Ever watch card players shuffle the deck? The purpose, of course, is to rearrange the cards for a new game. It’s a “reboot.” And it’s entertaining.
Is that what we are seeing with legal delivery: a reshuffling of the deck?
For decades, the game has been played without a remix. Law firms have dealt the same hand. No reshuffle. And their corporate clients rarely groused the deck was stacked. The outcome was entirely predictable: law firm wins. Rinse and repeat.
But the game has changed, especially since 2008. The deck is being reshuffled. Here’s how.
Legal Delivery in A Buyer’s Market
Legal consumers have taken over the dealer role from law firms; it’s a buyer’s market. And they are reshuffling the deck. Law firms are now drawing a different — and tougher — hand.
Same cards. New game.
How is this Hand Being Played?
Three concurrent developments are playing out in the legal marketplace: (1) mergers; (2) market share shift; and (3) new models. And each is indicative of the reshuffling underway.
Mergers can be divided into two categories: (1) consolidation of small firms; and (2) acquisition of big firms by bigger ones (think: Dentons). Both point to fundamental changes in the delivery — and purchase — of legal services. And each underscores the unsustainable partnership model.
It has been widely reported that last year set a record for law firm tie-ups; the bulk of them involved smaller firms. And many of those “boutique” firms, in turn, had previously peeled off from larger ones. Two common reasons: billing rates and conflicts. Simply put, many lawyers recognize they can deliver their services at significantly lower price points without the traditional partnership model and large firm cost escalators. This takes into account the discounts now commonly extracted from large firms.
The leaner, meaner model provides smaller firms — especially those headed by “recognized” big law alums — a key differentiator in the increasingly intense competition for outsourced corporate work. Add to that a vastly diminished concern with conflicts, and it spells real advantage.
So why merge smaller firms? Two reasons are to promote client control across practice areas; and to reap the resulting financial rewards. The ideal result of boutiques merging is a more efficient, cost-effective, conflict-light, client centric version of behemoth law firms. And to those old enough to remember when today’s mega firms were small and fit this description: yes, it’s déjà vu all over again. Call it Big Law 1.5.
As for mega-mergers, it’s the “too big to fail” strategy cloaked in a “global coverage” guise. Dentons, Baker & McKenzie, and DLA, among others, have filled that niche by gobbling up firms around the globe and slapping on their brand. Dentons, particularly, has sought to reprise the successful global strategy of the Big Four.
Will sheer size win greater market share and bind the stress cracks in the traditional law firm partnership model? Dentons and the other Swiss verein firms will be bellwethers. The verein structure has worked well for the Big Four, but accounting and law have different conflict rules, among other things. My hunch is that size and a unified brand- absent other differentiators — is not going to solve structural and integration challenges.
What about market share? Collectively, the AmLaw 200 dominated the corporate legal marketplace for a long time. But that’s changing. The latest statistics reveal that in-house departments now comprise just over 35 percent of overall corporate legal spend. And that’s rising quickly as in-house departments are bulking up in size, influence, and scope of work.
Two examples: Shell Oil now has a global in-house litigation team that is taking the lead on some of the company’s largest litigation matters. And 3M has, in the span of a few years, advanced more than half-way towards its goal to invert the 2/3 outsourced: 1/3 in-house ratio of its legal portfolio. And it’s not just about cost-reduction. Most law firms remain tone deaf to the clarion call of clients for greater efficiency, transparency, collaboration, and value.
Why don’t firms respond? Is it hubris, a structural problem, or both?
And why don’t corporate clients take more aggressive steps to replace large law firms with other providers? Is it a lack of viable options (other than taking more work in-house), inherent conservatism (the risk: reward balance tips towards stasis), or familiarity (many corporate counsel are BigLaw alums)?
Meanwhile, service providers are gaining traction. And while their share of the corporate pie is still small-about 1 percent — it is growing quickly. Most surveys point to a 30 percent annual rise. And that is likely to accelerate as corporate counsel view providers as “safe” choices to handle more complex, higher value work.
Legal Networks Ascending?
Law firm networks are a potent, albeit stealth provider source. There are currently approximately 170 legal networks, and their combined market share is an estimated 25 percent of the entire global legal business market. Most network firms are boutiques and mid-sized firms. Their billing rates tend to be lower than mega-firms (size usually equates to higher rates); their conflict issues are not nearly as acute; and technology now enables them to collaborate seamlessly with their fellow members. They are a quiet giant and a ready alternative to mega firms, many of whom are “networks” themselves but operating under a unified brand and with different rate structures and conflict challenges.
So why have networks not been more prominent in the discussion of legal delivery change? Brand is a big factor. Everyone has heard of Dentons because its member firms all practice under the same brand. Contrast that with Lex Mundi, the largest legal network whose member firms collectively dwarf Dentons in size, revenue, and geographic footprint but who do not practice under a uniform brand.
So what if existing networks amped up their brands and pushed a co-branded strategy with members? They would have a far greater market share, minus the conflicts, of the mega-firms. Hmm.
Enter: An Association of Networks
The Association of International Law Firm Networks (AILFN), has recently launched after a one year incubation. Not only will AILFN increase the visibility of law firm networks — and their brands — but it will also serve as a powerful spokesman and resource for them. This will include, among other things, identifying and committing top service providers to collaborate with member firms for the benefit of clients. Translation: AILFN members and their firms will have access to leading law firm and service provider resources around the globe. They will provide an integrated supply chain solution with global coverage. And they will be significantly more nimble, cost-effective, and client centric than their big firm competition. Plus, they will not have the same conflict issues as the unified branded mega-firms.
The deck is about to be reshuffled again….
The Buyer’s Market
The traditional partnership model worked well in a buyers market. But, as Mike O’Horo, a legal sales and marketing expert recently wrote, “In a Seller’s Market, everyone is a product company. In a Buyer’s Market, everyone must be a marketing and sales company.” Agreed — with the caveat that the traditional partnership model is not structured to sell now — either to clients or, increasingly, to lawyers who can read the writing on the wall.
Legal delivery is witnessing a reshuffling of the deck. This is true not only in the corporate segment of the market but also in retail. And the two will likely coalesce at some point. After all, law has a big distribution problem: millions of unrepresented clients in need of affordable service and tens of thousands of unemployed and underemployed attorneys.
The legal supply/demand deck needs reshuffling. Clients will benefit as will those providers that are responsive to them.
One thing is clear: buyers now hold the cards.
This post was originally published on Bloomberg BNA.