivery will find ways to make investments in emerging technologies. It will, however, be a slow, difficult process.

Lest one think that the cost of developing new technologies could be more easily borne by corporate legal departments, the budget process for corporate legal departments is enormously difficult for general counsel. These budgets are being reduced (or at least staying flat) with little flexibility for luxuries like technology development.

What is the Nature of the ‘Heavy’ Investment?

Taking it at face value, the investment is in hard dollars and cents (hence the foregoing budget discussion). In fact, many firms draw precisely that conclusion.

Smart investment in emerging technology, however, takes more than simply money.

It is easy enough, I suppose, to simply apply money, get a marketing bounce, and declare victory. But those victories will be short-lived. The real return on this type of investment comes when it is part of an overall strategy to rethink and redesign the service delivery model. This means an understanding of how people will engage with the technology, how they will behave differently, the change effort necessary, and a deep understanding of the work processes necessary to mesh the technology with the people driving the results.

This is a challenging assignment. In order to truly gain a benefit from the technologies working to reshape the practice of law, firms must recognize the need to invest not just with money, but in people bound by a vision for how those forces can operate together for the benefit of clients. The firms that cut that proverbial Gordian knot will truly distinguish themselves in a challenging market.

For more essays from Stephen Poor (@stephen_poor) and Seyfarth on change in the legal industry, visit Rethink the Practice.