A blog by Joel Barolsky of Barolsky Advisors

Are law firms ready for the Great Transition?

In Articles, Commentary on 5 November 2021 at 4:51 pm

The full text of my opinion piece first published in the Australian Financial Review on 4 November 2021.

Is the Great Resignation mostly hype or an issue of substance?

The evidence suggests that the period ahead will be much less about Australian lawyers seeking alternative careers, and much more about them responding to new opportunities in a tight labour market.

In other words, there is more validity to the idea of the Great Transition rather than the Great Resignation.

The Great Resignation was first coined in the United States just after a record 4 million Americans resigned from their jobs in April.

The theory goes that the COVID-19 experience, including role changes, greater workplace flexibility and more working from home, has led to people rethinking their careers, work-life balance and even their long-term goals.

The question is whether Australia will follow the US as it emerges from lockdowns and border restrictions? The fear is that hordes of workers will walk out the door for greener pastures, whatever they may be.

When it comes to Australian lawyers, the greener pastures won’t be in the Byron Bay hinterland, but for some it will be in other law firms or other legal roles – both here and overseas.

While there’s been more movement between firms in recent months, there are no underlying factors to indicate above-normal migration out of the profession. If anything, the prospects for better incomes and working conditions within legal organisations have never been better.

Golden era

The demand for commercial legal services will continue to be strong for the foreseeable future. Assuming capital remains cheap and abundant, ESG pressures persist and there’s no war with China, this golden era will continue.

What’s special about this cycle is that most sectors and almost all practice areas are predicted to grow.

Within this context, the key career transitions over the next 12 to 18 months will be away from firms/teams that are poorly led, don’t match the market in terms of remuneration and benefits, simply revert to the pre-pandemic operating model, and give lip service to workplace wellbeing and connection.

The transitions will be towards firms that help build their CVs, offer more interesting work, provide better and clearer career opportunities and are known to be happier places to work. Some will also be attracted to the brighter lights of New York and London.

Euphoria

The Great Transition will probably last for a year or so before returning to a more regular cycle. The euphoria of surviving COVID-19 will boost confidence.

This energy – together with the publicity around firms offering 10 per cent pay rises, news of major vacancies and the social proof of others making successful moves – will create momentum of its own.

There may be some regrettable departures that are clearly beyond a firm’s control.

If a high-flying associate wants to leave for a $US250,000 ($330,000) role in a White Shoe firm in New York, there’s probably not a lot that can be done other than staying in touch and welcoming them back (with an offer of three months’ sleep).

Leadership

Going through the list of what is in a firm’s control, the quality of team leadership is probably the most important element to consider.

A strong team leader can provide a sense of direction and connection, monitor workload and wellbeing, progress careers and development, and facilitate a positive work environment.

To make it through the Great Transition, firms need to ensure every team leader is up to the task. Stroking the ego of a powerful senior partner by making them a team leader may not work anymore. Team leaders need to have the time, skills, support and resources to do their job properly.

Putting a different label on the Great Resignation may reduce the concerns about overall labour supply across the market. However, there will be no let-up in the pressure on individual firms to retain their top talent over the next 12 to 18 months.

The empire strikes back

In Articles, Commentary, Legal Technology on 8 October 2021 at 11:20 am

The full text of my opinion piece first published in the Australian Financial Review on 7 October 2021.

The biggest structural change in the Australian legal market over the past 30 years has been the growth of in-house legal teams.

But while the vast majority of current in-house solicitors received their initial training in private law firms and then moved across to the client side, I predict that the next decade will see a reversal of this trend, particularly at more senior levels.

In comparing the employee value proposition of in-house versus private practice, there are five areas where law firms are fighting back.

Flexibility

In a post-COVID-19 world, very few law firms will return to a work schedule of 9 to 5, five days a week, in the office. They will be far more accommodating of lawyers seeking to work from home for part of the week, or those wanting to work across different time slots in the day or to limit the number of workdays.

Any perceived advantage that in-house roles were more flexible has been eliminated by law firms learning to operate effectively in an anywhere anytime model.

Workload

For many years, the lure of in-house has been roles with more work-life balance, less stress, and no timesheets. 

While no timesheets are still a point of difference, most in-house lawyers are now reportedly working extremely long hours and are stretched thin. The pressure for them to do more with less is incessant, and the demands on their time are likely to grow rather than diminish. 

On the other side of the fence, many law firms are rejigging the workload of graduates and early career lawyers to be far more sustainable. They have also stepped up their programs focused on employee mental health and wellbeing.

Technology

Association of Corporate Counsel research suggests General Counsel are constrained in adopting technology by restrictions on capital expenditure and a lack of time to implement new systems.

Many law firms, in contrast, are ramping up their technology investment and experimentation. The recent Thomson Reuters State of the Legal Market found that law firms spent over $22,000 per lawyer on legal technology in FY21. The same paper revealed that 30 out of the 50 largest law firms in Australia now have an innovation function.

Over time, the technology gap between in-house and private will grow. A career move in-house may become to be seen as a step back in time – a move to a job using old and blunt tools of the trade.

Income

Data from legal recruiters Mahlab suggests in-house teams pay more for 3 to 7-year PQE lawyers, but after that, the differential starts to swing the other way. Equity partners in premium law firms are now earning incomes that far exceed their peers in in-house roles, save for a few GCs of major listed companies that enjoy exceptional incentive arrangements.

Private practice salaries and benefits are estimated to increase by 8 to 10% in the coming years. It will be very hard for in-house to price match given budget constraints and the need for consistency across organisation-wide pay scales. To the chagrin of many CFOs, in-house lawyers are already the most expensive people on their payroll outside the C-suite.

Culture

“It’s a boys’ club”, has been a common refrain of female lawyers leaving private practice. With an industry average of just under one-third of female law firm partners, their complaint may have had just cause, till now.

Most of the top 30 law firms across Australia have fully committed to a 40:40:20 or an equivalent diversity goal at partner level. Significant efforts are being made to address unconscious bias and to eliminate sexist language and behaviour. More senior leadership roles are filled by women. Comprehensive diversity and inclusion programs are now the norm.

The progress is slow, but the prevailing culture across many law firms is shifting on gender issues.

If trends in the five areas described above persist, the employee value proposition of in-house will become less compelling. With increasing demand, in-house teams will have to build their own capacity by hiring more graduates and invest in early-career legal and commercial training.

This is good news for law firms; after years of training young talent only to lose them to in-house roles, the shoe will comfortably fit on the other foot.

The Big 4 in law – failing again?

In Articles, Commentary on 4 September 2021 at 12:13 pm

The full text of my opinion piece first published in the Australian Financial Review on 3 September 2021.

In 2018, PwC announced that it aimed to be a top 20 law firm in the world within five years. KPMG and EY also stated their intentions to significantly grow their legal teams.

While these ambitions of global domination are noteworthy, the progress of the big four in law has been underwhelming.

On one tangible measure of progress – the number of Australian-based partners – the evidence suggests PwC Legal has gone backwards, KPMG Legal has stalled, EY Law is growing, and Deloitte is still making up their minds.

If one added all the big four law firm partners and made one firm, this new player wouldn’t even make the top 15 in the latest Australian Financial Review Law Partnership Survey.

On other metrics, like lead roles in major M&A transactions, they’re hardly making a splash. They’ve made no attempt to enter the litigation space and recent headlines have been more about departures than new hires.

While the big four have made some inroads in managed service and volume legal solutions, this is mostly impacting in-house legal teams rather taking a lot of work from established law firms.

There are five major reasons why the big four might be struggling in law.

#1 The one-stop-shop

The essence of the big four value proposition is a one-stop-shop: buy all your business advisory services from us and there will be lower transaction costs, more integrated advice and a better client experience.

The problem is many sophisticated clients just don’t buy it. They regard the one-shop as risky and lazy.

These buyers prefer horses for courses and back themselves to pick out tried and tested specialists. They recognise the benefits of cognitive diversity and are wary of groupthink. They feel it’s easier to hold a specific firm accountable for their advice when it’s more discrete.

#2 Brand limitations

In another related market – management consulting – high-end strategy advice firms like McKinsey, BCG and Bain still have the lion’s share of the best work. On the supply side, top MBA graduates generally prefer jobs in these places than the big four.

I think there are similar limitations when it comes to premium legal work. When clients have a bet-the-farm legal matter, the big four are not naturally considered as part of the tier 1 set (tax excepted).

For smaller matters and operational work, the big four are not naturally in the tier 2 consideration set, as they mostly price themselves above it.

#3 Conflicts

The big four are just that. Four! This has inevitably put limits on their penetration of the legal market.

It is estimated that the ASX50 is served by more than 300 law firms, barristers, freelancers and other legal consultants.

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

The threshold test of perceived conflict in legal matters is also much higher than, say, helping competing companies implement an enterprise software system.

#4 Leadership

Tony O’Malley at PwC and Stuart Fuller at KPMG led the way in growing their firms’ legal practices in Australia.

Interestingly, both these leaders were promoted to senior global roles about two years ago.

While it’s hard to quantify the impact of such changes, it seems that some of the drive and energy of the local practice has been lost with these promotions.

#5 The club

For the big four to make serious inroads into legal, quickly, they would have needed to poach some heavy hitters from heavy-hitting firms. Assuming they can match incomes, they would be asking these lawyers to leave their club.

This is how a typical lawyer rainmaker might weigh up a 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, given 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 bean counters. Nah! I’d rather stay.”

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