Overruled: The New LegalTech Precedent

Speaker 1 [00:00:01] Hi, it’s John here. I was recently in Silicon Valley with some of the leading minds in AI from across the United States and Canada. Investors, engineers and executives from some of the world’s biggest tech companies. Among the many conversations which I’ll share in future episodes. We chatted about how close we are to seeing generative AI perform human tasks without command, and what we need to do as a society to prepare for that. Is this AI revolution going to spark mass unemployment or lead to social anarchy? Or will it lead to a world of surplus where humans will at last have the chance to fulfill the ambitions of humanity? Yes. When people hear AI, we often anonymize it with the robots are coming. Yeah, we’ve all seen James Cameron’s Terminator. But one of the things I took away from that trip is that in reality, the hardware side of AI is proving to be a lot harder than the software. And as a result, white collar work is likely to be more disrupted by AI in the coming years than blue collar work. AI, at least for now, is all about brainpower and less about brawn power. That means some of the most exciting opportunities for AI remain in the services sector. And one of the most valuable parts of that service sector is law. Over the past decade or so, cloud technology has transformed the legal profession. But it’s really just beginning. And now artificial intelligence combined with that cloud computing stands to transform the legal profession yet again. So, what does that transformation mean for lawyers and their clients? Can Canadian innovators lead the charge? And can lawyers be the next profession to put AI into practice? This is Disruptors, an RBC podcast. I’m John Stackhouse. Today I’m joined by Jack Newton, a technologist who studied machine learning and is now building one of Canada’s most successful tech companies. Jack is the CEO and founder of Clio, a legal tech centaur. We’ll hear more about that term later. Based here in Canada with global scale. He’s also the author of a bestselling book, The Client Centered Law Firm, and the host of his own podcast, Daily Matters. Jack, welcome to disruptors.

Speaker 2 [00:02:23] Thanks for having me, John.

Speaker 1 [00:02:24] Jack, let’s start with the origin story for Clio. What was the spark?

Speaker 2 [00:02:29] So the spark was way back in 2007, and I saw the cloud was going to be this massively disruptive transformational wave in many ways. It was very reminiscent of what we’re seeing with AI today, where it feels like this is going to change everything. And to me, in 2007, this was fairly early in the cloud journey, but I saw companies like Salesforce starting to explode. I saw 37 signals and what they were doing with Base Camp, and I felt like there’s a massive opportunity here, and this is going to revolutionize technology in every industry. And reached out to my childhood best friend, Rian Gauvreau, and kind of shared this thesis with him. Like, the clouds are going to be big. What do you think a good application domain might be? Ryan at the time was working as the IT manager for Gowling’s Vancouver office, and for anyone that is unfamiliar with Gowling, it’s one of Canada’s largest law firms. At the time, they had about a thousand lawyers on staff, and Ryan’s comment was, this is right in my backyard. But I see lawyers really struggle with technology and don’t use it very effectively. And a lot of the software that they’re using is frankly, garbage. And I feel like this is maybe the space we should innovate in. So that was the spark for the idea behind Clio. And the question was, where do we want to apply this new technology? And discovered that legal was, you know, many ways, one of the last major industries to almost just ignore the internet revolution. Yeah, a lot of lawyers at the time were practicing like it was still 1980. And these lawyers that are doing such important work were not leveraging technology in a way that helped them be productive and impactful.

Speaker 1 [00:04:18] I’m glad you said at the time, putting it in the past tense, that lawyers and technology were a bit distant from each other. There may be some listening who say, that’s still the case. Let’s come back in a moment to where the legal profession is at in terms of its relationship with technology. But give us a quick sense. Jack of Clio today. So, oh seven. You see the cloud? Hey, you’re a kid from Edmonton, so you saw where the puck was going. Here we are in 2024. Where’s the puck? Where is Clio?

Speaker 2 [00:04:46] So we saw this opportunity 2007. Me and Ryan went away and spent the better part of a year building the product and had a beta to launch at ABA Tech Show, which is the American Bar Association technology event in Chicago in March of 2008. And feel like we got the timing exactly right, because there was maybe half the people that approached us saying we were insane, basically aiding and abetting professional malpractice by suggesting lawyers store their data in the cloud. And we had another half of the audience suggest or tell us they’ve been waiting for somebody to create this product for them, and they were so happy to finally have a beautiful, easy to use, powerful cloud-based product that they could run their practice in. And that was just to them in an epiphany.

Speaker 1 [00:05:37] It’s a problem, Jack, in those days, because legal documents obviously are among the most secure documents. None of us want our legal secrets floating around in the public domain.

Speaker 2 [00:05:48] Exactly.

Speaker 1 [00:05:48] And the cloud was a new thing. More vulnerable maybe back then than it is now.

Speaker 2 [00:05:53] But that’s exactly right. The cloud in those days was so new that many people had reservations about storing data in the cloud. Lawyers have, you know, very high bar for their level of professional obligation to their clients and ultimately to be fiduciaries to their clients data and make decisions that helps preserve the confidentiality of that data. So, our perspective at the time, John, was a pretty radical one, which was. We believe your data is safer in the cloud and safer with Clio than it is in your own on-premises system. And this was especially the case for the initial audience for Clio, which was solo and small firm practitioners. Unlike Gowling, which has an entire floor of it people, they did not have any level of IT support. And what Ryan and I were really surprised by, by the way, was that the solo Small Firms segment is actually the majority of the legal market. 80% of lawyers practice in firms of ten lawyers or less, and that a full half of all lawyers practice as solos.

Speaker 1 [00:07:05] So help us understand how cloud computing. And then we’ll get into AI. But how cloud computing helps lawyers do things. Yes, more efficiently. Probably. Most people can figure that out. But how does it start to change the practice of law?

Speaker 2 [00:07:20] So number one, it makes real technological power available to all of those solos and small firms that I described earlier. They were this kind of ignored segment of the market. Even if they wanted to buy one of these on-premise products, they often couldn’t make the economics and the onboarding process work in the sense that these products were often $1,000, $2,000 to license just for one user. You had to buy a server, and you needed an IT person to support that server and maintain it and patch it. You needed to make a real investment to get up and running in this software. And then it was so complex, you needed a whole other set of investment to get trained on it and get running. And what the cloud changed about all of that was it was basically as easy as signing up for a magazine subscription online. It was a predictable, accessible cost, and you could deploy it in an evening. The more important technological transformation that the cloud has driven, though, it’s really helped lawyers reframe how they interact with their clients. And it’s also really dramatically changed how they interact and collaborate with each other. And what we saw over the course of COVID19 was the most dramatic transformation we’ve ever seen in the history of legal, in terms of both what clients expect and want from their lawyers and what lawyers expect when they’re working with each other and their professional staff. And the cloud helps enable this whole new world of effortless collaboration. It eliminates the need for that expensive triple A office space. And now we can see lawyers working from lower cost locations, working from their own home and delivering just as high quality, if not higher quality experiences to their clients that are similarly benefited by being able to access those legal services from their home or while they’re on their commute, or whatever the case might be.

Speaker 1 [00:09:18] Well, let’s come back to that point about it’s not just remote work.

Speaker 2 [00:09:22] Yes.

Speaker 1 [00:09:23] It is about the distribution work, which we got a taste of in the pandemic. And it’s still playing out this idea that work can be done by anyone from anywhere. It was Bill gates who said the pandemic would have been far worse in terms of its economic impact, were it not for cloud computing. But it also takes us with all technology. It takes a mind shift. It’s one thing to have the tools, totally different to use them. And you suggested off the top that lawyers and technology have not always been the best of friends. That’s changing significantly. But give us a sense, Jack in 2024. Scale of 1 to 10, where’s the law profession in terms of tech adoption?

Speaker 2 [00:10:04] I would say six today.

Speaker 1 [00:10:06] Not a great score. Probably most lawyers wouldn’t want to live with that. What are they missing?

Speaker 2 [00:10:10] No. And what I see, John, is a huge sea change happening in the profession as we speak. If you ask me that question in February of 2020, I probably would have said three. But also I think lawyers are sometimes unfairly blamed, call it for this lack of technology adoption when I think, you know, again, me and Ryan surveyed the landscape of what legal technology looked like in 2007 and said there is an ocean of opportunity to do better here. Like, these tools are not great. So we looked at that software, thought, we don’t blame lawyers for not wanting to use the software. It sucks. And so I think the tools have gotten a lot better over the course of the last 16 years. The need to embrace these tools has really gone from something that you only saw leading edge, technologically advanced law firms doing in 2018, 2019 to today, where it’s becoming more and more table stakes to embrace technology at a law firm. And law firms are starting to understand that the stakes are rapidly becoming existential.

Speaker 1 [00:11:24] Give us a sense, jack, of how AI is starting to transform law. I like to think of cloud computing crudely as the back office, and AI is moving more into the front office. It’s sitting there invisibly next to your lawyer, or next to your bank, or next to your doctor or whatever it’s doing. It’s not off in the back.

Speaker 2 [00:11:42] Yeah. We think about the divide in legal technology and even the day-to-day work of a lawyer as really orbiting around, on one side, the business of law, and on the other side the practice of law. The business of law. This is doing your billing, doing your invoicing, managing your leads, converting them to clients. And the practice of law is really about how you deliver your legal work product. This is writing a brief. This is doing legal research. This is summarizing a document for a client. And if you think about what the current generation of AI is strong at, it’s best at analyzing text and it’s best at generating text, when you have a large corpus of training data to train those algorithms on. And what is legal full of? It’s full of huge databases with large numbers of precedents of similar documents, and it’s obviously all text, so the use cases for AI on the practice of law side are almost limitless in basically every aspect of what a lawyer’s day to day job looks like can be augmented with AI. And on the business of law side, there’s similarly a gigantic opportunity to start look at all the data that exists in the practice of law, and start to generate some really profound and useful insights around, for example, what are my most profitable customer acquisition channels?

Speaker 1 [00:13:08] Jack, is this going to eliminate lawyers?

Speaker 2 [00:13:10] There is definitely some gnashing of teeth in the legal profession about AI eliminating the profession or having a profoundly negative impact on the profession. And I think that concern is misplaced. And if we look at the history of technological innovation, even rewinding the clock all the way to the first industrial revolution, what we see on a repeated basis, whether it’s the mechanical loom or whether it’s the assembly line building the model T, we see this lump of labour fallacy that there’s essentially a fixed amount of labor out there, and that AI will eat away at that fixed lump of labor. And what we saw in a more recent example that I think is very instructive to look at was the advent of the spreadsheet in the late 1970s and the impact that had on accountants. Did that destroy the accounting industry? It didn’t. What it did is it helped create a much more accessible tool that leveled the playing field for accountants and ultimately let accountants move up the value chain in terms of the value they were delivering to clients. So, what we see with this lump of labor fallacy, what will happen is AI will actually help lawyers become more efficient. It will help drive down the marginal cost of delivering legal services. It will help make legal services, in turn accessible to more people and in turn, lawyers and other legal professionals that are adjacent to those lawyers, because AI helped improve their marginal productivity. This will help make them more profitable while they’ve dramatically expanded the size of the legal economy.

Speaker 1 [00:14:51] That last point, though, is critical because it’s the difference between the fixed mindset and the growth mindset.

Speaker 2 [00:14:56] That is exactly correct.

Speaker 1 [00:14:57] The fixed mindset sees this as an efficiency play. I’m going to use this to cut my costs. That’s fine. The growth mindset sees it as a revenue play.

Speaker 2 [00:15:06] That’s right.

Speaker 1 [00:15:06] I was amazed at Davos this year. Those were clearly the growth mindset. Saw this as a generational opportunity to grow their businesses. Yeah might cut costs but this was really exciting for them. On the revenue side of things. How are you seeing that growth mindset take root in the legal profession?

Speaker 2 [00:15:24] It’s a real paradigm and mindset shift for lawyers because all through law school, they basically have the risk-taking nature of their personality surgically removed. They become what I call issue spotters, and they’re trained to walk into any scenario and spot potential issues. And then when they’re looking even at their own business and how they might improve it, all they can do is the same issue spotting. And I saw that in 2008 when we launched Clio. Well, what about what if you go bankrupt? What if you get hacked? What if the cloud is less secure than on premise? What if, what if, what if, what if? And that issue spotting just becomes almost debilitating at a certain point. And that, coupled with every aspect of the legal profession when it comes to arguing a case being oriented around precedent also creates a huge amount of gravity around the status quo, and doing anything new when there’s no precedent for it becomes enormously difficult.

Speaker 1 [00:16:36] You’ve articulated very well how lawyers can win in the age of AI, or prosper in the age of AI. I want to understand how Clio is going to win in the age of generative AI, but let’s start with where Clio is today, which is really impressive. I think you’ve got more than a thousand employees now, so congratulations on building that. As I said, off the top, you’re a unicorn so valued at more than $1 billion. But you’re also a centaur, which is a term applied to tech companies with more than $100 million of annual recurring revenue. Also really, really impressive. I think you’re doing that proudly here from Canada. Maybe just quickly give us a sense of looking back. Over the last decade, the smartest thing you did to, get you to where you are today.

Speaker 2 [00:17:24] Yeah. You know, it’s, series of decisions over the last decade plus that got us to where we are today. So we picked the market well, and we had our timing right. One thing you do successfully as a founder is sometimes fight off the pressures that are being applied to you along the way as well. And we were founded in 2008, ironically enough, when Ryan and I were living in different cities. So, we’re doing the work from home, distributed work thing way before it was cool. I was working at Edmonton, Ryan was working in Vancouver, we started a hiring team all over Alberta and BC, and when we started some of the early VC conversations in 2008, 2009, some of the first requests we got from those VCs were, hey, we like the company, but will, you move it to the valley, and Ryan and I really fended off those requests and felt like we can build a great company in Canada. And I’m really happy we made that decision, because I think we’ve helped prove, along with other great Canadian companies like Shopify and others, that we can grow incredible companies in Canada. And I feel very lucky that we narrowly avoided signing what would have been, with the benefit of hindsight. Catastrophically bad term sheets with potential investors either, you know, very low valuations or control provisions or other kind of structure that would have just led to an early death of the company or an early acquisition. On the note of what we’ve done. Right. Just from a people perspective, I think we’ve built a really great company culture that is focused on our customers, focused on supporting each other, thriving as a team and building a really collaborative, conducive environment for people doing the best work of their careers. We describe our culture as being human and high performing, where we see a real duality of both expecting high performance from our employees, but supporting them in getting there in a very human way. So I could go on about, you know, some of the bad decisions we made and good decisions we’ve made. But those are some of the near-death experiences we’ve had, coupled with a culture that is just focused on delivering long term value to our customers, that has helped us navigate 16 years now of very high growth.

Speaker 1 [00:20:06] Does the Clio story stop with law?

Speaker 2 [00:20:09] It’s a great question, and it’s kind of a perennial question we ask ourselves as we’re considering the strategic options available for Clio in the future. We see a very clear path to building $1 billion ARR company within legal. But beyond that, we see a huge opportunity to expand to other professional services over time, like accountants, engineers, consultants and so on. That, in fact, just as an aside was in mine and Ryan’s original business plan, we thought we could knock out legal in 2 to 3 years max and then move on to additional verticals. And what we discovered is legal is gigantic. It’s a huge market. There’s over $1 trillion of legal spend worldwide every year. So, what we’re trying to balance our ambition with is not wanting to get distracted by going into other verticals and continuing to focus on what we feel is an almost endless amount of opportunity, and still very much a greenfield opportunity in terms of even onboarding new customers in legal. Just to give you a sense of the opportunity, two thirds of lawyers in the US and Canada don’t use a practice management system like Clio. And I see, you know, for the next few years, we’ll be laser focused on legal. And as we move to, you know, billion dollars of AR and beyond, I think that’s where we may need to open up the aperture and think about what’s beyond legal for Clio. But I see a world where maybe that never happens.

Speaker 1 [00:21:53] Well, you’re also going to have your hands full with AI, which is not only a fantastic opportunity, it’s a big capital requirement.

Speaker 2 [00:22:00] Well, that that’s exactly it. And I think AI completely change that calculus as well, where, you know, we see an opportunity to double or triple our average revenue per account over time with the kind of value that AI will unlock. You know, you asked a question earlier that I don’t think I actually answered in terms of why Clio is well positioned to execute on the AI opportunity. And really the answer to that question is, as the system of record for a law firm, we’re what a lawyer uses day in and day out, where the first application they open in the morning and we’re the last application, they close at night.

Speaker 1 [00:22:44] How are you thinking through the competitive landscape in AI? The cloud giants are all over this, and they’ve got capital that most players can’t even dream of, as well as the technology clout. Where is Clio going to be in that landscape when you’ve got the Microsoft’s, Amazons, Googles of the world dominating the space? And they’re also attracting the capital now and the trillions of dollars. How do you differentiate yourself and compete in that exciting but somewhat daunting landscape?

Speaker 2 [00:23:18] I think it’ll be a flavour of what we see, even with call it the cloud era, and then the on premise era of software where the horizontal players like Microsoft will have a very hard to disrupt right to win for those horizontal applications. But what we’ve seen over the last decade plus is that there is an enormous amount of demand and appetite for vertically tailored applications and solutions that really deeply understand a customer’s needs and workflows and use cases. And AI is only going to exacerbate that situation and create an even bigger opportunity for vertical players like Clio. If your business plan is, I’m going to write a word processor that competes with Microsoft Word and competes with its generative AI capabilities. You’re going to be in for a tough slog. If your business plan is, I want to deeply understand how personal injury lawyers create demand letters, and how I could leverage data around all the claims that have happened across the United States in the last two decades, and use that to generate a more accurate demand letter that is closer to the maximum of what the insurance company is willing to pay. Microsoft is never going to touch that as a use case, but you’ve just unlocked an enormous amount of value for a personal injury lawyer when they’re trying to write a demand letter. So, I think that’s where the opportunity for entrepreneurs exist, is how do I take this generalized solution and target it to a specific vertical and create a high amount of value and high amount of impact within that vertical?

Speaker 1 [00:25:07] Jack, this has been a remarkable conversation. Thank you for your time. I wonder in our remaining minutes, if I can ask you to answer a few questions about the future. Fairly rapid.

Speaker 2 [00:25:16] Absolutely. Happy to.

Speaker 1 [00:25:17] Let’s start with the law firm of 2034. What does it look like?

Speaker 2 [00:25:22] The law firm of 2034 is absolutely cloud based. It is virtual. There’s no physical office. Everyone in that law firm is leveraging AI for probably what accounts for 90% of their day to day today, and they are in turn, able to handle an order of magnitude more clients than they did previously, and they’re able to deliver a higher level of service to each one of those clients. Thanks to the efficiency that both the cloud and I have enabled.

Speaker 1 [00:25:58] In 2034, will I be able to use ChatGPT? Eight, nine, ten whatever generation it is, as my lawyer?

Speaker 2 [00:26:04] You will use, I believe, likely some augmented version of ChatGPT that is supported by a lawyer that is easy to interact with, but that you can validate the output of with the lawyer that’s delivering that legal advice. At the end of the day, ChatGPT is an algorithm, and if you’re looking for a legal opinion, even in 2034, only a lawyer will be able to deliver that opinion to you. I think we’re we’ll see internet-based chat bots and similar tools leveraged is for consumers to better understand if they have a legal issue, and if so, which lawyer is going to be able to help them with that legal issue? And a lawyer that is technologically savvy, being tied into the back end of that ChatGPT API and be able to take that lead and probably jump on a video call without missing a beat after they’ve discovered they’ve got a legal issue.

Speaker 1 [00:27:04] So for all the lawyers who are still thriving in 2034, what will they have done over the next decade to be in that good place?

Speaker 2 [00:27:14] They’ll one have adopted the growth mindset you and I talked about. They’ll start thinking about how they can work backwards from people that have problems and how they can basically intercept a customer, a client, that has that problem, and they will leverage the cloud, they will leverage AI, they will leverage everything at their disposal. And I believe they will get more specialized in the type of problems they solve and solve those problems at scale.

Speaker 1 [00:27:48] Last question. Were in 2034, Clio’s ten times bigger as you predict. You’re still a Canadian company. What has Canada done to help you grow and reach that scale and keep you Canadian?

Speaker 2 [00:28:02] So I think Canada has an unprecedented opportunity to be the home of choice for people that are driving this digital transformation. We have every right to be the world leader in AI innovation, and we need more great companies growing in Canada. We need more incentives for companies to found and stay in Canada. We need to make it easier to attract talent into Canada. We need to find what Canada’s unique value proposition is, and make it the best place in the world for knowledge workers in AI to work. If we succeed at that, we’ve got an incredible opportunity to be the best place in the world to build an innovative company. And no other country has that kind of opportunity ahead of them.

Speaker 1 [00:28:56] Jack, great way to end the conversation. Two words for you. Keep going.

Speaker 2 [00:29:00] Thank you.

Speaker 1 [00:29:00] It’s really impressive what you’re building. Thanks for being on Disruptors.

Speaker 2 [00:29:04] Thanks for having me, John.

Speaker 1 [00:29:08] Clio is just one of Canada’s many AI success stories, and over the coming months, we’ll hear from other Canadian innovators who are exploring the new frontiers of generative AI and hear from them, as well as a host of Canadian businesses, on what it means for the Canadian economy, for the future of work, for business opportunities, and for society at large. It’s an essential conversation for all Canadians to lean into, so please join us.

[00:29:35] I’m John Stackhouse and This is disruptors, an RBC podcast. Talk to you soon.

Speaker 3 [00:29:43] Disruptors, an RBC podcast is created by the RBC Thought Leadership Group and does not constitute a recommendation for any organization, product or service. For more Disruptors content, visit our RBC.com/disruptors and leave us a five star rating if you like our show.

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