While private equity acquisitions and investment are not new to the legal technology sector, over the past few years they have become prevalent, opening the door to challenges that you would expect from a model that makes money from aggressive growth.
The legal sector’s increased focus on efficiency and automation means that it is ripe for disruption, with technology tools and vendors at the very heart of that. Culturally there is a shift: law firms have become heavily digitised in their working practices; even high-end legal practices are now considering case or matter management tools; firms are moving to the cloud in their droves; and in litigation, once highly controversial technology assisted review (TAR) is commonplace. Gen AI will undoubtedly follow suit.
A profitable, captive market
For private equity firms, this is manna from heaven. Legal is a hugely profitable, mature sector that is seemingly recession proof and investing in technology like never before. It is no wonder that legal technology as an industry is well and truly on private equity firms’ radar, and that is only likely to increase.
For legal technology vendors, this means they are continuously being approached with investment proposals that will seemingly allow them to build their product or go-to-market faster. To have access to the expertise, credibility and network that private equity often brings. To get a return on some of their investment or achieve an exit.
Less attractive for customers
and the end user.
While not all private equity firms are the same – and by private equity we also mean venture capital firms – they exist to drive excellent returns and can do that in several ways:
- Increase prices
- Drive sales teams harder with high (one might argue ridiculous) targets
- Create operational improvements
- Make further acquisitions and grow by expansion
We have already seen private equity businesses dramatically putting up prices in some sectors much to the horror of law firm customers. And we are seeing horrific targets that cannot be compatible with putting the needs of the customer first. Aggressive targets that cause stress for sales representatives and customers alike and can lead to encouraging unhealthy behaviours.
Quite often a private equity acquisition is sold to customers on the basis that the founding team will stay and continue to develop the product. But there are so many examples of founders and senior executives who have left as soon as they can, and often launch or begin working with competitive businesses as soon as they are legally allowed to.
The biggest concern of all? The only ones who can’t move quickly are the customers. Law firm technology is not just plug and play, it can be complex, and change is difficult. Change takes time.
The slightly controversial question that we would like to pose is this: the private equity sector is very aware that people in the legal sector won’t be able to move quickly, but are they gambling on it?
Do your homework
We have written before about how buyers can avoid the vendor consolidation merry-go-round and would also urge buyers to think about whether they want private equity firms in their life.
In every RFP process this should be factor. We at Kutana+Brochet, for one, can assure you that we will not be taking private equity money, and we don’t even have targets because we don’t think they are compatible with our collective end goal. Product is important but so is culture, and we believe in a culture where we put our end user first.
To find out more give Rob Simcock a call on +44 (0)333 202 0971 or email rob@brochet.co.uk