This year we will see the tipping point for many major developments in the legal market. Joel Barolsky, MD of Barolsky Advisors and Senior Fellow of the University of Melbourne, gives his take on five key areas of change, and how law firms can make a strategic choice to meet these changes

Five areas of change

1. Doing more with less

On the client side two points are worth highlighting. The first is that many clients are under huge pressure to ‘do more with less’. This presents a major threat to external counsel as legal budgets are cut. It also offers an opportunity for law firms to help in-house teams increase their impact and optimise their spend.

2. Collaborative in-house counsels

The second development is the growth of the Corporate Legal Operations Consortium (CLOC). CLOC is encouraging in-house legal departments to be far more collaborative in terms of sharing IP, documents, tools, processes, people and market intelligence. While in-house teams across organisations have networked for years, relatively informally, CLOC represents a much more structured approach to collaboration.

3. Huge growth of legal tech

In the technology area, Stanford Law School’s research reveals that in March 2018 there were nearly 800 legal tech companies across the globe, including 36 in Australia. Interestingly the same index reported only 19 companies worldwide in 2010. The prospect of using technology to change legal practice and operations is attracting new entrants at a very rapid rate.

4. More grads. Fewer partners.

In the people arena, the fortunes of two cohorts are distinctly different. Graduates from Australia’s 39 law schools are finding it hard to secure articles and full-time employment in traditional firms. It seems that supply far outstrips demand. At the other extreme, the war for talent in the ‘lateral partner’ segment is an intense as ever. Headhunting partners with large portable practices is the key growth strategy of a number of large mid-tier firms.

5. Changing structure of law firms

Practices are evolving from a pyramid structure with a partner at the top, one or two senior associates under them and then a larger group of early career practitioners at the bottom. There is strong evidence that the ‘process’ elements of transactions and litigation are now being automated through technology and/or undertaken by process workers. The bottom corners of the pyramid are disappearing so the structure of most practices is looking more like a rocket or a silo. This is having a profound impact on things like pricing and measurement, as well as staff recruitment and development.

The new shape of the market

It appears that overall market demand is parabolic. The premium segment and the retail segments are growing, while the mid-market is flat. However, the level of competition remains intense in all three segments:

  • Premium is primarily contested by Tier 1 incumbents, plus global boutiques, plus the Big 4 and specialist firms.
  • The mid-market is being contested by Tier 2 incumbents, consolidators, NewLaw companies, freelancers and multi-disciplinary firms.
  • The retail segment is been targeted by small and solo practices, on-line providers and industry associations.

A strategic choice

There is little doubt that both the practice and business of law is changing. And in this state of flux, you need a clear and coherent strategic response.

Your firm might decide to pioneer by investing in new technologies, innovating with new offerings or finding new flexible employment models.

Or you might prefer to keep your powder dry and wait to see what works, which platforms take hold, and what clients prefer.

Either way, an active choice needs to be made. Each comes with their own risks and opportunities.

A key challenge to investing in new initiatives is that the current core business is still very successful. While the market is complex and competitive, a number of firms are still making healthy profits. The challenge comes in balancing the old with the new.

Explore/Exploit/Both

One way for firms to address this balance is to think about strategy as two parallel streams: one being Exploit and the other Explore (based on the work of O’Reilly and Tushman).

  • Exploit refers to efforts to leverage current strengths and capabilities to make the current core business as good as it can be.
  • Explore refers to new exploratory and experimentation efforts that will hopefully bear fruit in the future.

One approach is to make the whole firm ambidextrous, that is, change the firm’s culture so that everyone embraces Explore AND Exploit in their everyday work and client interactions.

An alternative approach is to keep the Explore and Exploit far from each other and avoid cross-contamination. In this instance, Exploit is the cash cow and hires the suits, and Explore is a cash burner and hires the black skivvies. A third approach is to try to do both.

In an environment of rapid change and hyper-competition, every firm needs a healthy portfolio of both Exploit and Explore initiatives. A genuine commitment to Explore will most likely mean substantial changes to the firm’s dividend policy and capital structure. Firm governance and structural arrangements are also likely to be impacted, as will marketing, pricing, IT, operations and HR.

Joel Barolsky

MD of Barolsky Advisors, Senior Fellow of the University of Melbourne and Creator of the Price High or Low smartphone app.