Though we’ve been a notoriously ignored market, legal technology has finally started to attract the attention of outside investment by major players like Andreessen Horowitz and Sequoia Capital. Why the sudden interest? The total addressable market for the global legal industry may be as high as $3 trillion by some estimates. This massive market potential, coupled with the increasing demand for efficient and cost-effective legal solutions, has driven investors to recognize the untapped opportunities in legal tech. Moreover, advancements in AI and other cutting-edge technologies have enabled innovative solutions that streamline legal processes, making it an attractive sector for investment and growth.

One of the challenges facing any attractive market is the lack of experienced leaders to help drive intelligent and informed growth strategies for startups. Similar in many ways to fintech, legal technology tends to be an insular industry where “outsiders” are met with a certain level of skepticism. This distrust of people and ideas arising from outside the legal tech industry is rooted in a number of factors, including the precedent-dependent nature of the law, risk-averse attitudes within legal, and the reality that many business tactics that work in other industries fail miserably in the partnership model in legal. These dynamics make it inherently difficult for a new solution to break into the legal industry, and even harder for someone who has never sold to legal to develop a successful path to growth. 

The result of all this outside investment? Lots of “new” business ideas on rapidly scaling legal tech startups, many of which have already failed many times over. Have you ever heard of a product becoming a unicorn by launching via a freemium model in legal? Has an ‘app store for legal’ been successful? Have you seen a solution successfully sold through the “corporate flywheel”? If your plan, or your leadership’s plan, is to sell through one of these strategies, I encourage you to have a serious discussion about your expectations for success. Let’s break down just one of these ill-conceived strategies – the corporate flywheel.

The “corporate flywheel” is a commercial strategy which proposes to create a sales channel by leveraging successful sales of your solution to corporate legal departments. The strategy is an enticing one – a recent benchmarking report by the Association of Corporate Counsel and Major, Lindsey, & Africa found that middle half of legal departments outsourced work to 5 to 30 law firms, while the top 10% engaged 95 separate law firms. The idea that you might generate somewhere between 5 and 95 new sales opportunities by satisfying a single corporate legal department is quite a sexy proposition in any industry. If you’re able to extend this channel partnership one step further such that your corporate legal departments are willing to compel their outside law firms to buy your product to ensure frictionless working conditions, and you’ve now created strong, “captive” sales opportunities.

Whether proponents admit it or not, the corporate flywheel attempts to turn corporate customers into channel partners, allowing you to expand market reach, increase sales volume, and reduce the costs associated with direct sales efforts. But, channel partners are usually third parties who are already engaged in the sale or distribution of products or services adjacent to yours. But, corporate legal departments are your customers and the clients of the people at the law firms you’re ultimately trying to reach – they’re not engaged in selling to anyone. And most have no interest in doing so. 

Leaders who believe in the corporate flywheel will most certainly move next to the argument that you’re not actually asking them to sell; you’re simply asking for an introduction to their law firms. But that’s just not reality. There’s no single introduction that will get the demo scheduled and keep the opportunity moving at a law firm. This sort of referral requires repeated engagement from the referring party, meaning you’re asking for your corporate legal team to sell for you.

That’s not even the most illogical element of the concept. Did you know that the median corporate legal team includes only six employees?  Below are median legal department sizes based on the 2022 Law Department Management Benchmarking Report:

• Up to $1 billion: 3 employees
• $1 billion to $5 billion: 15 employees
• $5 billion and $20 billion: 59 employees
• Greater than $20 billion: 98 employees

Did I mention that 81% of the 427 companies surveyed earned revenues of less than $5 billion? That means that almost every corporate legal department you’ll be able to get access to during the early stages of your company will have 15 or less team members. Not only are they likely limited in their ability to dedicate time to selling your product, but it’s also highly unlikely they have the influence to compel their sophisticated outside law firm with hundreds or thousands of lawyers to buy your solution. 

Having spent about a dozen years inside law firms, I’ve certainly seen situations where a corporate client came to the law firm and said, ‘We love this product. You must use it.” And we have used it ZERO percent of the time. How have we defeated it without ruining the highly valued relationship with our client? There are oh-so-many great ways to reject a product or service, but here are a few of the most commonly used:

"Will you, CLIENT, accept full liability for any failure of the product or service?” After all, as the law firm, we didn’t select the product. We might not have even heard of them before. And especially if they don’t pass our exacting cybersecurity and privacy standards, we can’t take on the risk. But if you’re willing to waive our liability, we’ll consider it. To be clear, no client I’ve ever worked with has agreed to this, and thus we did not buy the product. 

“We will have to bill you for the time for our team to train on it.” In addition to the budget we’ve already quoted you for the work at hand, we’ll also be charging you for the time to train our lawyers and legal professionals who will support the product for your matter. That might add another $20,000 - $50,000 in billable time to a large matter. Again, no one has ever accepted this additional cost.

“You buy and maintain the product, license it to us, and train use on it.” This is just a combination of the two tricks above – a mix of risk mitigation and cost avoidance. Some software providers prohibit licensing in this way, so even if a client were willing to leverage a product they loved this way, it might not be possible from a licensing agreement standpoint.