Recent legal tech layoffs are part of a larger trend of cutbacks in the tech industry. What will the consequences be? We can look at the volatile history of tech for clues.

With the looming possibility of a recession, rising inflation, and growing economic uncertainty, one seemingly invincible industry has seen major cutbacks. A wave of layoffs has rippled across Silicon Valley tech companies over the past few months, including Amazon, Microsoft, Salesforce, and more.

These cutbacks have made their way into the legal tech world as well. In January 2023, ediscovery provider DISCO cut 9% of its workforce, following Relativity’s layoff announcements near the end of 2022.

This isn’t the first time that the tech industry has been adversely impacted by the onset of a recession. For instance, the dot-com collapse of the early 2000s resulted in the tech sector shedding a quarter of its workers and a slowdown in tech growth and innovation. At the time, legal technology was a small, burgeoning industry. Now, it is a major component of all litigation. With tech layoffs bleeding into the legal industry, one can only wonder whether a similar pattern will unfold.

The Dot-Com Collapse

In March of 2000, two catalysts led to the bursting of the overinflated internet bubble: rising interest rates, and a global selloff triggered by the onset of a recession. Internet stocks began to lose value, spreading fear among investors and as a result, causing a worldwide selloff.

Despite these challenges, the tech industry rebounded, driven in part by advancements in cloud computing and other technological developments. Although many tech companies succumbed to the ill-fated tech boom, some persevered through the turbulence. The companies that survived and went on to become major players in the tech field shared a common denominator: commitment to innovation.

Netflix, for example, continued to focus on their innovative business model and eventually transformed entertainment as we know it. Amazon became the leader of one of the biggest tech innovations of the century — the cloud. The company eventually founded Amazon Web Services, now the largest cloud service provider in the world, and the foundation of Nextpoint’s secure cloud infrastructure.

By committing to innovation instead of cost cuts and layoffs, companies like Netflix and Amazon endured the dot-com collapse. What can we expect from the big names in legal tech? Will they go down as a forgotten name that piques some memory of a decade long-gone (like Pets.com or eToys?) Or will they follow in the footsteps of the major tech companies that have remained successful through innovation?

With cutbacks continuing, it is natural to wonder how this could affect your practice and industry in the coming months. Here, we explore how layoffs in the legal tech industry may affect innovation, security, and more.

An Unprecedented 2023 Ahead

Since January 1st, tech layoffs have impacted over 100,000 people. With tens of thousands of workers suddenly losing their jobs overnight, it’s understandable that these shocks are reverberating across the labor market.

This poses the question: how productive are cutbacks, really?

Cutbacks and Copycats

According to Stanford Business professor Jeffrey Pfeffer, recent cutbacks are an example of “social contagion.” He claims that recent cutbacks are a result of imitative behavior over evidence-based reasoning. One company lays off employees and suddenly it becomes a domino effect. As eLaw Evangelist at Nextpoint, Brett Burney, puts it: “If I see one, I see another.”

Various academic studies have shown that layoffs do not improve company performance. Oftentimes, severance packages are costly for companies amid layoffs, while unemployment insurance rates significantly increase.

Cuts also reduce workplace morale and productivity as remaining employees wonder, “Am I next?”

Layoffs happening in rapid succession gives the impression that they are inevitable, making it easier for companies to be camouflaged as they continue downsizing.

The True Number of Layoffs Likely to Remain Hidden

Despite legal tech layoffs making their way into news headlines, Burney is doubtful that we will ever know how many cutbacks have actually transpired within the legal tech industry, especially those of private companies with minimal broadcasting responsibilities.

For instance, he points out statements used by various legal tech companies addressing cutbacks: “Nothing will be changing and companies will have the same leadership, there will be no layoffs,” only for the months following to prove differently as firms go through staff cuts and rearrangement of executives.

Despite this, Burney remains hopeful for the future of legal tech, as there will always be layoffs, he says. He claims that cutbacks are a result of “how invested executives are with the people that they choose to not lay off.”

Even though we’re unlikely to ever know the accurate number of legal tech layoffs, it’s likely that the industry will encounter challenges as a result of recent cutbacks.

Do Layoffs Increase Cybersecurity Risks?

In a world that is increasingly prone to security threats, consequences to a company’s cybersecurity framework may arise, especially when economic uncertainty urges companies to let go of a large portion of their workforce in a short period of time.

In a recent article from eDiscovery Today, Mark Sangster, Vice President and Chief of Strategy at Adlumin, expressed that cybersecurity risks should not be underestimated.

“When you go through any kind of transition as an organization, it creates both operational, and emotional upheaval,” Sangster said. “So you obviously have the human element of layoffs, [and then] the reassignment of duties,” meaning if the individual performing a certain role is laid off, the role is either abandoned or assigned to someone else.

Burney believes that many significant security holes could be closed up by administrators accessing security dashboards post-cutbacks. He refers to the security issue as the “People problem … where disgruntled or upset employees would surreptitiously take off with sensitive information, or somehow circumvent security protocols to take emails or other documents they believe could potentially help them land a new job.”

According to stats from a Beyond Identity Survey last year from the Great Resignation, 83% of former employees continued accessing accounts from their previous employer after leaving the company. 71% of IT department employees in the US and UK said the Great Resignation had increased security risks at their companies.

Burney noted that this may be a difficult issue to avoid, as not only is it difficult to track every bit of information an employee leaves with during major layoffs, it’s hard to gauge their mindset during exit meetings.

Curb Cutbacks, Invest in Innovation

A Harvard Business review article highlights how companies with little-to-no layoffs posted 9% of share price increases, on average, while share prices remained flat in companies that let go of 3-10% of their workforce.

Firms that let go of 10% or more of their employees suffered a startling 38% drop in share price.

Reducing costs with layoffs may be logical from an immediate cash flow perspective, but it is only a short-term solution with long-term risks.

Human capital is one of the largest cost centers, and subsequently, one of the most important assets of a company. Although it is impossible to predict when a recession will hit, legal technology leaders can take proactive steps to prepare for a potential downturn rather than downsizing.

Protect human capital: A key element to preparing for an economic downturn is to invest in human capital. There are several ways to maximize the value of human capital including exploring opportunities for up-skilling, lateral rotations, and other ways of increasing employee value. These solutions can reduce costs as an alternative to termination. Building human capital pays off for firms in the form of more consistent earnings and increased resilience during crises.

Promote innovation: As we saw in the dot-com collapse, innovation is essential for tech companies to persevere through economic downturn, but unfortunately, it is often the first thing to go when layoffs occur. Innovation is broad and doesn’t have to be as major as introducing the cloud or media streaming. For example, marketing departments can focus on optimizing client lists and automating campaigns, which have tremendous potential to yield large dividends.

So, What Can We Expect From Legal Tech?

A number of legal tech companies have recently announced layoffs in addition to Relativity and DISCO, including Contractbook, Filevine, Lawgeex, Onit, and Reynen Court, while many others may be stealthily letting go of their workforce. If history repeats itself, we can expect growth and innovation to slow down to some extent, but it may also be an opportunity for the true innovators in the industry to shine.

Pay attention to the product launches and updates that your legal tech providers announce. Are they routine fixes? Are they old tools dressed up with buzzwords and fancy language? Or are they true innovations that could change the legal tech space?

At Nextpoint, we regularly release product updates to improve our user interface and maximize efficiency in the app. At the beginning of 2023, we also announced a major product launch: Data Mining, our ECA software that addresses the modern question of how to handle massive volumes of legal data. This groundbreaking technology is poised to change the game in legal data management – see for yourself here.

In addition to keeping an eye out for innovation, look for any security issues that may arise in the legal tech field to spot the subtle repercussions of the layoffs. Recently, Relativity announced a critical defect to its users, hinting that it may be lacking in manpower to maintain the infrastructure of the app after laying off 10% of its staff. While this defect was not directly related to security, it did impact search results, increasing the likelihood that privileged or confidential material could be overlooked during document review.

What Does This Mean For Law Firms?

In-house legal departments have already been urged to achieve more on limited budgets with more to come as the threat of a recession looms. In response, legal teams are mitigating their spending on outside costs and implementing time-saving technology tools to streamline workflows and manual operations.

Despite uncertainty in our current economy, Gartner predicts a 3X increase in legal tech spending by 2025. The Future Ready Lawyer 2021 Report shows that for the year, 84% of legal departments plan to increase their technology spending. Companies that have already implemented legal technology into their operations reported increased profitability.

For instance, lawyers have historically had to deal with massive loads of physical documents. Fortunately, new technologies with high processing power can simplify data and streamline document review. And when dealing with big data, cloud-based solutions can help lawyers and clients share files and documents across multiple platforms rather than relying solely on emails. Firms transporting their data to the cloud can enjoy notable benefits, like major cost reductions.

Recessions are unpredictable for the legal tech sector and the tech industry as a whole. Will legal tech layoffs curb innovation? For some, yes. However, for others, they will see the value of innovation in the long-run and last far beyond this recession.