Looking to the US, it is easy to see that structural change is going to have to come to Australian law firms sooner rather than later. John Chisholm reports.
In April, I spent a few weeks in the US, primarily attending legal conferences and meeting with a range of people.
I spoke to lawyers in big law, lawyers in little law, and those in between: respected legal management consultants; bloggers, authors and commentators; legal academics; in-house legal counsel; law students; LPOs, legal profession disrupters, as well as some law firm innovators and outliers.
I know the US is not Australia, just as I know Sydney is not Melbourne or Perth, and I know your firm is different to all other firms, so what could possibly be of relevance to you and your practice about what is happening in the US legal market?
Everything and nothing.
I am not a fan of firms copying their competitors (even if you think they are better than you), but I do think law firms can and should look at what is going on in the wider world, especially outside our profession, and see if there is anything that can be adapted and varied to suit your own firm.
I am not suggesting that US law firms do things better than us (in some areas far from it), but the US is a big, diffuse and competitive legal marketplace. Most of us now operate in a global environment — because most of our clients do — and it would be unwise to dismiss what is happening in the US legal profession simply on geographical grounds.
The US legal profession, like the UK profession, is going through a huge transition, principally, but by no means solely, reflective of the global financial crisis that affected it and other parts of the world harder (to date) and sooner than it did Australia.
When businesses are faced with potentially unsavoury economic imperatives it often brings out the best and worst in business owners’ behaviours.
My overall impression from my latest visit confirms that, while there are some significant differences between our professions and our respective marketplaces, we share many similar challenges and opportunities. This view was highlighted in a recent survey conducted by Altman Weil, a respected legal management consultancy, of more than 200 law firm leaders in the US. Appropriately titled Law Firms in Transition, the survey showed that law firm leaders are “acutely” aware of the changes being faced by their profession and showed they:
• Are concerned that the demand for legal work is flat or shrinking in many practices
• Feel real pricing pressure from clients
• Recognise the competitive forces of commoditisation and the emergence of lower-priced, non-traditional service providers
• Are coming to grips with the idea that aggressive growth in lawyer headcount may no longer make sense
• Believe the pace of change is increasing.
Australian professional services consultancy Beaton Research and Consulting has also previously reported similar changes being felt and faced by many law firm leaders in Australia.
Lessons to learn
So how, and how well, are US firms responding to these changes and what can we learn from them?
At a symposium I attended in April at Georgetown Law School titled The Shrinking Pyramid: Implications for Law Practice & the Legal Profession and, the week following, at an Association of Legal Administrators Conference, many of these changes and challenges were discussed by an array of speakers and attendees.
Despite many presenters at these events urging law firms to be much more innovative; to look outside their profession for guidance; to embrace collaboration; to re-engineer their services; to adopt alternative pricing arrangements and to consider different business models, take up and implementation of most of these is still lacking.
In the US, like Australia, there is no growth in the legal market per se, so firms are essentially cannabalising each other for new business. To their credit, many firms have upped their service delivery, marketing and PR and are genuinely taking more notice of what their good clients want and, to quote Edge International founder Gerry Riskin, are “locking up their crown jewels”.
More firms are outsourcing their back office and using LPOs. Many have at last come to the realisation that a full-service law firm is not what clients want and nor will they pay for it; they want focus and specialisation.
Firms are either growing bigger by merging (or buying business by lateral hiring) in the belief that there is safety in the numbers of lawyers, areas of practice and geographical footprint, or they are downsizing (often not by choice).
Paying the price
Like some Australian law firms, in a misguided effort to increase revenue in a stagnant market, some US firms are increasing the billable hour targets of their lawyers by spending big dollars on technology and training so lawyers can better (“more accurately”) record their time wherever they might be and whatever the day or night of the week, much to their clients’ chagrin.
While many firms have put more focus into the pricing of their services, with several firms now employing full-time professional pricers, and have adopted alternative fee arrangements (AFAs), most AFAs are in reality what I term billable hours in drag (such as fixed fees, capped fees, blended rates etc; all calculated on the Time x Rates x People model) and do not really reflect a different pricing model.
Mostly though, firms have turned the trimming of their costs and discounting of their fees into an art form, failing to see that both of these actions are, at best, short-term fixes. The former has its limitations and the latter pits law firms against each other in a race to the bottom.
Demand vs supply
In the US, even if young lawyers wanted a career path to partnership, the path is now longer, narrower and littered with many obstacles or, in many firms, simply non-existent. One firm partner told me the best they can offer lawyers that join them is, if they work hard, they will be given “learning opportunities”.
This has longer-term repercussions on succession planning and sustainability for the profession.
There is an oversupply of lawyers in the US and reports suggest nearly 50 per cent of graduate lawyers in 2012 and 2013 have not, and will never, find work in private law firms, yet the myriad of law schools continue to churn them out in astonishing numbers.
As the law firm pyramid shrinks and changes shape, expect law schools to do likewise.
Leadership in firms is being tested more than ever but, as one commentator explained, managing partners in some firms just have one major KPI: “Don’t sink the ship on my watch”; hardly inspiring or a long-term strategy.
Like in most western law firms, the time and people leverage model still predominates in the US, and while there is little doubt that most law firms are working hard to respond to these challenging times, what really struck me was that, apart from some innovative and courageous outliers who have completely changed their business model, most firms continue to work within the confines and restrictions of the existing model. A model that they believe has served them so well in the past and will do so in the future when things return to relative normality.
The reality is that, while at some stage there will be a semblance of a return to some form of normality, some things have changed forever.
It is the outdated time and people leveraged business model that needs to be completely changed, and until that happens no one should be surprised that good people will increasingly look for better and more fulfilling alternatives than working in a private legal practice.
Clients will look to other providers instead of law firms to add value to their businesses; external disrupters will continue to flock to the legal profession in droves to exploit the legal profession’s soft underbelly: our lack of flexibility; our failure to innovate; our unwillingness to collaborate; our short-term greed for the almighty dollar; our 19th century governance structures, our absence of diversification and our cultural desert.
As US Army General Eric Shineski said: “If you don’t like change, you’re going to like irrelevance even less.”
John Chisholm is a legal consultant and the former managing partner of law firms Maddocks and Middletons [now K&L Gates]