The quarterly publication of the International Legal Technology Association
Issue link: http://read.uberflip.com/i/34686
From Immalleable to Agile A ‘Perfect Storm’ for Law Firms The past few years have not been easy for most firms. The deepest recession in a generation has forced firms to retrench, consolidate or, in some cases, even close their doors. But beyond the pain of the recent downturn, there are broader long-term changes sweeping across the entire legal industry. The challenges in adapting to these changes are substantial, but they are challenges that also provide vast opportunities for new growth and greater profitability for firms able to take advantage of the changes. Traditional Growth Drivers Waning There has been a major change in the market’s ability to absorb higher rates. For many years, a primary driver of growth and profitability has been a simple and reliable one: raising rates. Traditionally, many large firms raised their hourly billing rates five to 10 percent annually, providing a steady source of growth and profitability, independent from other sources of growth, such as new clients and new markets. Data from the Hildebrandt Baker Robbins Peer Monitor Economic Index (PMI) show that rate increases have been in a long-term free fall for the past several years. PMI data show that rate increases for large law firms in 2010 averaged a mere two to three percent, barely above the rate of inflation. It is important to understand that this decline began before the start of the recent financial crisis. Recession or no, clients have simply reached their limits and are pushing back, sometimes aggressively, on rates. They are viewing their legal spend as just another line item of cost that they seek to reduce. A recent survey by Thomson Reuters of leaders at large U.S. law firms found that an overwhelming 96 percent expect to see an increase in the use of alternative pricing models over the next three years, including portfolio pricing, fixed-fee arrangements and so on. Clients are demanding clear, demonstrable value in return for their legal spend. The Association of Corporate Counsel (ACC) recently launched the ACC Value Challenge to encourage in-house and law firm leaders to find ways to reduce the cost and increase the quality and value of legal services. The ACC summed up clients’ frustrations this way: “Costs keep rising, but with no noticeable improvement in efficiencies and outcomes.” Market Forces In addition to client pressures, global market forces are changing rapidly. The major paths to global growth between now and 2020 are going to be centered not in the mature economies, but in rapidly emerging economies, such as China, India and Brazil. Firms in the U.S. and Europe are already scrambling to open offices or develop alliances in those regions and elsewhere. In addition, after a brief lull during the recession, law firm mergers are rising again — both cross-border mergers and mergers between U.S. firms — as firms seek to gain both scale and global coverage. Establishing or expanding global practices carries substantial challenges, including selecting and staffing locations, developing jurisdictional expertise, developing legal infrastructures, addressing inconsistent adoption of rule of law, and reconciling differences in currencies and taxes. At the same time, formation of new boutique firms is leaving many firms caught in the middle between large global practices and small, nimble, highly specialized niche firms. Opportunities for the Agile Law Firm The litany of challenges facing firms as we race toward 2020 may seem daunting, especially since these client and market forces are accelerating the rate of change in the industry. At the same time, the challenges of this decade hold great potential for expanding growth and profitability. Harnessing the fast-changing opportunities requires near real-time capabilities that enable the firm to: • Increase visibility into market and competitor dynamics • Deepen and broaden client relationships • Expand globally to capture high growth • Improve efficiency in the delivery of legal services Success between now and the year 2020 will depend on cultivating expertise in areas far beyond the table stakes of providing outstanding legal services. As a leading provider of solutions to global law firms, we observe many firms with different levels of capability in important areas that can improve or inhibit performance. We have identified five key capabilities that will drive success within the business of law: • Firm Strategy and Governance • Business Development/Client and Industry Intelligence • Practice Delivery • Financial and Profitability Management • Talent Management Within each of the capabilities, we commonly see four levels of execution “maturity.” These levels are described as follows: • Disconnected: A multitude of disparate processes and tools not being used or integrated; significant lack of training and confusion among partners and associates • Reactive: Some performance metrics, planning and buy-in; improvement in execution, but inconsistent results • Responsive: Enabling tools and information, training and process compliance in use; partner support and buy-in are present • Agile: Information and tools integrated dynamically across all levels of the firm; significant performance improvement achieved; agile capability is seen as a “must have” for achieving the best client outcomes Peer to Peer the quarterly magazine of ILTA 73