Law firms in transition survey – strategic disconnects on the legal market

The eight annual Altman Weil Law Firms in Transition Survey identifies ways in which law firms are responding to the market forces that are reshaping the competitive legal landscape. Eight years along, the pace of change is still quite modest. This year, the report points out five key findings on the state of the legal market:

  • The erosion of the overall demand for work done by law firms is a permanent trend. Many firm leaders remain concerned about how to grow profitability in a market characterized by stagnant or declining demand, intense competition from old and new sources, commoditization and price pressure.
  • Overcapacity of equity and non-equity partners, especially in larger firms, is endemic and a drag on profitability.
  • Inefficient delivery of legal services; although nearly all law firms identified the need to improve efficiency, more than half have not significantly changed their approach to achieve greater efficiencies.
  • Proactivity is a competitive advantage. Firms that have taken a proactive approach to alternative fee arrangements during the past seven years, have shown a compelling success.
  • The slow pace of internal change in many firms is attributable not to lack of awareness or will among law firm leaders, but to low awareness and high resistance among their partners.

Reading the report, it becomes clear that firms are failing to be drivers of radical change. As pointed out by Keith Lee in his review, "despite pockets of true innovation, most firms are choosing to proceed with lawyerly caution in the midst of a market that is being reinvented around them." There is also an alarming disconnect between the insights on the need to change and the actions being taken (or rather not being taken).

For example, over 90% of law firm leaders think that a focus on improved practice efficiency is a permanent trend in the legal market, but still fewer than half of all law firms (44%) have significantly changed their strategic approach to efficiency. And only one third of law firms are making strategic changes in their approach to pricing. Firms are also slow in adapting new technology. The technology tools used widely are knowledge management and HR-tools. Techniques that really change the way work has been done traditionally, like automation and reengineering of work processes, are less likely to have been adopted.

These disconnects are alarming as it is clear that firms who make effort to understand and manage new or evolving market tactic, like new technology and alternative fees, generally succeed in doing so, and enjoy increasing benefits over time. It is also clear that the legal market is moving towards a "winner-takes-all" kind of environment. Legal work is going to continue to be in-housed, commoditized, or replaced with technological solutions. Going forwards, there are going to be fewer players fighting over the shrinking available work, as competition is more and more frenzied and law firm consolidation continues to accelerate.

So why aren't firms doing more to adapt?

The main impediment to change, is that partners resist change efforts. Part of the problem is simply lack of awareness among rank and file partners. Even though law firm leaders might be fully aware of the need and willing to take on strategic change, there is low awareness and high resistance among their fellow partners. When asked to assess partners' overall awareness of the challenges their firm face in the current legal market, only 4% rated their partners as highly aware. Another factor, mentioned by 59% of firm leaders, is that client aren't asking for it. As elaborated by D. Casey Flaherty in the 3 Geeks and a Law blog post, his impression is that the managing partners are correct in their observation that most clients don't ask. "This is what one might call an impasse: Law firms are waiting on clients to make them change. Clients are waiting on law firms to be proactive or change in response to market pressure. /…/ The conversation around service delivery is relatively new. Most in-house teams aren't quite sure what they want. They are just want more of it. And knowing what you want differs from articulating it in a way that is digestible by someone who has no frame of reference."

Partner's high autonomy is another problem. In a third of law firms, leaders believe their partners - if forced to choose - would sacrifice some compensation to protect their current level of autonomy. In other words, they would actually pay money to be left alone. Considering this, it is quite understandable that change take time and that leaders tend to focus on staying with the pack rather than initiating more signifant change. Law firm leaders also remain generally confident in their firms' adaptive capacity. But if the strategy is to simply keep up with the current marketplace, it misses the point that most of the other players are lagging too and that just a small increase in pace can distance a firm from its undifferentiated competitors. As noted by Keith Lee in Above the Law, this will not be possible to hang onto any longer: "'Good enough' is dying. Good enough work meant that lawyers were able to make clients adjust to their demands and schedules. Good enough work meant that lawyers don't have to worry about the presentation or delivery of their services. Good enough work meant that lawyers didn't have to bother with competing on price. Lawyers were able to get by with "good enough" much longer than other industries as the practice of law is an eminently local business. /…/ But what about when "good enough" lawyers are gone? When all that's left are above average lawyers, and multi-national corporations attempting to consume the legal industry? The spectrum of what constitutes "good enough" will change. Excellent legal service will no longer be enough. Clients will expect more. They'll want excellent legal service and streamlined delivery and competitive pricing."

A firm can never get ahead by merely aspiring to keep pace with sluggish competitors. Vigorous pursuits of opportunities has always paved the way for competitive success.

 

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