October 23, 2012

The Gravity of Market Forces: A Global Firm Leader’s Take on the Trends That Will Reshape Law Firms

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January/February 2010 Issue | Volume 36 Number 1 | Page 52


The Gravity of Market Forces: A Global Firm Leader’s Take on the Trends That Will Reshape Law Firms

We all know that overall demand for legal services is down, that we have more lawyers than work, that clients are behaving differently and that generally compensation levels are dropping. This is what we know about today—yet what do we know about tomorrow? One thing is certain: We cannot expect yesterday to become tomorrow.

While it is understandable that the immediate need to deal with today’s economic turmoil must take priority for law firm leaders, it is also important to acknowledge longer-term trends and look past the recession to what we know will be a different future. Here is a look at crucial trends that law firm management must respond to when determining strategies for future success.

Broad Market and Practice Trends

First, the single strongest trend propelling change in the legal profession is undoubtedly the increasingly competitive market for legal services. Competition pushes prices down and forces lower production costs. Competition opens up opportunities, too—but it is a real threat to those who don’t know how to compete. Increased supply of service alternatives, reduced demand for private practice solutions and easier access to alternative providers will continue to change the face of the profession. Market forces are like gravity—it is impossible to ignore them. Mediocre and poorly managed firms will be more quickly punished by the market. In addition, the cycle time between legal solutions that look like rocket science and commodity work is getting shorter and shorter, so the price for any given type of recurring work will continue to go down as other lawyers or clients themselves learn how to do the work. The lesson here is that firms need to keep moving to new issues and new practice areas as part of their strategy to help keep their earnings up.

Capital and trade flows also have changed and will continue to change—moving away from heavy reliance on flows between North Atlantic countries to global flows, higher growth, and increased flows with and among the BRIC countries and those benefiting from generally rising oil prices. We already see smaller businesses trading across borders and operating in other countries. And we see developing countries, previously limited to inbound capital flows, investing in developed countries. While these trends will not affect every firm, they are and will affect many firms, opening opportunities to those with international skills and closing doors for those without them.

Technology’s Evolution

Next, let’s consider some examples of the ongoing changes in information and communication technologies. Improved anywhere-anytime communication tools make it possible to use offshore, cheaper suppliers. Easier access to an ever-growing wealth of information means that clients are more sophisticated, and they will not pay for what they can get for free on the Internet. Plus, using online tools, clients can find “the right lawyer” at the “right price” far more easily than ever before. For their part, law firms now routinely give away information and even solutions that they used to sell. Such factors are creating both a more cost-competitive market and a market of sub-specialist, “been-there-done-that” lawyers who, because they are accessible to a broader market, can deepen their experience and skills in particular areas.

At the same time, technology is allowing buyers to evaluate lawyer performance in more detail and to more easily share the information with each other. How much, for example, does it cost to have a particular firm do a deposition? How many cases did a firm dispose of at what aggregate cost? From word processing and menu-driven document generators to emerging expert systems and information consolidators, the labor content of legal work done in law firms or legal departments is going down. Leverage is now as much in technology as it is in people. Thus, more solos and small firms can compete with bigger firms.

There are three key lessons to take from technology trends:

  • Your highest value to clients comes from information that cannot be easily accessed on the Internet, as well as from the application of skills and judgment that cannot be duplicated with technology (i.e., high value does not come from your ability to crank out one more merger agreement).
  • Your competition can be almost anywhere.
  • Failure to keep up with new technologies and information sources means you lose your competitive edge.

In the short- to medium-term, we have too many lawyers, both new law school graduates and senior lawyers reluctant to retire. We also have lawyers offshore who can or will soon be able to do some of our work at much lower cost, along with non-lawyers who can do some of the work previously reserved to lawyers. In addition, we have clients who can do more of their own work. The result is that lawyer incomes will not be growing as they had been, and we may be in for another downward adjustment.

Longer term the picture is uncertain. Will poor job prospects decrease law school enrollments? Will negative population-growth trends in the United States and Europe reduce supply long-term? Will the improved education of offshore lawyers make them more appealing alternatives to clients’ local lawyers? Will the lifestyle issues that have been changing employment and work patterns survive a long recession? Will uncertainty in demand drive down the number of full-time career lawyers in firms? These uncertainties should push law firm management toward a more flexible approach to how work is staffed and relationships between the firm and its lawyers are structured, with innovation being paramount over tradition.

Structural Shifts in the Law Firm Market

Now let’s consider the trend to consolidation and perhaps stratification among law firms. Intensifying competition, exacerbated by lower demand, is punishing poorly performing firms. With lawyers more mobile than in the past, there is an ongoing sifting of talent. Specialists are moving to firms with scale and reputation in their particular specialty, and more successful lawyers in general are moving to better performing firms. Successful firms, in turn, are using their economic strength to buy into hot and emerging practice areas. Firms are also becoming less tolerant and more frequently moving low-performing lawyers out. The result will be to reinforce the successful firms’ market positions, both in terms of the strength of their key practices and their economic performance, which will further strengthen their reputations and market positions. This is now playing out in the form of larger diversified firms and larger specialized boutiques. For many larger firms, it is playing out in more focused practices, driven by the market demand for expertise and depth, so that fewer “fringe” practice areas are maintained in those firms.

Consolidation has already occurred in other professional services arenas, including accounting, medicine and engineering. While the law is in part unique, including, among other factors, in the limitations inherent in the current conflicts rules and prohibitions on agreements that restrict lawyer mobility, it is hard to see why fundamental market dynamics would not apply to our profession. Current client trends to working with fewer firms and demanding deeper expertise seem to be reinforcing this development. Firm failures owing to a tough market will reinforce it. It will still be possible to succeed in this very complicated market as a niche player and to take a boutique practice into the upper echelons of a market, as we have seen in the past decade. But a major move up by broader-based business firms, while always possible, will be a greater challenge. And it will be very possible for firms that are not well managed to fall or fail.

Altered Buying Patterns

Client buying behavior was changing even before the recession and will probably continue changing for some time. From price pressures and alternative fee structures, to bidding and other competitive processes, to more careful balancing by clients of the cost of the legal services versus the value of a matter, today’s legal departments are behaving more like corporate purchasing departments or insurance companies than in the past. In fact, increasingly, purchasing departments are actually managing the processes through which lawyers are retained. Some clients are disaggregating the work on matters, buying a small amount of high-priced highly expert talent from one source and getting cheaper talent to do the routine aspects of a matter from another source.

Clients overall are clearly increasingly cost-conscious—not just on rates but on total cost for a matter or the total corporate legal spend—and looking for less expensive, equally effective alternatives. Old buying patterns are breaking down. And for reasons already noted, it is easier and easier to find competitive alternatives and lower prices.

So what will the ultimate result of all of this be?

Lethargy Could Prove Lethal

I do not think it is possible at this point to tell if we have a true structural break in the market, one that will open it up in a major way to wholly new competitors as has happened in other markets when technology breaks disrupted industries. It is clear, though, that for most law firms the market will require “better, faster and cheaper.” It will also require more flexibility and nimbleness. It will require better management and a higher level of performance from law firm partners. Until a boom economy returns, there will not be enough revenue growth sloshing around to cover over management mistakes or firm lethargy. Firms that can master the skills of effective and efficient service, effective management, strong financial discipline, including cost control, and a strong competitive culture will be provided with greater opportunities as the market pressure drives out poor performers.

However, having said all of this, the fact remains that the future is persistently uncertain so, as always, law firm leaders will be wise to continue to question conventional wisdom and all predictions. As Mark Twain said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

About the Author

Harry Trueheart is Chair of Nixon Peabody LLP, a global firm with 800 attorneys collaborating across major practice areas in 17 cities.