Many in the legal market talk about a “New Normal” where margin pressure is the norm. Is this true, and does it matter? Yes, and here’s why.
Clients Want Value. Although BigLaw continues to prosper, it faces new competition. Clients want value and they now have market power, so they buy from alternatives to large firms.
Clients Bring Work In-house. The most formidable “new” competitor may be the client itself. A recent survey found that many general counsels bring work in-house. By “making” instead of “buying,” firms get less work.
The Rise of New Competitors. Firms also face many new competitors:
- “New model” law firms slash overhead, work smarter and offer low fixed fees.
- Legal process outsourcing (LPO) providers and document review companies invest in process and technology so they can offer lower costs.
- Alternative business structures (new UK entities that allow outside investment) have spawned competition from retailers, insurers and even a trucking company.
Competitors are Growing. The threat may still be small, but the new competitors are growing fast. For example, Axiom Law, Novus Law and Huron Consulting saw double-digit growth or better recently. Contrast that to BigLaw’s low single digits.
Tech Substitutes for Lawyers. Technology first came for blue collar workers. Now it’s come for lawyers. Predictive coding means we need fewer lawyers to review documents and new software reduces the need for lawyers to conduct due diligence or draft contracts.
Firms Can Counter the Threat. Defending your business depends on the mix of matters and clients. Price insensitive clients may be happy as is, but price-sensitive ones demand better value. Here are some ways to improve value:
- Shift work to or partner with LPO or specialized document review companies.
- Use lower cost resources, which can include “staff attorneys,” paralegals, contract lawyers and part-time lawyers.
- Just do less. Don’t deliver luxury sedans if clients just want an economy box.
- Re-engineer the work. Legal project management, process improvement and technology reduce the cost to deliver the right results.
These techniques are especially important to make an alternative fee arrangement profitable rather than a mere discount. (Note: be sure to consider ethical issues of alternatives, which are addressable.)
Cut Overhead to Protect Profits. Firms are slashing support costs. For example, in 2013 about two dozen AmLaw 200 firms cut staff, especially secretaries. Cuts have continued in 2014. The ratio of lawyers to secretaries is rapidly moving to 4:1.
Streamline Support. Smart firms go beyond simply cutting staff. They eliminate unnecessary tasks, improve processes and substitute technology for labor. They also centralize staff in a single location to gain operating benefits. Some even open support centers in low-cost locations.
Choose Your Fate. Management can ignore competition and assume steady market share and profits, or it can take steps to improve value for clients and control support costs.
Ron Friedmann will present on this topic at the 2014 Annual Conference in Toronto, “Maintaining Profitability with New Approaches to Legal & Business Support” on Tuesday, May 20, 2014 10:15 AM – 11:15.