Competing in a buyers’ market – three strategies for law firms
Despite in-house legal teams playing hard ball with external law firms regarding the provision of legal services, there are effective strategies that firms can use to improve their chances of winning profitable work, writes Eric Chin.
“An industry begins with the customer and his or her needs, not with a patent, raw material or a selling skill.” – Theodore Levitt
The legal industry, like any functioning market, is made up of buyers and sellers of legal services.
In recent years, Australia’s $23 billion and New Zealand’s $3 billion legal sectors have witnessed the globalisation of legal service providers and the rise of NewLaw firms (where labour arbitrage is at the centre of the business model) and LegalTech firms (where technology arbitrage is at the centre of the business model). In a buyers’ market, we have also seen increasing client sophistication in the distribution of their legal wallet, the expansion of in-house legal teams and an increase in the professionalisation of the procurement processes for legal services.
The insights from this article are derived from the 2017 Benchmarks and Leading Practices Report that was recently launched by the Association of Corporate Counsel (ACC) Australia. The study collates insights from 222 ACC Australia members, 85 In-house Lawyers Association of New Zealand members and interviews with 13 general counsel.
In 2017, 60 per cent of Australian and New Zealand in-house lawyers reported pressure to reduce legal costs, while one quarter reported pressure to minimise cost increases. For legal service providers, some of the burden of this cost pressure was felt through an increased request for discounts and alternative fee arrangements. In fact, 31 per cent of Australian and New Zealand corporate counsel consider hourly billing to be not very appropriate, an increase from 22 per cent in 2015 and 12 per cent in 2012. The report also revealed that 42 per cent of corporate legal departments have alternative fee arrangements in place, an increase from 34 per cent in 2015 and 28 per cent in 2012.
As highlighted in Figure 1, it is not all bad news for legal service providers; Australian and New Zealand corporate legal departments have seen their legal expenditure increase from $3.16 million in 2008 to $4.30 million in 2017. A breakdown of this increase reveals that external legal expenditure has outstripped internal legal expenditure since 2012. The sources of this are an increasingly complex regulatory environment and the tightening of regulation in a post-GFC world.
Using the findings from the benchmarks report, we can dissect the external legal expenditure, the internal legal expenditure and the buyer funnel to suggest strategies for law firms in a buyers’ market.
1. Ecosystem approach to legal services
As recently as the early 2000s, when a company had a legal need, it essentially had two options: first, to turn to its in-house legal department, or second, to engage law firms. Today, however, that same organisation has a plethora of legal service providers from which to choose. Figure 2 breaks down this redistribution of legal expenditure as general counsel turn to NewLaw firms, LegalTech firms and directly to barristers.
While law firms still dominate with 86 per cent market share of the legal pie, general counsel are slowly turning to alternative providers as the ecosystem of potential solutions grows. As outlined in the NewLaw tipping point paper last year, an ecosystem approach to legal services would require law firms to:
(i) Incubate NewLaw Skunkworks*
This will enable firms to resource on matters based on clients’ budgetary needs and at the same time compete against the growing battalion of NewLaw firms.
(ii) Embrace co-opetition with NewLaw firms
Through joint ventures and alliances and partnerships with NewLaw or LegalTech firms, law firms can protect their market share and remain relevant to clients’ needs.
(iii) Diversify their value proposition
There is an opportunity for law firms to diversify beyond legal solutions into other arenas like the Big Four accounting firms have successfully done.
2. Differentiate, differentiate and differentiate
In 1979, business strategist Michael Porter wrote that companies should focus strategy on cost or differentiation. The blurring of the strategic groups (including global firms and those with external shareholding) in Australia and New Zealand’s legal industries can be traced back to upstart (or mid-market) firms’ differentiated focus on particular expertise or industry sectors.
Figure 3 outlines the buying funnel for corporate legal departments, including determination of a need, drivers of choice and, finally, drivers of satisfaction. It highlights that the classical strategy arsenal of expertise, brand and service remains as relevant today as before.
In each of the stages of the buying funnel, firms must emphasise their differentiated approach in order to win and keep clients:
(i) Differentiate on expertise to win clients
As outlined in the chart above, four out of five corporate legal departments turn to law firms when external expertise is required. For firms, this means focusing on building their profile in particular practices and/or industries. The risk of pursuing growth for growth’s sake is that by trying to be everything to everyone, a firm may end up becoming nothing to anyone.
(ii) Differentiate on value to retain clients
The study reveals that commercially applicable advice is a strong driver of satisfaction. Corporate legal departments turn to legal service providers to help them attain commercial outcomes through legal advice. For lawyers, this means understanding, communicating and reorientating advice to that commercial outcome.
(iii) Differentiate on service to retain clients
In a service-intensive environment, corporate legal departments place significant value on the level of service received, whether it is through a demonstration of empathy towards the in-house counsel’s role (91 per cent) or the organisation and its goals (89 per cent). Law firm consultant David Maister’s chapter on A Service Quality Program highlights that while firms emphasise the importance of technical excellence, few truly focus on delivering the client service excellence they espouse in mission statements and strategy documents.
3. Paradigm shift from legal to business solutions
General counsel today have inherited operating and sourcing models that are high touch with a curative approach to legal issues. In recent years, there has also been a shift from curative to preventative treatment of legal issues. This means investments are required to improve workflow, technology and legal training.
Figure 4 is a breakdown of internal expenditure among Australian and New Zealand corporate legal departments. As the study reveals, 88 per cent of the internal legal budget has been committed to staff costs, leaving very little for legal training (6 per cent), technological improvement investments (4 per cent) and workflow initiatives (3 per cent). Law firms can capitalise on this need by partnering with existing providers to better service corporate legal departments’ needs.
In a buyers’ market, the biggest risk for law firms is to be subjected to price competition as NewLaw firms and LegalTech firms slowly grow their slice of the legal pie. While the legal purse has increased significantly in the past decade in Australia and New Zealand, this rise is due largely to the increasingly complex and highly regulated legal environment instead of growing legal budgets. Law firms need to rethink strategies for growth to help corporate legal departments better serve their internal constituents and be at the forefront of the paradigm shift from curative to preventative treatment of legal issues.
As Theodore Levitt, of Harvard Business School reminds us: “People don’t want quarter-inch drills. They want quarter-inch holes.”
Eric Chin is a co-author of the 2017 Benchmarks and Leading Practices Report. He works with senior management in law firms on corporate strategy, mergers and acquisitions, market entry strategy, Asia strategy and business model innovation across Australia, New Zealand, Hong Kong, Singapore, the US and other major markets in the Asia-Pacific region. You can connect with him through LinkedIn or Twitter.
* A skunkworks project is one that is developed by a small group of people, primarily for the sake of radical innovation.