Dig the new breed of law firm

Legal tech startups, especially those using or claiming to use artificial intelligence (AI), are still attracting record investment and attention worldwide, and this is likely to continue. However as Legal Pioneer observed, while there are more venture capital funds investing in legal tech than ever before, challenging economic and business conditions mean they are less likely to fund companies on a path to profit. At the same time, current trends indicate that tech innovation is being driven by a new sense of purpose. As consumers and investors increasingly base decisions on environmental, social and political considerations, environmental, social and governance (ESG) is the new key to financial performance and investor confidence.  

ESG dilemma

ESG has only recently emerged as a critical success factor. CB Insights data shows ESG mentions on earnings calls skyrocketing since January 2020, with only a short dip at the start of the pandemic.  

ESG scores are benchmarks used to measure company and firm reputation and impact in relation to, for example, climate and environmental risks, political affiliations and scandals, and diversity and inclusion issues. They have quickly become key indicators for law firms and their clients.

However, ESG is not straightforward to measure. As CB Insights’ report observed: ‘ESG scores are often subject to inaccuracies. Because a company’s environmental or social impact cannot be measured with traditional datasets like financial statements or SEC filings, the scores depend heavily on self-reported data.’

Reputation is another key indicator: 72% of business leaders surveyed by applied AI company Signal AI ‘believe that reputation will be a bigger driver of business performance than margin’ by 2027, and 92% think ESG will have an impact on reputation within the next 12 months. This research was conducted in February, just before the start of the conflict in Ukraine and the subsequent withdrawal of most global brands from Russia.

Report cards

The focus on ESG and reputational issues is breathing new life into legal AI, which although now incorporated into mainstream and startup legal systems and applications, has not delivered on expectations of wholescale transformation. Rather, legal AI has focused predominantly on standardising and automating contracts, and applying data analysis to legal and management processes and decisions.  

ESG is giving legal AI a new direction, helping firms clarify their ESG agenda and avoid potential reputational pitfalls. Legal-specific startups use AI software to capture and analyse alternative datasets that help firms and legal departments to manage ESG performance and reputation. This also enables corporate counsel to make informed decisions around appointing panel firms and instructing external firms on specific matters. Because they use verified publicly available data, they take self-reporting beyond greenwashing (making unsubstantiated claims related to environmental sustainability).

ESG data analytics company Impactvise creates sustainability report cards specifically for law firms, giving them a 360-degree view of their ESG profile in three areas: performance against 18 ESG metrics tailored to the legal sector; the transparency of their ESG reporting; and their external ESG impact. This helps firms develop a clear strategy for sustainability, compare their score against that of their competitors and identify areas for improvement.

‘Because there are so many metrics, firms first need to identify their core purpose and what they stand for – which metrics are important to them,’ explains co-founder Adrian Peyer. ‘They can then measure their own performance against best practice – we have so many examples of what the best firms are doing in each area – and work on improving in those areas.’

Impactvise collects and analyses data on 950 law firms worldwide. AI is essential for scalability – to collect and collate real-time data on so many firms – and to identify correlations and insights within a large and growing dataset, such as which firms (by size, profile, region and practice area) are making progress on ESG. It relies on publicly available data – what firms publish and what is published about them – and examines how transparent they are about ESG initiatives. And also how they are perceived, by bringing in real-time sentiment analysis from news media and social media profiling.

As well as objectively benchmarking themselves against peers and competitors, firms use Impactvise to prove authenticity when clients (increasingly) request information about their ESG initiatives. ‘No law firm would publish negative information about themselves, but potential clients will check their claims against how they are reported in the media, for example,’ says Peyer. ‘For general counsel, the focus is on aligning the legal department’s values and practices, including their choice of external counsel, with the company’s ESG strategy, and adding data to the relationship-driven selection process.’

Objective analysis is also about accountability. ‘There is always risk of greenwashing because nowadays everyone has diversity and sustainability targets, but capturing the data holds people accountable to what they said,’ he adds. ‘In five years’ time we will be able to go through our database and find out whether or not they achieved those targets.’

Impactvise is aligned with another legal tech startup, Hence. This is an in-house counsel management platform that provides in-house counsel with real-time information that helps them to select lawyers whose values reflect their own, and manage and evaluate their relationships with external lawyers and firms. Co-founder Sean West spoke at Future Lawyer Week in London on the geopolitics of external counsel selection.

As West explained, ESG adds another layer of complexity to an already complex world. In addition to the increase in corporate scrutiny due to expectations around ESG, events in the news have prompted companies to reflect on what they stand for. For example, the murder of George Floyd focused companies on racial diversity, while the #metoo movement got them thinking about gender equality. And in the US, Law Students for Climate Accountability have been producing the law firm climate change score card since 2020, analysing the top 100 US law firms by their contribution to the climate change agenda. More recent news stories have focused on which firms have ceased operating in Russia.

Hence uses AI to bring together in real time internal corporate information (which lawyers have been instructed on different types of matter, and their effectiveness and value for money) with external information from multiple sources, including factual information and sentiment analysis from news feeds and social media (who else they represent, their success rates, their perceived values and so on). This enables corporate counsel to make informed real-time decisions about engaging lawyers and (panel) firms who align with their company’s requirements and their values, and helps to avoid potential reputational issues.

Legal entrepreneurs

Entrepreneurial law firms have the freedom to create their own purpose-led business model and culture. Alice Stephenson, founder of Stephenson Law, presented on ‘Why law needs more entrepreneurs: the case for a new breed of law firm’ at Clio’s Innovate Legal event in London. When Stephenson set up her firm in 2017, she made a conscious decision to shift from the traditional law firm and prioritise work-life balance, flexible, agile working, diversity and inclusion, and innovation (including technology). When asked about how she went about choosing technology for her firm, she highlighted a perennial legal tech dilemma – the confusion created by an embarrassment of choice. ‘You can’t use everything – you have to be strategic,’ she said.

Stephenson’s strategy is based on managing the data flow around the business. Cloud computing supports this and facilitates business agility. ‘The great thing about SaaS (software as a service) products is that it’s easy to switch,’ she added. The flexibility to switch systems, and add and remove applications, means that you can ensure your system is always up to date and reflects your business requirements as the firm grows. Stephenson is committed to ‘being the change’. She believes that law needs more entrepreneurs and to that end she has produced a guide based on her own experience to setting up your own law firm.