One of the most common questions I’m asked about my past life as a founder is how we managed to deal with the big incumbents early on, leading to acquisitions by Fortune 500 companies years later.

In many industries, the operational backbone or system of record (SOR) is a formidable incumbent, deeply entrenched in workflows optimized over the years. Many adjacent and point solutions are built around the SOR, adding immense value to the investments made in these systems.

In the legal tech landscape, the incumbent SOR—whether it’s a legacy practice or case management system, or a traditional billing platform—is the 800-pound gorilla that everyone fears. This reality applies across small, medium, and large law firms, as well as legal departments.

David and Goliath

In the early days of eBillingHub, I secured a meeting with the CTO of the leading incumbent. We were the first electronic billing solution to solve a massive pain point for mid and large firms. Excited about a potential partnership with such a big corporation, I shared details about our architecture, SaaS approach, and transactional pricing model. They were impressed. They loved everything about it. The next step? Formalize the partnership and plan the go-to-market strategy.

After numerous attempts to follow up, I was ghosted. Months later, they got back to me with a note: “We have decided to move in a different direction. Best of luck with your endeavors.”

A few weeks after that note, they announced via a PR release that they had launched a competitive product.

It’s hard to describe how furious, mad at myself, and disappointed I was. However, it taught us some of the biggest lessons ever: 1) If they copied us, we were onto something of such value that the giant incumbent wanted to replicate, and 2) We must beat Goliath, not with a stone, but in the market—one customer at a time. There’s no other way. Keep our heads down, keep building and selling, and they’ll come back.

Their product was inferior and lacked 70% of the features we had. Nonetheless, their announcement froze the market for years. As the saying goes, “No one gets fired for buying from IBM.” But the most innovative firms and those with the most pain saw the value and signed up with us. Then, firms that were disappointed with the incumbent’s lesser product also started to buy from us.

After capturing a good portion of their market, with hundreds of firms sending hundreds of thousands of e-bills through our platform, the incumbent reached out and wanted to partner. eBillingHub became the market leader and one of the best and most innovative point solutions for law firm operations. They retired their product from the market, and the rest is history.

The Incumbent Advantage

Incumbents often hold the upper hand over new point solutions because they are deeply entrenched in existing workflows. The SOR aims to provide a comprehensive, integrated solution for multiple business functions, while point solutions target specific needs or gaps in functionality.

Their solutions are familiar, reliable, and seamlessly integrated into the broader ecosystem of tools that organizations use daily. This creates a level of inertia in the industry—switching to a new, untested solution requires not just a leap of faith but also significant changes in processes, staff retraining, and potential workflow disruptions. Moreover, incumbents have access to vast amounts of historical data and customer insights, allowing them to continually refine their offerings and fend off new entrants by quickly adopting or mimicking innovative features.

However, the incumbent’s most significant advantage is distribution—they already own a significant part of the market and control the channels through which software is purchased and deployed. This ownership allows them to reach a vast customer base quickly and efficiently, making it difficult for new entrants to gain traction. By controlling both the product and the pathway to the customer, incumbents can stifle the adoption of innovative point solutions, no matter how compelling, by either replicating these innovations or bundling them into their existing offerings, effectively locking out competition.

Challenging the Incumbent in the Era of AI: Legal Tech’s Opportunity

In a recent article by a16z, the discussion around AI copilots and agents highlights how white-collar roles will be increasingly impacted by these technologies. While incumbents are slow to innovate, their SOR is the most natural place for these copilots and agents to reside. So, how can innovative vendors and startups overcome the natural advantage of the incumbent?

1. Own the Data: By positioning your product at the data collection or aggregation stage, you can become a critical part of the workflow, making it difficult for incumbents to bypass your solution.

2. Focus on Pain Points: Identify the most painful, time-consuming workflows that are still handled manually or require significant human involvement. These are prime areas for AI-driven automation. If you can reduce the friction in these processes, your solution will quickly become indispensable.

3. Integrate Multimodal Data: Traditional legal SORs might only capture structured data, such as case numbers, client details, document metadata, and billing hours. However, significant information resides in emails, chat logs, and other unstructured formats. By integrating these diverse data sources, startups can offer a more comprehensive view, potentially creating a new type of SOR that outpaces the old guard.

4. Augmentation, Not Just Automation: Focus on creating AI copilots that enhance users’ capabilities rather than fully automating roles. This approach may face less resistance from the legal community.

5. Integration Capabilities: Develop tools that can easily integrate with existing legal software to lower the barrier to adoption.

While startups building point solutions are nimble and can solve immediate needs quickly, they can also lead to data silos, integration challenges, and increased complexity in the overall IT landscape if not managed carefully.

Charting the Future

AI often favors incumbents, as highlighted by Tomasz Tunguz in his article “When AI Favors the Incumbents.” But they also have disadvantages. Established players are inherently slower to innovate, their reliance on legacy systems, entrenched processes, and risk-averse cultures make it challenging to pivot quickly or embrace disruptive technologies. 

This is where startups have the upper hand. By bringing fresh perspectives, agility, and innovative solutions that address the gaps incumbents overlook, startups can carve out significant market share and demonstrate their value.

Incumbents recognize this, which is why part of their growth strategy increasingly involves acquiring these nimble innovators. However, partnerships or acquisitions only happen when startups have proven their worth—either through rapid growth, profitability, or by capturing a critical piece of the market. 

For legal tech founders, the message is clear: while the road may be tough, building a solution that truly addresses pain points, scales effectively, and captures market interest can put you on the radar of these industry giants, positioning your company as an essential part of the future legal tech landscape. 

But more importantly, it’s never too early to start building those relationships. Be patient. Don’t be intimidated. Keep hustling and grinding towards a big vision. Success will naturally come. Happy building!

Do you have an idea, or are you working on something awesome and want to chat? 

Please feel free to reach out and comment, and if you enjoy this content, consider subscribing so you don’t miss future posts on these topics. Visit our website, BUILDLEGALTECH.com, to read more.