A blog by Joel Barolsky of Barolsky Advisors

Is the demand for legal booming?

In Articles, Commentary on 1 February 2018 at 8:14 am

The Thomson Reuters Peer Monitor report on the state of the Australian legal market indicates that overall market demand for major law firms has declined by around 10% over the past five years.

The IBIS report indicates a legal market declining in real terms – 1.9% nominal annual growth from 2012 to 2017, and 1.4% pa growth predicted for the next five years.

The Australian legal press is filled daily with messages of doom and gloom.

But what if we’ve got this all wrong? What if we’re being misled by inaccurate reporting, or as some might say, “fake news”?

There are five growth areas that I don’t think are accurately reflected in the market data that is reported:

  1. Growth of in-house lawyers
  2. Growth of foreign boutiques
  3. Growth of law companies
  4. Growth of legal imports
  5. Growth of bush lawyering.

By adding this direct and indirect demand to reported data, one might conclude that overall market demand is actually booming. If that is the case, the market is fragmenting even more rapidly than people realise with the large incumbent providers, as a whole, rapidly losing relative market share.

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Source: apartmentlist.com

#1 Growth of in-house lawyers

In June 2017, the NSW Law Society published a report that revealed a 59% increase in corporate in-house lawyers and 34% in government lawyers from 2011 to 2016:

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The increase of 6,222 employed in-house solicitors roughly equates to 1.4 million of production hours per annum. Even if this data is half right, the numbers are staggering.

ACC analysis indicates that some of this demand has been driven by insourcing, but it has also grown from a general increase in regulatory and risk issues as well as commercial, employment, real estate and operational matters. It is worth recalling that Australia holds the world record for the longest period of recession-free growth for a developed country and the outlook is strong.

#2 Growth of foreign boutiques

The revenues of large foreign firms like Allens-Linklaters, KWM, HSF, Ashurst, K&L Gates and Dentons are captured in the traditional metrics because most have involved a merger or an alliance with a large established domestic firm.

What’s missing from market reports like Peer Monitor are the 21 new foreign boutiques now competing mostly at the top-end of the market. These are firms with 30 or fewer partners with a premium focused offering. Examples include Clyde & Co, Jones Day, Squire Patton Boggs, Pinsent Masons, PwC, KPMG and White & Case. Carlyle Kingswood data suggests there are now over 225 partners working in this segment, roughly accounting for $350 million of annual fees.

#3 Growth of law companies

Australia’s Eric Chin is famous for coining the term NewLaw to describe legal startups. This descriptor is evolving into ‘law companies’, as explained by Mark Cohen in his recent post. Firms in this category include Elevate, Axiom, Lawyers on Demand, LexVoco, Keypoint, Unison, LegalVision, Hive, Helix, Nexus, Pangea 3, LawPath and Bespoke.

Data suggests law companies have grown their share of the outsourced corporate legal market from around 3% to 10% over the past five years.

Again, I wonder how much of this spend is include in official indicators tracking legal demand in Australia? Many of these companies have non-traditional employment arrangements, they engage a number of non-lawyers to deliver legal services, and they combine both local and overseas talent.

#4 Growth of legal imports

The chart below breaks down the $A15.4 Billion worth of Chinese investment in Australia by industry in 2016. Interestingly the figure was only $A2.1 Billion in 2007. One could provide similar statistics for the USA, Japan, UK, Germany, Singapore, etc.

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It’s a safe bet to assume that legal advice was necessary on a significant proportion of the transactions that facilitated this investment. I think it’s also a safe bet to say that a lot of this legal advice was not provided by Australian lawyers. In a sense, this is Australian-based demand for legal advice is not accounted for because it’s being provided by offshore advisors, i.e. it is being imported.

#5 Growth of bush lawyering

Australia is becoming more and more regulated. One proxy measure of this is the pages of legislation passed per year. The chart below shows the trend in Canberra. A similar story is evident in all the states.

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Developing systems to comply with these regulations and managing breaches usually requires expert legal advice. My guess is that a significant number of organisations don’t seek this advice but just wing it through a combination of ignorance, ignoring and bush-lawyering.

One could argue that this demand for legal services is actually non-demand. However, this is potential revenue lost by a combination of providers perceived to be expensive and consumer disregard.

What if I’m right

There are some pretty profound implications if we’re being misled by inaccurate reporting and the overall market is actually booming.

For established traditional Australian law firms, some of the takeaways are:

    • There might be more value in collaborating than competing to fight the threat of the newer entrants;
    • They should be making much more of the significant growth in foreign investment and government regulation;
    • They should be exploring new models to service those with atypical legal needs;
    • They might want to hedge their bets by investing in law companies and/or newer growth segments; and
    • Market fragmentation usually means less tolerance for mediocrity. There will be more winners and losers and a greater premium for sound strategic leadership and followership.

 

For industry bodies and professional associations, they need to:

  • Measure their industry more accurately and reliably;
  • Develop strategies to reduce legal imports; and
  • Help transfer latent demand to real demand.

What do you think?

The accountants re-enter legal. Meh!

In Articles, Commentary on 24 November 2017 at 12:17 pm

There are countless articles on the threat of the Big 4 re-entering the legal market. Yes, they’re cashed-up, capable and well connected, but I don’t think it will be as smooth a road for them as many are predicting. A deeper analysis suggests there are five factors that will limit their growth.

#1 The one-stop shop segment is small

The essence of the Big 4 value proposition is one-stop shop: buy all your business advisory services from us and there will be lower transactions costs, a deeper understanding of your needs, more integrated advice, higher levels of service consistency, better coordination and greater convenience.

The problem is many sophisticated legal buyers just don’t buy it!

For operational, run-the company work maybe, but for bet-the-company and reputation-sensitive matters, buyers generally prefer horses for courses. They back themselves in picking out tried and tested specialists, rather than relying on one firm to wheel out all their colleagues. Intuitively, these buyers recognise the benefits of cognitive diversity and are wary of the party line or groupthink. They feel it’s easier to hold a specific firm accountable (and sueable) for their advice when it’s more discrete. Many senior buyers regard the ‘all eggs’ approach as risky and lazy.

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Source: alphacoders.com

#2 Brand limitations

PwC is the most well-known and powerful brand in the global business services market. The other Big 3 are not far behind them. Over the years they’ve leveraged these brands to develop massive global management consulting depth, breadth and reach.

Notwithstanding these advantages, firms like McKinsey, BCG and Bain still are thriving at the top-end of the consulting market. The evidence would suggest that many clients tend to shy away from accountants when it comes to solving their most complex business problems.

After decades of organic investment, PwC had to resort to paying top dollar to buy Booz & Company to make serious inroads into the high-value segment. Interestingly, they resorted to a new brand of Strategy& for their consulting business rather than a brand extension of PwC. It appears that PwC thought their own brand was a net negative in fighting the likes of McKinsey.

All the evidence from graduating MBA students across the globe points to the top students preferring the specialist consulting firms over the Big 4. I can only imagine it will be the same at the premier law schools.

#3 Ring binders

I did a small consulting project for Booz about a year before they sold out to PwC. Yes, it was all my fault :o)

In speaking about competitors, they referred the Big 4 as “ring binder” consultants. What they meant was that the Big 4 consultants were good at following a predefined process documented in a ring-bound manual. What was implied was that the Big 4 consultants couldn’t really think for themselves.

While grossly disparaging, there is an element of truth in these comments. In order to achieve scale and process efficiencies, resource fungibility, accelerated learning and service consistency across all business lines, the Big 4 have sought to codify their approach and have trained their consultants in how to use it. One can only imagine they’ll adopt a similar method in legal to achieve similar benefits.

The standardised approach is brilliant for repeat work but can come unstuck if things vary widely from the norm. Top GCs will run a mile if they feel they’re being ring-bound in handling their complex matters that they feel require bespoke solutions.

#4 Conflicts

I was shown some recent analysis that listed the number of different law firms and freelancers engaged by the ASX50. The list had over 300 names on it. I can’t vouch for the precision of this research but intuitively it feels right.

One of the key reasons for this fragmentation is conflicts. Most legal clients are particularly sensitive to the same advisors being involved, directly or peripherally, on both sides of a transaction or a dispute.

The Big 4 are just that. Four! This will inevitably put major limits on their penetration of the legal market. The threshold test of perceived conflict in legal matters is much higher than say helping competing companies implement an enterprise software system.

The large mid-tier firms like Grant Thornton, BDO, RSM and Pitchers will be loath to enter legal, beyond tax, because of the fear disenfranchising their major referrers of work.

#5 The club

For the Big 4 to make serious inroads into legal, quickly, they will need to poach some heavy hitters from heavy hitting firms. Assuming they can offer better incomes, they’re asking these lawyers to leave their club.

This is what a typical lawyer rainmaker will weigh up in considering the move..

The new club is a lot lot bigger and I will have even fewer decision rights. The new club will pander less to my specific needs give it already has dozens of heavy hitters. The new club will ask me to fit into their service style and product ‘packaging’. The new club will be run by beancounters.

Nah! I’d rather stay.

6 strategic shifts and implications for HR

In Articles, Commentary on 8 November 2017 at 4:22 pm

By Joel Barolsky and Sue-Ella Prodonovich

If you have HR responsibilities in a professional services firm then you’re working in the epicentre of turbulent times. Changes to our workforce population, participation and productivity are throwing up new challenges while the expectations of firm owners and employees are changing – but not necessarily in sync.

Here are six strategic shifts we’ve observed which we believe will have profound implications for HR.

#1 Shift to the rocket model 

The next five years will see a migration away from the pyramid model towards the rocket model. A typical pyramid structure has a partner at the top supported by one or two senior associates and four or five juniors. In the rocket model, most juniors are substituted by a combination of technology and para-professionals.

For HR this means

  • Partners need a new set of skills and knowledge to manage their rockets and to win and deliver projects, profitably
  • Improvement in digital literacy across the board.
  • The end of the apprenticeship model that involves training juniors on-the-job on low-level process work.
  • New recruitment markets, processes and criteria to include non-technical areas.
  • Measurement and reward systems that reflect non-time-based pricing, innovation and collaboration.
  • Managing a much more diverse culture of professionals, para-professionals, technologists and project managers,

#2 Shift to workforce accordions

Most firms currently operate with a defined cohort of full-time staff. With growing variations in client demand, there is a growing trend towards the accordion model. This model means having a blend of full-time staff plus a pool of pre-selected trained variable cost contractors. Corrs’ Orbit, Minters’ Flex, Pinsent Masons’ Vario, Allen & Overy’s Peerpoint are firm-based accordions. LOD (Lawyers on Demand), LexVoco, Crowd & CoBespoke are examples of specialist providers in this space.

Other variants of the accordion include flexible work arrangements, hot-desking, secondments, reverse secondments and sabbaticals. Maddocks recently reports that over 20% of its partners were working outside the ‘normal’ 8 to 6, five days a week model.

HR complexity increases exponentially as a firm increases the variability and flexibility of its workforce.

#3 Shift to smart collaboration

With the increased competition from in-house providers, boutiques and individual freelancers, most multi-service firms are recognising that their main competitive advantage lies in the collective. If firms continue to be just a collegiate group of individual practitioners, then they will lose share to other competitors with lower costs and/or better-perceived quality.

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Source: uspinjaca.hr

While economic geographers have identified the positive relationship between physical co-location of knowledge workers and firm performance, HR plays the critical part of bringing capable people together. It’s through true cross-practice collaboration that the firm can offer something that others can’t. Bringing a diverse set of expertise and experiences to solve clients’ toughest problems is more profitable, more fun and more valuable to the client. It’s also a lot harder to do.

#4 Shift to supportive intolerance

There is ample evidence that better leadership leads to better performance. Firms with a depth of leadership capacity across all its partners are in a much better position to handle market uncertainties than those with just one or two stars.

Developing leaders doesn’t just happen through a wish and a prayer. It requires a particular style of operating, first coined by David Maister, called ‘supportive intolerance’. The support bit is offering partners personal insight/reflection, coaching and training to help them develop their full leadership potential.

The intolerance bit is making them accountable for their actions and inaction. This means calling-out behaviours inconsistent with firm values, providing constructive, prompt and honest feedback, having full transparency around agreed actions, and if all else fails, reducing reward as a sanction.

HR should be the lead change agent in introducing this style of leadership and operations. Again, it’s really hard without formal authority, but it’s critical to the firm’s long-term sustainability.

#5 Shift to loving the problem (not the solution)

While we try to do more with less and stay up with game-changing ideas, many HR professionals are still expected to solve day to day problems so it’s easy – and tempting – to go into problem-solving mode.  Boudreau and Rice’s caution for HR professionals:  “Embrace too many ideas (from popular talks and articles) or apply them too superficially and you’ll develop a reputation for fad surfing. Dig beneath the surface to the fundamental scientific research and insights and you can set the stage for true impact.” So one thing HR can do to add more value is ‘fall in love with the problem’ – that way you’ll look forward to spending more time on understanding them more deeply.

#6 Shift to ambidexterity

One can think about firm strategy as two parallel streams: one being ‘exploit’ and the other ‘explore’ (based on the work of O’Reilly and Tushman). Exploit refers to efforts to leverage current strengths and capabilities to make the current core business as good as it can be. Explore refers to new exploratory and experimentation efforts that will hopefully bear fruit in the future.

Firms need to become more ambidextrous, that is, change the firm’s culture so that everyone embraces explore and exploit in his or her everyday work and client interactions.

In an environment of rapid change and hyper-competition, every firm needs a healthy portfolio of both exploit and explore initiatives. A genuine commitment to exploring will most likely mean substantial changes to the firm’s dividend policy and capital structure. Firm governance and structural arrangements are also likely to be impacted, as will marketing, pricing, IT, operations and, in particular, HR.

Join us in Melbourne November 21 or Sydney November 22

HRMinds have asked Joel Barolsky and Sue-Ella Prodonovich to help finish their year of seminars with a discussion of major trends and practical ideas for those with an HR remit. These November workshops will be in Melbourne on Tuesday Nov 21 and Sydney Wednesday Nov 22. Details and registration here.

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