A blog by Joel Barolsky of Barolsky Advisors

Posts Tagged ‘innovation’

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Is bigger better?

In Articles, Commentary on 13 December 2019 at 7:20 pm

Full text of my opinion piece first published in the Australian Financial Review on 12 December 2020.

Ranking law firms by size implies in some way that second position is better than 22nd. But is it?

As with many things in the legal business world, the answer is not straightforward.

Gilbert + Tobin is a wonderful case study of a relatively small firm – only 16th in The Australian Financial Review Law Partnership Survey – competing very successfully in every market it chooses to focus on.

The firm is widely recognised as a powerhouse in corporate, banking and dispute resolution and is one of the most profitable commercial firms in the country.

In the US, Wachtell Lipton Rosen & Katz has only 260 attorneys but is No. 2 on the Vault table of best places to work for graduates, first for mergers and acquisitions work and generates in excess of $US6.5 million ($9.5 million) per equity partner per annum.

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AFR print edition

Russell McVeagh is regularly ranked as one of the top firms in New Zealand. Their website lists only 36 partners which makes it the smallest firm among its peer group by a significant margin.

Despite these compelling examples, there are four areas where it appears bigger is better.

Lower-cost operators

Australia’s largest partnership, HWL Ebsworth, offers partner rates at 30 per cent – 40 per cent discount to comparable firms. It is able to sustain these rates by having a low-overhead operating platform, maximising the utilisation of it, and consistently increasing the number of partners sharing its cost. Size does yield economies of scale to HWL Ebsworth and others that have adopted this model.

The general insurance market in Australia has converged significantly over the past decade with four major companies now enjoying market dominance. The flow-on from this trend has meant that law firms specialising in insurance have had to get bigger to match the buying power of their key clients. Size helps these firms meet the unrelenting client demands for lower cost legal services and still make a buck, just.

Large matters

Clients do seriously consider the size, or “bench strength”, of the legal teams that compete for large-scale transactions, major projects, investigations or litigation work. Clients want the assurance that there are ample resources in place to manage large workloads without a hitch. They also seek to limit the risk of being reliant on just one or two key individuals; they want the B-team to be just as good as the A-team.

A large practice team also helps firms cope with the volatility of demand. A larger team can smooth out the peaks and troughs over a wider base of work. A smaller team runs a bigger risk of boom-bust actually meaning bust.

Innovation

Many of the new legal technology products that are emerging are based on cutting-edge cognitive technologies. The rough rule of thumb is that 70 per cent – 90 per cent of new products fail. Firms need to be of sufficient size with sufficiently deep pockets to be innovators and wear the cost of failure.

One of the key success factors in legal product innovation is effective distribution. Large firms with a wide reach will clearly have a market access advantage relative to say a smaller firm or a start-up offering a similar application.

Firm size also helps in taking a few more risks when it comes to lateral hire or practice acquisition. Recruiting a cultural terrorist in a small firm can be an existential problem. Larger firms tend to have more options and a bit more resilience to bad hire decisions.

Client panels

Many large corporate and government buyers of legal services have reduced the number of business law firms on their legal service panels.

A byproduct of this trend is that firms of scale, range and reach are often preferred to specialist boutiques. To target this market segment, law firms need to grow to ensure their full-service value proposition remains credible.

In conclusion

So, is bigger better?

Larger firms will generally point to their strengths in critical mass and coverage. Smaller firms will make the most of their focus and agility.

It appears they are both right.

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Legal technology products: A new trick for old dogs

In Articles, Commentary, Legal Technology on 29 November 2019 at 1:46 pm

Full text of my op-ed first published in the Australian Financial Review on 28 November 2019

According to The Economist, advice on strategy accounts for only 10 per cent of revenues for McKinsey and its peers, Bain & Co and Boston Consulting Group. The balance comes from sources including designing and developing technology products for their clients.

So if meat-and-potato strategy advice has become a side dish for the major consulting firms, will legal advice become a niche product for premium law firms?

I don’t think so, but some are seriously asking the question.

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AFR article print edition

Tier 1 law firm Allens currently has nine legal products in its a+ solutions portfolio. One of these, SmartCompile, pulls together publicly available company information for due diligence reports. The firm is also working on new risk assessment apps, a FIRB notification app and a contract workflow solution.

A quick review of other premium law firm offerings suggests the ripple of new legal products will turn into a wave in the years ahead.

With that in mind, I posit that law firms have to learn five new tricks to make their legal product strategy a success.

New measures

Current law firm KPIs (key performance indicators) such as utilisation, leverage and realised rates are irrelevant in a world of legal products. New indicators should cover factors such as product life-cycle cost, annual recurring revenue, channel profitability and subscription retention rates.

The time frame around KPI targets also needs a rethink. The rules of thumb around time to break even and profit cycles are vastly different for technology-based products. It took Amazon 10 years before it started to generate any cash profit, never mind recover its investment costs.

The challenge ahead is for firms to redesign their KPI dashboard to include service and product measures, but also balance short-term and long-term strategic objectives.

New channels

Most traditional commercial legal practices rely on two primary channels to market: direct selling to clients and referrals from intermediaries.

There are far more options when it comes to getting products to market: app platforms, a dedicated sales force, accredited resellers or agents, other technology vendors or via competitors.

Other channel-related choices include compensation payments, sales incentives, spotter fees, territory allocation and channel exclusivity.

New roles

Hall & Wilcox’s client solutions director Peter Campbell is tasked with providing technical support to the firm’s partners and clients as they develop and implement new products.

Other new roles like product manager, channel strategist and deployment specialist will start to emerge in law firms.

Existing positions will also be reshaped. Partners and senior associates will need to be trained to identify product opportunities and drive sales efforts. Marketing will need to hone their online retailing skills. IT will have to embrace working with both internal and external clients.

Interestingly, Allens has set up cross-functional “squads” to help develop new legal product concepts, test them and bring them to market – quickly.

New pricing

Technology-enabled products are usually priced via a licensing or subscription model. It can fluctuate based on the number of users or volume of transactions.

Setting the right price level will be tricky as there is often no clear frame of reference or way to compare prices for these products. In some cases, firms will be making the market or creating the category. Go too high, and there will be limited trial and take-up. Go too low, and the product will never be valued highly (or be profitable).

New norms

Many traditional law firms will need to adopt new norms in selling products.

Practitioners need to resist the buzz that comes from creating something new from scratch each time. The big egos need to get used to the idea of clients buying branded products, not them. Partners need to get comfortable with product-push campaigns rather than waiting for clients to call with a specific need.

In some ways, the most significant barrier for new legal product success is the firm itself.

If it does not adjust its business model, there will be little opportunity for these products to mature and flourish. Long-term, this will mean these old dogs won’t learn any of these five new tricks.

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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.

AFR oped 5 April 2019 copy

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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