Fundamental Changes Coming to the Legal Industry
This article was first published on Bloomberg Law. You can read it HERE
We are at the dawn of the 20-twenties, and although time is a continuum, the turn of a decade is still an occasion that invites to look forward at what we will see happen over the next 10 years.
For the legal industry the post-recession period between 2010 and 2020 has largely been driven by fear. Despite the fact that revenue and profits kept growing, law firms were wary of the disruptive effects of technology, competition of new entrants in the market, and were complaining about experiencing pressure on price from clients.
Whether or not we are floating toward a new recession, and despite the collapse of the concept of one undivided global trade economy, I am very positive on the future of the legal industry over the years to come.
Below are three important changes that I see coming to the business of law and all three provide great opportunities for creating better law firms that are a fabulous place to work and that are able to develop even closer relationships with clients.
1. ‘Value’ Will Be the New Paradigm
Over the past decade, the price of legal services has been high on the agenda. Clients tried every trick in the book to get a better deal and law firms have cleverly pushed back. This resulted in countless seminars, articles, and books on pricing of legal services, professional procurement, professional vendor management, alternative fee arrangements, and much more.
The result of all these efforts is that prices steadily kept going up, enabling law firms to grow revenue and profitability in a market where demand has remained flat over the decade. This clearly is not sustainable, and clients remain unhappy.
So why is it that so many very clever people have not managed so solve this conundrum? The answer is surprisingly simple: because the discussions have focused on the hourly rates and time is not the right measurement method in the first place. Whether or not you perceive a purchase as “good value” has noting to do with price. In other words: low price does not equal great value. It is much more complicated than that.
For legal services price is linearly related to time. This assumes the premises that more time also linearly leads to more value. This is pure nonsense. On top of that lies the assumption that each increment of time will create the same amount of value. This is obviously not the case: one hour spent on litigation strategy does not have the same value as one hour listening-in on a multi-caller conference call. The former could have tremendous added value and the latter close to none (who does not continue working on the computer during such calls?)
Where there is no relation whatsoever between time and value, data analytics shows that there is a strong and direct relationship between value perception and return on investment. Companies do not mind spending money on lawyers as long as it helps them directly create profit (or prevent a loss).
As the value matrix below shows, value also will depend on the number of available lawyers that qualify for the job. In the years to come, both lawyers and clients will gradually embrace value-based pricing, and this will lead to higher client satisfaction, better understanding of the clients’ business, and stronger relationships between clients and outside counsel.
2. ‘Swarm Intelligence’ Will Become Standard
At most law firms today, partners are primed to compete with each other for clients and matters. Regardless of the profit distribution system, each partner will need the business. So, if there are two M&A partners, they will both want to land the merger.
Over the past decade lawyers have become increasingly specialized and the areas of specialization have become more and more niche. Within a firm, the lawyers are organized in practice groups according to their areas of specialization. So, we have lawyers who compete, organized in silos, and having an increasingly smaller scope.
The world in which their clients operate has over the same decade become increasingly complex and connected. Companies face permanently changing political, regulatory, and technological challenges. Many industries and businesses must completely reinvent themselves to survive. This calls for a different kind of advice from their outside counsel.
The problems have become too complex to put into one box and are often uncharted territory that goes well beyond the ability of one individual to solve. In order to keep up with the needs of their clients, the law firms need to break down the silos, introduce a more generalist career path for some lawyers and learn to fully tap into the combined knowledge, problem solving creativity, and intelligence of everyone in the firm.
We call this “swarm intelligence” and it will become the new normal in law firms. The days of individually competing partners, operating in silos are numbered. Collaboration and teamwork are the way forward.
3. Outsourcing of All or Most Non-Core Activities
In order not to risk losing their most successful partners (and attract new talent), law firms must maintain their profitability. Profitability is of course not only dependent on revenue, but equally on costs.
A characteristic of law firms is that costs are fixed in the short term and are not influenced by revenue. In other words: producing more revenue does not lead to higher costs (except for bonuses) and making less revenue does not lead to lower costs. Lowering the fixed costs or making costs more flexible will be hugely attractive and will directly have a leveraged impact on profitability.
Over the coming years we will see law firms shrink their core group of lawyers to only the best, who have most added value, and are fully occupied most of the time. High-volume, low-value work will be largely outsourced to mid-tier law firms and/or alternative legal service providers. Non-essential lawyers will increasingly be hired through a flexible work pool.
When it comes to non-legal staff functions, there also is a strong business case to outsource. Not only will it become increasingly difficult for law firms to attract the non-lawyer top talent they need, not having all staff on very expensive premises will also reduce occupancy and office costs. Just think about the IT department as an example. Professionals with high-level IT skills are in high demand (even Silicon Valley struggles to find the right talent), so what IT professional in his or her right mind would consider working at a law firm an attractive career move?
Outsourcing has already started with IT departments, but also other functions such as marketing, human resources, finance, and facilities will follow. The law firm of the future will have a very lean staff and most services outsourced to professional third parties. The decisions carry some risk, but also big rewards.