We lawyers are an important lot. We are the grease that lubricates the wheels of commerce. We make the world go round.
However with our status as the world’s lubricator there comes a problem: when the wheels of the real economy slow, the legal economy slows. This is the unfortunate reality for lawyers; that the real and legal economies are pretty much inseparable.
“Historically, the legal economy mirrors the national economy, albeit with a time lag of six to nine months.”
Ward Bower, Altman Weil, ‘Strategy Determines Trends in No-Growth Legal Environment.’
As we stand in the shadow of the recent George Osborne budget and the news that has accompanied it, the immediate future for law firms is gloomy. A quick summation: in the UK growth for 2013 is forecast at 0.6%, debt is up, jobs are down and the deficit reduction has stalled. In the euro zone the European economies are heading for recession which spells hard times for law firms.
So standing against a backdrop of low growth and low sentiment, things are hard for the modern law firm. On the supply side, the market is cluttered and there’s an excess capacity of lawyers. On the demand side, retail and institutional clients are radically altering their demands and expectations.
Compounding the problems of a down economy, lawyers also have to contend with a buoyant and fluid digital economy.
So what’s the prognosis?
The starting point is that the current conditions are the “new normal”. The pre-boom years were an aberration and will not be returning. So before anyone does anything they need to know one thing: law firms are operating in a new and changing environment; so they too need to change.
On a micro level the attorney-client relationship has utterly and irreversibly changed (FT).
Therefore the answer is: law firms need to offer more flexible fee arrangements, more value-added services and become more commercially aware.
On a technology level, computer software and digital communications are revolutionising the way people live their lives and do business. IT systems, project management software, cloud computing and other practice management tools are growing in prominence and have become invaluable to many lawyers and law firms.
Then there’s the emergence of social media, blogging and websites which are becoming part and parcel of the modern legal practice.
Therefore the answer is: law firms need to adapt new technologies and build their practice online as well as offline.
On a macro level, the world economy has radically changed. Growth and economic dynamism has shifted east and towards the BRIC economies. Whilst the world’s largest single market, the euro zone stagnates and the world’s largest economy in the US bumps along.
Therefore the answer is: law firms need to go either big, boutique or bust.
In the face of chronic economic difficulties these are the three broad prescription choices that we've heard from commentators. However there are a few voices of dissension.
On this occasion I want to discuss and explore the second prescription that law firms either need to go big or boutique or face a fatal decline.
Big or Boutique
It was the irrepressible legal blogger David Lat of Above the Law who said that law firms face a binary choice: go big or boutique.
Chief Excutive of legal researcher Acritas, Lisa Hart Shepherd also echoed this position. She predicts a future where the legal industry is one in which firms will either adapt to dominate the field as a global force, or become specialised and develop a boutique practice.
The Law Society of England and Wales also pushed on the internationalisation message in Part 2 of the Legal Services Industry Report 2013.
Chief Executive of Norton Rose, Peter Martyr said:
“Unless you’re in New York or are a boutique, global wins at the end of the day."
But we need to ask: why go big?
Well according to the recent Acritas report going international helps build brand awareness and brand equity.
It’s also a growing fact that clients prefer firms with wide reach. This is something recently addressed by the FT.
This second point is crucial. Ultimately the world in which we now live is borderless. It’s also one in flux. Where businesses and economies straddle many borders. Therefore they require multi-jurisdictional litigation, and multi-jurisdictional transactional capabilities.
So to meet these changing realities law firms need to mirror and meet the new needs and wants of internationalization.
Then on the boutique size: as the FT reported, clients want commercially aware advisors and legal counsel that truly knows them and their subject matter on a deep and intimate basis.
By going boutique and specialised law firms can meet this emerging need and really carve out a space as being the go to firm on a certain legal issue.
By going boutique law firms can increase their flexibility, adaptability and versatility. Boutique firms can respond quickly to market movements and developments.
Boutiques can also be more price competitive and can operate on lower overhead costs which is ultra-important as ABS and LPO becomes more and more prevalent. So boutiques can compete with the likes of Riverview Law and Axiom in ways that full service independents and mid-size firms can’t.
Certainly Charles Christian has said that ABS services are due to bring about untold changes to the shape and structure of the legal market. So law firms would be foolish to not take any notice of these emerging entities.
Boutiques are also less top down and more collegial which is one of the core recommendations sketched out in the Citi-Hildebrandt report.
How can firms go Big?
Going big is a simple matter lateral hires or mergers.
And incidentally the Big 4 accountant BDO recently found that more than one third of top 100 law firms expect to merge in the next three years.
How can firms go boutique?
This is a matter of the leadership charting a strategic path towards a core goal and restructuring the firm around that goal.
Voice of dissension
The Managing Partners Alliance in Australia said that the days of the full service independent law firm were numbered which echoes the “big or boutique” prescription explored above.
I put this suggestion to William Axtell, partner at Charles Russell - a full service law firm – and got an interesting response. William remains bullish about the future of the smaller full service firm.
In response to the proposal that the days of the small full service firms are limited he said:
“No, provided they continue to innovate in technology, pricing and service delivery.”
The economic downturn certainly hasn’t been kind to the law industry on both sides of the Atlantic.
The global legal community was rocked when the US firm Dewey LeBoeuf went bust in April 2012. Certainly this was the law’s Lehman Brothers moment.
However like Lehman this event was just an act in a wider theme of law firm failures that has played out since the economy turned.
The moral of the Dewey story is that law firm’s need to “change or die” according to Forbes magazine.
Scarily the chief executive of legal market disrupter Axiom, Mark Harris said that more law firms will follow the way of Dewey & LeBoeuf. Law firm failures have been pretty consistent since 2005, peaking in 2007 and then troughing in 2010 and then picking up again in 2011.
For the full Thomson Reauters report on law firm failures click here.
Over in the UK the Manchaster-based law firm Cobbetts recently failed. Following on from this Michael Clavell-Bate who heads up Eversheds in Manchester has reiterated again the message that law firms must change:
“The legal world has changed for ever and all law firms are having to examine their business models and make difficult decisions to secure a successful future.
Cobbetts is not the first casualty and regretfully it will not be the last. However, Manchester is a vibrant city with strong transport links and a real hub for international business.
The market is ripe for innovative firms who are prepared to be bold and work with clients to offer them commercially-minded solutions.”
The story of the need for law firms to change and adapt abounds. Including from the Wall Street Journal here, from the Hildebrandt Institute here, from the ABA Journal here, from the Global Legal Post here, from the Managing Partners Forum here.
Even on Twitter people are driving conversation around the need for change:
Worth a re-read ‘New regulations, technology, competitors and customer expectations' force law firms to change bit.ly/14XhkY7 Lawyer— Riverview Law (@RiverviewLaw) February 21, 2013
Legal Tweeters are even picking up on just how many voices are clambering for change:
— The Am Law Daily (@AmLawDaily) February 5, 2013
Going forward it’s clear that nothing is going to change on the economic side any time soon. And for many it’s going to get worse before it gets better. A recent survey of partners in the UK found that 95% expect more failures over the coming two years.
So how do law firms respond to this news and actually become more adaptable to fit the "new normal"?
According to the Hildebrandt Institute which cites the Harvard Business Review, law firms need to take a few cues from nature.
“Adaptability is the power to detect and respond to change in the world, no matter how surprising or inconvenient it may be. All of Earth’s successful organisms have thrived without analyzing past crises or trying to predict the next one. They haven’t held ‘planning exercises’ or created ‘predictive frameworks. Instead, they’ve adapted.”
Lawyers are inherently conservative. It’s a congenital issue – something they’re born with if often seems. So admitting that they need to change and adapt is the first stage to recovery.
Once they’re admitted this fact it’s then a matter of assessing their position in the market, their specific challenges and their goals.
So to conclude: there's a broad truth to the prescription that law firms need to go big or boutique. It is a reality that is however, not absolute. As William Axtell suggested, full service law firms can change and adapt and offer new services and can position themselves well to counter the troubles.
Perhaps William Axtell has caught what is needed best. That law firm can survive whether they're big or boutique or mid-sized and full service - so long as they adopt new thinking, reimagine the way legal services are delivered and truly bring all the "change" rhetoric to reality.
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