9 reasons for law firms to be optimistic

As the prophets of doom forecast the end of legal services as we know it, Neil Oakes questions their arguments and suggests there are many positives for well-run, innovative firms.

There has been no shortage of pessimistic predictions for the future of legal practice. Issues dominating the legal media include graduate oversupply and underemployment; digital disruption and increasing disintermediation; more price competition coupled with higher costs of delivery; and greater client empowerment and price sensitivity.

In addition to these perennial issues, firms are now living through significant changing generational demographics among the partner-director base. Some firms have three generations within their partnership and the millennials are on their way! The baby boomers, gen X, gen Y and potential millennials all have differing views around collective endeavour and entitlement. While all of these issues and challenges are real, there remains cause for optimism, certainly in Australasia.

FMRC data indicates that many firms are growing, increasing revenue and profit, and retaining excellent clients and enthusiastic, capable talent. Having served the profession since 1989, I have seen significant change, but change rarely manifests itself in the degrees of profundity championed by many ‘black hat’ commentators. Change in the legal services market has been a constant, sedimentary process, never a cathartic baby-bathwater-footpath scenario. There are plenty of opportunities for progressive firms. Here are some reasons for optimism.

1. The ‘disrupters’ do not seem to be disrupting that much

There has always been space in the Australasian market for firms of all shapes and sizes. In recent years, we have seen a number of alternative models emerge. What we have not seen is a rush of clients away from existing firms to the providers of NewLaw. Nor have we seen market incursion by non-lawyer providers or new entrants in significant numbers. The profession is, in fact, remarkably stable. Lawyers may be practising inside alternative structures or under international brands, but the number of practising certificates relative to the total legal market has been remarkably constant for many years.

2. An increase in shareholder class actions should prompt a swing in the insourcing-outsourcing cycle

When I started working with lawyers, 2 per cent of practising certificates in NSW were held by in-house lawyers; it is now about 32 per cent. This has been a significant structural change. The insourcing of legal work was thought to be a cyclical phenomenon; perhaps it still is. I suspect that company directors (and their insurers) may become increasingly risk averse as shareholder class action litigation increases. This may see significant work returning to the private profession as a matter of good governance and risk minimisation.

3. Pricing has stabilised (but watch the discounting)

I recently read an article reporting on a large survey of corporate lawyers which concluded that 70 per cent of respondents felt that they received ‘fair value’ from their current providers. This is good news. All of the segments surveyed by FMRC in Australasia reveal modest annual increases in price and have done so for the past three years. That said, all you have to do to get a discount is ask for it. I am seeing more firms investing significantly in improving the client experience, explaining and delivering value and building their brand through trust-based relationships, all the while maintaining pricing levels and providing clients with a choice of pricing methodology.

4. BigLaw firms have left the GFC behind; they are by and large succeeding, employing and innovating

Far from facing a predicted death, large Australasian firms are doing well. Some are dealing with ongoing challenges but most are increasing graduate intake, salaries and profit. In the main, partner and lawyer productivity is up and expenses are being contained – a good recipe for ongoing business success.

5. Mid-tier firms are stable as a market segment, although they are competing for talent and clients

I have studied this market segment for a long time. We have listened to advisers predicting the demise of the mid-sized firm for decades. The remarkable truth is how stable this segment has been, for decades. The size of the market, productivity measures, profitability measures and graduate intake are all remarkably stable. Within the segment, there is significant competition for clients and senior talent, but this is actually beneficial to the market as a whole. These firms are having to provide greater value, innovative solutions, better employment conditions and opportunities and more innovative profit-sharing approaches.

6. Small firms continue to do well, particularly those that collaborate

I have watched and measured groups such as LawAustralasia and Lawlink in New Zealand as they have developed over the years. I am utterly convinced of the merit in small firms collaborating to achieve success. Sharing resources and pooling buying of expertise, advice and services delivers an economy of scale that many small firms could only dream of. Outside such groups, many smaller firms are doing well. Commoditisation remains a constant challenge, but technology and international process outsourcing are returning profit margins to offerings that stopped being profitable some time ago.

7. The quality of the next generation of leaders and lawyers

Wow, have you interviewed any graduates recently? I do not know whether to be excited or terrified, but for my money the future of the profession is in good hands. These people are very impressive.

8. Economists and futurists seldom hit the bull’s eye

We have seen some bold predictions in the legal media in recent times, some predicting the end for lawyers. Who knows? One day we might all be digitised out of work, but I doubt it. Predicting booms and busts relies on a set of considered assumptions. Many get it wrong because they assume that markets behave ‘perfectly’, with informed consumers making rational purchasing decisions. The thing is, they do not. In fact, the very essence of consumer marketing is to get ill-informed purchasers to make irrational purchasing decisions. How can a $7000 handbag exist when it does exactly the same thing as a supermarket shopping bag? Markets do not behave perfectly and consumers do not usually buy the quickest, cheapest alternative, even if it is better.

There is little doubt that commoditised, repetitive tasks are being digitised out of the hands of lawyers. It is also likely that some people in some market segments will choose to purchase from those with whom they have developed relationships over many years. Whatever happens, it is highly unlikely to be all or nothing. Change has been and will continue to be sedimentary, layer upon layer. Change can be and should be managed; indeed, it is being managed right now. Good firms will continue to be good firms. The emerging digital economy presents opportunities that will enable many firms to thrive. I remain extremely optimistic.

9. Opportunities from the ‘block chain’

If you do not have a block-chain strategy (or if you do not know what it is) spend some time on YouTube discovering the potential. Long story short, this technology enables ‘smart contracts’; self-executing agreements held on a decentralised data base. While you can, in theory, participate in this new world without advisors or third-party providers, most businesses will not. These agreements will involve lawyers working with coders for all but the simplest agreements. Firms have a great opportunity to work with their clients to develop block-chain strategies and implement them. We will hear a lot more about this technology in the next few years.

So there you are. I am not saying that practice will not be challenging, but there are plenty of reasons for optimism. Innovative, technologically enabled, well-run firms have, in my view, plenty of upside.

Neil Oakes is the director of FMRC, which has provided research, training and management advice to law firms throughout Australasia for the past 30 years.

www.fmrc.com.au