A blog by Joel Barolsky of Barolsky Advisors

Archive for the ‘Articles’ Category

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The legal world is about to enter a new era of standing up for principles

In Articles, Commentary on 11 June 2022 at 12:11 pm

The full text of my opinion piece first published in the Australian Financial Review on 9 June 2022. The article was #3 Most Viewed in the Companies Section on afr.com on day of publication.

The legal world is about to enter a new era.

Until the late 1990s, it was common for law firms to be identified by a strong affiliation to a particular religion, political party or ideology.

We had “Catholic firms”, “Labor firms” and “union-bashing firms”. These labels were reflected in the make-up of a firm’s partner group, the type of clients they served and the work they did.

Over the past two decades, many of these firms have tried to dial down these affiliations and present themselves as agnostic. This has meant changing the partnership cohort to include people from diverse backgrounds and taking on a wider range of clients and matters.

However, there are signs we are about to commence a new period where firms will be forced to take a position on a range of issues, especially in the ESG area.

They are already being asked by their staff and others where they stand, and will be judged by their willingness to uphold these principles.

To illustrate, a law firm that actively supports a shift to carbon zero may come under enormous pressure to “live” these principles and refuse briefs from fossil fuel clients. This might include not working for banks and financiers that provide capital to these same clients.

At the recent Australian Financial Review Banking Summit in Sydney, the CEOs of the Commonwealth Bank and NAB were greeted by protesters chanting about “bastard” banks funding coal and gas projects.

Christopher Black said in a letter to NAB chief executive Ross McEwan: “I am a 15-year-old climate disaster survivor. I’m in Year 9, and I live in Forestville, and I am very concerned about the climate crisis. For me, this is a very personal issue, which is literally a fight for my future.”

Law firms already have quite a few Chris Blacks working for them. If the recent election is anything to go by, they will become the majority over the next few years.

It should be noted that law firms and the profession have been grappling with ESG-related issues for some time.

Key presentative bodies like the Law Council of Australia have been strong advocates on a range of social issues, including refugee rights and access to justice. Almost all major law firms have comprehensive pro bono programs that focus on community work and addressing social ills.

Law firm leaders were active campaigners for same-sex legislative change in 2017 and will likely be so for the Indigenous Voice as it heads to the referendum promised by the Albanese government.

Hip-pocket consequences

What’s different about this new era is that the focus of change is not within the broader community or legislation passed in Canberra, but rather directly on how the firm itself operates.

In some instances, it could have serious hip-pocket consequences. Having to drop all its coal clients could be fatal for a resources-focused firm.

Another aspect of this new era is that firms may be forced to be more public on their specific policy on a particular issue. The pressure will come from external stakeholders such as clients, referrers and regulators, but more especially from staff. If the war for talent continues, employees will have more leverage and be a powerful catalyst for principles-led change.

The first step every firm should take is to identify ESG-related risks that may affect a firm’s social, and internal, licence to operate.

There will be a number of relatively simple and cheap things the firm can do to reduce some of these risks. For example, firms can work towards having a carbon zero, or carbon negative, footprint.

For other issues, firms should consider establishing new governance entities or roles that focus on ethics and principles-led decision-making.

Law firms need to be better prepared for these difficult ethical choices. The Chris Blacks in their ranks will be demanding it.

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The challenges keep rising for overburdened partners

In Articles, Commentary on 13 May 2022 at 7:18 pm

The full unedited text of my opinion piece first published in the Australian Financial Review on 12 May 2022.

The partner role in law firms has always been a ‘stretch’ job – complex, demanding and business-critical. It’s also extremely well paid and prized by many. Most equity partners in Australia’s top 25 firms will earn over $1 million in 2022.

Looking ahead the partner role is only going to get tougher.

It started with Covid

The step-change in the role of partner can be traced to the start of the pandemic. 

A decade’s worth of pre-Covid records analysed by Thomson Reuters Peer Monitor showed that associates had around 10 more billable hours per month on average than partners in the same firm. However, in April and May 2020, this long-term trend reversed and partners recorded more billable hours than associates. 

The reasons cited for this shift were that clients demanded more direct access to partners to address their most pressing issues and remote working made delegation more clunky.

Two years on and the data suggests both partner and associate billable hours have gone up. Partners are still recording more hours than their associates, although the gap has narrowed.

What’s clear is that the supply side of the legal market is really stretched and a lot of the burden is falling on partners’ shoulders.

Rising expectations

Looking ahead we see client demand remaining strong. While there’s uncertainty as a result of the war in Ukraine, inflation and supply chain issues, the predominant mood is still bullish. 

At the coalface this means most partners will have to do more with the resources they have, at least in the short-term. As one partner recently commented, “when that urgent client matter arrives on my desk after a busy week, I find it really hard to ask my exhausted associates to work on it. What typically happens is that I take it home and do it all myself.”

A high demand market has put pressure on salaries and people are transitioning more frequently. One inevitability of high staff turnover is that partners spend more of their scarce time in recruitment interviews, onboarding and in ‘stay’ conversations. 

One of the solutions to address high turnover is for partners to develop deeper relationships with their team members.  They are expected to engage with team members more meaningfully regardless of where and how they work.

Leading a flexible team also brings new operational challenges. One partner I’m aware of spends around an additional 30 minutes a week configuring workload, arranging desk space, meetings and collaboration events. 

Team of the future

Over the next decade partners will not only need to become better people people but also better tech people. In the first half of 2021 over $US1.4 billion was invested by venture capital firms in legal technology. Most of this investment is in new tools to assist lawyers in doing their work and to provide better client service and value. 

Partners will have to be digitally literate to stay competitive. This means being aware of latest software most relevant to their practice, and when and how to deploy it most effectively.

Allied to the advances in technology is the growth in diversity of legal teams in terms of age, identity and ethnicity. One partner I spoke with recently commented on the challenges of leading a team of five generations: “The Boomers, Gen Xs, Ys and Zs in my team have each have their own expectations and idiosyncrasies. Tailoring the messaging and engagement approach can be exhausting and I often get it wrong.”

Create the capacity

The most obvious strategies for firms to deal with increased role complexity is to provide their partners with better support, coaching and training. 

I think this response will only get firms part of the way. 

A more profound examination of the role, and in particular the financial expectations of partners as producers, will create the capacity for them to be [1] healthier, and [2] better leaders and managers. 

The partner role is a stretch job, but stretch it too far and it might break.

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Will Danny Gilbert’s succession be a train wreck or triumph?

In Articles, Commentary on 1 April 2022 at 2:42 pm

The full text of my opinion piece first published in the Australian Financial Review on 31 March 2022. It was #2 most viewed article on afr.com’s Companies section on that day.

For law firms, a leader stepping down can be a moment of vulnerability. Most partners know succession done badly can have significant cultural and financial consequences.

So, it’s no wonder the announcement at Gilbert + Tobin that managing partner Danny Gilbert is stepping down is being closely watched across the legal industry.

I suspect the interest is less about the welfare of Gilbert and more about watching a potential train wreck in slow motion. Or, perhaps learning from a best-practice study in leadership transition.

Succession management in law firms is different to major public companies or government agencies.

It’s usually partners at large, not the board, who vote for their preferred leadership candidate. They can also fire them at any time.

The candidate pool for managing partner is usually much smaller, with a strong preference for those in the existing partnership.

‘Home-grown’

Only two of the top 30 firms in the latest Australian Financial Review Law Partnership Survey don’t have “home-grown” leaders. The country’s largest law firm, Minter Ellison, are again in that boat after having two external CEOs from the large consulting firms.

In larger firms, the candidates may have to give up practising law and take on a new career with poor employment prospects after their tenure ends.

In my view, law firms run into succession issues when there is a major power imbalance across the partnership.

Power in a firm is about:

  • Decision-making: who can make or significantly contribute to key decisions such as setting direction, allocating resources, recruiting new staff, resolving conflicts and setting reward and remuneration;
  • Information: who has access to what information and when they receive it; and
  • Relationships: who has sway with key clients and figures inside the firm.

It is usually concentrated in three areas: directed power from the office of the managing partner or executive leadership team; individual power held by specific partners and practice team leaders; and collective power which is held by the broader partnership operating as a whole.

Shared power

To work effectively over time, a firm needs to ensure a sense of shared power.

In other words, the partnership needs to be directed with an agreed strategy led from the top; individual partners need to feel empowered and have the autonomy to build their practices; and at the same time, the partnership feels part of one firm and involved collectively in making critical decisions.

Problems arise when there is a major power imbalance.

When a firm has too much directed power, it may succeed while the “dictator” is in control. However, their departure can result in a massive power vacuum characterised by infighting and wheel-spinning.

Firms with too much collective power become paralysed democracies. Endless meetings to resolve trivial issues mean less partner time on the things that really matter – clients and people. Most collectives also seem to do poorly in building a pipeline of future leaders.

Fly or fail

When partners have too much autonomy, sub-cultures or silos can emerge. If each partner is only looking after themselves, the firm merely becomes a shared office or a hotel for lawyers.

The construct of shared power can be a useful lens to analyse why some firms fly or fail.

From the outside looking in, Gilbert + Tobin appears to be addressing the potential succession risks with an extended process of selection and baton passing.

To avoid this issue repeating, Gilbert + Tobin would be well served by ensuring it has the right power and governance model rather than looking for Danny Gilbert mark II.

The managing partner’s decision to step down after 33 years is being closely watched across the legal industry.

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Law firms have a big problem, and the answer is inside their offices

In Articles, Commentary on 15 March 2022 at 12:14 pm

The full text of my opinion piece first published in the Australian Financial Review on 10 March 2022. The article was the #1 most viewed piece in the Companies Section of afr.com on the day of publication.

Lou Gerstner, the former CEO of IBM, famously stated that “an organisation is nothing more than the collective capacity of its people to create value”.

“Culture isn’t just one aspect of the game,” he said. “It is the game.”

So, it is with law firms.

Despite many thriving during the pandemic, there is a deep concern that connections people have with the firm and with each other are getting weaker, not stronger.

As one managing partner put it to me recently, “I worry that the logo on our lawyers’ screens becomes the only real difference between working for us and for another firm.”

There are three main reasons underpinning these perceived threats to firm culture:

  • Remote working: The move to a hybrid operating model may result in people experiencing a working life that has fewer meaningful interactions with fewer people. With weaker emotional bonds, the ties that bind loosen. Most lovers know that long-distance relationships seldom work out.
  • Fatigue: Thomson Reuters Peer Monitor data suggests the past 18 months have been particularly busy. Many senior practitioners are exhausted from heavy workloads as well the stress of living through a major public health crisis. The energy required to rebuild culture and restore relationships is simply not there. Most people at the brink of burnout will seek to lean out rather than lean in.
  • New faces: The war for top legal talent in Australia is hot and will remain so for the foreseeable future. Some firms are now experiencing staff turnover rates of more than 25 per cent. With every departure there is a loss of institutional memory as well as personal loss and disconnection. With every replacement, there is a new set of standards and expectations to shape and fresh relationships to form. The cumulative impact of one in four new faces each year is potentially massive

No quick fix

Unfortunately, there is no quick and easy fix. 

Most firms are looking to enhance the work experience of each employee, with the strategies that include:

  • Ensuring every associate has at least one strong mentoring relationships with a senior practitioner;
  • Enhancing partners’ and supervising associates’ skills in giving and receiving feedback;
  • Having an effective workload monitoring system to ensure sustainable work patterns across the team; and
  • Organising one-on-one “stay interviews” that focus on career opportunities and reasons to stay.

All these efforts are commendable, but they can inadvertently exacerbate the cultural atrophy problem.

Sub-cultures

In building stronger vertical relationships within practice teams, there is an increased risk of distance and disconnection with other teams. This could lead to less of a one-firm mindset and the emergence of stronger sub-cultures.

Firms need to work both vertically and horizontally to preserve their culture. The latter means amplifying the role, status and skills of “lateral leaders” who work across the firm connecting people from different practices to address a specific opportunity.

These roles typically include client relationship partners, sector leaders, major matter leads, business service heads and strategic pursuit leads.

Lateral leaders

Effective lateral leadership is largely about facilitating deep cross-practice collaboration. From a culture perspective it enhances understanding, widens networks and creates a stronger identity with the firm and its strategy.

If firms are serious about reducing attrition and preserving culture, they need to create the capacity for partners to be more effective in their leadership roles. It takes time to be a mentor, to supervise and to influence without authority.

Otherwise, the only option is to increase the logo size on the screen and hope for the best.

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Law firms could learn a trick or two from Qantas

In Articles, Commentary on 5 February 2022 at 2:29 pm

The full text of my opinion piece first published in the Australian Financial Review on 3 February 2022.

Qantas places each customer into six categories of descending importance: Platinum One, Platinum, Gold, Silver, Bronze and non-frequent flyers.

Almost all medium and large law firms go through a similar exercise of grading clients. Few do it well.

Many firms place too much emphasis on historical revenue without due consideration to profit and profit growth potential. A persistent revenue bias in client grading can, over time, lead to margin erosion and stagnation.

The grading model should balance the benefits of securing the work from today’s high-revenue clients with tomorrow’s future stars.

The second mistake firms make is not really thinking through the consequences of grading. In other words, they don’t get clarity and buy-in on the critical differences in service and pricing between the various grades.

I recently came across a firm that had developed a three-tier grading model of “strategic”, “growth” and “valued” clients.

It sounded great on paper, but the only things strategic clients got that the others didn’t were a few extra invites to the corporate box at the football. There was also little difference in approach between the “growth” and “valued” categories.

To me, it seemed like a trivial response to months of work on the grading model and category allocation.

Lost opportunities

Getting the grading model wrong can mean overservicing at the one end, or big lost opportunities at the other.

In my view, the discrimination between client grades should address these five areas:

  • Overall investment. This calculation would typically include specific business development expenses, the cost of partner and management time and cost of value-adds such as training, secondments, tailored reporting and access to proprietary apps and data;
  • Resources and queue-jumping. The relative priority the firm is willing to give in terms of access to top talent and work scheduling. One large law firm makes special effort to give top clients access to its “A-Team” (my words, not theirs) and, if necessary, to divert resources to ensure key projects are finished on time;
  • Preferential pricing, risk sharing and contractual terms. The level of discounting, risk sharing and preferential terms the firm is willing to offer its different client grades. The relative importance of the client relationship is one of the key factors in guiding the decision to share risk and to go “hard” or “soft” on pricing a particular matter;
  • Relationship management model. In some instances, a particular client grade warrants a particular type or profile of client relationship partner (CRP). Using David Maister’s typology, “Finders” are great for high-growth-potential clients, “Binders” would be good for large multi-service, multi-location clients, “Minders” for clients the firm wanted to keep but had limited growth potential, and last, “Grinders” should be kept away from CRP roles. Other decisions include whether to have a formal client engagement team and the scope and quantum of business development support; 
  • Client engagement plan. Research shows that preparing a client engagement plan for high-growth, complex client relationships is generally a good idea. Being clear on the scope and detail can ensure the potential benefits are commensurate with the effort involved.

Qantas publishes a table on its website detailing the services and benefits each grade receives. It promotes the potential of customers getting to a higher level as a motivator for them to stay loyal and fly more.

Law firms could learn a trick or two from Qantas and use their key client programs not only for internal resource allocation and strategy decisions, but also as a powerful incentive for clients to strengthen the relationship and to buy more.

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Time to ditch your ‘Batman’ clients

In Articles, Commentary on 12 December 2021 at 9:16 pm

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

“Hello Batman!”

That’s how a top three client of a particular firm insisted that his calls be answered on his dedicated phone line and handset. Unlike the mild-mannered caped crusader, his tone in the conversation that followed was usually aggressive and demeaning.

Little was done to address Batman’s behaviour for several years because he was a very important client. When a new managing partner was appointed, the firm finally plucked up the courage to stop doing his work.

While this is an extreme example, most law firms continue to serve clients who are “wrong” for them.

There has never been a better time to deal with the wrong clients in your firm.

The latest Australian Financial Review Law Partnership Survey points to a year ahead where demand will outstrip supply. The risks of not replacing any lost revenue are much lower than usual, and the opportunity costs of continuing to deal with these clients are much higher.

Wrong clients

There are four broad categories of wrong clients, or sometimes referred to as the four ‘uns’:

  1. Unfair pricing and commercial terms. In some instances, the accumulative impact of deep discounts, scope creep, special favours and free value-adds is such that the firm would be much better off walking away and giving their exhausted lawyers a rest and finding other clients willing to pay a fair price.
  2. Unreasonable service requests. While most clients will have the occasional emergency and request very fast turnarounds, some classify everything as super urgent and demand rapid responses day and night, weekdays and weekends. A subset of this group are clients are those that consistently provide briefs that are incomplete, inaccurate or misleading. 
  3. Unconscionable behaviour. The third category includes the Batman clients of the world who disrespect their service providers. In some instances, it’s not the individual buyers who behave poorly but rather a major misalignment in core values between the firm and the client organisation. For example, firms that are deeply committed to diversity and sustainability are finding it harder to service clients that just pay lip service to these things.
  4. Unprofitable. Some legal practices with a high-cost client acquisition and delivery model would be better off financially without a long tail of very small clients. As practice teams reach full capacity there’s folly in a relentless drive to grow revenue from any type of work from any type of client.  

The task of classifying clients into one or more of the four categories can be a difficult exercise within a law firm partnership. There is often a lot of defensiveness and protection when it comes to labelling a client as ‘wrong’.

In some cases, the source of this resistance is emotional – the classification risks disrupting personal friendships and/or the legacy of long-term relationships.

In other cases, partners see a major risk to their personal practice. Any intervention to make a wrong client right risks a drop in earnings, progression or status if things don’t go to plan.

Taking action

Assuming one can get over the resistance, the next step is to decide on the preferred outcome of the relationship reset for each client. These outcomes usually range from terminal at the one end of a continuum to tweak at the other. 

Tweaking outcomes may include negotiating new commercial terms or seeking a substantive shift in behaviour, or simply taking away Batphones.

In some instances, the firm may elect to take unilateral action like notifying a change in pricing levels or changing the service team or refining scope and terms. In the case of a terminal outcome, the firm may suggest alternative firms the client could consider with an offer to transfer old files and other records.

For more important strategic clients, a 360-degree relationship review might be a gentler way to address the issues. These reviews involve asking all the stakeholders to provide comments on the relationship as a whole, as well as their views on others’ performance and their own. Feedback can be sought on a range of factors like communication, value, trust and quality. This feedback is then shared between the parties and collective action agreed upon. 

The power shift from buyers to sellers in 2022 offers a unique opportunity to reset some poor relationships.

Notwithstanding any financial or other strategic benefits, the impact on staff morale from dealing with fewer Batman clients will be significant.

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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.

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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.

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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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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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