With the recent announcement of the LeClairRyan UnitedLex
partnership, I wonder if this is the direction that law firms are going, if it
will work, and how it will work. If this
becomes a trend, what will the legal market landscape look like? Here are a few thoughts:
Segmentation of the market into four groups:
- Mega firms whose revenues will be insulated through their breadth of services, diversification of geographical presence, and efficiency from economies of scale.
- Full-service firms who either partner with existing LPOs or create their own in-house (which many firms have already done). With LPOs resonating with clients and cornering a larger corner of the legal market, particularly in historically profitable work that traditional law firms not only handled but relied on to sustain their leverage model, law firms will see their yearly revenues steadily decrease and profitability become more and more at risk. With falling profits comes lower profits per partner and ultimately, defections and economic instability. Firms will have no choice but to change their model and adapt one that meets clients’ needs to prevent them from using other legal providers.
- Boutique or specialized firms whose revenues are protected by charging a premium for cutting edge, complex, bet the company work.
- The rest of the AMLaw100 who will either be forced to merge, be acquired by other firms or who will collapse as a result of partner defections caused by year over year falling revenues and decreased profits.
This segmentation will have effects in
not just firm structures, but also how they operate:
Practice: The first tier will need to maintain and even grow the breadth and depth of their practices in order to stave off competition for business from tiers 2 and 3. The second tier, with the addition of the LPO component, will need to evaluate the profitability of their practices and eliminate those with lower profits in order to offset the cost of operating the LPO component and revenues lost to the 1st tier and stand-alone LPOs and other third party vendors. The third tier will need to maintain their excellence in their boutique areas, which will entail lateral hiring and possible increased partner salaries/guarantees to obtain and maintain top talent.
Technology: All three tiers will need to ensure that they are taking full advantage of the technological advances, including e-billing, e-discovery, pricing software, and other key technologies that increase efficiencies and lower costs to the client. This may include partnering with a third party vendor or establishing greater infrastructure in their in-house IT departments.
Business Development/Marketing: Firms in all three tiers will need to expand their marketing and business development departments to account for the greater competition in the market, alternative pricing needs and new requirements from clients. Some may employ sales professionals to effectively sell services to potential clients to eliminate the lost revenue dollars of having partners with high billing rates making these pitches.
Recruiting: With the segmentation of the market, firms in the three tiers will need to focus their recruiting strategy on specific practices, honing in on the value of each individual attorney candidate at both the entry level and lateral levels. Firms in the first tier may still maintain their broad spectrum hiring, while firms in the second and third tiers may need to eradicate their wide net recruiting and develop a more tactical approach. It may include only entry level hiring for certain practices, while others only require experienced hires, or only looking at candidates with specialty training, or having two tiers of recruiting for the traditional law firm division and the LPO division.
Finance/Accounting: Firms in the second tier may structure the LPO division as a separate legal entity with its own P&L, revenues and compensation system to delineate the difference between the services provided by the LPO and the traditional law firm practice. Firms in all three tiers will need to develop further and better utilize big data such as key performance indicators, matter cost evaluation, profitability analysis and other key metrics.
The market has already become a buyers’ market which will continue as clients look for lower cost and efficient legal solutions. However, once the legal industry alters its business model to operate as efficiently as possible as a result of this pressure from clients, companies may be able to handle their legal work at a lower cost by using outside counsel rather than handling in-house due to inefficiencies, redundancies, outdated technologies, and inflated salaries. The market then may turn to back to a sellers’ market and the reconfigured law firms will once again be able to set their own rates and inflate the prices of their services until in-house counsel adapts their own internal legal department processes.
Practice: The first tier will need to maintain and even grow the breadth and depth of their practices in order to stave off competition for business from tiers 2 and 3. The second tier, with the addition of the LPO component, will need to evaluate the profitability of their practices and eliminate those with lower profits in order to offset the cost of operating the LPO component and revenues lost to the 1st tier and stand-alone LPOs and other third party vendors. The third tier will need to maintain their excellence in their boutique areas, which will entail lateral hiring and possible increased partner salaries/guarantees to obtain and maintain top talent.
Technology: All three tiers will need to ensure that they are taking full advantage of the technological advances, including e-billing, e-discovery, pricing software, and other key technologies that increase efficiencies and lower costs to the client. This may include partnering with a third party vendor or establishing greater infrastructure in their in-house IT departments.
Business Development/Marketing: Firms in all three tiers will need to expand their marketing and business development departments to account for the greater competition in the market, alternative pricing needs and new requirements from clients. Some may employ sales professionals to effectively sell services to potential clients to eliminate the lost revenue dollars of having partners with high billing rates making these pitches.
Recruiting: With the segmentation of the market, firms in the three tiers will need to focus their recruiting strategy on specific practices, honing in on the value of each individual attorney candidate at both the entry level and lateral levels. Firms in the first tier may still maintain their broad spectrum hiring, while firms in the second and third tiers may need to eradicate their wide net recruiting and develop a more tactical approach. It may include only entry level hiring for certain practices, while others only require experienced hires, or only looking at candidates with specialty training, or having two tiers of recruiting for the traditional law firm division and the LPO division.
Finance/Accounting: Firms in the second tier may structure the LPO division as a separate legal entity with its own P&L, revenues and compensation system to delineate the difference between the services provided by the LPO and the traditional law firm practice. Firms in all three tiers will need to develop further and better utilize big data such as key performance indicators, matter cost evaluation, profitability analysis and other key metrics.
The market has already become a buyers’ market which will continue as clients look for lower cost and efficient legal solutions. However, once the legal industry alters its business model to operate as efficiently as possible as a result of this pressure from clients, companies may be able to handle their legal work at a lower cost by using outside counsel rather than handling in-house due to inefficiencies, redundancies, outdated technologies, and inflated salaries. The market then may turn to back to a sellers’ market and the reconfigured law firms will once again be able to set their own rates and inflate the prices of their services until in-house counsel adapts their own internal legal department processes.
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