How the market for law firms has changed! Who would have thought we’d be applying Michael Porter’s Five Forces model to understand law firm strategy?

Let’s face it Porter’s Five Forces, which draws upon classical industrial organization economics, is a framework to understand and address the dynamics of competition and profitability in an industry populated with companies – not partnerships of professionals.

Foreword
Preface
Chapters

1> Introduction
2> The Legal Services Industry Today
3> Porter’s Five Forces and Maister Maxed Out
4> Clients of the Future
5> The 2025 Kaleidoscope Scenario
6> Diagnosing Your Firm’s Readiness for Change
7> Designing the Business Model
8> Brand, Marketing, and Business Development
9> Pricing and Fee Arrangements
10> Sourcing and Outsourcing
11> Legal Project Management and Process Improvement
12> Technology, Knowledge Management, and Analytics
13> Partners, Innovation, and Change
14> Outlook

Foreword

Change does not come easily to the legal profession. We are trained to be skeptical, cautious, anchored in precedents and tradition. Yet, disruptive change is here…

There was a time when we mostly worried about advising clients and billing time. Today, we deal with disruptive technologies, commoditization, unbundling of legal services, globalization of firms, neologisms like BigLaw and NewLaw, and “co-opetition.” These terms reflect changes…of a magnitude and variety our clients and our profession have not previously experienced…that challenge many of the ethical foundations of what makes ours a special, regulated profession.

Cost-conscious clients (empowered by new tools and technologies) are challenging us to manage projects better, improve efficiencies, control costs, and assure quality. They want the right people doing the right things the right way, at the best possible cost, and as quickly as they require.

These are not the challenges many in our noble profession signed up for…but they cannot be avoided. And, truth be told, they are making what we do far more professional, and more exciting and rewarding for those who embrace and adapt to change and the opportunities it brings.

As chief change agent for one of the world’s largest law firms, I am constantly looking for insights and advice to help us make sense of change, and to make those changes necessary for us to remain one of the world’s leading law firms. That is why I am delighted to introduce Remaking Law Firms: Why and How.

Eduardo C. Leite
Chairman of the Executive Committee
Baker & McKenzie International

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Preface

Perhaps ironically, the origins of Remaking Law Firms, a book about traditional firms, lie in an innocuously titled blog post ‘The rise and rise of the NewLaw business model’…which kicked off a lively and passionate cyber-exchange…involving Australia, Canada, Hong Kong, Spain, the United Kingdom, and the United States, culminating in publication of NewLaw New Rules: A conversation about the future of the legal services industry in December 2013.

In this turbulent, even hostile, environment the time is right for an unflinching look at the traditional law firm business model in Remaking Law Firms: Why and How.

Law firms around the world have relied on the BigLaw business model for decades because it delivered excellent service to clients and handsome profits to partners. But the times have changed…price-down pressures, commoditization, and increasing client demand for efficient, business-relevant services. To respond, law firms will have to go beyond cutting costs while preserving the general way they win work, produce work, and govern themselves.

Law firms need to remake their business models to improve alignment with the needs of commercial clients. Remaking Law Firms: Why and How will fuel a desire for change in law firms that goes beyond thinking and planning, and leads straight into the challenging, exciting world of implementing change, and ultimately to better client service.

George Beaton & Imme Kaschner
Melbourne, Australia

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Chapters 

1> Introduction

Remaking Law Firms sets out a compelling scenario showing how client demand is driving deep changes in the legal services industry. Our analysis of the future (the Why) leads to a comprehensive assessment of how firms can—and must—adapt to the new normal by changing, i.e. remaking, their business models. Remaking will be done in many ways, including learning from and cooperating with non-traditional legal services providers (the How). Many examples and case studies from innovative law firms, in-house departments, non-traditional providers, and others bring the concepts to life.

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2> The Legal Services Industry Today

Today’s law firms share a business model that we call ‘BigLaw’. BigLaw has been immensely successful for clients and partners over many decades, but the model is increasingly less well suited to competing in an industry characterized by buyer power, cost pressures, increasing digitization, and substitutes. BigLaw firms and competing NewLaw providers are compared in how they win legal work, how they produce work, and how they are led and governed. Demands to ‘do more for less’; an ongoing shift of work from law firms to in-house legal departments; the rapidly growing role of digitization; a move away from artisanal, one-off practices to commoditized services; globalization, and possibly even large scale deregulation are pervasive trends shaping the future of the industry.

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3> Porter’s Five Forces and Maister Maxed Out

Incumbent traditional law firms are under great pressure from hypercompetition with each other, backward integrating clients, NewLaw substitutes, lawyers who have more power in supplying their talent, and new firms entering. The industry is now truly and irreversibly mature which has profound, mainly adverse, consequences. A case study graphically illustrates why strategies that rely on pulling the levers in David Maister’s formula for law firm profitability are no longer a sustainable way forward.

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4> Clients of the Future

Clients of the future will be more discerning and seek value beyond price reductions. The growth of in-house departments parallels a reduction in external legal expenditure with the allocation of the remaining spend depending on the nature of the work and analytics. Spending is more consolidated to maximize clients’ buying power and the benefits of cooperation between clients and external providers. Procurement professionals are increasingly involved in selecting outside counsel. Client companies without in-house legal departments and start-ups offer growth opportunities to law firms.

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5> The 2025 Kaleidoscope Scenario

Major changes in the legal services industry make the next decade very uncertain for BigLaw firms. By 2025 the legal services supply chain—clients, law firms, and other types of services providers—will look very different to today. Our analysis of the industry serving corporate clients makes one multifaceted scenario most likely. This ‘kaleidoscope’ scenario is set in 2025 and in the kaleidoscope many forms of legal services providers, not only traditional law firms, coexist, compete, and cooperate, depending on clients’ preferences, jurisdiction, and area of corporate and commercial law.

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6>Diagnosing Your Firm’s Readiness for Change

A diagnostic tool for law firms is provided. It helps firms to assess their levels of awareness of changes in the legal services market, to what degree individuals and firms have already changed how they win work and how they do work, and the change readiness of their firms. The scoring process directs change initiatives by identifying strengths and weaknesses in specific areas that are important in remaking the firm. The scores and their interpretation provide guidance on how to use our book.

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7> Designing the Business Model

A business model sums up how a firm works, and how it makes money, i.e. how work is won, how work is done, and how the enterprise is led and governed. The business models of BigLaw and NewLaw firms are quite different. Remaking a firm means designing its business model to move toward the more client-centric, more efficient, and more agile hallmarks of the NewLaw business model. A larger firm can consist of two or more different business models through an ownership stake in captives or legal start-ups, through sourcing from NewLaw providers, by providing on-demand legal talent agencies, and/or by offering commoditized online services.

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8> Brand, Marketing, and Business Development

Brands are what make services providers stand out in commoditized markets. Law firms are missing opportunities by focusing too much on personal partner brands. Building a credible brand around differentiated and, for some, diversified offerings, is based on comprehensive market- and client-derived insights. Diversification into new services and markets cannot succeed without brand permission. Marketing-related activities communicate the firm’s brand purpose to influence clients’ decision-making. Successful marketing is based on research and analysis. A dedicated, professional sales team creates value through better business development, quality client relationships, and client service.

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9> Pricing and Fee Arrangements

The billable hour has shaped the culture of the traditional law firm in a profound manner, but in the interests of clients, law firms must move more rapidly away from it as the dominant form of pricing. AFAs can be employed profitably and have the potential to increase realization rates and demonstrate better alignment with clients’ needs. Pricing needs to address how pricing fits into the firm’s overall strategy, who is responsible, and how pricing is measured and executed. Pricing needs involvement and data input from all parts of the firm. It is important for firms to understand that cost consciousness is a stronger driver of clients’ perceptions of value than is low price offers.

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10> Sourcing and Outsourcing

Options for innovative sourcing include on-demand workers, captive entities, and third-party outsourcing. Clients are the driving force that leads law firms to explore alternative sourcing options. A clear understanding of how legal work is produced, at what cost, and how it relates to risk is necessary to identify appropriate outsourcing targets. Law firms working with LSOs and LPOs are understandably concerned about quality and client confidentiality, which have to be managed by communication, procedures, and agreements.

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11> Legal Project Management and Process Improvement

LPM is about a structured approach to the management of legal matters to meet the clients’ and the firm’s expectations in respect of quality, time, and budget. Whereas LPI is about optimizing processes to achieve a balance of quality, cycle time, and efficiency. The two methods need to be combined in any initiative aimed at reducing costs and improving service levels. Relying too heavily on technology in implementing LPM ignores the significant challenge in helping lawyers learn to work differently. Bringing LPM and LPI together requires significant time, investment, and dedicated project management expertise.

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12> Technology, Knowledge Management, and Analytics

Driving maximum value from IT is achieved by structuring IT governance with senior management accountability and seamless IT integration across the firm. Information technologies are already replacing lawyers to some extent. Artificial intelligence enables the analysis of vast amounts of complex, language-based data in a more consistent and efficient way than humans can. Expert systems allow firms to broaden their services to clients and leverage their expertise beyond custom-made individual advice. Analytics help firms provide more quantitative information relating to legal risk management. Visualization is an effective tool to improve communication of both qualitative and quantitative information in legal as well as other contexts.

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13> Partners, Innovation, and Change

The ubiquitous nature of change in the industry necessitates transformational rather than incremental change in law firms. This invokes negative emotions, the ‘change monster’, added to which lawyers are conservative and risk-averse. Their quest for perfection is at odds with the experimental approach that is a necessary part of change. Innovation—or remaking—must be an integral part of a firm’s overall strategy, starting in small ways with a portfolio of innovation initiatives. Sustainable change initiatives require very considerable resources and must be led from the top. Successful change depends on monetary and nonmonetary signals, i.e. partner performance management and remuneration. The change journey needs to start now and be continuous.

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14> Outlook

If you agree with any our assessment of the future of the legal services industry and the consequences for traditional law firms you have concluded the traditional model is not sustainable without significant changes. We hope reading Remaking Law Firms inspires you, and helps you be ready and able to take remaking action in your firm.

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