Fundamental and permanent change in the legal market is set to gather pace as the economic recovery takes hold. The decisions that law firms take now will shape their long-term future. But one issue is more pressing even than identifying the right strategic response: can your firm and its people accept and deliver revolutionary change?
The years since the credit crunch have been difficult. A minority of firms have managed to maintain revenues and profits, but most have seen them drop, with many yet to return to 2008 peaks. Most firms have cut staff number, trainee intakes are down and expenditure is being reined in. Some firms are under scrutiny by their bankers, who no longer regard law firms as immune to catastrophic failure.
For many partners, it has not been a pleasant time. Some have been managed out altogether whilst others have been demoted from equity status. Remaining equity partners are being asked to contribute more capital at a time when their drawings and profits are lower.
What makes this a period of fundamental significance for law firms is the fact that the double-dip recession is just one of a number of dynamics that are reshaping the legal marketplace:
The recession has made life difficult for almost everyone: Substantial reductions in revenues and profits caused by lower volumes (particularly in corporate finance and real estate) have weakened firms. The position is made worse by the fact that many clients have themselves experienced tougher market conditions and are looking to pay their lawyers less.
Clients are asking, where is the value for money? It is becoming harder for law firms to justify their fees when balanced against the tangible value they add to a client’s business. A managing partner might review a sample of work recently completed by his or her firm, and ask a few hard questions: Did we make a difference for our client? Were our fees proportionate to the difference we made? How easily could the client have procured a comparable service from someone else for similar or lower fees?
Competition is increasing: Established firms must now compete against each other for work and against increasingly powerful in-house teams and ambitious new entrants to the market in the form of providers of legal process outsourcing (LPO).
Liberalisation of the legal market will drive commoditisation: Non-lawyers are entering the market place and applying proven business techniques. They are focusing on service, process and the use of technology to deliver consistency and reduce cost. As they do so, they will relegate large areas of the law firm service portfolio to commodity status.
There are too many law firms: Competitive dynamics, fee pressure, the current trend for clients to rationalise their relationships with external firms and the contraction of the economy all point to significant overcapacity in the market. The Solicitors Regulatory Authority (SRA) has reported that there are fewer law firms operating now than at any point since they began recording numbers.
As these dynamics force the fundamental re-shaping of the legal market, the response from law firms must be revolution, not evolution. Identifying the right strategic response is important. But the bigger challenge by far is to grasp the scale of the change required.
This is a difficult issue for many firms. The law firm model has been with us for a long time, largely unchanged. Most lawyers have been going about their business in much the same way for most of their professional careers. But the changes required at an organisational level will depend for their success on the willingness and ability of each individual within that organisation to embrace change sincerely and with true commitment.
This means all partners, without exception, will have to accept and lead fundamental change in the way they interact with clients, deliver services, manage their people and are remunerated. The key challenge for senior management is to mobilise and motivate able and opinionated partners and lawyers, despite the fact that radical change is likely to turn their professional lives upside down.
Further, the new landscape is unlikely to offer a fixed, stable target; like most other market places it will constantly evolve. The risk is that, in adopting specific solutions, a firm will find that, even when it has delivered its plans, the market has moved on. This means the change dynamic within the business needs to be a constant. Firms must embed agility and continual renewal to meet the changing features of the market and its competitive dynamics.
Only when a firm and its people have got to grips with change as part of business as usual will it have an environment where new solutions can be implemented and adopted on a sustained basis. Without that environment, it will not matter how good any strategy or solution is; the chances are it will fail.
For unconstrained thinking on current challenges in the legal market, contact us now.