Knowledge Automation’s Next Frontier - Legal Tech: Why We invested in LinkSquares
The rapid advancement of software and AI technologies has garnered significant attention for its potential to revolutionize legal workflows. This isn’t just about boosting the efficiency of top-tier law firms navigating complex litigation or empowering the average person to tackle everyday legal hassles like battling a parking ticket. We’re looking at how this influx of new technology is making waves in the evolving role of in-house counsel. As new tech collides with established legal practices, we’re seeing a sea change ushering in a new era of opportunities.
As the costs of outside counsel have soared and the demands for tighter governance, liability control, and swifter document execution have increased, there has been a significant push to bring more legal work in-house. This shift towards internal efficiency has intersected with heightened regulatory scrutiny and climbing fines, leading to a reimagining of the corporate legal structure.
The result? The rise of the Chief Legal Officer (CLO).
This shift represents a transformative change from the traditional role of the General Counsel (GC) – as a resource for legal guidance – into an authority unto itself, taking responsibility for massive risks across business units of the enterprise. In this evolved role, the legal department no longer just offers counsel but actively participates in board-level decision-making, shapes strategic direction, and controls a material budget. Looking ahead, we anticipate this newly empowered legal suite will play a crucial role in driving the adoption of legal tech throughout the enterprise.
Since the 1980s, reliance on outside counsel as consiglieres to the Chief Executive Officer (CEO) and business units (BUs) has declined as in-house legal teams expanded to reduce costs and lessen exposure to billable hours while enabling rapid decision-making. This movement profoundly reduced the inefficiencies of outsourcing decision-making concerning complex, fast-evolving businesses to private practice attorneys not involved in day-to-day business operations.
In 1980, only 10% of American lawyers were in-house. Back then, the move in-house was often viewed as taking the foot off the career gas pedal, the sign of a weary lawyer stepping away from the relentless pace of private practice to spend more time at their kids’ soccer games. Fast forward to today, and the tables have turned. In-house attorneys outnumber external counsel and are truly forward-thinking advisory counsel that sits just two doors down from the CEO.
In recent decades, the role of outside counsel has been tailored more to specialized tasks like diligence and discovery and, of course, corporate transactions. Today, that trend continues, with 53% of companies’ legal spend internal and 47% external. For the past several years, we have seen the role of in-house legal teams consistently broaden.
In-house used to refer to the General Counsel. However, the GC suite is no longer the main legal function. Instead, the Chief Legal Officer has ushered in the creation of legal operations, aka “legal ops.”
CLOs lead dedicated legal ops teams to drive efficiency through technology, data, and outsourcing – into any process connected to a legal workflow. Survey responses about key responsibilities of legal ops included process development and project management (92%), data analytics (84%), technical and process support (84%), vendor management (84%), and financial management (81%).
Functionally, the emergence of legal operations has had a dual impact on the role of the GC. On one hand, it has narrowed the GC's responsibilities by removing managerial and business operations from their domain, focusing more on oversight led by the CLO.
The ascent of legal procurement is an interesting, related trend. An emerging emphasis on strategic vendor selection for legal services, once a spot where a GC was free to kick work back to their old firms, reinforces the new framework for evaluating legal spend.
This is no minor trendline, nor is this transformation a minor shift. Legal operations have rapidly evolved from a novel concept primarily seen in technology companies to a mainstream practice. The statistics speak for themselves, "legal operations positions have grown by more than 75% since 2018," and "61% of respondents now have at least one person in legal operations," a significant increase from 21.2% in 2015.
According to a 2022 survey conducted by the Corporate Legal Operations Consortium (CLOC), approximately 46% of legal departments have established dedicated legal operations functions, showcasing ongoing adoption and integration within the legal landscape.
Meanwhile, enterprise legal spend has skyrocketed, rising 30% last year alone. The drivers are plenty. Expanding privacy regulations at both state and anticipated federal levels. Mounting employment and wage transparency laws. The complexity of cross-border operations.
In response, legal departments are not expanding proportionally. In 2020, 87% expected teams to stay put or shrink. Yet workloads have intensified as COVID exacerbated thin staffing. In the face of this, technology naturally fills the gap as a problem-solver. Moreover, the legal department evolution creates room – and necessity – for investment in tech solutions. It also helps that legal leaders have seen the success other departments have enjoyed through technology investments, and it’s sparked a similar drive to the same.
The newly emerged CLOs are active technology buyers; in a survey of CLOs, 41% said they plan to invest in new legal technology solutions in 2023. They’re also closer to the purse strings than ever before, a recent survey underscores this trend, finding that a considerable majority of CLOs, 77% globally and 81% in the US, now report directly to the CEO. This represents a stable trend over the past five years and a significant rise from 64% in 2018.
Their spend responds to various pressures, including compliance, privacy, and cybersecurity. Fittingly, last year, over half of CLOs said they implemented technology solutions to help comply with data privacy regulations, and 84% of CLOs expect their expenditures for regulatory compliance solutions to increase this year.
At the intersection of that cost pressure and the authority of the newly empowered CLOs to drive efficiency with tech, Gartner suspects a growing tailwind of in-house legal software spending as a result – 3x from about 4% in 2020 of budgets to nearly 12% in 2025.
They see software complementing a growing appetite to lean harder into nonlawyer staff. Already, we see movement from generalist legal to specialized legal resources and nonlawyer staff support. In fact, legal departments anticipate replacing 20% of generalist lawyers with nonlawyer staff by 2024 and Wolters Kluwer's 2022 Future Ready Lawyer Survey found that spending on legal ops is the top budgeted growth area for corporate legal departments over the next three years.
The good news is the emergence of the CLO has expanded the scope of legal oversight in enterprises. CLOs are now tackling responsibilities beyond traditional legal matters, such as compliance, privacy, ethics, risk management, government affairs, ESG, and cybersecurity response.
Arguably, this broader mandate suggests that the same lens of driving spend efficiency and carefully optimizing internal and external resources extends well beyond the traditional " legal " boundaries in the enterprise. This opens opportunities to use software to empower nonlawyer staff and remove legal friction across business operations. This could include streamlining the terms of legal contracts to facilitate transactions, shortening sales cycles through collaborative tools for commercial agreements, and enabling speedy and compliant editing of marketing content.
Most of these trendlines are significant to larger enterprises, but we’d argue they also offer opportunities to startups leaning on software vs human legal from formation. Even as they scale their legal suite, their native comfort with legal tech will give them a major operational advantage.
Ultimately, mounting risks and compliance challenges have birthed a new orientation to in-house legal, empowering that group with the authority to backstop and manage those risks. Budgets have followed – fundamentally charged with fighting that climbing legal friction with collaborative platforms and solutions for visibility that don’t slow the business units down.
But the potential extends beyond staying afloat amid the rising tide of legal obligations. There’s a more significant opportunity at play here – leveraging AI not just as a defense mechanism but as a proactive engine for revenue generation. This prospect of transforming the in-house legal function into a value-add center opens up an exciting dialogue that we’ll delve into further, alongside the potential for optimizing law firms themselves in subsequent discussions.