LAW firms are currently experiencing change like never before. In the last two years, many firms have seen their revenues and profits decline for the first time in over a decade. They’ve had to let go many talented lawyers, both at partner level and below. Clients who used to accept above-inflation fee increases each year now have the upper hand – they are increasingly dictating how they would like their lawyers to work and the prices they are prepared to pay.
Obviously, the state of the economy is behind much of this change. But when economic conditions improve, the legal sector is unlikely to return to the state it was in a couple of years ago – it’s facing profound structural as well as cyclical change. The Legal Services Act, which comes in next year, will potentially be the biggest shake-up of the legal landscape in a generation.
To get an idea of the magnitude of change that the sector may go through, it’s instructive to look at how other professional services sectors have evolved.
Thirty years ago advertising looked a bit like the law does now. The sector was highly fragmented, with a large number of privately-owned agencies. They could never get really big, people said, because of client conflicts. They would never attract much interest from external investors because their only real assets were their people, who could leave at any moment.
Account managers, media buyers and the creative department worked together under the same roof because they always had done. Apart from a few international networks, most agencies were nationally based because, people said, the business was about developing local relationships and understanding local markets.
Fast-forward to the present day. Sir Martin Sorrell has built WPP into a global, full service, publicly-quoted marketing services conglomerate with well over 100,000 employees working in over 150 subsidiary companies, spread across more than 100 countries. Interpublic, Omnicom and Publicis are structured similarly, with specialist subsidiaries focusing on disciplines like market planning and research that were once integrated within agencies.
Or consider management consultancy. Thirty years ago, consultancies were relatively small partnerships focusing on the delivery of strategic advice. The largest – think McKinsey or Booz Allen Hamilton – had offices in the US, the UK and a few other countries. As information technology became more pervasive, firms that could not only provide advice about computer systems, but also help implement them, moved into the ascendancy. The largest – think Accenture – had much lower revenues per head than more traditional strategy houses, but much higher leverage.
Over time, some IT-focused players sought to operate their clients’ systems as well as install them. These organisations – you could argue that is no longer appropriate to call them consultancies – are now vast, publicly-quoted companies with operations and infrastructure around the world, and structures that bear little relationship to partnerships focused on the delivery of business advice. Very few consultancies – Deloitte may be the only one – have the scale and breadth of services that enable them to compete from strategy to operations and technology.
What does this mean for law firms? Well, they don’t have to start preparing to be like WPP or IBM. After all, there are still successful advertising agencies and consultancies that look similar to their predecessors from 30 years ago and besides, the legal sector will almost certainly evolve in different ways from advertising and consulting. But if you want a sense of how transformational the change in legal sector is likely to be, a look at the evolution of those sectors is a good place to start.
Within this context, law firms need to ask themselves questions. What should be their market focus, based on the opportunity presented in the sectors in which they compete, their capabilities and the aspirations of their partners? What is the best operating model to address the opportunity? How should they align their funding and ownership models to their operating model and market focus? Change is coming. Those who are best prepared will come out on top.
David Hawley is a strategy consulting director at Deloitte