Managing and Growing a Law Firm: Part 2 of 3Yarman J. Vachha
In this series of three articles, I highlight the legal scene in Asia, the changes to the legal industry, and the different resources available to law firms for expansion. In my first article, I shared my thoughts about managing and growing a law firm. In Part 2 of this series, I share thoughts on the global legal industry and its challenges.
At a micro level, the estimated USD600 billion global legal industry is very much in transition, with many different disruptors entering the legal markets.
Major Challenges Faced by Law Firms
In my view, the biggest challenge to the profession comes from disruptors offering quality alternative legal services, such as contract lawyers, at a reduced cost. To counter this, firms like Allen & Overy have set up alternative businesses such as Peerpoint, offering similar services to compete with these disruptors. There is also much evidence of this type of defensive strategy being adopted by other global firms to counter the threat of disruptors. To drive down costs and still provide quality services, some of the larger global firms are also moving some of their process-driven commoditised products to centres of excellence. Examples of firms taking this approach include Allen & Overy, Baker McKenzie and Herbert Smith Freehills, with significant paralegal bases in Belfast.
#2 Big Four accounting firms
The Big Four accounting firms also pose a major threat. Their core strategy is to complement their compliance and transactional businesses with a quality legal function. This multi-disciplinary offering creates a “one-stop shop” which is very attractive to clients. History tells us that when accountants attempted this strategy in the late 1990s, it failed. In my view, the reasons for that failure were that they were not fully committed to the strategy, and the world was less connected 20 years ago. I do believe that there is much more resolve now, and the accounting firms have much deeper pockets than they did in the 1990s. Furthermore, today – unlike the 1990s – we live in a global marketplace. With that said, I do not believe that the accountants’ core strategy in entering the legal space is to directly compete against quality global law firms. At least not yet! This initiative is being taken more to complement the existing core businesses of accountants, such as compliance (audit, tax, etc.) and transactional work (mergers and acquisitions, consulting tax structuring, etc.).
Banks and corporations are also repositioning themselves by creating sizeable in-house legal departments which focus on providing commoditised services internally at a lower cost. These services are the staple of many small- and medium-sized law firms, which are being slowly eroded. To put this threat in context, an internal legal department of 50 or 100 lawyers is, in effect, a medium-sized law firm.
While there are challenges, there are also opportunities. In a similar fashion to what the accounting industry went through in the 1980s, if and when regulations are relaxed over the next five to ten years I see more consolidation of law firms, more alliances, and continued global expansion – particularly into emerging markets, such as ASEAN, Africa, Latin America, and India. The traditional markets of USA, Europe, China, Japan will remain strong; however, I am of the view that these markets are over-lawyered and oversaturated and the competition for quality work and talent is fierce. Firms need to look at new markets to grow revenues. The one note of caution: Firms looking at a foray into emerging markets will require patience and deep pockets initially, as an acceptable return on investment from these markets will take time.
From a micro perspective, small and medium firms will have a part to play. Some firms may be experiencing a dip in revenues and profits, as much of the “commoditised” work that previously flowed to them from global firms or which clients found too expensive for large firms to discharge is now being captured by the disruptors in the industry – i.e., the alternative legal-services providers and, to an extent, in-house legal departments. The one sweet spot for firms in Asia and particularly south-east Asia would be to consider expansion into ASEAN markets and alliances with firms looking to enter these markets from the U.S., Europe and Australia. As a general rule, global firms are not as nimble and not always geared towards emerging markets; hence local firms are attractive to global firms looking to enter the ASEAN market.
Closing Thoughts on Countering The Challenges
It is my belief that many firms are still living in the past. They need to focus on the present and plan for the future. To survive and grow, these firms need to take a step back and take stock. In this fast-developing alternative-market environment, doing nothing is not an option, as profitability and even possibly survival is on the line for many firms. The first step is to perform a deep-dive review into their core businesses and determine if service lines are still profitable and if there still exists a decent pipeline of work. They should then strategically review what can be done internally and externally to capture more of the market, and consider an off-shore emerging markets strategy and / or a merger or alignment strategy with firms locally or internationally that is complementary to their core business.
The key to operating in today’s legal environment is to ensure a quality, value-based offering at all times, being nimble and innovative, and making an appropriate investment in experienced professionals to advise on, facilitate and drive this strategy.
Managing and Growing a Law Firm: Part 1 of 3Yarman J. Vachha
In this series of three articles I highlight the legal scene in Asia, the changes to the legal industry, and the different resources available to law firms for expansion.
Being a lawyer and managing a law firm are two different spectra and require different sets of skills. Some 85% of law firms in Asia are actually not the big law-firm names that you might know, but are smaller law firms with fewer than five lawyers.
All law firms are in different stages of development and sophistication, which results in differing requirements and pressures. However, the common issues for all of them tend to be: tight or declining profitability due to stagnant revenues and increasing costs; increasing competition for work and talent; disruptors coming into the legal market; and fee pressures from clients.
In my experience, many law firms – including some large firms – are not efficiently managed, and are not maximising their full potential.
The Importance of Business Professionals within a Law Firm
One of the main reasons law firms fail to optimise their potential is that they see their support functions as a “cost” rather than as an “investment”. Many firms still refer to the back office as “support,” as they have a closed mindset and do not recognise those who fulfil these functions as business professionals in their own right.
If these business professionals are properly selected and invested in, they will bring much value to the firm. As a tongue-in-cheek analogy, would you trust a lawyer to perform heart surgery on you? Highly unlikely! So why is it a good use of a partner’s time to run the finance, human resources or information technology aspects of a legal business? The chances are that this partner does not have the expertise to do so. The key point is that in a very competitive environment, it is important to have skilled professionals to provide advice on operational strategy, and expertise in running the business.
Over the last two decades or so, firms that have recognised the need for professionals to advise and assist in running their businesses have, by and large, excelled, and they generally play in more sophisticated markets. This does not mean that the partners (who are owners of the business) relinquish power or control – the key is to leverage off the expertise of the business professionals to enable firms to maximise the potential of their business.
Where to Start?
I firmly believe that there is a gap in the market, particularly in Asia and India, for consultants to advise law firms (and professional-services firms) on all aspects of financial management, operational efficiency, pricing and pitching strategies, strategic planning, human resource policies, information technology rationalisation and improvement, remuneration structures, succession planning and mentoring of partners and staff.
I would however caution firms considering going down this route to choose wisely. Whilst there are many consultants out there, not many can boast having grassroots experience in the specific areas of focus of their clients. Engaging a consultant with the relevant background and hands-on experience will bring much value and can help firms professionalise their business operations. This will enable them to grow profitably, develop a strategy to sustain that profitability, and mitigate business and reputational risk. This is partly achieved through running a slick and well-managed business-services function, having a sound business-development strategy, educating the firm’s lawyers to think about the legal profession as a “business,” and establishing a sensible succession plan.
The Importance of Internal Grassroots Knowledge
I recently assisted a major global law firm with the integration of their North Asian and South East Asian business by creating one business with a single management, operating and remuneration structure.
This was a complex project as it required integration among multiple offices and jurisdictions, and created a single business with 2,000 staff. The biggest challenge initially was to bring the various parties to the table. Once an agreement was in place, we turned our attention to changing mindsets at all levels of the organisation, and mitigating the inevitable post-integration risks. This would not have been possible without my having had intimate knowledge of what makes a law firm “tick”.
Interestingly, the technical aspects of this internal integration were relatively straightforward compared with the human dynamics of accepting change. A tough job but very satisfying!
How Long Does It Take to See Results?
Based on my experience of the projects that I have worked on internally or externally as a consultant, success and the speed of this success are very dependent on the will of the management and the buy-in from the partners at large. There needs to be a mindset to change, and the key is a real focus on the end game. Once there is a general buy-in, the change and the results can be quite revolutionary.
The first hurdle firms need to address to achieve their goals is the need for an element of investment which, if made wisely, will mitigate future risks and improve the business considerably.