A blog by Joel Barolsky of Barolsky Advisors

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.”

Is your practice in the right shape?

In Uncategorized on 14 August 2021 at 12:10 pm

The full text of my opinion piece first published in the Australian Financial Review on 12 August 2021.

The start of a new financial year often coincides with law firm partners updating their budget and doing a strategy health check.

Targets are usually set around revenue, margins and headcount, as well as qualitative indicators such as client service and staff engagement.

This is great, but there is one critical thing missing.

Practice shape is one of the most important drivers of success but seldom gets a mention. By shape, I mean the number, type and roles of practitioners at different levels within a practice team.

David Maister, in his seminal work, Managing the Professional Services Firm, stated, “many factors play a role in bringing goals [of client service, staff satisfaction and financial success] into harmony, but one has a pre-eminent position: the ratio of junior, middle-level, and senior staff.”

Getting it wrong

Poor practice design can be a handbrake on practice performance.

Being too ‘top heavy’ can result in mid-level lawyers leaving to join other firms with better promotion prospects. It could also lead to deep discounting so as to match competitors with more appropriate leverage.

A ‘bottom-heavy’ practice runs the risk of producing lower quality work and creating burnout and stress for those left to carry the load. (Bottom-heavy is also a good description of me after 18 months of intermittent Covid-19 lockdowns 😀).

A ‘missing middle’ often leads to practice stagnation and major financial opportunity costs. Interestingly, many premium firms are facing this issue right now partly as a result of reduced graduate intake in the mid-2010s.

Bad design can also contribute to systemic under-delegation. Partners who hog all the work make their practice far less competitive over time, not to mention sapping the morale of their people.

Succession is also a whole lot easier when the next generation is there trained, ready and waiting.

AFR August 2021

New shapes

The world has changed since David Maister first published his book in 1993. New technologies, providers, channels and delivery platforms have created new design opportunities beyond the traditional pyramid.

With the rocket model, the left and right corners of the pyramid are cut out and most low-level process work is done using a combination of legal technology, paralegals and law @ scale outsource providers. Rocket practice teams generally have fewer entry-level lawyer positions and more legal operations roles.

The hub and spoke model has a partner at the centre of a network that brings in a range of different resources and modular solutions to solve a specific client problem. These resources may include full-time lawyers in their firm as well as advisors from other professional service firms, the bar, data analysts, client resources and third-party software platforms.

The agency shape splits a practice into specialist groups focused on what they’re best at. A great example of this is the award-winning ad agency, Thinkerbell.

Thinkerbell has two groups: Thinkers and Tinkers. To quote their website, Thinkers are “a cross between strategy-types and suity-types, they ask a lot of questions and listen very carefully for the answers. They’re problem-solvers.”

It says Tinkers are “creativey-types and producery-types who pull things apart and put them back together again. They hit things with hammers and fiddle with knobs and buttons. They experiment, and play and build.”

Revisit your design

So, returning to annual budgets and strategic plans, practice leaders need to ask themselves a few critical questions about their current practice shape:

  • does it help or hinder career advancement and learning opportunities?
  • does it fit with the mix and complexity of the work?
  • does it optimise the business model i.e. how the team makes money?
  • what should the shape look like in three years, and in seven years?
  • what alternatives could be considered?

The agency model might not be a realistic alternative at this time, but it’s essential that leaders keep thinking and tinking when it comes to practice shape.

Karate Kid lesson for law firms

In Articles, Commentary on 12 July 2021 at 11:49 am

There are two broad scenarios for the future of the Australian legal market: Vax On and Vax Off (with apologies to Karate Kid fans).

Vax On describes a scenario of buoyant demand and a growing legal market. Vax Off is the opposite.

Events over the past three weeks have increased the odds of the Vax Off scenario from highly unlikely to a distinct possibility.

The scenarios

Vax On is centred on the idea that Australia will be successful in vaccinating its population relatively quickly and emerge strongly into a post-Covid normal state within six to eight months. Most of the current drivers of legal demand are positive and will continue to be so in a Vax On world.

The Vax-Off scenario is based on slow vaccination rates and conservative health policy settings.

On 2 July 2021, the Morrison Government announced a four-phase plan to return to Covid Normal. If the snail-paced vaccination rates continue as they are, we may only reach Phase 2 in the second quarter of 2022 and Phase 4 in 2023.

Vax Off will mean we stay with closed borders and disruptive lockdowns for quite some time yet. A prolonged period before Phase 4 will have significant implications for the broader economy and law firms.

#1 Brain drain

In the Vax Off scenario, the UK, USA and other legal centres may return to a Covid normal state 12 months ahead of Australia. Many ambitious, talented young Australian lawyers will see major benefits working and living abroad. The pitch is compelling – do great work, earn good money, live without lockdowns, and put your passport to good use.

The current tide of talented ex-pats returning home will shift from a small flow to a major ebb.

This brain drain will hit Australia’s law firms when these resources are needed the most and firms have few viable Plan Bs. A second-order impact might be a significant spike in average salaries and benefits paid to those lawyers that have remained at home. 

#2 A depressed commercial property market

Lockdowns mean full-time work in the office is off the table. Border closures will result in fewer international students, tourists and migrants.

In combination, all these factors point to a significant drop in demand for commercial properties, hotels and high rise residential real estate.

A depressed property market will directly impact real estate lawyers, but it could also affect other related areas like construction, banking, project finance, and funds.

#3 Collapse in travel, tourism and education

Government support packages and insolvency moratoriums since April 2020 have kept most businesses in the travel, tourism and education sectors alive. In a Vax Off world, a vast majority of these businesses are too small to save, and the liquidators will eventually move in.

At one level, that’s good news for law firms’ insolvency practices, but the flow-on impact of significant job losses and the fall of iconic brands will lower consumer confidence and GDP. 

#4 A return of protectionism

Leading economist Saul Eslake recently argued that the long-term economic damage from closed borders might have a similar impact to the trade barriers that lowered Australia’s living standards up until the 1980s.

An extended Vax Off period runs the risk of Australian businesses and law firms becoming less relevant in global markets and losing out on major deals and projects.

#5 Disrupted operations

Almost all of Australia’s Top 30 law firms have some kind of international alliance or connection. Herbert Smith Freehills, for example, is a financially integrated global partnership. Maddocks is a member of ADVOC – a network of independent firms spread across the world.

Most cross-border collaboration is going to be negatively impacted in a Vax Off scenario. There will be no physical meetings and limited joint business development activity. International client and referral relationships that have taken many years to cultivate will weaken.

Scenario planning is often done when there are two or three alternative futures that are possible, uncertain and beyond any party’s direct control. In the case of the Vax On or Vax Off scenarios, our political leaders can have a major influence on which future we have.

Let’s hope they soon find the courage of Karate Kid’s Daniel Laruso and the wisdom of Mr Miyaji.

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