Whilst many people have late August earmarked in their diary for an overdue holiday, the legaltech aficionados out there will have it circled for something more exciting: the release of the annual ILTA Technology Survey.

The theme from the 2022 edition that is grabbing the headlines is that law firms, catalyzed by the realities of hybrid working, are finally moving past concerns over the security of confidential client information and catching up to the rest of the world by embracing cloud technologies. If you listen carefully, you may hear 1000 legaltech CEOs muttering "finally..." under their breath.

When we first invested in Litera in 2019, the timing and pace of legal's cloud migration was a topic we spent a lot of time exploring. Legal felt 10 years behind what we were observing across investments in comparable industries such as accounting and financial services and we were surprised at quite how resistant CIOs were to the prospect of cloud adoption over the coming years. We saw this first-hand with Doxly trying to sell a public cloud transaction management solution to law firms in 2019.

Fast forward to 2022 and that picture has changed markedly. Cloud has been the pivotal factor in our diligence in every potential legaltech investment we have considered in the past 12 months. I wanted to share some of our observations from those exercises and how we think about it from an investor standpoint.

Pace of Cloud Migration

We're seeing cloud migration happen a lot quicker than even the most optimistic legaltech CEO would have imagined. In the 2021 ILTA Survey, 67% of Tier 1 firms were either "mostly cloud" already or adopting a "cloud with every upgrade" policy. In recent months, we have spoken to many law firm functional leaders with a mandate to move all of their technology stack to the cloud within 3 years to better enable hybrid work.

Vendor-Driven

A number of commentators have picked up on the disparity in cloud adoption across key categories within legal. This is primarily driven by the cloud-readiness of incumbent vendors with firms typically preferring to migrate existing solutions over switching. However, incumbents lagging on this journey are running out of time and we think many will find their product and proposition hard to translate to a cloud environment. 

This was a central pillar of the investment thesis behind Litera's acquisition of BigSquare - we strongly believe CFO's will look to move away from the age of heavily-customized, on-premise data cubes to cloud native BI and that BigSquare is years ahead of competitors here.

Enter the Horizontals

Legal's embrace of cloud is finally opening the door to the tech giants, such as Salesforce, Microsoft Dynamics, Workday, Oracle and SAP. This platform requires a substantial investment and firms are therefore looking to maximize the value they get by consolidating adjacent solutions onto these broad platforms. A number of legaltech vendors may find themselves becoming collateral damage if they do not re-evaluate their proposition to co-exist alongside them.

But it's not all doom and gloom - this is giving rise to opportunity for both legal ISVs that build on these platforms (eg Litify, Peppermint, Upper Sigma, Fulcrum GT) and vendors positioned to provide "vertical companions" (for example, a number of firms have paired Litera's Foundation platform with Salesforce in marketing).

Matter-Centric Teams

Whilst horizontal platforms are emerging in Business of Law, the prospect of a firm moving their DMS to the likes of Microsoft remains many years away, largely due to sustained innovation from iManage and Netdocuments. However, the broader Practice of Law ecosystem is not isolated and the disruption will come from Microsoft Teams becoming the core collaboration platform in the industry. 

84% of the largest firms had adopted Teams by 2021 - we expect this to reach 90% in 2022. However, only 15% of these had matured to provising Teams channels for matters or clients. The Eureka moment during our diligence of Prosperoware was sitting down with two Magic Circle firms who gave us a demo of their new matter-centric Teams templates where they were templating the best of Office 365 (Chat, Planner, Power BI) with legal products like Kira, iManage and Litera Transact to offer lawyers a 'single pane of glass' to access all matter workflow applications within Teams. As more firms realize the seismic shift in workflows and technology adoption this can enable, it will open the door for a number of Practice of Law tools to drive adoption.

Next-Gen Productivity

Many predicted that "Practice of Law" solutions would be the last to go to the cloud as they touch confidential work product. This hasn't played out. 62% of firms have already moved their DMS to a cloud environment. 

Over the last 5-10 years, we have seen hundreds of startups emerge with innovative solutions for end-lawyer productivity (typically founded by frustrated lawyers), but you can count the number that have truly scaled on one hand. Resistance to cloud has been a critical barrier to growth for many, alongside the difficulties faced in finding early adopters amongst a very risk-averse customer pool and the unsolved mystery of how to get lawyers to adopt new tools. 

Agonizingly for many founders, the advent of cloud in legal is coinciding with a challenging macro environment where they face new headwinds in raising growth capital and firms reducing innovation budgets. This will further catalyze acquisitions of the most promising solutions by platforms with strong balance sheets and existing trusted relationships in legal.