Great expectations

Great expectations

23 May 2016 By Felicity Nelson
future

NewLaw firms have grand ambitions for reshaping the legal industry, but how successful have they really been?

Much puff and publicity has accompanied the birth of NewLaw. Since first appearing on the horizon more than 15 years ago, NewLaw firms have been heralded as potentially fierce foes to established law firms.

In the midst of the global financial crisis, when traditional law firms were feeling the pinch, many NewLaw firms made their grand entrance onto the legal scene.

These young and ambitious start-ups made big promises, pledging to unshackle lawyers from time billing, trim overheads and extract efficiencies through technology.

They wanted nirvana for lawyers and the best deal for clients – a tricky balance to strike, particularly when working with fewer resources than incumbent firms.

Some legal consultancies, notably Beaton Capital, examined the meteoric growth trajectories of these scalable businesses and predicted the demise of BigLaw.

In a Beaton Capital blog post in 2013, consultant Eric Chin coined the terms ‘NewLaw’ to spell out these seemingly inevitable developments. These alternative legal service providers, turbocharged with technology, could be the future of the legal industry, he said at the time.

For instance, in 2013 Mr Chin predicted that US-based Axiom Law would overtake global firm DLA Piper by revenue by 2018, based on early compound growth figures.

Dr George Beaton, a partner at Beaton Capital, believes these projections were intentionally provocative, but not unrealistic.

Axiom Law’s growth has since slowed and the firm is now unlikely to “catch up with a firm doing $2.5 billion or more” by 2018, according to Dr Beaton.

However, successful network businesses such as Google or Facebook can demonstrate staggering growth over short periods of time, he says.

Law is no different, Dr Beaton explains. Winning start-ups can easily swell from millions to billions of dollars in revenue in a few short years. Bold predictions such as these have made BigLaw firms understandably nervous.

Recent developments, including the merger of Lawyers on Demand in London and AdventBalance in Australia, are further evidence of the growing acceptance of and success of these business models, according to Dr Beaton.

John Chisholm, a legal consultant at John Chisholm Consulting says: “NewLaw will be an increasingly serious competitor for those firms that just long for the good old days. Some will adjust, but there will be casualties.”

But the thing about NewLaw firms is that they are exactly that: new. Firms such as Axiom Law and Riverview Law overseas, or Keypoint Law and AdventBalance in Australia have been growing rapidly, but they are still only in their infancy.

NewLaw is barely a speck on the legal landscape in Australia at the moment, which raises the question: Have NewLaw firms lived up to the hype?

The yardstick

To answer this question, we first need to determine what it was about NewLaw that captured the imagination of the market, according to Jodie Baker, managing director at Hive Legal.

“I guess the first question is: What was the hype? What was it that everybody was expecting?”

Ms Baker identifies four key NewLaw features that drummed up enthusiasm.

The first element is the abolition of the billable hour and the rise of alternative pricing models. “I think there is a lot of hype around pricing,” says Ms Baker.

The second feature of interest is changes to legal process, which includes unbundling, systemisation, commoditisation and legal process outsourcing (LPO).

Next, we have technology. “There is a lot of discussion about how AI is going to change legal services, whether robots are going to replace lawyers – all of those sorts of big questions,” says Ms Baker.

“But I think that commentary is still an exploration rather than hype about something that is about to happen in the next five minutes.”

Lastly, there is excitement around flexible work and an expectation or enthusiasm by the next generation for working in a different way, Ms Baker continues.

Together these NewLaw features have persuaded clients that “the vast majority of legal services are actually not rocket science and they are able to be unbundled and delivered in a much broader vision, in value-based ways”, says Peter Monk, a principal at Hive Legal.

Measuring up

Determining how successful NewLaw firms have been on all these fronts requires the invention of new metrics, according to Mr Chisholm. Old measures of success such as number of partner recruits or revenue growth apply to OldLaw firms, he says.

NewLaw firms are playing a different game. They focus on efficiency rather than growth and have fewer but more flexible staff, he explains.

“In the future there will be a different way of measuring the success of those NewLaw players,” said Mr Chisholm.

It is difficult to give NewLaw a report card without examining whether they are reeling in top clients, scoring a seat at the table for prominent deals, remaining competitive and causing a stir in the industry. However, some firms do not buy into these traditional indicators of success.

“I’ve worked with firms that would say they are incredibly successful – they may not make as much money as other firms but they have a great culture, great relationship with their clients,” says Mr Chisholm.

Marque Lawyers is probably the most extreme example of this kind of nonconformity. Managing partner Michael Bradley tells Lawyers Weekly “metrics is one of the words that we are not allowed to use”.

“We have certain basic financial expectations in terms of profitability […] but our measures of success are not financial.”

Mr Bradley is also cynical about the importance of growth. “We don’t think growth is a particularly good measure of anything,” he says.

“We don’t see growth as a strategic goal or aspiration. We measure success by the extent to which we enjoy coming to work each day.”

Another problem with evaluating NewLaw firms is that they are a fairly recent phenomenon and judging success would be “premature”, according to Mr Chisholm.

Slice of the pie

Despite the difficulty of choosing metrics to measure NewLaw’s growth, certain trends can be identified.

NewLaw has made a big splash in the media but it is still a small part of the total legal services industry, says Lachlan McKnight, the CEO of LegalVision.

“The market is huge – it’s a $25 billion market,” he says. “We could be 10 times bigger than we are now and we would still only be a pinprick in the market.”

Mr McKnight says NewLaw’s disproportional amount of attention in the press is a product of lawyer psychology.

“Lawyers love hearing about how everything is going to be disruptive,” he says. “Lawyers love worrying about stuff.”

That being said, the legal services industry is “massively fragmented”, according to Mr McKnight. Even the toptier firms, such as Herbert Smith Freehills or Minter Ellison, only capture around one per cent of the market, he explains.

One aspect of NewLaw that is generating a buzz in the industry is its rate of growth, according to Sandra Gibson, managing director Australia at AdventBalance.

Ms Gibson says the number of new entrants, including businesses launched by traditional players, is indicative of the sector’s success.

“The fact that there are so many NewLaw firms means there is some demand out there from clients,” adds Mr Chisholm.

The internal growth within NewLaw firms is equally impressive, with many firms hitting double-digit revenue growth year on year.

“NewLaw firms are growing in size and that’s the case with our firm as well,” says Warren Kalinko, CEO at Keypoint Law.

“The underlying drivers of what is causing NewLaw to come about in the first place are not disappearing – in fact the opposite, they are only strengthening – so it is inevitable,” he says.

Keypoint Law has only been operating for 18 months but has already scored a place on the Australian government’s legal services multi-use list, along with Hive Legal.

Mr Kalinko says it is important to think long term when considering the future of NewLaw.

“NewLaw is still tiny in terms of overall per cent of the legal market but what will it be in 10 years’ time is the [real] question,” he says.

The growth potential is also a pull factor for traditional firms, continues Mr Kalinko.

“That’s why we teamed up with Gilbert + Tobin last year,” he says.

“They invested in our business and I guess their thinking is that there is a lot of opportunity for us to keep growing. We are not competing with them for clients. If anything, there are a lot of complementary opportunities there.”

The price is right

Innovative pricing models were another promise made by NewLaw – but in this regard, the sector may be failing to live up to expectations, according to Ms Baker.

“Industry-wide, my feeling is that we haven’t progressed as quickly as many commentators expected that we would,” she says.

The problem is that a “time shadow” lingers even where firms promise fixed fees, she continues.

“The notion of alternative billing arrangements is often just capped fees using some sort of time-recording mechanism that sits behind it.”

However, Ms Baker believes NewLaw is taking the industry in the right direction and that firms and clients will become more comfortable with new billing methods over time.

Hive Legal has remained true to its fixed-fee proposal, with 96 per cent of all files done on a fixed-price basis, according to Ms Baker.

“We time record only where specifically required by a client or for pro bono matters,” she says.

Mr Kalinko says Keypoint Law has similarly delivered on pricing by using a low overhead, lean operating model.

While BigLaw firms have “central dictation” around billing, lawyers at Keypoint Law have the absolute decisionmaking rights over how they price services, he says.

By removing the pyramid structure of partners and junior lawyers, Keypoint Law employees can bill at lower rates, Mr Kalinko added.

Production line

Breaking down legal services into separate tasks and maximising the efficiency of each stage in the process is a strong feature of NewLaw. According to consultant Ted Dwyer of Dwyer Consulting, this is where “most of the innovation is happening right now”.

“You are seeing really significant innovation in how matters are managed, how to make estimates more accurate – all the boring stuff that doesn’t make it into the press but that has significant benefits,” he says.

Ms Baker agrees that some interesting progress has been made, pointing to new entrants such as Unison as leaders in this space. BigLaw firms have been across LPOs for well over a decade now, she adds.

For instance, Baker & McKenzie has been running a business services facility based in Manila since 2001.

Mr Bradley went further, saying that the commoditisation of legal services, particularly in the consumer law space, is “one of the biggest threats to the traditional model”.

The infusion of technology into legal services has facilitated some of these changes, but NewLaw is just getting started when it comes to using technology to materially benefit clients, says Ms Baker.

“The end-users of that technology – the client – still can’t find those tools or implement them easily to really make a huge difference to their buying power,” she says.

Liberating lawyers

Flexibility is a major part of the NewLaw sales pitch, with firms such as Hive Legal and Marque Lawyers listing their enlightened workplace culture as a big point of difference.

Hive Legal lawyers are able to work from home and are encouraged to “buzz in and out of the office” at will, according to Mr Monk.

The firm has “taken trust to the next level” by focusing on outcomes instead of monitoring the amount of time lawyers spend at their desks, he says.

Over half of the principals at Hive Legal are women and there have been no resignations by permanent legal staff since the firm launched in 2014.

Similarly, Marque Lawyers measures the success of its lawyers through the quality of work and relationships rather than billable hours, according to Mr Bradley.

When Lawyers Weekly asked if there was a way to quantify these contributions, Mr Bradley laughed, and said: “Of course not – it is entirely subjective. It means we actually have to know them, we have to talk to them, we have to listen to them and look at what they do – all that terrible stuff.”

Marque Lawyers is openly eccentric when it comes to measuring success. For instance, Marque Lawyers takes pride in the fact that 17 babies have been born to employees since 2008 and that all these employees have remained at the firm.

The firm has a strong record in retaining female staff, with women making up 55 per cent of partners and 70 per cent of employees.

Shy clients

Corporate clients have been hesitant to switch to NewLaw, but they are starting to try it out, says Mr Chisholm. Sometimes corporate counsel will unbundle legal work and use NewLaw providers for one part, alongside traditional providers, he says.

Others, charmed by the NewLaw offering, will demand that their traditional providers match the new players on price and efficiency.

Mr Dwyer says NewLaw firms are struggling to win over conservative, riskadverse in-house teams.

General counsel are interested in new ways of doing law but have little appetite to use unfamiliar legal service providers.

“These general counsel can’t afford to take too much of a risk, […] especially if their own career is on the line,” he says.

“If NewLaw can hang on maybe 15 years you might get a new generation of buyers that are quite different, but that is a very long time.”

Mr Dwyer says the criteria that clients use to procure legal services do not generally include innovation.

“Clients are not usually buying a pricing model,” he says. “You should never form a business based on how you believe the world should be. It has to be based on reality.”

Mr Kalinko agrees that corporate clients are careful in their selection of external counsel. However, NewLaw firms are starting to recruit the top partners and general counsel, he says. As the experts migrate, client trust will move across to the new sector.

Mr Kalinko adds that corporate clients are price sensitive and “don’t want to pay for harbour views” or overheads that do not add value.

Firms such as AdventBalance, which supply senior contract lawyers for in-house teams, are becoming mainstream, according to Ms Gibson.

“There is now credibility in the market for this stuff, which there wasn’t before,” she says.

Many of the BigLaw firms have launched rival businesses to AdventBalance and Lexvoco, indicating that there is a growing demand from corporates for this model, she adds.

Mr McKnight says the bulk of LegalVision’s clients are more forwardthinking businesses, such as start-ups.

Mr Bradley is aware that Marque Lawyers “isn’t everyone’s cup of tea” and that the firm has a “natural affinity with the edgier industries”. He says the firm would much rather clients “self-select out” if they feel they will not enjoy the experience of working with the firm.

However, Mr Bradley is intent on raising his firm’s profile and welcomes publicity, unlike many conventional firms.

“My perception is that lawyers continue to be terrified by the media,” says Mr Bradley. Lawyers in general find marketing is “grubby” and beneath them, he says. “But I think if you’re a new business in any market, particularly a crowded and competitive one, then you have to market yourself,” he argues.

“You have to have a point of difference and you have to be prepared to speak up for what you stand for and you have to take risk with that, otherwise it is fairly hard to be noticed.”

Identity crisis

In many ways, the umbrella term ‘NewLaw’ is a misnomer for innovation in the legal industry.

“I think there is a fundamental error to be had if you were to create two categories, one being traditional law and the other being NewLaw,” says Mr Monk.

In ‘OldLaw’ there is “one approach to doing things from end to end. In NewLaw, however, there are a multitude of completely different services.”

‘NewLaw’ is a “very broad church” of innovative businesses, including secondment models, online lawyer registries, tech-driven businesses and new species of law firm, he says.

With new companies popping up every month in the NewLaw space, and each offering something completely different, clients are having a hard time taking it all in, according to Ms Baker.

The lack of distinction between various providers creates a “noisy landscape” and confuses clients, she says.

Mr Dwyer says the NewLaw/BigLaw dichotomy creates a “world of stereotypes” where traditional firms are slow and lazy and the new players are nimble and innovative.

And this could not be further from the truth, according to Mr Dwyer. “The reality is that the large and medium-sized firms are innovating the most.”

Mr Dwyer says large and medium firms have the resources to fuel substantial innovation and, unlike NewLaw firms, can afford to hire external experts.

Maria Polczynski, head of group legal at Bendigo and Adelaide Bank, predicts that the industry will address client confusion by creating ‘legal brokers’ to recommend the best combination of providers.

“That might even relieve clients from the need to try to penetrate the market noise and confusion, confident that they are actually getting the benefits of the new options, without the pain of having to study and track them minute by minute,” she says.

Chickening out

Perhaps the best measure for success is whether NewLaw firms have stuck to their original plans, which are generally announced with much fanfare at launch.

“I think a lot of the firms that are self-described as NewLaw, when you scratch the surface, there’s not much difference in reality,” says Mr Bradley.

“I know a number of examples of firms that have hit the market with a blaze of publicity about fixed-pricing and valuepricing and so forth, but they have very quickly retreated from that and gone back to time costing.”

Firms attracted to the surface-level gloss of NewLaw have struggled to adopt different pricing strategies because they lack the commitment to radical philosophical change, says Mr Bradley.

Mr Chisholm believes clients can pick the firms that are full of empty rhetoric and will take their business elsewhere.

“Just because I say I’m NewLaw, doesn’t mean I am,” he says.

Mr McKnight says every month there is a new player in NewLaw, but he admits that some firms are “more smoke and mirrors than actual substantive business”.

“I assume that many of them probably do fail,” he adds.

Firms slipping back into old ways could be a sign that the NewLaw model did not catch on with clients and generate profit.

More than 50 per cent of start-ups fail and, when the odds are stacked against you, there is a strong incentive to snap back into a tried-and-tested business model. However, some NewLaw firms are so different that it would be “impossible” for them to take on a BigLaw form, says Mr Kalinko.

“To change our firm to be like the mainstream would require a complete rewriting of all the rules of engagement. It is simply not possible,” he says.

But diverting from your stated goals is not always a sign of trouble. For instance, LegalVision began as an online legal documents provider but quickly morphed into a law firm.

“So I guess we pivoted and we set up an incorporated legal practice and we started doing legal work ourselves,” explains Mr McKnight.

Mr Chisholm says this adaptability was one of the great strengths of legal entrepreneurs.

“They are flexible and can tweak their business or do something else. For a long time you could have any colour you liked – as long as it was black.”

But Mr Dwyer remains sceptical about whether the NewLaw approach will translate to business success in the long run.

“The jury is out,” he says. “NewLaw has shaken up the market, which is a good thing, but that does not mean they are going to be successful businesses.”

Great expectations
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