Ka-Ching: What's Behind Legal Tech Providers' Spike in Prices?

After a months-long drought, funding started trickling back again to the legal technology industry earlier this year, in part due to the appeal of generative artificial intelligence.

But this wave of venture capital (VC) and private equity (PE) funding may have brought more than just cash to legal.

Industry experts told Legal tech News that some of the recent investments have led to significant price increases across the industry-in some cases doubling existing fees-in an effort from vendors to narrow in on bigger clients as they approach end-of-year goals.

This chase for "whales" among firms and legal departments is not only starting to price out some of the smaller and midsized clients, but also to shrink the already small pool of customers that VC and PE-backed providers traditionally go after.

"Venture capital a little less, but private equity especially, they expect their returns and they want to see the roadmap that they bought into when they funded the company," said Brad Blickstein, founder and principal of Blickstein Group and NewLaw Practice co-head at Baretz+Brunelle. "And it seems at least that the quickest way to hitting those revenue numbers is by a smaller number of big deals."

A Perfect Storm

Of course, price increases are nothing new to clients, even in the legal tech world. But Sean Weller, senior consultant at Argopoint, a management consultant to Global 500 and Fortune 500 corporate legal departments, explained that the industry has reached somewhat of a tipping point, leaving many providers with few options other than to raise their fees.

"Both venture capital and private equity backers are placing significant pressure on legal technology teams to start delivering profits," Weller explained. "Think about the typical lifecycle of a VC-backed startup. The average startup takes seven to 10 years to go from founding to [initial public offering] or exit. And I think investors are getting the seven-year itch."

Still, not all startups are approaching this challenge in the same way. Some-although a minority-have slightly decreased their prices, trying to expand their customer base. But for many others, the focus is on squeezing the most out of their clients.

"Not only are [legal departments] getting requests from their law firms to increase rates by extraordinary amounts compared to the historical record, but they are also getting a lot of pressure from these providers to expand the use of that legal technology in their legal departments," Weller added. "And I've seen these requests come to in-house legal departments at both a higher rate and at a higher cost than I've seen at any time in the past five years."

Add to this storm the boom of generative Al, which has, too, left its mark on prices. Providers have had to hire prized Al talent, whether developers or engineers, that come with high salaries.

"Everyone's in the market looking for these high-paying roles. These expensive roles. ... So where do you get that cash from? Where do you get that budget from?" explained CJ Webster, founder of C Webster Consulting. While sales talent has historically paid "for itself" through sales, Al-focused roles are not as directly linked to instant profits and require pricing adjustments elsewhere.

"That is on another side of the budget," he noted.

Smaller, Midsized Market Left to ‘Fend for Themselves'

These higher fees are already causing some legal teams to reevaluate their stack of solutions, especially when vendor contracts are expiring and subject to price increases.

"I took a gamble by locking in many contracts over a five-year period which is usually unorthodox. They will usually do three, if that, particularly because of that. And thankfully now I'm feeling a little bit better about it. But in three years I'm certainly going to be in trouble," said Ed Empamano, chief information officer at Dykema.

He added, "Other folks that I know that the terms were up or whatnot, they're seeing some massive increases. Of course they're negotiating, they will come to something-but it's certainly not flat."

And it's not just the smaller law firms and legal department clients that may end up being priced out. Weller said that even "some of the largest legal departments in the world" are being quoted at levels that "they just simply can't afford."

Still, these legal tech providers are betting on business with large clients.

"There's a trend where we will see these legal tech companies, especially in my experience with litigation tech, driving towards those enterprise-level agreements with the large firms leaving some of the solo and smaller firms left to fend for themselves, even those boutique firms," noted Haydn Jones, director of business development at Benchly.

It's unclear how sustainable this smaller-net, bigger-fish approach will be for the legal tech world—especially amid the uncertainty that generative Al brings to legal.

"I'm starting to hear rumblings within the Am Law 200 where they're like, you know what, we're not taking a pay increase right now," Webster said. He added, "We want to wait because you're telling me what this product can do. You're not showing me that I can really use it right now."

source: ALM | LAW