A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘innovation’

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Law firm partnerships could give BHP a productivity lesson

In Articles, Commentary on 7 September 2019 at 10:03 am

Full text of my opinion piece first published in the Australian Financial Review on 6 September 2019.

CEO Andrew Mackenzie and the top 200 global executives at BHP Billiton do not dig for iron ore, or cart coal, or drill for oil. They are 100 per cent dedicated to the task of leading and managing their company.

In contrast, almost all of the top 200 global partners in Herbert Smith Freehills (HSF) are involved in legal service production in some way. This includes advising clients, supervising the legal work done by juniors and pursuing new opportunities.

A BHP vs HSF comparison points to one of the key differences between law firm partnerships and corporations; almost all senior people in law firms have a producer-manager-leader (PML) role.

As producers they win and deliver legal work; as managers they organise and control people, processes, resources and facilities; and as leaders they help set direction, align constituencies, innovate and inspire others to perform at a higher level.

There is strong evidence that most law firm partners bias production over their management and leadership roles. The reasons for this are both structural and personal.

Proof of legal excellence and client followership are the most common ways people get promoted. Production-related outcomes are the things that are celebrated and rewarded – acquiring new clients, winning high profile cases, beating budgets, winning awards and ranking higher in directories.

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Entitled Millenials

Ask partners what they enjoy the most in the job, the most common response is helping clients solve really important complex problems. The thing they enjoy least is dealing with entitled millennials.

As the business of legal becomes more complex and competitive, so does the importance of effective leadership and management.

As firms grow there are more cats to herd.

As legal technology evolves there are bigger strategic bets to place.

As client expectations and sophistication rises, so firms have to deliver more for less and still make a buck.

As younger lawyers leave the profession in droves, firms have to do much better at engaging top talent.

One obvious solution to deal with this production-bias is to employ full-time specialised managers and leaders and let the lawyers just do law.

This thinking is seriously flawed.

Rather than blindly follow what corporations do, law firms should wholeheartedly embrace the PML model and just work harder at addressing the problems listed above.

Empowered self-managed teams

PML results in law firms being run as a network of highly empowered self-managed teams. There’s no middle management pushing papers and inventing new reports. There’s no CBD head office tower filled with bureaucrats. There’s no intricate incentive system to extract more discretionary effort from senior executives.

In the main, premium law firms are highly profitable perpetual engines of productivity. As an organisational form, traditional partnerships create wealth, share wealth and reduce risk very effectively.

Boris Groysberg of the Harvard Business School mentioned during his recent Australian tour that many large corporations are in fact trying to move towards the PML model. They see the obvious benefits of reducing overheads, fostering empowerment and having executives much closer to customers.

The key lesson is for law firms to reframe their whole talent system around the PML model. This means hiring more rounded legal graduates. It means providing non-legal training, especially in people skills, at all career stages. It means fast-tracking those with obvious leadership potential to senior roles more quickly. It means adding new elements to the symbols and measures of success.

It also means support for incumbent partners to better manage the trade-offs and tensions across their current portfolio of responsibilities.

The frequently cited claim that the partnership model is an anachronism is misguided. Having an empowered organisation with almost everyone on the tools in some way would make BHP’s Andrew Mackenzie think he’s discovered another Pilbara.

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Firms pay price for poor HR record

In Articles, Commentary on 4 August 2019 at 7:22 pm

Full text of op-ed first published in the Australian Financial Review on 2 August 2019.

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Almost all large and mid-sized law firms have an in-house human resources (HR) team to handle recruitment, development, reward and other people issues. A high-performing trusted HR team is essential in winning the war for top talent.

Unfortunately, many firms are shooting themselves in the foot by having poor relationships in and around HR.

At its extreme, it goes something like this…

HR team members perceive their firm’s partners to be disrespectful, disempowering and ignorant of the value that HR professionals can really bring. They feel excluded from critical conversations concerning performance management, remuneration and workforce strategy, especially for partners and senior practitioners. They are frustrated by people that don’t show up to important HR-initiated meetings, and if they do, they’re there in body but not in mind or spirit.

One the other side of the fence, the firm’s partners have an ambivalent or even hostile attitude toward their HR team. They perceive them to be process-driven, uncommercial, reactive and superficial fad surfers. Partners discount their advice because HR team members appear to lack deep knowledge of firm economics, firm strategy and broader legal market trends.

The consequences

In practice, this chicken or egg standoff results in things like:

  • Being too slow to respond to new talent opportunities and missing out
  • Being unaware of flight risks and reacting too late
  • More ‘ow’ than ‘wow’ in employee experience
  • Low impact and clunky performance management
  • Incomplete HR data and unreliable analytics
  • Wasted training and development resources
  • Expensive HR practitioners doing low-level process work
  • Partners second-guessing decisions in areas they have little or no expertise.

Accumulatively these problems add cost and become a strategy handbrake. Over time, firms simply become less competitive.

Addressing the problem

There are five things firms should consider doing to address this problem:

1.    Call it out. The standoff scenario described above is extreme. This problem may only exist in pockets or not at all, but it’s good to know the truth. An honest and comprehensive review of what’s working and what’s not can isolate what’s really needed. This review should not be seen as a HR witch-hunt, but rather how the firm’s partners and the HR team can truly collaborate to give the firm a competitive edge.

2.    Improve the science. Many HR initiatives are (a little unfairly) perceived as soft and fluffy and requiring a big leap of faith when it comes to return on investment. Applying the principles and practices of data science to HR can set the stage for true impact. New HR initiatives supported by compelling evidence will get much greater interest and uptake. There are myriad of fresh valuable insights waiting to be discovered from mining HR data and especially in the linkages with financial, operational and client data.

3.    Calibrate risk profile. Many HR decisions come with big risks. For example, a bad new recruit can become a cultural terrorist, or a poor reward decision can lead to a regrettable departure. These risks push many HR teams towards being very conservative and opting for the path of least resistance. This approach can be sub-optimal especially if the firm is trying to innovate and create a growth culture. A joint effort by the firm’s leaders and HR to calibrate HR decision risks and policy will go a long way to avoid blame-shifting and getting strategic alignment.

4.    Create lateral leaders.  As with all business service functions, HR has lots of responsibility but with little or no formal authority. This means HR practitioners have to develop lateral leadership skills to work across the organisation as influencers and catalysts for change. They need to learn to lean-in and develop the personal gravitas to have their voice heard.

5.    Learn from IT.  Many law firm IT departments have moved to a co-sourcing approach with the outsourcing and automation of low-level process, support and compliance activity, and insourcing of high-level advisory work and R&D. The managed service model is maturing at a rapid rate and HR should embrace this trend to focus their energies in becoming true trusted advisors.

‘True trusted advisors’! Surely that’s a better vision than process-driven, uncommercial fad-surfers?

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Five lessons from successful lawyers

In Articles, Commentary on 8 July 2019 at 9:14 pm

The full text of my opinion piece first published in the Australian Financial Review on 5 July 2019.

There are five stories worth retelling in comparing the 2019 AFR Partnership Survey to the one reported 10 years ago in July 2009.

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Original AFR article

#1 Resilience

Over the past decade, numerous commentators have predicted the end of BigLaw. Headlines such as, ‘Large law firms are about to have their Kodak moment’, ‘BigLaw is dead. Long live NewLaw’, and ‘Law is ripe for consolidation and disruption’ has attracted readers’ attention, but it is safe to say that these predictions have simply not yet come true.

Analysis of 2009 vs the 2019 Top 30 lists shows:

  • Average firm size is quite similar and there has been very little consolidation. In fact, the largest firm in the land by partner numbers was 297 in 2009 (Minters) compared to 266 in 2019 (HWL Ebsworth).
  • The business models of the Top 30 firms are by and large very similar to those from 10 years prior. They still operate within traditional professional partnerships, they make money through leverage of people, and they price directly or indirectly based on time.
  • While there are a number of global brands in the 2019 list, the Australian-based partnerships of these firms are still broadly the same set of people, putting aside obvious partner promotions and retirements. The vast majority of Australian legal work is still done by Australians in Australia.
  • For all the hype about the Big 4, PwC Legal does not make even it to the Top 30 list in 2019, and the other three are way behind.

#2 The shadow

In July 2009, DLA Phillips Fox had 164 partners and 434 fee-earners. It was the 7th largest firm in the land, the first trans-Tasman integrated partnership (excluding Perth) and a market leader in insurance, government and transport.

Ten years later the AFR Survey shows that DLA Australia has only 70 partners.

UK-based DLP Piper may be very happy with the slimmed-down version that their Australian branch office has become, but it seems amazing to me that nearly 100 of those original Phillips Fox partners who put up their hands to vote ‘yes’ for the DLA tie-up, left the firm they owned within a relatively short time period. Why did so many get it so wrong?

#3 Spot-changers

Much is said about law firms’ and lawyers’ resistance to change but it is worth highlighting the success that two firms are having in changing their gender profile. The 2009 AFR survey revealed that 16.3% of Allens’ partners were female. Ten years later this percentage is 33.1%. Over the same time period, Maddocks has shifted its female partners from 16.9% to 36.6%. Interestingly, the pioneer in this area, Gilbert + Tobin, has seen its proportion stay roughly the same: 36.2% in 2009 versus 35.7% in 2019.

The numbers do not reveal the specific strategies to become more inclusive, but they do show that a real commitment to a goal can make some leopards become less leopard’ish.

#4 The trainers

The firms listed in 2019 AFR survey hired 1,222 graduates over the past financial year. Most of these firms will spend the next three or four years of training these graduates to become independent legal advisers. Back-of-the-envelope calculations indicate that this is around 1.5 million hours of training at a rough cost of $90 million.

Assuming one-third leave the profession, the market cost of this attrition is $30 million. Assuming 20% go into in-house roles, the law firms are providing an $18 million training cross-subsidy to their clients (now how’s that for a value-add!). Assuming firms are expanding their training programs to include digital literacy and related topics, these costs are only going to escalate.

All this data points to the cost of not getting significantly better at talent management.

#5 New and old friends

The 2009 AFR listing included IP specialist firms Davies Collison Cave and Griffith Hack. Both of those firms are now part of ASX-listed entities and playing a very different game.

The 2019 AFR survey includes points to two emerging strategic groups:

  • The multi-disciplinaries or MDPs – firms that include significant consulting and adjacent (to legal) offerings. The standout members are the Big 4 legal arms plus Minter Ellison. Others that have a foot or toe in this pond include Corrs, Clayton Utz, Herbert Smith Freehills and McCullough Robertson.
  • The global boutiques – firms that are focused on just one or two service line or sectors in Australia and tied to a mothership back in UK or USA. Obvious examples include Seyfarth Shaw, Clifford Chance, Allen & Overy, Clyde & Co, Squire Patton Boggs, Jones Day, White & Case and Quinn Emmanuel.

In conclusion

There are lots of other interesting case studies behind the AFR surveys. They provide a rich history of our legal market and we should be very grateful to the participating firms and the AFR that the data is there to be shared and stories to be told.

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When Google Comes to Legal

In Articles, Commentary on 10 June 2019 at 10:02 am

Full text of op-ed that first appeared in The Australian Financial Review on Friday 7 July 2019.

The ‘legal supply chain’ can tell us a lot about the future for lawyers – and how much technology will disrupt the industry.

Will they become middlemen for technology providers?

Will the race to provide operations software yield a winner with extraordinary leverage over the legal sector?

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Original AFR article

Traditional law firms have been at the core of the supply chain for well over 150 years. In-house legal has a phenomenon of the past 30 years. Law companies – those providing legal process specialists, managed services and contract lawyering – have become a force over the past five to seven years.

Legal technology providers are the newest kids on the block, but the growth has been remarkable. Stanford Law School’s TechIndex points to 1,051 legal tech startups across the globe since 2016, all wanting to be part of the supply chain.

There are six broad entities that are involved in the delivery of commercial legal services in the modern era; the law and legal system; legal technology, algorithm and data providers; law firms and law companies; in-house legal; client organisations; and end-consumers.

Not all legal services involve all six entities, many don’t follow the chain sequentially and some services start and end at different stages. However, its still a useful conceptual framework for those who don’t’ have a crystal ball.

Many lawyers will become value-added resellers

Fast forward five years and legal technology will have matured to the point that it will become integral to legal advice and delivery. Many commercial lawyers will become value-added resellers of sophisticated technology developed by third party vendors.

To illustrate, Contract Probe software allows users to do a comprehensive review of draft NDA, service, supply, consultancy, IP license or employment contracts within 60 seconds for a fixed fee of $100 or less. Created by former Allens TMT partner, Michael Pattison, Contract Probe generates an overall quality score out of 10, highlights key omissions and errors, and makes suggestions for improvement. Contract Probe uses a machine learning approach which means it gets better each time it is used.

In this world, there will be fewer junior lawyers doing the grunt process work but a greater demand for the ‘human’ elements in the client-lawyer exchange, i.e. empathy, problem-solving, creativity and judgement. Competing as a reseller will require lawyers to have a profound understanding of how the technology works, and how it doesn’t. They will also need to get a lot better at pricing their service to capture value beyond charging for their time. Resellers will live or die based on the depth of their client relationships and their ability to be true trusted advisors.

Powerful platform providers will emerge

PwC and KPMG both recently announced collaborations with Australian providers of legal operations software for in-house legal teams. This SaaS technology provides a single scalable low-cost solution for in-house lawyers to transact with external counsel, manage internal workflows, prepare and store documents, service internal clients, communicate value to the C-suite and stay in control of their budget. While this software has been around for a while, attaching it to the world’s most powerful B2B brands with deep change management expertise is a gamechanger.

Fast-forward ten years and one of the Big 4, or another provider like Elevate or Xakia, will have won the battle to be the dominant platform for in-house legal teams. They will have unrivalled data around law firm performance, pricing, client satisfaction, in-house productivity and a myriad of other benchmarks. They will own the screen of every in-house lawyer giving them extraordinary influence and leverage along the entire legal supply chain.

In this future scenario, the Big 4 winner will become the intermediary that premium law firms, law companies and technology vendors have to deal with. They won’t compete as clones of traditional firms but rather as Google of the legal world.

A single platform will most likely lower transaction costs and improve choice, quality and responsiveness for client organisations. It won’t displace or disrupt incumbent law firms, but it will most likely reduce their relative bargaining power.

It is worth noting that data security and legal conflict concerns are major obstacles in the way of a single legal operations platform developing. Notwithstanding these issues, the momentum for change in the ‘more for less’ era is significant.

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Stop trying so hard to be different

In Articles, Commentary on 6 May 2019 at 4:33 pm

Full text of op-ed that first appeared in The Australian Financial Review on 3 May 2019.

99% of Australia’s full-service law firms have a strategy based on seeking clear market differentiation. In my view, they’re largely wasting their time and money.

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AFR Legal Affairs op-ed

Conventional strategy thinking suggests there are two sources of sustainable competitive advantage: [1] having the lowest cost, or [2] differentiating from competitors on things that matter most to customers. The former strategy allows firms to win by having greater price-setting discretion. The latter strategy allows firms to extract a price premium for added benefits.

When it comes to the legal market, this theory starts to get a bit wobbly.

Research shows that while most law firm clients can distinguish firms between groups of firms, such as Tier 1 versus Tier 2 or domestic versus global, they really struggle to clearly discriminate between specific full-service firms within a group. To clients, many of these firms look and feel the same.

One of the reasons for this is market fragmentation. Unlike most industries with three or four dominant players (think airlines, grocery retail or banking), the Australian commercial legal market has nearly 30 firms claiming in some way to be leaders in legal expertise and client focus. Australia’s largest law firm by partner number, HWL Ebsworth, has less than 5% share of the total market. Carving out and keeping a unique and relevant market position in such a crowded market is next to impossible.

Another reason for a lack differentiation is a self-inflicted one. Most full-service firms present themselves as being all things to most people. Within the partnership model it’s political suicide not to give every partner a guernsey in describing what the firm is really good at.

So, what’s the solution?

The first part of the answer is to worry less about being known for being different and focus more on just being known. Strong brand awareness still counts in opening doors and staying top-of-mind.

The second part is to encourage more differentiation at the practice, partner and/or product level. With a more micro approach, differentiation usually come from legal specialisation combined with a focus on a particular market segment or industry. So, for example, a general commercial litigation team can distinguish themselves by positioning as class action defence specialists for ASX200 companies.

The third element is to concentrate firm strategy on how the firm competes. ‘The how’ refers to the resources, skills, standards and systems used to win. These are collectively called capabilities, or as Pier D’Angelo, Allens’ Chief Strategy Officer, calls them, the organisation’s “muscles”.

Most full-service law firms need work on these five muscle groups and the inter-play between them:

1.   Firm and team leadership – setting and aligning everyone around a clear direction; inspiring others to meet/exceed expectations; and providing support with accountability.

2.   Talent management – recruiting, developing, engaging and retaining the right workforce for the firm to flourish, both now and in the future.

3.   Winning work and capturing value – developing trusting relationships with clients and referrers; converting more of the right opportunities; and pricing profitably.

4.   Collaboration – shifting the mindset from ‘my’ to ‘our’ client and combining expertise from inside and outside the firm to solve clients’ wicked problems.

5.   Operating with discipline – having an efficient and effective operating platform; ensuring adherence to agreed policies; executing plans consistently; and optimising leverage and utilisation.

Spending more time at the law firm gym will, over time, create a form of cultural and operational distinctiveness. Paradoxically, this will most likely be reflected externally and create a firm that both top clients and top people will want to work with and for. They will be authentic points of difference not created by spin doctors but radiating from a firm truly fit for the future.

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Why premium law firms are falling behind in a downward trajectory

In Articles, Commentary on 6 April 2019 at 4:54 pm

Full text of my op-ed that first appeared in The Australian Financial Review on 5 April 2019.

The recent Hayne sugar hit can’t hide the fact that the 10-year trend line for legal work done by Australia’s premium firms is on a downward trajectory.

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AFR print edition

One conclusion to draw from this data is that the market for legal work is flat or declining. Another way to look at is that the total market for legal is booming, but the premium firms – those law firms selling their deep expertise and charging higher fees – are losing market share.

There are three key reasons to suggest the latter conclusion is more likely correct:

First is the growth of in-house lawyers. NSW Law Society data revealed a 59 per cent increase in corporate in-house lawyers across Australia from 2011 to 2016.

Second is the growth of  ‘alternative legal service providers’ (ALSPs). Thomson Reuters’ Legal Executive Institute recently reported that ALSPs recorded global revenues of $US10.7 billion ($15.04 billion) in 2017, with compound annual growth rate of 12.7 per cent. ALSPs include firms doing litigation and investigation support, legal research, document review, e-discovery and regulatory risk and compliance.

Third is the growth of regulatory risk and compliance. Over the past 10 years, the Commonwealth Government has introduced roughly 5500 pages of new legislation each year. For every major new regulation there is usually the need for strategic and legal advice; the design and implementation of new compliance systems; and support and investigations when there are breaches. It appears that the demand for legal-related regulatory work has mostly been satisfied by accountants and a range regulatory specialists and software providers.

Vacating low-margin segments

A kind interpretation of the premium law firms decline in market share is that firms have deliberately vacated the segments they’ve perceived to be dominated by low-margin commodity work. By focusing on specialist higher-priced work, firms have been able to maintain partner profits and keep the essence of their business models intact.

A less glowing view is that these law firms have been blindsided by the new entrants, in-house lawyers, the accountants and software providers – and that they are slowly losing the battle of being the most relevant legal advisers to companies and government organisations. They are become niche specialists called in only when there is a really complex legal issue or a dispute and/or where the client organisation wants to transfer risk.

At the recent Managing Partners Forum, Anthony Kearns of Herbert Smith Freehills stated the top concerns of many his firm’s general counsel (GC) clients were more managerial than strictly legal.

They included issues such as:

  • How can we enhance the value of legal to our business?
  • How can we enhance the performance of the legal supply chain?
  • How can we build a platform of influence within our organisation?
  • How can we meaningfully contribute to the development and delivery of our organisation’s strategy?
  • How do we do more for less?

Gap for Big 4

His thesis was that if law firms didn’t start to help their GC clients with these problems, then the Big 4 and other consultants would.

On the surface, it would seem law firms might not have the expertise to assist. But on closer examination most of the larger firms are full of highly specialised HR, IT and marketing and operations people that are highly skilled in dealing with lawyers. At the moment, they’re just facing inwards not outwards.

So, our premium law firms are facing another strategic choice whether to accept this opportunity to help their GC clients, or leave it to other advisers to fill the void?

My prediction is that a small number of premium firms will say “yes” and pursue these and other adjacent business opportunities with vigour. The majority will stick to their knitting and retreat to what they know best – being legal specialists.

There are some interesting times ahead.

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Not quite the life of Harvey Spector

In Articles, Commentary on 2 February 2019 at 2:40 pm

Full text of my op-ed published in the Australian Financial Review on 1 February 2019.

The Australian Financial Review December 2018 Partnership Survey is fascinating for what it shows and what it doesn’t show. On the surface it reveals overall market growth as a result of the Haine Royal Commission, major infrastructure projects, real estate investment, regulatory change, private client wealth transfer, litigation funding and class action defence. It also reveals the rapid ascent of the law divisions of the Big 4 to a total of 87 partners.

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AFR print edition

However, the AFR Partnership Survey doesn’t show the names of four major firms that, for all intents and purposes, failed: Henry Davis York, Dibbs Barker, TressCox and Kemp Strang.

Paradoxically the latter firms weathered all the ups and downs over the past decades but failed in a rapidly growing market. Their demise can be traced to a combination of competitor aggressiveness, poor market focus and internal instability. The loss of key rainmakers to highly-acquisitive firms HWL Ebsworth had an immediate back-pocket impact on their high fixed cost business model. Profits took a further hit by a primary focus by some on commoditised banking, property and government work with a non-commodity low scale service delivery model. Coping with all these pressures with consensus-based decision-making significantly hindered rather than helped.

A broken talent supply model

Many of the law firms interviewed for the AFR survey indicated that they will be significantly increasing their graduate intake in 2019. The data revealed a rough ratio of 0.6 new graduates for every existing partner. The total of partners listed in the survey, plus the no-show Minter Ellison, is 3,560. At the 0.6 ratio we’re talking roughly 2,200 new graduates to be apprenticed at the elite level in 2019. Add another 1,000 for quality commercial and plaintiff firms and organisations not listed in the survey and we get a total of 3,200.

Australia’s 39 law schools produce around 8,000 graduates per annum. This means an immediate attrition rate of 60%. And 2019 is a boom year for graduate hiring.

Graduates then join our top law firms expecting to be Harvey Spector (or your favourite TV law hero) on Day 20 and find out that it’s not so glamorous. In fact, if one takes indicative employee experience data from Glassdoor.com.au, we see that many find it pretty average (ratings out of 5 for the top 5 firms):

·      HWL Ebsworth: 2.5

·      Clayton Utz: 3.6

·      King & Wood Mallesons: 3.1

·      Herbert Smith Freehills: 3.7

·      Norton Rose Fulbright: 3.4

Within three years of working in a major firm, a number of disillusioned trainees leave and seek employment elsewhere. This ultimately results in a shrinking talent pool of quality mid-level 3 to 7-year PQE lawyers.

Paradoxically, we have 60% over-supply of legal graduates but a significant shortage of trained lawyers. Surely, there must be a better, fairer and more sustainable way to supply top talent to our top firms?

Three strategic questions

There are three strategic questions have taken up thousands of partner decision-making hours across many of the firms listed in the AFR Survey in recent years:

·     Should we join up with a global firm?

·     Should we change our partner remuneration model?

·     How do we differentiate our firm?

Using partner numbers and growth as a proxy for success, the AFR survey reveals that both global and domestic firms are thriving. In the Top 20, we have seven globals and 13 locals (including Minters). It appears that there is a compelling argument that both models work.

The data indicates that there is no correlation with any particular partner remuneration model. Amongst the Top 20 firms we have strong individual performance-based models in firms like HWL Ebsworth and Mills Oakley, lock-step equal share models in firms Hall & Wilcox and Maddocks and hybrids like Allens and Baker & McKenzie.

If market differentiation was a critical success factor then one would expect three or four standout brands, like a Qantas and Virgin in airlines or Coles, Woolworth and IGA in grocery retail. The AFR survey reveals 54 brands with no obvious differentiation within broad peer groups. Given that many of the first listed are highly profitable it appears that there many more important factors that determine success than market differentiation.

In my view, firms would be far better off worrying less about globalisation, rem models and pursuing differentiation. The things that really matter are growing the pie through effective firm and practice leadership, nurturing a strong organisational culture, strategic focus and operational excellence.

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The future of law has fewer seats for grads

In Articles, Commentary on 16 September 2018 at 10:53 am

First published in the Australian Financial Review, 14 September 2018

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The pyramid has been the foundation operating model in private practice law firms for the past century. Put simply, a typical pyramid has a partner at the top, one or two senior practitioners below him or her, and then three or four juniors below them. These ratios obviously vary from practice to practice. Leverage and utilisation of the mid and lower levels of the pyramid are the primary profit engines of most firms that charge by time.

More recently there has been much talk of the pyramid losing its bottom left and right corners and becoming a rocket. In this model, there are far fewer junior lawyers and their work substituted by a combination of technology and lower-paid process workers.

The shift towards the rocket model is being driven by both the demand and supply side. Sophisticated clients are stating that they’re happy to pay premium rates for highly-trained senior practitioners to provide strategic advice, insights and judgement, but they’re not willing to pay high rates for junior lawyers to do largely process work.

On the supply side, many NewLaw and legal technology providers have seen the market opportunity to supply legal process services directly to corporate legal departments, to SMEs, to private clients and to law firms. Catalyst Ventures estimated the global LegalTech market to be worth over $US 16 billion in 2017.

There are four major strategic implications for private practice law firms in moving towards the rocket model.

#1 The role of partner

Law firm partners will no longer get by by just being great advisors and team leaders. Project management will become a critical element of the partner role. This means partners need to become adept at configuring the most appropriate mix of legal, process and technology resources to solve a client’s problem. They need to be able to design, prepare, price and sell project plans. To manage projects effectively they will need to be both digitally and economically literate. Teaching old dogs these new tricks will be a very big challenge in many firms.

#2 Size and access to capital

Economies of scale have not traditionally been a key success factor in labour-intensive law firms. New York’s Wachtel Lipton is one of the world’s most successful firms despite being a relatively small single-office partnership.

With the addition of product, process and technology to the business model, firm size and access to low-cost capital may bring specific advantages. These include the ability to wear the risks of R&D, and the ability to invest in high-potential start-ups, technology infrastructure, marketing capability and big data. There is also a defensive argument in that if your firm can’t afford the new bright shiny toys some clients might stop playing with you.

#3 Recruitment and development

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Source: strikingly.com

The pyramid model creates a “tournament” where a large group of aspirants start at the bottom and are encouraged to beat their peers on the way up. The rocket model potentially changes the game with far fewer recruited at the bottom and a philosophy of retention rather than competition. It also challenges the apprenticeship system of learning and development.

Firms will need to make profound strategic choices around whether they ‘make or buy’ talent. If clients are not prepared to pay for junior development and apprenticeship, then some firms may prefer just to poach mid-level staff trained by others. However, this free-rider approach may negatively impact firm culture and ultimately drive up labour costs.

#4 Pricing and measurement

Imagine your firm offers a new compliance solution for its clients that incorporates legal advice, training and a suite of software tools. You cannot bill for the software tools using hourly rates. Charging for the training by the presenter’s time severely undervalues the IP. Tracking staff utilisation in this scenario would not only be meaningless, but dangerous.

It is clear that time-based pricing will be less prevalent in a talent + data + technology world. New pricing models will be required to set, communicate and capture value. This will include things like user license fees, subscriptions and incentivised retainers. What constitutes a “fair price” will become more complex, and need to factor in development costs and risks, IP fungibility, the scale and scope of application, and duration of benefit.

Measurement will shift away from input measures like utilisation towards more outcome measures like client results and clients’ propensity to refer.

In conclusion

The rocket model scenario poses some profound challenges but it also presents many significant opportunities. There is clearly a benefit to be ahead of the curve in thinking through these issues and shaping your future. Not only it is critically important, the journey to becoming closet astronauts can be quite fun.

 

 

 

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