Q&A: Marcus McCarthy – "I wanted to deliver a new practice system that's better for lawyers generally"

In this Q&A, Nexus Law Group principal Marcus McCarthy discusses his innovative law firm model, the benefits of innovation and why there is no need for doom and gloom in the legal services market.

In the past few years, the Nexus model has allowed sole practitioners to benefit from the collegial support of a network of other senior lawyers in a practice system that provides administrative back-up. What are you doing differently?

“It’s the ethos and structure behind the business, which is a system that puts lawyers first and connects independent skill properly under one delivery platform. Many asserting that moniker of NewLaw* are actually just traditionally structured firms organised virtually with a particular pricing strategy, or perhaps selling documents online, but very few businesses in this space are actually engaged in a restructure of the law firm itself. It is very easy to set up umbrella networks or online lawyer directories, in which the lawyers are disconnected from each other. It is very hard to join them all together into one practice system to create a unified practice that can compete with the service delivery of traditional firms. In this regard we are doing something quite unique in Australia, but not without precedent overseas. We have perhaps advanced the dispersed practice system itself, which we now call OpenLaw. Our practice model represents a viable and serious third practice option in the market that did not previously exist here – embedded sole practice, for want of a better term.”

Do you see yourself as a disruptor?

“Yes, but I see us as a positive innovator, not a ‘disruptor’ (in the negative sense of the word). Our model is very beneficial to both lawyers and clients. Not all disruption at the moment is positive or produces good outcomes. I feel there is a lot of confusing misrepresentation of NewLaw. Even some of the expert commentators seem to focus on technological innovation as the sum total of NewLaw and that is a serious mistake. I feel this is creating fear and insular behaviour, rather than helping the profession move to a better equilibrium for lawyers. There are very interesting structural possibilities that are now possible with technology and the problem mostly is over-regulation of our industry and fear of change.”

Tell us more about your model.

“I wanted to deliver a system that’s better for lawyers generally, putting them at the front of the business and engaging them in their own career development and earning potential. It’s a system that directly rewards their efforts and intellectual capital. Ours is a low overhead, direct-access model, so it’s also much better for clients because it connects them with the most experienced person who is relevant for the job at rates much less than what these lawyers used to charge at their former firms, while the lawyers themselves still get a greater income return. It directly incentivises referrals to other senior specialists in the system to encourage team-based work.

We are actually a hybrid model. In the middle of it all is an Incorporated Legal Practice that is very traditionally structured and run. It’s the base the network needs to function properly. We chose to include an ILP in the structure so we could build the most cohesive and professional network model possible, and in order to be fully regulatory compliant and give all our members a single trust account and insurance. Unlike, say, an Orbit or Lexvoco, who are attached to BigLaw firms, we have inverted that typical firm structure and made the consultant network itself the operating basis for the entire firm. We are considering licensing the OpenLaw system to other firms, which has the potential to significantly shift the industry to this style of practice.”

 Your OpenLaw practice management system is based on heavily customised cloud systems and joins together a collective of senior legal experts under a single platform. How does it work?

“Our systems mean that anyone in Australia can work together under an open and fixed reward system according to inputs. There are no budgets or fee restrictions, but you only get out what you put in. It is best for independent types who want practice freedom but still understand the power of large firm infrastructure, branding and collective resources. The system itself is based on a highly customised version of an established cloud-based legal practice management software. Our global remuneration systems sit outside of that and together these two things make up the basis of OpenLaw. Importantly, this was one of the only systems that would allow us to fully silo information down to individual practices within the broader whole. Because it is all in the cloud, we have a base management system that is universally accessible and borderless.”

What implications does your model have for the rest of the legal services market?

“There’s only a small percentage of lawyers and practice areas that fit the ‘connected consultant’ model. It’s probably around 10 per cent to 15 per cent of the market, at best. Traditionally structured firms will always be there because they service a portion of the market very well. Many sole practitioners do not fit our structure. I don’t think Nexus’s particular structure will disrupt the industry. We are just another practice option for lawyers in the mix, servicing the same clients as traditionally structured firms and there is a place for all of us. Some lawyers need a traditional structure around them, others don’t. I do believe more lawyers over time will start to understand that you don’t need a traditional structure around you to practice law effectively, and profitably, as long as you have a good base to do it from.”

 Nexus has recently picked up the national Boutique Law Firm of the Year at the Australian Law Awards. The approach seems to be working.

“It was a big surprise actually. We have flown under the radar for a while, with other NewLaw businesses getting a lot more press attention in the market than us, at least initially. But I think the judges understood that we were doing something quite different structurally from even the other NewLaw outfits in that category and punching above our weight compared to the traditional, much larger firms also in that category. I think there may have also been a recognition of the potential our structure brings for a positive impact on the professional lives and careers of lawyers, in a profession plagued by high rates of depression and attrition.”

What are your lawyers saying about the system?

“They love it. It’s the most beneficial and fair remuneration system in the market right now, so they don’t have a lot to complain about. The referral systems are working very well. People naturally come together with complementary specialities, so they refer to each other and work together a bit more closely. They are quite happy to just go out and practice law without having to think about the hassle out of running a legal business and managing their back-office requirements. The remuneration systems are totally automated, so they have the confidence that whatever they do or refer is fully captured and paid accordingly.”

Let’s discuss those remuneration systems. Your lawyers have no billable targets and receive 75 per cent of what they bill from their own clients, or 65 per cent if the work is through a referral, and 15 per cent of the gross fee for introducing work into the system.

“That’s right. If you line it up against a traditional firm where you have a metric of say a third for overheads, a third for wages and a third for profit, and that’s being generous, that 30 per cent wage component is indexed at 75 per cent and the 15 per cent of gross for introductions is the same as 50 per cent of net profit in the one-third scenario, so it is in effect like everyone being in a 50 per cent partnership with everyone else without actually having to be in a partnership structure. The beauty of this is that it creates a natural incentive for people to refer matters to each other, without any of the competitive tension you get in disconnected agency networks or between practice groups of a traditional firm. Interestingly, although I never envisioned this when we started, that 15 per cent acts as a great tail for lawyers near the end of their career if they would like to scale back but still get the benefit of their client relationships.”

So one of your key messages is that disruption can be a good thing for the market. Is that correct?

“Absolutely. I believe you are not really innovating anything unless you’re doing something positive for both lawyers and clients. Ultimately, disruption to me means doing something positive for the profession as whole and preferably benefiting clients while you are doing it, not engaging in a race to the bottom. We can all use and benefit from the technology that facilitates process-driven work, however, whenever the issues get even slightly complex, there is simply no substitute for senior experience and human interaction, and I don’t believe that will ever change, no matter how advanced technology gets. This is where I differ from the Beatons and the Susskinds of the world. I believe the future of this particular profession is very sound, but the business of law itself is under extreme pressure on all fronts and it is time for structural and regulatory reform to facilitate better practising conditions for lawyers.”

After all the publicity around the entry of multinational firms into Australia, do you feel there has been a rebalancing of the market back to boutiques?

“Not yet. There’s certainly a market drift to sole practice and boutique firms. There is a recognition that boutiques can deliver top-level outcomes now, but I lament the fact that a lot of the discussion in the legal industry is still focused on the top-tier firms. It’s actually such a small portion of the industry and skews the perception away from the reality of law, which is that the top tier does not actually have a monopoly on talent at all. The rise of the multinationals really delivers nothing extra in terms of skill, so I personally find that aspect totally uninteresting.”

You now have more than 20 lawyers in your system since the relaunch of the brand two years ago. How is your growth going?

“It’s a slow, steady build as opposed to an avalanche. Lawyers are very conservative, even though this is a highly beneficial system for them. I think fear and uncertainty around NewLaw is actually working against us but not for much longer.”

You clearly have an innovative streak. From where did that come?

“I have always just been interested in how things work and how to make them work better. My friends often describe me as an ‘ideas man’ but I’m not sure they’re being complimentary. I did a business degree and worked in business administration and marketing for six years before doing a law degree. So I came into law observing the business and process of law. Even though I really enjoy being a lawyer, observationally I was always looking at it from a different perspective, at an industry level. It was obvious to me that partners were constantly coming and going and lawyers were not happy with oppressive hourly budgets. Lawyering can be highly competitive and difficult in the traditional structure and this is a recognised industry problem. I wanted to build a structure that would directly address these problems and improve the process of law.”

Finally, how do you see 2016 panning out?

“I’m very positive about the future of the legal industry, but I think 2016 will continue to be flat with resources prices down and the economy looking for a positive transition. I am more concerned with the rise of in-house counsel and non-lawyers delivering legal services than anything else. Our regulators seem to be asleep at the wheel on that one. It is these factors putting pressure on traditional firms and I feel that pressure too. I think those trends will continue throughout 2016 and beyond. Doom and gloom about the industry is driven by unfounded fear of change and achieves nothing. A focus on the positive innovations in the industry is needed and, if the industry supports change, it will ultimately benefit.”

www.nexuslawyers.com.au

* NewLaw refers to the rise of firms that can be substitutes for traditional firms and which typically take a significantly different approach to the creation or provision of legal services than was the norm in the past.