Growth is Dead, Now What? – Law Firms on the Brink

Bruce, you just published a startling book on the latest developments in the US law firm market.* It reads like a wake-up-call to lawyers who – in your view – have the best years behind them and should be urged to adapt their business to the new demands of their clients. What are the drivers of the dramatic market shifts you see happening?

If you look at the law firm business as it is traditionally carried out, you will see data showing that – in general – there is great pressure on the fees, in-house legal departments increasingly in-source legal work, alternative legal services providers gradually gain market shares, and therefore law firms offering legal services to corporate clients have stopped growing.

Given the expectation that law firm partners want to earn as much in the future as they have in the past, how should they react to these developments?

A first action to be taken will come almost naturally – cutting cost. So, law firms do what I call labor market arbitrage.. They get more reluctant to pay partner track salaries to every one of their first year associates. Instead, big law firms install “low-end-practices” in less expensive places outside the city centers. There, work is carried out that does not require the highest of qualifications. Young lawyers hired to work in these premises will have to live with getting significantly lower wages than their city based colleagues. They will also not be offered the opportunity to become partner. The bad news on cost cutting is, that it doesn’t take you far enough! Competitors will follow the model. Moreover, once having entered the market for commodity legal work you will face fierce competition from specialized and greatly innovative providers of such services. And you will be forced to heavily invest in IT, in standardization, and modulization. These are not things that law firms like to do or are particularly skilled in!

So, what could be the way out of this dead end?

First of all, law firm partners must realize that there is an issue that potentially threatens their existence. This applies not only to firms in the middle section of the market but also to first tier practices. Since all participants in a market struggle to climb up the food chain no firm will stay unaffected by the market shifts in the aftermath of the financial crisis. Therefore, (1) there has to be a change in the mindset: You do have competition, no matter what your position in the food chain is. (2) Treat your business as a business. Although we lawyers tend to think of ourselves as people who know everything needed to successfully run a law firm – and by all means knowing better than anybody else – it is worth considering to hire the best available people for shaping the business. These people are not necessarily trained lawyers! (3) You need a strategy that clearly answers the question on why a client should choose your firm over all other firms. The strategy is meant to lead you to a position where you can be distinguished from your competitors in terms of services provided, client segment focus, markets, and ways of delivering your services.

Looking at law firm partners who have been spoiled with success in their careers and would be reluctant to think of their future as potentially troublesome, this is no easy track to follow.

Yes, you are right! Nevertheless, there is no alternative. All available indicators show that law firm business as it is known to us for many overwhelmingly successful decades is at a turning point. Law firms will either relaunch their business models or they will find themselves on the descending slope. Clear-sighted partners will choose to follow a consistent path. This would include the restructuring of the „demographics“ by reducing leverage and increasing partner attention, the readiness to draw upon talent outside the firm or your own onshoring operations, and an absolutely relentless focus on the client’s businesses and needs.

Do not get me wrong: There will always be first tier law firms; maybe fewer and smaller ones than today, and only a few will be doing global business. There will always be „boutiques“, focusing on doing one thing exceptionally well. And there will be what I call “category killers”, specialists who target on broadly needed services, and who will be the dominant market leaders in their respective field. The full-service, national, one-size-fits-all firm though, typically located in the middle section of the market, trapped in between global high-end law firms and boutiques on the one end and the uprising commodity-services providers on the other, is an endangered species. For them – and this is the vast majority of all law firms serving corporate clients –, it is either a dramatic change in their business model or, I’m afraid, a decline.

06/2013