The legal market is undergoing fundamental and permanent change which will gather pace as and when we emerge from recession. The decisions which management and partners are considering and taking now will shape the long-term future of their firms, and determine the winners and the losers. But one issue is more pressing than even identifying what the solutions are to the massive challenges firms are facing: can your firm and its people accept and deliver revolutionary change?
The last 12 to 18 months have been difficult for most firms. A minority of firms have managed to do well in terms of maintaining revenues and profits, but most have seen revenues and profits drop, in some cases quite alarmingly. Many firms have been reducing staff numbers and trainee intake and most are trying to reduce cost and to control expenditure much more tightly. Some are being looked at very carefully by their bankers, who no longer regard law firms as being immune to catastrophic failure. It has not been a pleasant time for many partners, some of whom have been managed out altogether whilst others have been demoted from equity status. For those remaining as equity partners, many are being asked to take on greater personal risk with the prospect, at least in the short to medium term, of less reward, as they are required to contribute more capital at a time when their drawings and profits are reduced.
What makes this a period of fundamental significance for law firms is the fact that the economic turmoil of the last two years is only one of a number of dynamics which together will reshape the legal marketplace. What are those dynamics?
· The recession has made life difficult for almost everyone. Substantial reductions in revenues and profits caused by lower volumes (particularly in the corporate finance and real estate sectors) have weakened firms. The position is made worse by the fact that many current and prospective clients have been experiencing serious financial troubles, and in reviewing their spending categories they are looking to pay their lawyers less.
· Clients are asking, where is the value for money? It is becoming increasingly difficult 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; viewed from the client’s perspective (1) did you make a difference? (2) were your fees proportionate to the difference you made? (3) and how easily could the client have procured a comparable service from someone else for similar or lower fees?
· Competition is increasing. Not only are established firms having to compete against each other aggressively for clients and work, they are having to compete against increasingly powerful in-house teams and increasingly 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 are bringing proven business tools and techniques to bear. They are focussing 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. It would be a dangerous to assume that when markets return as we emerge from recession, it will be back to business as usual. Competitive dynamics, fee pressure, the current trend for clients to rationalise and manage more actively their relationships with external firms and the contraction of the economy all point to significant overcapacity in the market.
These dynamics are driving market changes which are fundamental and are likely to be permanent. As a consequence, firms that do not emerge from the recession in the winner’s enclosure will find it very difficult to recover. Therefore the decisions being taken now by law firm management and partners will determine the long-term destiny of their firm.
If we are truly in a period where several dynamics are converging to force the fundamental and systemic re-shaping of the legal market and therefore the law firm model, the response must be revolution, not evolution – and all-embracing, not marginal. Therefore the single most important issue (right here, right now) for a law firm is not only identifying the right strategy or solution, it is establishing whether the firm is capable of grasping and understanding the scale of the change required and, even if it is, whether it has the skills, resources and collective will to manage and deliver change of that scope and complexity.
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 of helping and advising clients in much the same way for most if not all of their professional careers. What are contemplated here are changes at an organisational level which will depend for their success upon the willingness and ability of each individual within that organisation to embrace that change sincerely and with true commitment. That means partners (every single one of them without exception) 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 the consequence for those individuals is likely to involve turning their professional lives upside down.
Further the new landscape is unlikely to be a fixed, stable target; rather like most other market places it will be constantly evolve. The risk therefore is that, in adopting specific solutions, a firm will find that, if and when it has delivered its plans, the market has moved on. Therefore the change dynamic within the business needs to be a constant – embedding agility and continual renewal to meet the evolving and changing features of the market, and its competitive dynamics.
What is required is nothing less than transformation, at an organisational and an individual level. It is only when a firm has got to grips with the ability of its people to change truly and wholeheartedly, and continue to accept change as part of business as usual, that it will have created an environment in which it can confidently predict that any solutions it decides upon will in fact 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.
Mike Henley, Member of the Management Group at PA Consulting Group: www.paconsulting.com
