Mid-tier partners shouldn’t underestimate the ability of major law firms to dominate in a deleveraged legal market, writes Ted Dwyer.
If you read the media, you’d be tempted to believe that the major Australian law firms are under siege. After all, they are under pressure in key areas. Clients are more discerning on what they need from law firms, and the money they are willing to spend is harder to access for law firms. International players are pushing into the income pool that the Aussie majors have relied on to drive profit. Sophisticated, smaller law firms (usually labelled ‘mid-tier’) are providing a genuine choice to clients, especially for work that requires expertise, but is not so high in risk that it justifies paying a major law firm’s rates.
So, all gloom for major law firms and all upside for ‘mid-tiers’? Don’t be so sure. While the sun may be shining for the mid-tier firms now, it is actually these firms that are under increasing pressure, precisely because the large law firms (or at least some of them) are responding very effectively to the challenge before them.
True, the mid-tiers to now have arguably been the true innovators, especially firms with origins in Brisbane, Melbourne and Adelaide. What has emerged is a small group of highly sophisticated, focussed law firms with high quality leadership and top-tier lawyers. No wonder major Australian corporate clients are responding so positively.
However, after a slow start, large law firms are also dealing with this new market reality in different ways. It is generally accepted that they need to ‘de-leverage’. A simplistic interpretation of ‘de-leveraging’ is to confine the discussion to partner : fee-earner ratios (that is, reducing the size of teams within practice areas). A better understanding, however, is to regard it as a process of re-designing the firm for the future. In sketch form, this means reviewing and divesting non-core services; focussing on core, specialised services that command premium pricing positions; then shaping the structure of the firm around those services, in a way that is meaningful to clients.
The major Australian firms are highly sophisticated organisations. It’s worth noting that many have thrived for over a century. These types of organisations have a great capacity to adapt to and overcome challenges. Cash rich and with comparatively more strength in resources than smaller, younger firms, they have a greater capacity to identify specific client needs, as well as to innovate in a way that resonates with clients. It is dangerous to underestimate their ability to regroup and come out fighting hard – which is what we are about to see in the Australian market.
For an example of how a ‘de-leveraged’ firm might work, we can look to the USA. One of the very large ‘white shoe’ law firms there now boasts a leverage of 1:1.5/2, which has decreased from 1:4 only 3 years ago. Yes, this means that there are fewer fee-earners per partner. The size of the firm has contracted. But it also means that the firm has effectively divested services that were not considered strategically core for the future, and has structured those services around their assessment of future client needs. It means that the firm has thought deeply about how to re-engineer the overhead for different categories of work, so as to present a full service offering that resonates with client needs. The result is an even more profitable firm, with highly satisfied quality clients – who return again and again.
Which brings us to the rising confidence of the mid-tier firms in Australia. A centrepiece of their current competitive posture is the proposition that they can provide the quality of a large firm, or near enough, far more cost-efficiently. The continued strength of that proposition relies on the assumption that major firms are not able to compete in the ‘mid-tier’ space. However, with major firms quickly adapting to the new market reality, this is precisely what they will be able to do – as well as to maintain their current competitive strength in premium legal services, which mid-tier firms have yet to penetrate in a significant way.
To put it simply, the major firms will soon seek to compete with the mid-tiers on their turf, using precisely the same argument currently being used by mid-tiers to win work from major clients. It is very likely that large corporate clients will be interested in any approach from a major firm that competes with current mid-tier strength. The threat of a direct assault from major firms on the work that mid-tier firms are currently targeting is not on the agenda for most mid-tier partnerships right now, but is more than a possibility. Mid-tier partnerships should take note, and plan accordingly.
Ted Dwyer is director of Dwyer Consulting. He provides law firms with advice on profitability, strategy, CRM and pricing.