The legal market is facing unprecedented change. New entrants are coming into the market, offering a wide breadth of services and stepping up the competition for business from increasingly demanding clients who want easier ways to do business with law firms. Whilst current business performance remains strong, law firms need to react to these market forces now if they are to safeguard long-term success.
To investigate how well equipped law firms are to meet these challenges now and for the future, PA Consulting Group, in conjunction with Legal IT, undertook a survey of the Top 100 law firms during the latter part of 2001. The survey looked in depth at how these firms run their business now and in the future, and, more specifically, at how they utilise IT.
Looking forward, four key areas are important to firms over the next three years:
- Client relationships
- Efficiency gains
- Expansion
- Staff
When we analysed the survey results in each of these areas we found that firms need to make a step change in the way they manage themselves in order to:
- Develop mutually-beneficial relationships with the right clients - the survey shows that firms may be risking their commercial success for the benefit of their clients
- Reward all the staff in the firm for working towards clearly stated strategic objectives - the survey shows that, whilst strategic direction is clear to the leaders of the firm, it has not been communicated to all staff who may therefore be 'doing the wrong things'
- Prevent new competitors taking away significant market share - the survey shows that the scope of business available to law firms could reduce
- Expand and merge effectively - the survey shows that over half of merging firms have not received the full benefit from the merger
- Exploit the intellectual capital within the firm fully - the survey shows that barely 25% of those firms that have invested in 'knowledge management' believe that they have generated the full benefit
- Organise to deliver full value from IT - the survey shows that there could be a mismatch between the strategic direction of IT and the business.
Develop mutually beneficial relationships with the right clients
34% of respondents see developing and managing client relationships as the most important factor in the success of the firm going forward.
However, the measurement of commercial value, or other key indicators of business performance, is not carried out consistently. All the firms that responded to the survey are highly client-focused with almost all monitoring value delivered to the client, mainly in the form of a client satisfaction survey. However, only 47% measure the delivery of each client matter against quality, time and cost metrics and fewer know the true commercial value of a client relationship.
Clearly, then, firms do not have full information to control their relationships and engagements on an ongoing basis. Constant progress and quality checks allow any client dissatisfaction or potential overrun in fees to be found and dealt with earlier, reducing commercial risk.
These disciplines will be even more important in the future. Looking forward, clients are increasing their commercial demands - 60% of firms believe that they will be doing more fixed fee work in the future and 80% recognise that they must deliver this work at lower cost. So firms will require an increased level of project and commercial management. However, the survey reveals that many firms do not have the necessary competencies and approaches at present - only 60% manage client matters as a project and only 60% see project management as being a core competency.
It is important that law firms develop the competencies to monitor and measure key delivery and performance metrics all the time.
Rewarding staff for 'doing the right things'
There is a general awareness of the need to manage staff well and all firms know that they need to attract, retain and reward top quality staff. Almost all firms are sensitive to personal needs when allocating work and most believe that their reward and remuneration system is aligned to the strategy. Firms clearly care for their people.
However, the survey revealed that, whilst 93% of firms believe they have a clear business vision and strategy, only 60% believe that this vision has been clearly communicated to staff. Similarly, only 60% of firms believe that staff have personal objectives linked to the success of the firm and only 54% reward all professional staff based upon their individual contribution to profitability. This means that staff could be doing the wrong things, unknowingly, because their personal objectives may be different from the firm's.
Firms need to ensure full understanding of the business vision amongst staff and drive that vision through into working practices and staff management processes.
Stopping the competition stealing the market
The survey found that, within the next three years, 87% of firms expect to see new competitors entering the legal arena from other professional service firms. However, there are currently few plans for those already in the legal market to explore other fields - only 20% of firms plan to move outside the traditional legal arena.
If this happens the markets in which firms are able to operate will shrink. Indeed, many of the firms moving into the legal sector are making greater use of IT as part of their product and service, and law firms risk being left behind. Firms need to be more innovative in the way they respond to these competitive pressures.
Expanding and merging effectively
Some firms see expansion as the way to respond to these pressures - in the next three years, 20% of our respondents expect to expand their firm overseas. Currently all firms surveyed are UK focused and 60% perform 10% of their work across geographic boundaries. In three years time we expect to see 57% of firms performing 20% of their work across geographic boundaries.
The survey also shows a potential increase in the number of mergers and alliances as part of the response to market and competitive pressures. 13% of respondents expect to merge with another firm over the next couple of years and almost half expect to form or strengthen alliances.
However, where firms have merged in the last eighteen months, only 44% believe that the benefits of the merger have been maximised. Mergers and alliances fail where the strategic objectives of the two parties are not aligned. They also fail where the methods and processes used for managing and carrying out work are not consistent, or are not consistently applied. The survey shows that 73% of firms have no firm-wide standard operating procedures and 53% have no firm-wide management information system.
Similarly, more clients now demand a truly global legal service with an economy of scale and consistent and shared legal advice. Such a service demands the seamless provision of legal advice or information anywhere in the world, making common working procedures and systems even more important. Without them, firms will have to adopt costly additional processes that, if they do not work, irrevocably damage the reputation of the firm.
Once again, for their competitive ambitions to be met, firms need to define and implement consistent processes and procedures, aligned to their strategic objectives.
Exploit intellectual capital to the full
Our survey shows that most law firms recognise that they must exploit their intellectual capital to the full. They see a fundamental need for some kind of knowledge management (KM) initiative to collate and share all the company's intellectual capital. Sadly, only 31% of business respondents (and only 21% of IT respondents) think that their knowledge management investments are bearing fruit.
Knowledge management works most effectively when linked back to business objectives, using the processes and exploiting the reward mechanisms that, as we have seen, are currently absent from many firms. The survey also suggests that knowledge management may not be working because of the wide range of IT applications and systems in use in law firms. Information and IT are fragmented and do not easily support a firm-wide knowledge base.
Firms must manage information, and information technology, within a consistent firm-wide knowledge framework.
Organise to deliver full value from IT
The survey shows that law firms currently spend between two and ten % of their turnover on IT each year, the average being 5.5%. When benchmarked against other information intensive sectors, some firms are undoubtedly investing too little. And, whilst the overwhelming majority of respondents believe their firm receives good value for money from its IT expenditure, this is not fully supported by measurement. In fact, only just over 50% of firms measure the value or the level of the IT service they receive. Without measurement, it must be difficult for firms to be absolutely sure they are getting full value from IT.
Clearly, the full value of IT is only realised when it supports the overall business objectives and where business and IT leaders of the firm have a common view of those objectives. However, the survey revealed that only 65% of business leaders think that IT receives a clear direction from the executive and only 45% of IT leaders think this direction is clearly stated. Furthermore, whilst 65% of business leaders think that IT understands business needs, fully 82% of IT leaders think they know what the business wants. These figures should be the same (and higher).
As we have seen earlier, whilst the objectives of the firm may be clear to its leaders, the implications of these objectives are not widely understood, nor are they translated into the processes and procedures that IT systems can support. So whilst IT efforts in firms might be directed for best value, there is much more that can be done to ensure that this is the case.
Leaders of law firms need to invest more time and effort in engaging with IT leadership to ensure there is a common view on business direction and objectives.
Strong and visible leadership is vital for success going forward
In responding to the findings from this survey, then, we have seen that leaders must bring more structure and discipline to the management of their firms.
The logic of a business model which uses clear principles, expressed through consistent objectives, processes, procedures and systems, to deliver value to clients, people and the firm is very strong. However, putting it into practice is not necessarily so straight forward, especially where the partnership model of law firms creates such a strong imperative to operate by consensus. The firms that take the difficult but essential decision to re-write the rulebook of their business model will need their top management to champion the initiative. PA's experience is that devoting significant effort at the outset to agreeing and documenting a new set of business principles is the first and most crucial step, and one from which the rest of the work flows.
For the law firms that thrive, the three priorities of clients, people and firm form a strong virtuous circle - delivering real value to clients provides the challenging and developmental work for the best lawyers, and the profit stream on which the firm's long term future depends. For the firms that fail, a vicious circle will form, with a dwindling client base, escalating recruitment and retention difficulties, and falling profitability. That all firms must make this shift to thrive seems inevitable - what remains to be seen is how far those that make the move first will exploit their competitive advantage.
Collaborative working
The survey revealed that a client portal is seen as being a key priority over the next two years. Some clients are already demanding secure Internet-enabled collaborative working areas in order to have real-time access to documents and information. In response, many of the leading firms have invested heavily in developing electronic deal rooms for their clients. Although, as the survey revealed, such technology has been developed in a bespoke fashion rather than utilising off-the-shelf packaged systems.
The development of these bespoke, non-standard systems may become unacceptable to clients who use the services of many firms and who are unwilling to learn how to use various different systems. Unless the legal industry adopts some form of standardisation, then there is a strong case that clients will (and some already are) develop their own deal rooms, which they will expect their law firm of choice to use. This may render existing law firm derived systems obsolete, along with the investment that has been placed in them. The large players in the software market, such as Microsoft and Lotus, are already promising future standard off-the-shelf solutions that may provide some of the functionality currently provided by bespoke systems.
