New Kinds of Competition
Competition from nontraditional service provides a daunting challenge to the legal market. Those competitors are already taking business from law firms. The biggest bite being taken is by clients themselves, law firms are currently losing business to corporate law departments that are in-sourcing legal work, and this is a potential threat going forward. Clients may not be asking for change – but they are showing law firms that they can and will take alternative measures themselves to achieve greater efficiency and economy. In other words, if clients can’t buy it from law firms, they’ll build it themselves.
The second largest ‘non-traditional’ threat to law firm business is clients’ use of technology tools that reduce the need for lawyers and paralegals. A significant number of law firms are currently losing work to client technology solutions and others not yet affected, sees this as a potential threat to their firms’ business.
Alternative Legal Service Delivery Models: Lawyers no longer have a monopoly on the law. The legal marketplace is changing and clients are now seeking legal assistance from a growing number of non-lawyer professionals including paralegal technicians, legal document preparers, legal self-help sites, virtual assistants and offshore legal vendors. These new options are enabling the offer of legal services to citizens at a reduced rate while also enabling individuals to in certain circumstances address their own legal matters. With the continuous emergence of professional bodies in various areas of work and vocation, new legal delivery models will continue to emerge and gain momentum in the coming years.
In this regard, Non-law-firm providers of legal and quasi-legal services are taking business from law firms and law firms not yet affected also see those non-firm vendors as a potential competitive threat. Non-traditional law firms are having a significant impact on traditional law firm businesses. As law firms consider the competitive marketplace, they must beware of looking only at other law firms. The greatest market disruptors typically come from without, and there are a number of significant new market forces moving to disrupt the law firm status quo. For instance Companies Secretariat Services which is hitherto traditionally the preserve of legal Practitioners are now being provided by members of the Institute of Chartered Secretaries and Administrators, so likewise is the registration of companies and the filling of returns with CAC. The filing of tax returns with the FIRS and SBIRs and the management of tax matters is now being effectively done by Chartered Tax Practitioners who are CITN members. In the same vein, probate matters are now being handled by Estate Managers, Trust firms and Professional Registrars. Similarly, property management and perfection of title documents in land is now being handled by Surveyors and Estate Managers. Registration of trademarks and patents can now be done online by the clients themselves without the need for lawyers. All these point to the continuous shrinking marketplace available for legal practitioners to sell their products and services.
Internal Challenges
Perhaps the greatest legacy of the recession and its aftermath for the legal profession is overcapacity — too many lawyers and not enough work. Despite painful cuts made during the downturn, many firms are still grappling to right-size their workforces. In a substantial number of law firms, partners are not sufficiently busy. Thus overcapacity is diluting firm’s profitability.
Non-equity partners continue to present a particular dilemma for law firms. Although most firms have a non-owner partnership tier and see its potential value, in many law firms a non-equity tier has become a warehouse for underperforming lawyers as some firms have too many non-equity partners.
The planned (or unplanned) succession of founding and rain-making partners is a serious unresolved issue in many law firms. Despite the inevitable move toward retirement of this critical class of senior lawyers, very few firms have a formal succession planning process in place. The economic impact of this failure to plan for succession is imminent. In law firms, partners aged 60 or older control at least one half of total firm revenue. Without systematic planned transitions, that revenue, along with valuable relationships, skills and knowledge, will be walking out the door of many law firms in the next few years.
Drivers of Success
Despite a general uptick in financial results, there is clear divergence of performance in the legal market. Some law firms are doing a lot better than others. For some firms this may be due to an auspicious practice mix that meets current market needs or the geographic variables of local markets. However, there are strategic choices that are affecting law firm performance. Law firms that have changed their strategic approach to lawyer staffing, efficiency of legal service delivery and pricing are consistently more likely to see increases in gross revenue, revenue per lawyer (RPL) and profits per equity partner (PPEP) than those firms that have not embraced strategic change. The greatest impact comes from strategic changes to lawyer staffing. Pursuing strategies to improve the efficiency of legal service delivery will also deliver a substantial payoff. Changing pricing strategy has a lesser, but still significant, impact on economic performance metrics. In each case, the greatest performance differential is seen in Profits Per Equity Partner.
Performance of Large Firm
The a number of areas in which larger firms vary from the average of all law firms, with the variance increasing as firm size increases. Larger law firms tend to report larger challenges. They have a much bigger problem with overcapacity in their partner ranks (although at same time, they are more likely to have plans to grow even larger). Demand has been slower to return in larger firms overall. And larger firms are losing more business to non-traditional competitors than smaller firms. Larger firms offer larger fee discounts to their clients, and use more alternative fee arrangements.
Large firms are also getting more pressure from clients. In response they are doing more, both strategically and tactically, to change traditional pricing, staffing and service delivery models. They also report a higher level of decision-making authority conferred upon their leaders to drive change in their firms. When it comes to financial performance, as a group larger law firms consistently report better results for gross revenue, revenue per lawyer and profits per equity partner. Although there are many reasons why larger firms might outperform smaller firms, it’s noteworthy that large firms are doing more of those things identified as drivers of economic success. Although, there are also some areas where large law firm leaders, are closely aligned with leaders of smaller law firms.
Managing for the Future
Over the past few years, the transition in the performance of the demand for legal services and the legal market seem to have consistently declined in a manner that seem to have permanently altered the landscape for law firms. Those firms that have done more in the areas of pricing, staffing and efficiency are outperforming those that have done less. These are rational business responses to the trends before us. Even if demand for legal services were to return to the bullish era, firms will still have to hustle, be lean, be businesslike, and understand and deliver client service and value to outperform their peers. Firms that have begun change efforts will need to stay the course and avoid complacency. For the rest, it’s not too late to begin. But in the absence of serious strategic change, the gap between higher and lower performers can be expected to widen.
Clients must be the center of your strategy. Not changing more because “Clients aren’t asking for it” is a terrible mistake. Don’t wait for clients to ask — instead demonstrate to them that you understand what they want (or that you want to find out) and are willing to do what it takes to deliver. Do the work to define your firm’s legitimate, meaningful, differentiating advantages and communicate them.
Overcapacity and under-productivity are real problems diluting profitability and compromising too many law firms’ long-term health. Stop pushing the problem onto your business development professionals — they can’t solve it for you. Adopt an ‘up or out’ policy for non-equity partners. Stop hiring associates without critical analysis of future needs. Rethink your firm’s five-year staffing profile. Candidly assess your legal personnel and invest exclusively in high-quality people delivering outstanding performance.
Effectively planning the retirement of Founding Rain-making partners is critical and must be resolved timeously. The timing is not flexible, and if unaddressed the cost in lost revenue and client relationships could be devastating. Quantify and personalize the situation in your firm without delay. Establish each senior partner’s intentions and timeline, address compensation issues and create a formal framework to achieve the smooth transition of clients and knowledge.
There is a dawning recognition of the power of ‘smart’ technology to do work that paralegals and lawyers traditionally have performed. This will present a mortal threat to some practices, but the impact of new technology is woefully misunderstood by most law firm partners. Systematically assess and plan for the impact of changing technology on each of your practices over the long term. Learn which technology trends your clients care about and find ways to get ahead of the curve.
Use your next retreat to focus on long-term competitive advantage, not next year’s profitability. Adaptation plans should be bold and transformative, although they will be underpinned by more incremental, short-term activities. Disrupt from within before you are overtaken by external disruptors.
The Obligations of Leadership
In an organization of highly intelligent, independent and skeptical lawyers, leadership is a particular challenge. And in a partnership organization the authority to lead must be granted by your partners; it cannot be commanded. Altogether law firm leadership is a tough job. But those who take the path of least resistance or settle for the lowest common denominator of agreement are no more than caretakers; they are not leaders. That might have been a viable alternative in strong economic years, but in the current market it reflects a failure to address threats and to seize opportunities at this pivot point for the legal profession.
Recommendations:
Deal with Overcapacity: In Practice areas where a firm will continue to have more lawyers than the available work, and will eventually have to downsize, it is better to do it now. Lowering individuals’ salaries and allowances does not address the long term problem. Employing too many chronic underperformers creates a number of avoidable consequences, including a drain on profitability, blocking up-comers, dampening of the morale of diligent and hard working employees. It therefore calls for efficient management of lawyers’ headcount in the employment of the firm more assertively by strictly matching supply to demand.
Competent Leadership of the Firm: The Head of Chambers or the Managing Partners in Law Firms must be individuals who are sensitive to and understand the direction of the market, and who are willing to work with partners, associates and clients to plan and execute market-friendly solutions in the areas of pricing, staffing, efficiency, e.t.c. The competent candidate for the headship of a law firm need not be the biggest rain-maker or the most senior partner, so long as he/she possesses the requisite courage and business acumen to drive the firm aright, while inspiring and influencing other partners and associates to be better in terms of efficiency and performance.
Visit your Clients: There is no automatic formula that will satisfy every client. Each client has his/ its own circumstances, personalities, motivations, wants, and needs; but do not wait for your clients to tell you what they are looking for- go and find out. Ask about their goals, decision processes, how they select and evaluate outside counsel, what they are getting from other law firms that they like, and what they would love to see from their lawyers if they could get it. Use communication, empathy, and service excellence to differentiate your firm by deeply understanding your clients. This can be extra-ordinarily useful, and can be done by small firms as well as large ones, and doesn’t cost anything.
Ask Partners to Think through Issues: Retreats provide an excellent forum for partners in a firm to meet in small groups and devise firm – or practice-level strategies that are responsive to client needs and likely to generate competitive advantages in the near term. The slow pace of change in the legal profession translates into continued opportunities to get out in front of your competitors. Structured exercises in which Partners analyze threats and opportunities and develop rational action plans will stimulate good thinking and help overcome resistance.
Work with Partners who will work with you: You may not be able to get every partner to agree to create process maps for repetitive matters, shake up staffing models to increase efficiency, and re-price the work, but some will. Rather than pushing against a large immovable partnership group, choose instead to create well-defined, low risk, short-term projects led by wiling colleagues. Share your successes and enlist others to participate.
Mergers, Restructuring & Re-alignment of smaller firms: A merger offers obvious cost saving and cross-selling potentials. Mergers are also important for practice expansion, tapping new markets and going global. In order therefore to obtain marginal benefits in the reduction of running cost and staff maintenance, and maximize gain or profits, smaller firms may consider the option of going into mergers to form medium, large or super-large firms wherein the proprietors of each constituent small firm in the merger becomes a partner in the new firm structure. This also provides the benefit of access to a wide and a variety of strategic areas in the market via the aggregation of clientele base of the partners into a single pool for optimal utilization and synergy for the ultimate benefit of all partners.
The goal of reducing running costs for sole practitioners or smaller firms may also be achieved by forming Associate-ships wherein the Associates maintain a common office space, contribute in equal shares to the running costs for rent, utility bills, and payment of support staff salaries ( i.e clerks, or secretary) where any, while each associate maintains his clientele and run his own business separately. In this regard, there is no pulling together of clientele base, each associate makes and keep his own profit or loss as the case may be, the only common obligation is in contribution to the running of the office space and matters ancillary thereto.
Legal Process Outsourcing: In recent years, the legal industry has experienced a global paradigm shift in the delivery model for legal services. This new model, known as legal process outsourcing (LPO), transfers the work of attorneys, paralegals and other legal professionals to external vendors located domestically and overseas. Legal outsourcing, both onshore and offshore, is transforming law practice as law firms and corporate legal departments seek to minimize costs, increase flexibility and expand their in-house capabilities.
Need for Specialization: While it is observed that most legal practitioners in Nigeria are general practitioners, it is imperative for individual practitioners to start specializing in an area of practice where they have comparative advantage and innate competence and experience. This is because with specialization comes less competition, greater competence, skills and capacity to deliver. This will place a practitioner in a specialized field at a vantage position as opposed to general practitioners who only delve into such fields once in a while. It is better to be a known authority in a specialized field of practice than remaining anonymous in all fields of practice as a general practitioner. More so, a general practitioner may not compete well with the specialists in the various areas of practice, thus it is better to specialize in one. “A Jack of all trade is a master of none”
Trans-National Partnerships: The new global trend in legal practice is that domestic law firms are expanding across frontiers of national borders, collaborating with foreign firms and forming intercontinental mergers, erasing traditional boundaries on the geographic scope of law practice. Although globalization is not new, it is gaining momentum due to the growth of the Internet, the automation of legal processes, developments in data security and emerging technology tools. As law firms continue to expand their footprint worldwide, globalization will continue to reshape the landscape of the legal industry in the coming years. Thus international alliance with law firms in other jurisdictions with advanced technological tools for legal practice will place a local firm in Nigeria at a vantage position to be at the fore front of compliance and acclimatization to global changing trends reshaping the landscape of legal practice.
Virtual Law Firms: In order to minimize or eliminate the burdensome running cost of maintaining a practice, powerful mobile devices, software-as-a service and secure web-based technology coupled with availability of e-library and e-law report allow legal professionals to work from virtually anywhere. As a result, more legal professionals are working remotely from home or a virtual law office. Virtual law offices provide an alternative method of practicing law that permits flexible work hours and foster a better work/life balance for legal professionals. Virtual work is not just for lawyers – a growing number of legal professionals are working remotely. Working virtually allows legal professionals to serve their employers and clients while maintaining a better work/life balance and modifying their schedule to fit personal and family needs.
Conclusion
From the issues discussed in this paper, it is evident that the legal profession is changing, as the nature of legal services required alters, there is a correlation between those firms that are doing more to address those changes and those that are enjoying greater economic success. This is not about business development or ‘making your numbers.’ It is about changing the way work is done and priced. It is about rethinking client relationships and service delivery. Opportunities clearly exist to differentiate your firm, move past competitors and strengthen the foundation of your law firm. Some firms have accomplished this already. But it doesn’t happen without committed leadership. Reimagining the practice of law is unlikely to be on the to-do list of busy practitioners. It’s the leader’s job to put it there and inspire a sense of urgency.
Founding Partners, Managing Partners and Head of Chambers must become more forward-looking and get every lawyer in the firm to shapen up with strategic anticipatory reorganization and the acquisition of core competence and specialization in areas of law and practice that will be relevant to the changing nature of legal services that the market will require, this may be rightly aided where there is a proper understanding of the impact of changing trends already in motion. In this regard a soul searching question to ask is this “What would legal practice in Nigeria look like in eight to ten years from now if the forces of decline in demand, excess in supply, commoditization and technological change continue to progress at an increasing pace without a corresponding strategic reform or change in the nature of or ways legal services are provided” ?
Olagoke Odubunmi LL.M, BL. Legal Practitioner and Tax Research Officer at Maples & Temples, Lagos.
Part I here
Part II here
Part III here
Part IV here
Part V here
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