For more than 30 years, legal professionals in Germany have been using digital solutions to facilitate their legal work. Specifically, this article examines the digital transformation of corporate legal departments in Germany, including its drivers and resulting opportunities. Moreover, this article considers how the recent Covid-19 crisis may have had an accelerating impact on the already ongoing transformation.
A Short History of the Adoption of Legal Technology
When evaluating the digital transformation of legal departments in Germany, one should consider the origins of legal technology. As far back as the 1980s, pioneering software companies were developing digital solutions in MS-DOS for legal professionals including practice management solutions like PHARAO and expert systems. The adoption rate back then was rather low given the size of the German market for legal professionals at the time, and only slowly increased during the 1990s.
In the 1990s, the first Windows-based legal software solutions like Phantasy were developed and gained traction especially in law firms and a few legal departments. The main features of practice management solutions included case- or matter-based document management, deadline and reminder systems, claims and foreclosure management, as well as bookkeeping. Beyond that, many other solutions were being developed, such as more sophisticated expert systems. During the 90s, the German legal software market became more crowded, with a few market leaders eventually emerging that have managed to remain relevant through constant innovation, and that still have large and growing user bases to this day. As such, these solutions laid the foundation for legal technology in Germany and collectively paved the way for the digital transformation of German legal departments.
From today’s point of view, legal professionals using digital solutions back in the 80s and 90s can be respectively considered as the innovators and early adopters of legal technologies (see Figure 1). This becomes more obvious when looking at some advertisements of legal software companies back in the 90s, such as “Why does a lawyer need a mouse?”. At that time, not every legal professional would immediately understand that question or find an intuitive answer to it. The early adopters, however, did understand it and likely not only smiled, but got out their new Motorola International 3200 or Nokia handheld phone to make an order right away. (Figure 1)
In the 2000s, only a few legal software providers managed to spot the upcoming trend and the advantages of cloud-based and browser-based software solutions at an early stage and managed to develop a sustainable competitive advantage lasting until the 2010s and even the 2020s. Apart from the technological developments, the adoption of digital solutions by legal departments in Germany picked up even more in the 2000s. In addition to the widely prevalent and trusted fax machines, legal departments across all of Germany started using the extremely popular Microsoft Office Tool Suite, mainly Word and Outlook, either as a standalone solution to digitize the legal department or even in combination with practice management solutions in more sophisticated cases.
In the 2010s, there was a significant increase in the adoption of legal technologies in German legal departments. This was facilitated by the general trend of organizations initiating company-wide digital transformations. Within these, the legal department was a far less obvious candidate to start the digital transformation in a given company than, say, the production or customer facing departments, where immediate efficiency gains and advantages of digitization would be apparent. However, the general mission to digitally transform the company would eventually also affect legal departments, resulting in an increased interest in software solutions and tools for the digital transformation of legal departments as well.
Digital Transformation Drivers in Legal Departments
The desire to digitally transform legal departments is rooted in more than the simple desire go digital. According to Richard Susskind there are three key drivers that decisively influence the digital transformation of the legal industry and, as such, that of German corporate legal departments: the more-for-less challenge, liberalization (understood as increasing deregulation in combination with the dissolution of the monopoly of the legal service provider sector), and the aforementioned process of digitization.
First, the more-for-less challenge has arisen due to the pressure on legal departments to manage their costs, and their increasing demands on their external legal counsels to provide more high-quality services at significantly lower fees and with more transparency and accountability. In addition, external legal counsels have begun to slowly adopt new methods of sourcing legal services, as the real drive to cost reduction does not seem to be a matter of changing how legal work is charged, but rather of sourcing legal services in new ways. Richard Susskind’s efficiency strategy, involving the compartmentalization of legal services into different activities and the sourcing of those in the most efficient way to reduce costs, and his collaboration strategy involving clients coming together and sharing the costs of legal services, provide sound responses to the more-for-less challenge.
Second, calls for regulatory change and liberalization of the German legal industry to promote competition, reduce prices, and spur innovation have been increasing, as critics accuse the legal industry of being an unjustified monopoly that does not offer sufficient choice or access to justice to consumers by having anti-competitive working practices. In Germany, the permissibility of multi-disciplinary partnerships has enabled new legal business providers equipped with disruptive technologies to slowly make inroads into the German legal market and, as such, provide new sourcing opportunities and (digital) ways of working for legal departments.
Third, the digitization of German legal departments, being the most profound driver of the digital transformation, is having a transformative impact on the way legal services can be provided. Legal technologies are driving the digitization, and these provide great opportunities for facilitating the compartmentalization and automation of legal services, for meeting more-for-less demands for greater efficiency and transparency, and for accelerating the trend of outsourcing legal services by leveraging platform business models that facilitate the interactions between different stakeholders.
Moreover, the increase in the adoption of legal technologies in the 2010s was accelerated by the trend around LegalTech (legal technology). The term gained widespread recognition, especially through the venture capital industry where any type of technology for specific industries or verticals follows the format xx-tech. Defined in a generalized and very simple way, LegalTech involves the use of technology within the legal industry and among legal professionals. More specifically, according to the study How Legal Technology Will Change the Business of Law conducted by the Boston Consulting Group and the Bucerius Law School, legal technologies can be categorized into “enabler technologies facilitating the digitization of legal data, support-process solutions infusing new efficiencies into case-management and back-office work, and substantive law solutions supporting or replacing lawyers in executing core legal tasks in transactions and litigation cases.” Among the latter, increasingly modern technologies, such as artificial intelligence or blockchain technologies, are being used to create new types of legal software solutions. The use cases for – and the consequent adoption of – these innovative legal tech tools are yet to be fully explored in Germany.
Further factors driving legal departments to digitize and introduce legal technology solutions have included the trend of globalization which has impacted their ways of working due to the need to collaborate with remote colleagues, international partners, or affiliates across multiple locations and channels. In line with this has been the trend of new work, i.e. concepts around new ways of working in a global and digital age, including mobile and remote working models, such as home office. Additionally, the adoption of legal operations practices in German legal departments has slowly fostered a culture of data-based decision making. As a collective result, there has been an increase in demand for legal technology solutions supporting such new modes of collaboration and working in legal departments. These solutions offer centralized and secure data and document storage, immediate accessibility, smart searchability and secure shareability of this data for the legal department to collectively achieve the best results for their company as a team, independently of where each team member is located.
Barriers to Legal Technology Adoption Before Covid-19 (B.C.)
Most of the legal departments that adopted digital solutions in the 2000s and 2010s can still be considered as the early majority (see Figure 1). Why the early and not the late majority, given the large time span? Because a large percentage of legal departments in Germany have still not undergone a proper digital transformation yet, and as such have not yet adopted legal technologies.
The main reason for this is that the semi-analogue (strongly paper-based) or semi-digital legal departments have simply not yet suffered enough to implement digital and legal technology solutions. Especially for ones where globalization or new work have not yet had a profound impact on the legal department’s ways of working, the old ways of working still function very well and the need to digitally transform has not become obvious. When all team members of the legal department are in the same office, most official legal documents arrive via post and are sent out again by post or with the reliable fax machine, e.g. to courts, and everything in between is handled via e-mail and organized in desktop folders, and it all works, why would you change anything? A life entirely without paper or fax machines is still difficult to imagine for some legal professionals, even in legal departments.
The lack of pressure is sustained by the external environment of legal departments. The current state of digital transformation of other stakeholders, such as law firms or the court system, does not incentivize or pressure legal departments to use digital or legal technology solutions specifically catered to their needs and interactions with external stakeholders. Rather the opposite is true – that legal departments are the driving force when it comes to the digital transformation within the legal industry as a whole, as examined by Susskind.
Moreover, even though the use of e-mail has become widespread in most legal departments over the last two decades, the introduction of a special digital e-mail inbox for lawyers in Germany (beA – besondere elektronische Anwaltspostfach) caused great debate among German legal professionals, and not only because of its early security flaws or complicated user experience. This debate showed two characteristics rather typical for legal professionals, which differentiate them from other professionals in companies. German legal professionals are often very risk averse, conservative or skeptical, which is core to their professional work, but may also apply to digital solutions and technology, and on average are not the most tech-savvy professionals, since, amongst other reasons, the use of technology to facilitate their work has not yet received much focus in their education.
German legal professionals usually take great care in scrutinizing solutions with regard to data protection and data security standards. Given their profession, their duties within companies and the data and documents they handle, this is no surprise but rather entirely justified and essential. As such, assuring the highest standards of data protection and data security is of the utmost importance when procuring solutions as a legal department.
Today, given decades of experience, sophisticated legal software providers can even offer legal departmentscloud-based solutions meeting those standards. Initially, the fear and skepticism of cloud-based solutions among legal professionals had been strong and the consequent adoption of these rather modest. As a result, especially before Covid-19, the most popular solutions among German legal departments were browser-based software solutions that arehosted on-premises, i.e. on the companies’ own servers or in a private cloud, enabling them to ensure the highest possible data and cyber security according to their individual corporate standards and guidelines. Nevertheless, the adoption of cloud-native solutions or cloud-based solutions hosted in a public cloud, i.e. on servers not directly controlled by the company, has been slowly increasing in popularity among legal departments, even before Covid-19. This change in attitude has been mainly driven by companies’ IT departments, as cloud-based solutions offer significantly lower maintenance needs and cost savings in IT infrastructure. The choice of cloud hosting partners for cloud solutions most commonly lies with the company, so that again corporate guidelines and security standards can be met, with a universal preference among German legal professionals for choosing data centres and data warehouses that are located in Germany.
In addition to security concerns, legal departments, like most corporate departments, face obstacles within the company when trying to implement new software solutions. Besides having to get all stakeholders and decision makers on board and to unlock a budget, legal departments have to identify, select and procure a solution that is tailored to their needs, implement it according to their needs and processes, which often requires customization, or possibly adapt their processes to digital ways of working, and subsequently train all users and gain their acceptance in order to achieve effective adoption and actual use of the solution. This process is tiresome and can sometimes take many years, and this is one of the main reasons why many legal departments may not yet have undergone full digital transformation and belong to the late majority group (see Figure 1), even though they might have been wanting to digitally transform for several years already.
Acceleration of the Digital Transformation of Legal Departments During and After Covid-19 (A.C.)
The worldwide lockdowns caused by the Covid-19 crisis have forced companies all over the world, on an unprecedented scale, to move their work into home offices so that their employees can work safely from home. This has revealed a profound lack of – and need for – digital infrastructure and solutions in many companies, and therefore legal departments, to enable such modes of remote working and collaboration.
Having the ability, right infrastructure and solutions in place to work digitally and remotely has become more important than ever and turned out to be a vast competitive advantage for any company and its legal department during the recent months. The firms well prepared in advance, having undergone digital transformations (such as innovators, early adopters and the early majority) and having multiple, coherently working digital solutions in place, had hardly any problems switching to remote working within hours or days. A combination of modern cloud-based software solutions and VPN-enabled access to slightly older software solutions allowed these legal departments to access all their data and documents securely from home and to effectively continue to collaborate with their colleagues and partners and to support their companies, especially in these extraordinary times of crisis. In contrast, legal departments which had not yet undergone a digital transformation struggled with the changeover to remote working given the large amount of paper files that were impossible to all take home, to immediately digitize or to collaborate effectively on. If this was not a cause of suffering in those legal departments before Covid-19, it has undoubtedly became one since. Thus, the pre-Covid-19 stage of digital transformation and level of adoption of digital solutions and legal technology majorly affected a legal department’s ability to enable its team to work from home, and most importantly, to keep them safe.
The Covid-19 crisis has exposed the advantages and necessity for working digitally, even to the biggest skeptics among German legal professionals. Some skepticism and reservations may prevail, which may have their justifications. However, the increase in demand for digital solutions and cloud-based legal technology for legal departments over the last months has shown what an accelerating impact the Covid-19 crisis has had on the digital transformation of legal departments in Germany and the German legal industry as a whole. Many legal departments had to painfully discover how unprepared and non-digital they were and have come to realize that the use of digital solutions and legal technology has become an undeniable imperative for them. The findings of a recent survey by LOD (Lawyers on Demand) of 383 inhouse legal and compliance professionals from over 250 companies, in which 59% believed the Covid-19 crisis to have increased their workload despite the economic slowdown and drop in business activity across many sectors (https://www.artificiallawyer.com/2020/07/15/59-of-inhouse-lawyers-have-increased-workload-since-crisis/) make the necessity of using digital tools to effectively manage this increased workload even more obvious.
Finally, regarding the last 30 years of legal technology adoption, Covid-19 can be clearly acknowledged as a significant and, even if unpleasant, valuable accelerator of the digital transformation of German legal departments. German legal departments and professionals should understand this crisis as a great opportunity to not only digitally transform their work, but also to unleash their legal superpowers by being able to seamlessly continue delivering great legal work for their companies without sacrificing standards or security, at any time, from anywhere, whether there is a global pandemic or not.