The annual Report on the State of the Legal Market, a collaboration between Georgetown Law’s Center for the Study of the Legal Profession and Thomson Reuters’ Peer Monitor benchmarking program, is available.
In recent years there has been no shortage of conferences, reports and studies documenting the challenges facing the legal services industry and the seemingly inevitable changes that are coming its way. This report is one of the major annual barometers of the state of that transition. This year, it gets a little more specific regarding ongoing challenges, likely structural changes to the industry, and steps law firms need to take to keep up.
More than anything, the major take-away from this year’s report is the sense that the time to talk about impending changes has passed, and the time for executing those changes is here. It offers a number of indicators that execution and concrete change on a number of fronts is starting to gain traction. That shift in mentality is illustrated in the introduction, which begins with a recitation of the usual dynamics behind the changing legal market:
* The rapid shift from a sellers’ to a buyers’ market;
* modest growth in the demand for legal services;
* the decision of many corporate clients to shift more legal work in-house;
* the growing willingness of clients to disaggregate services among many different service providers; and
* the growth in market share of non-traditional competitors.
One Firm at a Time
It’s not enough, argues the report, to simply meet these challenges with traditional tactical reactions—responding to request-for-proposals, engaging in competitive selection processes, and working under alternative fee arrangements. That’s just a matter of adjusting to today’s challenges, when in fact a more comprehensive and strategic response is called for.
The report references Allen & Overy’s recent strategic redesign as an example of a longer-term response, one that “skates to where the puck will be” as the saying goes. At a recent Thomson Reuters Legal Executive Institute, David Morley, A&O’s Worldwide Senior Partner, described a redesign of the firm’s traditional structure into a hybrid consisting of five parts:
1. The core A&O law firm;
2. Peerpoint (a contract lawyer service);
3. A&O Consulting (offering hybrid solutions for legal problems);
4. A&O Derivative Services (for on-line legal services); and
5. A&O Legal Services Centre (in Belfast, Ireland) (for document review services)
This is not simply a matter of being more “responsive” or “efficient”; this is a case of a firm re-thinking its entire business model, and unbundling some services around the needs of today’s clients. A&O’s exact formula for the transition might not ultimately be the final answer for all firms, but it’s a good example of a firm contemplating what it wants to be, building a strategy, and executing on that strategy.
Buying Habits—Clients in Charge
Evidence is mounting that buyers really are in charge. Corporate General Counsels have beaten firms to the punch in executing in this area. There is no longer a “sense that the balance of power has shifted.” The report cites good data, from multiple sources, that corporate spending on law firm services has declined (in inflation-adjusted dollars); that GCs are shifting spending from outside firms to their own staffs; and that GCs are increasingly finding non-firm partners for a share of their outside work.
Another pocket of execution is found in the growing range of new types of non-firm providers that have moved in to the space to take a share of legal spend. Legal process outsourcers (LPOs) such as CPA Global, Pangea3, and Integreon are not exactly new, but the report cites a number of other types of alternative providers that have gone mainstream, including new-model law firms like Riverview Law and Redgrave LLP; legal talent management services like Axiom; sophisticated document creation systems offered by firms like KM Standards; or dispute resolution and expert systems provided by companies like Fair Outcomes, Inc., Resolution Tree, Raptor Analysis, and Neota Logic, Inc. In addition, the Big 4 accounting firms are gearing up to take more market share as well, primarily in markets outside the U.S.
Revenue from all this activity might still be low compared to the total billings of traditional law firms, but there is enough activity to make it clear that the legal services industry is now bigger than just the law firm industry. Technology-based companies and new alternative providers are among those executing on the new trends, and they appear to be here to stay. (For a back-of-the-envelope tally of the size of this alternative provider space, see Sizing the New, More Diverse Legal Market at Ron Friedmann’s Prism Legal blog, with Tweeted input from Liam Brown, George Beaton, and Jordan Furlong. In the piece, Furlong says: “Anyway, from 0 to $2 billion in <10 yrs isn’t the least impressive growth curve ever.“)
Focus on the Right Metrics
One of the remaining hurdles for law firms that want to execute their way into the new legal market is to start focusing on the right metrics. The report has a good review of the difficulties the industry has in this regard, with its reliance on measures of inputs such as billable hours, fee growth, utilization, leverage, etc., that have nothing to do with value for clients. The next frontier in the transition to executing their way into a new environment will come when more firms start to measure outputs such as profitability (per matter, client, and practice area); market share; client satisfaction; brand strength, and client quality indexes.
Some are Turning the Corner
From reactive and tactical to strategic and long-term—that’s the path taken by the firms that are executing well today. And results may be starting to show. The report documents the emergence of a more highly segmented industry, with 20 elite firms outperforming the rest of the AmLaw 100 firms. Even in the AmLaw Second 100 firms, a handful of firms are consistently outperforming the others.
Like other reports about the industry, this research identifies a familiar list of challenges facing law firms, and highlights the resistance of many firms to make the long-term shifts to meet those challenges. In the past, a certain reluctance to change may have been rooted in a sense that the challenges might be only temporary and the legal industry would return to the way it had always worked as the economy inevitably recovered. This report identifies a few parts of the industry where now permanent change is taking root. Moreover, it shows that both traditional firms and new competitors have been able to execute on strategic changes that are having a real impact on performance and on the structure of the industry.
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