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Handling the Truth About Legal SaaS
breaking down Clio and Filevine
Legal SaaS is experiencing a bit of a boom. Investors are clamoring to pour dollars into all kinds of different solutions. Even with all the investment and despite the specialized nature of the solutions, legal SaaS is kinda weird to talk about from a vertical SaaS perspective. A lot of the software that gets sold looks more like horizontal software that is sold into in-house legal teams.
In fact, some investors have altogether written off the more vertical specific software that’s focused on the core providers of legal services: law firms. We will get to the reason in a second, but at the outset, it’s important to recognize the eccentricities innate to legal SaaS. We can most definitely talk about vertical SaaS focused on law firms (and we will), but can we talk about the broader legal SaaS ecosystem in a meaningful way?
I think we can. In part, the quirks stem from how the legal profession works. First, you can split legal into two different subverticals: litigation and transactional. Litigation is Tom Cruise and spans all types of sub-subverticals like constitutional law, personal injury, employment, etc. Transactional on the other hand is broadly anything that has to do with contracts and business law: things like fund and business formation, SaaS contracts, and more. After law school, most lawyers end up practicing under one of these umbrellas at a law firm. Some lawyers end up practicing at law firms for their entire career, while others end up practicing “in-house,” at a company.
Ordinarily, if someone was an accountant at an accounting firm and then joined a startup, we wouldn’t call software made for corporate accountants, a “vertical specific system.” It’s just QuickBooks, which is as horizontal as it comes.
Law is different. It’s implicit even in the term “in-house.” The legal profession somewhat views itself as an independent fiefdom within corporates. Sure, they share the company budget, but legal software ends up far more tailored to the quirks of the legal system as a whole. And because of this, a lot of workflows end up shared by in-house counsel and outside counsel (law firms).
This however isn’t the only peculiarity. The way this ecosystem interacts is primarily in the form of text documents. There is very little courtroom drama; what matters is the written word that then gets transmitted between law firms, their clients, their adversarial counterparts, and the court system.
So broadly, I think a lot of different legal SaaS solutions whether focused on in-house or law firms end up kinda interacting with each other in an ecosystem even if it feels a bit more horizontal. The ecosystem is weird and it doesn’t map perfectly.
With that said, today is really about the core software, legal practice management (LPM) systems, used by law firms. And I’m mostly interested in figuring out who wins a head to head battle for the hearts and souls of law firms over the next 20 years.
I don’t claim to be an unbiased observer in this. Fair warning: a lot of my analysis on this is colored by my views on what vertical SaaS should be like and what the most successful companies will prioritize. As such, there’s a chance that I’m wrong or missing something.
Perhaps, then it’s helpful at the outset to say that I really didn’t expect to land where I have when I set out to capture the legal SaaS landscape.
A couple years back, when I first did a survey of the legal SaaS scene, Clio seemingly had won. Admittedly, I hadn’t developed a strong stance on how to pick winners, much less develop some thoughts around successful vertical SaaS as a category. But when I started to look at the landscape once more, I was somewhat surprised to discover that Clio hadn’t cleaned up.
There is a true war going on between Clio and Filevine within the more complex (and more lucrative) segments of law. Sure there are some other LPMs, but I am fairly confident it’s a two-horse race for market share over time and the jury is still out on what ends up happening.
So today I want to try to distill the history of the companies and their products, focus on where the solutions need to go, and then touch on why I think Filevine wins the head to head battles on a long enough time horizon. If you end up disagreeing with me, I'd love to hear it!
In many ways, Clio’s path to becoming the most well known LPM mirrors Procore… except if you thought it was difficult to get contractors to use technology at the jobsite, try lawyers.
It’s not that lawyers are universally averse to technology, it’s simply that great technology hasn’t historically had the same benefit to lawyers as it does in other industries. Usually the pitch to industries is something like: save time! Except, law firms don’t really want to save lawyers time. They want to charge more for more of it.
A lot of this stems from how law firms tend to operate: the billable hour. Law firms drive revenue through throwing the time of partners and associates at a client’s problem. The result? A model where firm revenue is tied to the raw number of hours (or 6 minute increments) that are spent on a problem.
So yes, back office efficiency has mattered somewhat, especially to reduce reliance upon support staff, but the whole legal tech space has been facing an incentive misalignment issue for years. Any attempt to decrease attorney time spent on issues must come up with a solid justification for why software might decrease billable hours and thus revenue.
The other real influence on why it has been so hard to bring better software into law firms is simply how the promotion pattern works.
At the largest law firms, everyone operates on an up and out model. Firms welcome a class of fresh JDs into their firms, give them tons of work, and then expect that most of the class will burn out within 2 years. For the ones whom survive, they eventually obtain partner status. But depending on your firm size, this doesn’t mean you get to make decisions around operational practices, it mainly means that you are the one managing and signing off on client work.
So the true decision makers at law firms are either very senior partners whom were probably older and not as keen on figuring out why the move to the cloud was a big deal. Or at a smaller firm, it’s a partner whom still has a ton of client work to manage and doesn’t have the time or energy to worry too much about what software her firm is running.
As such there historically hasn’t been a lot of successful software surrounding the actual work product of lawyers. There are two giants: Thomson Reuters with Westlaw and LexisNexis, whom are focused on case research, and there has been a dearth of successful tools besides these.
So the question that everyone whom has ever considered starting a legal SaaS startup has asked is whether you even bother going after “legal practice transformation” or whatever you want to call it or if you pick an easier client base altogether.
Well one did before around the same time that everyone was decently soured on vertical software market sizes: Jack Newton.
Jack and his cofounder and childhood friend, Rian Gauvreau, realized in 2007 some of the classic problems that every vSaaS solution realizes: law firms were stuck in the 90s, full of on-prem software, and smaller firms couldn’t afford the maintenance costs of the existing on-prem solutions.
Jack and Rian decided that it was the right time to start developing a cloud-based legal practice management SaaS solution and went after it full steam.
You can broadly trace their approach as focusing heavily on small law firms and upon the back office annoyances they faced. Things like invoicing, time tracking, calendaring, documents linked to client management, etc.
And sure, these are highly important processes to streamline, but I think if you look at Clio’s evolution, it has mostly been a story of Clio realizing that their solution didn’t actually digitally transform legal practice and wasn’t robust enough for more complex firms and trying to rectify that.
It was pretty good for super small law firms. And since they were really the only game in town, they became widely known. But it’s hard to say that they were bringing digital transformation to the core of the industry. The actual work product of lawyers, cases and documents, still happened mostly off platform.
And because of that, Clio didn’t build a platform that was transorming legal practice as a whole. They had a tough time scaling up-market and so throughout most of their history, they have focused on smaller firms.
Along the way, they have become widely known within the industry due to ClioCon, aka “the Burning Man Festival of the Legal Industry.”So the brand has been quite sticky, and this stickiness combined with everyone else in technology shuddering at the thought of working with lawyers more closely for about 10 years led to Clio getting to industry-wide recognition while continuing to expand the platform and workflows.
So fast forward to 2022, and most of Clio’s problems should be effectively remedied by a killer M&A strategy and industry trends stemming from Covid.
In its current form, Clio looks like a far more integrated platform. They’ve been on an acquisition tear having scooped up document automation solutions, case management solutions, and payments (more on that later). They’ve built out more robust client intake, launched Clio Grow to help smaller law firms with their marketing, and more.
And on top of that Covid has acted as a boon to the entire legal tech industry as every lawyer realized that their workflows could not continue to be done via fax. So Clio was the first call for a lot of law firms and they crossed 100m in ARR this year.
So why is there reason to believe that the race towards market domination is far from over?
Well really, because Ryan Anderson and Filevine are really damn good at what they do and I think took the better approach to product development and GTM. Critically and to recall last week’s piece: their architecture is disruptive to the core legal workflows and can handle the complexity of the highest paying customers: large law firms.
Filevine: The Last Mover?
Filevine’s story actually starts with frustration around the existing legal software. At the time, Ryan Anderson was a partner at a personal injury firm and was looking for software solutions that could make managing a medium-sized law firm easier. And since, Silicon Valley had collectively become more blind to the legal tech opportunity than Justice herself (too much?), Clio was really the only game in town.
But right away, Anderson could tell that it wasn’t built for more complex practices. And if you’re not familiar, litigation is about as complex as it gets. And if you are not only in litigation but a partner at a litigation firm, you end up managing highly complex cases and junior attorneys with their own complex caseloads as well.
Clio really couldn’t help Ryan out with this. Clio didn’t have a case management system built for larger firms with highly complex workflows and so Ryan went looking for something else. He found that nothing really existed.
So Anderson started to stew on what it would mean to build a true legal operating core.And so, Anderson along with some star developers worked on the problem and eventually built Filevine's initial workflows around case management. In many ways, the Filevine team designed this in opposition to Clio. It wasn't designed to feel like an LPM, but instead like a project management tool more akin to Asana. The goal was for lawyers to view it as core to their work, crucial to their communications, and beneficial to their productivity.
This was the big unlock. Case collaboration, partner oversight, and settlement calculations all began to originate in Filevine. In Verticalized terms, Filevine treated the “case” as the core primitive of law firms and set about building everything around cases as the center of the platform.
Now what’s interesting is that initially Filevine was highly focused on litigators. But they didn’t overfit the platform to any specific type of litigation. In fact, because litigators have by far the most complex workflows in law and Filevine built the platform to be highly customizable to the specific workflows of any individual law firm, the case management system was extensible to any law firm managing legal matters and customizable to their unique workflows.
This had two knock-on effects. First, since Filevine was built for the most complex LPM contexts, Filevine has always had an innate ability to go up-market into the most complex law firms in ways Clio couldn’t.
And second, because they focused on workflows that truly transformed how lawyers operate, their architecture could accommodate expanding into other legal workflows in a way that feels more like a true platform approach. It’s not a series of point solutions: it all revolves around the case.
So far this has looked like Filevine’s own string of acquisitions - a client intake system called LeadDocket and a contract lifecycle management system named Outlaw in 2021. But more on Outlaw later.
In 2022, Filevine is on an absolute tear, having raised 100m+ in April. Perhaps most incredible: they’re projecting 100m in ARR by end of year. And will have crossed the Rubicon within 6 months of Clio despite far less time in existence.
Clio and Filevine are quickly arriving at the same set of features, albeit perhaps with different architecture. The competition around MM/ENT customers will get hotter in the next couple of years and thus it’s interesting to look at where the core of the battle will go. Some of the most competitive product expansion will be within fintech adjacent products and legal drafting. Whoever cleans this up, cleans up the market in my opinion.
Adventures in Legal Fintech
A couple years back when I was deep into legal SaaS trends and potentially looking to start something in the space, one of the things I was absolutely sure was going to undergo serious transformation was legal payments.
Legal payments are a bit of a beast for lots of different reasons. You can probably break this down into both consumer facing payments and B2B payments, but let’s just keep it simple and talk about it at a high level.
The crux of the problem with legal payments is that there has never been a great way to match the requirements around legal billing to the payments themselves.
One of the things that the American Bar Association does to justify its existence is set up things like the Uniform Task-Based Management System which dictates codes for each category of time spent on behalf of clients. In theory, this should give a standard way to bill, but whether or not this is actually followed is a whole different matter.
So what typically happens is that an in-house lawyer will receive an invoice from their outside law firm, instantly see an insane billing estimate and start to comb through what the lawyers are spending time on
Whole departments and a whole software category, legal operations, have been formed around reducing this spend!
So then after review, the law firm gets a politely worded “no way in hell will we be paying these billables or this category of expenses, please correct the invoice” and a new invoice gets generated. At some point, a payment will happen, but it might not be for all of the work, aspects of the work might still be contested, or it might be a pain to figure out which invoice and which billables it should be associated with. This starts to matter a lot for profit conscious law firms. After all, your goal as a firm should be to determine which billables never get contested and ratchet those up. Payments, invoices, and codes all matter to form this portrait.
These are all second-order insights that a platform should provide, but in order to get there: you have to get way better payments and billing visibility (and timekeeping) and be able to solve the complexity.
Clio realized this too and in late 2021 rolled out Clio Payments. The only significant competition is LawPay who has dominated the space, yet doesn’t have a a true billing software solution.
So far Clio is the only one whom has launched integrated payments and thus they seem like a clear favorite to win. That being said, I don’t think Clio Payments is all the way there yet and this is going to be a longer project to really get to the second-order effects that will allow for great financial intelligence in the back office.
Meanwhile, Filevine has indicated that they are looking to develop a fintech solution. The natural path for them is to launch their own payments solution that also can really crack BigLaw billing.
If I was Clio or Filevine, I would also be looking to launch some type of legal spend management tool that can more easily catalogue expense for lawyers associated with different projects/cases. Ramp for Law Firms is probably the analogy here and I think could be quite compelling.
So with all of that said, I don’t think either Clio or Filevine has really cracked payments/fintech and it’s probably a space where an independent solution could still innovate and disrupt (and be a natural acquisition target).
Word isn’t built for Lawyers
The other critical aspect of product innovation coming down the pipe is all around legal drafting. Clio has some stuff cooking here in document automation, but really this story is about Filevine.
The legal tech sector with the most buzz over the past 7ish years has probably been the contract lifecycle management (CLM) space. Essentially imagine a platform that centralizes all contracts of a company, adds workflows and automation on top to help build these documents automatically, and then streamlines legal communication.
There’s some big names in the space, with Ironclad perhaps being the most well known. But I don’t think any platform has a shot to disrupt not only contract generation but all of legal drafting in the same way as Filevine.
Filevine’s foray into CLM began with their acquisition of Outlaw. Outlaw is a great platform within its own right, but it’s even better as part of the Filevine platform.
Since Filevine has had tremendous success at digitizing case management, they have now earned enough trust to manage and potentially digitize the entire value chain around documents.
Legal drafting as a whole has been in the dark ages for quite some time and CLM systems have mostly been forced to accommodate the current feudal lord: Microsoft Word.
With contracts specifically, legal work gets done by redlining Word documents and then versioning them in your CLM.
The bet with Filevine is that they can create a more holistic real-time document system that the legal community as a whole uses. If this happens, the distinction between “Filevine for law firms” and “Filevine for in-house attorneys” starts to break down. It just becomes “Filevine for legal teams.” Core to that is building a platform that fully understands legal drafting in both litigation and contract flows.
The Outlaw acquisition has allowed Filevine to gain core competencies across the spectrum of CLM, develop infrastructure that is word processor agnostic, and start to parlay this into document automation.
Additionally, so much of the critical data that ends up in these sorts of legal documents is already compiled inside of the case management system. You might be able to see where this is going.
The bet is that the work they’ve done around case management starts to feed insights into document generation across litigation and transactional workflows and you end up with a native platform for legal doc generation with best in class automation.
What’s interesting is that I think if legal drafting becomes 5-10% easier as a result of the case management integrations, lawyers will switch all of their workflows over to Filevine.
As CLMs become table stakes and document automation continues to get better and better, the second-order value will be designing documents and drafting to interact seamlessly with the rest of the case file. Filevine has the best claim on making that vision come true.
So even while Clio and Filevine start to reach feature-parity, I don’t think they will reach platform-parity. Filevine’s architecture is a massive leg up on realizing the vision of digital transformation within legal practice.
Where do we go from here?
While I’m far more bullish on Filevine as a whole, I think you can expect Clio to continue to dominate small firms for the foreseeable future. They have a lot of great things going for them: they’re 15 years into their product lifecycle and have fully fleshed out their solution with additional product lines.
The bull case is that the differences that I have outlined are not really substantial enough to matter and cause switchovers to Filevine. And for smaller firms, they very well may not be.
Additionally, Clio has done a really good job of encouraging startups to build on top of Clio. And so there’s a solid argument that some of the inadequacies of the platform get rectified by companies that fill the gaps. This is probably an area where I am underestimating what Clio has accomplished.
But with that said, I think Filevine becomes the industry platform. The architectural decisions that allow them to tackle complexity is part of it and it has many of the hallmarks of vertical disruption, but I also think they have a killer GTM that I’ll touch on briefly.
GTM as a core competency
Product and GTM are heavily intertwined. I’ve said in the past that having a great product isn’t sufficient for developing a killer company and Filevine doesn't act like it is. Product-led growth is often overrated for vertical platforms that really aspire to transform their industry. The best companies figure out how to combine world-class products with world-class GTM teams. That's what Filevine has done.
Due to the complexity of their product, implementation is by far the biggest challenge to signing customers. Yet, Filevine has learned how to do this effectively by staffing an implementation unit and combining this with a robust channel sales motion. In fact, partly because of the complexity, consultants are jumping at the opportunity to implement and work with Filevine.
When you have a killer product, killer channel motions, and a true savage GTM team, good things happen.
In some ways the Clio vs. Filevine turf war has re-crystallized the old Peter Thiel quip around first movers vs. last movers.
“First mover isn’t what’s important — it’s the last mover. Like Microsoft was the last operating system, and Google was the last search engine.”
The truth about a lot of current vertical markets is that even when there has been a cloud-based, post-2007 startup that has entered the market (in other words, a first mover), it’s not a reason to believe in the supremacy of the platform.
It could be the case that their feature depth masks some ill-conceived architectural choice, they failed to disrupt some portion of the market, or that they aren’t well set up to take advantage of some new technology paradigm.
The duty then for investors and founders is to invest and found businesses that are the last movers in their chosen market. And sure, this is always an approximation at best. Software is ever evolving.
But it does feel that the field is wide open. Software still isn’t even close to eating every market or every workflow.
And in many ways, the software landscape has even changed post-Covid with new technologies emerging around ML/AI, new infrastructural possibilities, and enhanced data buildouts. All that matters.
So the task then becomes to suss out the flaws of industry platforms and where they are open to disruption risk, and then take bets accordingly.
At the root of all this is a belief not only that the best software should win, but also that industries deserve the best software.
So may the best vSaaS win. I look forward to seeing who the last movers are.
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You will have to tolerate the occasional legal pun today.
It’s a pretty interesting conundrum to ponder if the billable hour should exist or what should replace it. In my view, nobody can really propose a compelling alternative. Billable hours are the original consumption model. It’s just not compute time, it’s human time.
This same problem doesn’t apply to personal injury law, where Filevine got its start. On the contrary, lawyers get paid a portion of the case earnings, and thus are more inclined towards meaningful workflow transformation.
The revenue these companies pull in is truly astounding.
One of the unexpected consequences of building a platform designed to automate away the annoyances of the back office without touching the core workflows is you end up with a platform that people actively spend as little time on as possible! Hard to scale into new products that way!
Yes, this is apparently a thing a real person said:
Omar Ha-Redeye of Slaw dubs the Clio Cloud Conference the Burning Man Festival of the legal industry, saying: "You have to attend it at least once in your lifetime, and once you do, there are no words to truly describe the experience."
This is indeed more evidence that the true way to legal transformation involves sending lawyers to the real Burning Man.
One of the fascinating things about legal SaaS is every company is branding itself as the legal operating core. Yet they are not all the same architecturally.
Salesforce is the analogy here that Ryan uses for this type of customizability. I think it fits.
This relationship between invoices and what actually gets paid shows up in tons of different industries. One of my big hunches is that the vertical companies who figure this out with modern fintech will accrue significant revenue upside.
One of the more speculative ideas I have here would be an embedded litigation finance solution. If you want a fun tangent, read onwards. This is incredibly speculative however, because of the capital demands, technological sophistication, and the need for legal expertise.
Regardless, litigation finance is booming with all types of different financing arrangements. If you aren’t familiar, imagine you are a lawyer with a great case but not a ton of capital to support the litigation. Litigation Finance fills the gap. The unique element is that it’s more like venture capital than lending. Your outcome is either a) you get paid a portion of the settlement/judgment or b) you end up with nothing. But your upside is relatively uncapped (except by statutory limitations on damages)! The most techy firm in the space is Legalist.
Essentially the idea would be you have so much data on platform (documents on the case, settlement history, etc.) that a litigation finance firm could create some type of onboarding/intake flow on Filevine or Clio’s platform. Even apart from the embedded aspect, if I was a litigation finance firm, I’d be clamoring to get access to these sorts of legal tech data rooms. Sure, you will still need to underwrite the case on its own merits, but every litigation finance firm is already trying to use ML + legal teams to underwrite effectively. An embedded solution seems somewhat natural over time.
To complicate, the legal ecosystem portrait, Outlaw has also given Filevine a foothold inside of in-house fiefdoms. This allows them to connect the value chain in a way that nobody is really set up to do. It also may have a claim on being the best CLM.
There’s a whole other platform called “Word Perfect” that Filevine likes to say that they are disrupting. It’s just Word with slightly better editing features.
Does this crunch legal billing? Maybe? But also, a lot of the drafting work is done by junior lawyers who bill less, cost firms more relative to their value provided, and have increased salary creep every year.
Filevine might have a geographical advantage here, being based in Salt Lake City. As Ryan puts it, “Utah has the best sales talent.”