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In years past the legal profession was a highly competitive marketplace where image and reputation mean a great deal. However, there is no question that the worst recession for 80 years has had a major impact on the legal sector. General Counsel (GC) are under pressure to deliver more for less. Providers of legal services are being forced to set about changing their business to provide greater efficiency, better service and realistic pricing. Innovative use of technology and the possibility of moving work to lower cost centers are all part of an agenda to deliver more for less. As firms begin to recognize this, they must evolve in order to survive. "Strong strategic plans will provide guidelines and procedures for determining which of these opportunities to pursue and how to pursue them without engaging in extensive new discussions across the firm (Young & Overbeck, 2009)."
The traditional concept of relying upon attorney/client case-by-case representations is no longer a viable business model. Clients are now seeking, and in fact need, "business-to-business" relationships. What's the difference? For one, the traditional model is one-way: the attorney assists the client. Business to-business relationships are two-way: mutual assistance in achieving each other's goals and objectives. Moreover, these relationships require that both parties operate as businesses and employ sound business principles. While the practice of law is a profession, law firms are businesses and must operate as such. Clients desire these new "B to-B" relationships. Whether called "preferred provider" or "convergence" programs, the goals of clients are the same: to have a few substantial relationships that can be efficiently administered; prequalified in terms of expertise and personnel; and provide a high level of client service, consistent results, predictable costs and dependable protection of corporate assets. In return, the mutuality, the client provides a substantial, more predictable level of work; enables a more productive use of firm resources; enables greater ability to predict and control law firm costs; and creates an opportunity to increase firm profitability. Only a true "business-to-business" relationship can achieve these goals. While positioning the firm to address this challenge is not easy or without significant investment, it presents a major short and long-term opportunity.
Many small and medium-sized general law firms have shifted their focus away from traditional private client work and now offer a complete range of professional services. Some law firms are also beginning to realize that the profession's traditional hierarchy and management infrastructure can no longer support a profitable or practical service. Change is no longer a four-letter word, but an essential part of legal life. What impact will the Great Recession mean for the legal market now and into 2025? Will it bring about a new world order, or would the market revert to its pre-recession form in the future?
STATE OF THE LEGAL INDUSTRY
The legal industry has seen dramatic changes over the years. The Golden Age where growth and revenue grew exponentially are no longer. The economic downturn of late 2000's has taken its toll and Big Law is in a place where it needs to take a look at itself. The American Lawyer began tracking firm financials in 1984 and creating what is now referred to as the AmLaw 100. The Am Law 100 comprise the 100 the top-grossing law firms in the United States.
Since 2001, the growth in equity partners has been above the 21-year annual average of 3.2 percent only once, in 2003. From 2003 to 2008, average revenue per partner (RPL) increased by $205,000. Before that, it took the firms ten years, from 1992 to 2002, to improve that much. In that same time frame, profits per partner (PPP) jumped by $438,000, to an average of $1.3 million. It took the Am Law 100 firms 15 years, from 1987 to 2002, to make a similar gain.
In 2007, The Am Law 100 finished the best sustained growth spurt since 1984. For the first time, the firms showed five consecutive years of better-than-average growth in both revenue per lawyer, the key measure of law firm financial success, and profits per partner, the metric that has turned law firm managers into contortionists ("LESSONS OF THE AM LAW 100 2008," 2008).
"This Law Firm Golden Age was fueled by surging demand for high-end legal services and unrelenting annual rate hikes. Partners reaped the benefits of hard work-and of pulling up the ladder behind them. Stoking these gains has been a dramatic slowdown in the naming of new equity partners. ("LESSONS OF THE AM LAW 100 2008," 2008)"
Then, in 2008, for the first time since 1991, both average profits per partner and revenue per lawyer dipped among the Am Law 100 firms. The economic downturn started taking hold and that set the stage for record law firm layoffs and cost cutting. Overall gross revenue grew by 4.1 percent, to $67 billion, a new record. But head count grew faster, increasing by 5.4 percent, to 81,992 lawyers. As a result of that growth, plus a serious drop in demand during the second half of 2008 for high-end work--especially in the corporate and finance sectors PPP fell by 4.3 percent, to an average of $1.26 million, and RPL dropped 1.2 percent, to $818,000.
The downturn was widespread but not ubiquitous. On average it was felt most acutely among the firms that are classified as New York, national, and international. Firms in those three categories, which include 57 of The Am Law 100, suffered profit and RPL drops. By contrast, the 12 firms headquartered in Texas and Washington, D.C., when taken together, showed both revenue and profit gains. The rest of the firms were, on average, flat on revenue and down about 3 percent on profits (Press & O'Conner, 2009).
As of the end of 2008, The Am Law 100 was essentially still a bit ahead of where it was in fiscal year 2006, which, at the time, was hailed as yet another record year. But after 17 years of steady and sometimes spectacular growth, it's hard to find many big-firm lawyers who remember an industry-wide downturn. Since 1991, Am Law 100 firms have doubled in size and gross, while the profits of their partners have shot up by a dizzying 215 percent.
In 2009, the best that can be said for the performance of The Am Law 100 was it could have been worse. Three of the four key categories measured for 25 years--gross revenue, head count, and revenue per lawyer--fell, while PPP barely increased by 0.3 percent, or $3,463, to $1.26 million. Overall, gross revenue was off by 3.4 percent, and head count dropped by about 1 percent. The firms earned a total of $64.8 billion, down roughly $2.3 billion. And, in the first year-over-year reduction in head count since 1993, they cut their lawyer labor force by 1,219, to 80,772. For all the heated attention to layoffs, about half the firms actually increased their size last year. RPL, which we regard as the most telling economic indicator, was down $15,697, to $802,381, a 2 percent fall. This was the second consecutive year in which RPL fell, another sign of the toll of the weak economy (Press & O'Conner, 2009).
"The big story of 2009 in the legal market was the sharp drop in client demand that crystallized initially with the credit crisis in the third quarter of 2008 and continued through most of the past year. BTI reported that outside counsel spending dropped 10.8 percent in 2009.1. According to the Full Year 2009 Flash Report, an analysis of 193 US headquartered law firms by Citi Private Bank's Law Firm Group ("Citi"), 2 demand for the surveyed firms fell by 4.1 percent compared to 2008 - a stark contrast to each of the years in the 2001- 2007 period, when demand rose by some 4 percent per year. Reduced demand can also be seen in the HBR Peer Monitor figures for the year, as reflected in Chart 1 below. Overall, demand among HBR Peer Monitor firms, 3 fell by 5.1 percent during 2009. Generally speaking, AmLaw 100 firms were harder hit by this significant drop in demand than were firms in the AmLaw 2nd 100 ("The 2010 Client Advisory," 2010)."
A national survey, commissioned by LexisNexis, a first of its depth and breadth to be conducted on the legal industry since the start of the economic crisis yielded interesting results. Key findings included:
Of the 305 private practice attorneys surveyed, the following report actions by their firms since the start of the economic downturn in September 2008: 43% report reduction in workforce or layoffs; 33% report hiring freezes; 29% report deferred start dates for new hires; and 26% report reduction in employee salaries.
For 2010, 38% of the 305 private practice attorneys surveyed believe their firms will continue to lower costs by reducing workforce/conducting layoffs and deferring start dates for new hires. However, 45% of that same survey group does not expect any additional cost reducing actions in 2010.
55% of the 305 private practice attorneys surveyed report that if any hiring takes place, it will most likely be associate hiring.
71% of corporate counsel responded that law firms today are not doing enough to respond to the current financial pressures on their business model
Almost half of the in-house counsel polled (46%) say they have requested rate cuts since the start of the economic downturn, yet less than one in five (18%) private practice attorneys say their law firms have reduced billing rates
Only 38% of corporate counsel believe that law firms are being responsive on changing fees and costs given the current economic recession
69% of corporate counsel have shifted work in-house since the start of the economic downturn; 56% have reduced spend on outside counsel
Private practice attorneys say clients are too focused on costs, at the expense of quality and results
More than half of corporate counsel surveyed (58%) say they believe law firms are too profitable; however, most private practice attorneys (77%) believe their clients are too focused on reducing costs, at the expense of quality and long-term results
Opinions are split on the future of the legal industry
Only 53% of corporate counsel and 52% of private practice attorneys believe the recession will permanently change the way business is done in the legal industry
57% of corporate counsel believe the billable hour will give way to alternative billing arrangements
More than half of corporate counsel responded that they will shift work in-house (57%) and reduce the amount of their total spend on outside counsel (55%) in 2010
When asked what actions their law firm is most likely to take in 2010, the top two responses among private practice attorneys were: conduct layoffs (18%) and defer start dates for new hires (18%)
PORTERS 5 FORCES for the LEGAL INDUSTRY
Buyer Power - The rise of buyer power is driving many of the changes in the legal industry today but has been building over the last decade.Â Key changes include access to information, increased volume, price sensitivity, etc.
Threat of Substitutes - The prospect of substitutes was unheard of a few years ago but now we see competition coming from the potential impact of the Legal Services Act, Legal Process Outsourcers, and technology, among others.
Barriers to Entry - I Barriers to entry seemed low in the past.Â The segmentation of the market means that firms, even the largest firm, have the ability to follow a differentiated strategy and be a market leader in their segment.Â Not all firms aspire to be a leading NY corporate and M&A firm, which is indeed a change from a decade ago.
Supplier Power - The key supply for law firms is talent.Â Historically this has been one of the forces that created the competitive dynamic among firms.Â But given the oversupply of talent in the market, along with increasing differentiation of the talent required (partner track associates vs. staff attorneys vs. paralegals) the competitive dynamic has changed.Â Â
Rivalry - The historic growth of the legal industry diminished the impact of rivalry and rivalries tended to be quite genteel.Â As the demand for legal work declines, the degree of rivalry will likely increase.Â Increasing market share will need to come at the expense of competitors, while in the past it simply required capturing a share of the growth of the market.
In times of economic stress, law firms will be faced with more choices than ever. Weaker firms will continue to shed lawyers and offices, and some will close their doors forever. Global firms, with their portfolios of clients, markets and practices, will be well-positioned to react to these opportunities. However, the costs of running a multi-office global firm are high and expansion is expensive. A robust strategic plan can help firms act quickly and avoid costly mistakes because it streamlines decision-making.
While it is not possible for Chairman and Managing Partners to totally predict what impact factors such as the recessions and government regulation will have on the legal industry, it is possible for them to develop simulations or scenarios that paint pictures of what future conditions might be like if certain things were to happen. This is known as scenario planning. "The purpose of scenario planning is to identify several different stories about, or visions of, how large-scale forces will have an impact over time. Scenario planning differs from other kinds of forecasting or trend analyses that companies use to assist them in the decision-making process in that it is not used to predict specific future events. Instead of forecasting, where only one version of how things might evolve or develop, scenario planning involves painting several different pictures or "scenarios" and takes into consideration the fact that the future is uncertain and can't be predicted. Scenario planning juxtaposes the two variable uncertainties rather than trends. As a result, the future is generally characterized by one of these directions, although other variables' influences may keep these uncertainties from reaching either extreme ("Scenario Planning..," n.d.)."
The first uncertainty involves the legislative and regulatory control and consistency in 2025. The prevailing question is: Will the regulatory environment be restrictive and non-harmonized or will it be hands-off and harmonized?
In a restrictive, non-harmonized future, there is a high level of governmental intervention. Regulations are regionally based, with significant differences between international, federal, and state laws. The environment is volatile, unpredictable, and complicated. When the regulatory environment is filled with volatility and diversity, it is more challenging for firms.
In a hands-off, harmonized environment, similarities have been established across geographic and political boundaries. Local laws are still in effect, but the overall system is moving toward integration. A hands-off approach by world governments has resulted in significant power for large global corporations.
The second uncertainty concerns the how legal-service will be delivered in 2025, will the channel of service delivery be aggregated or disaggregated? A highly aggregated channel allows a single contact point into a firm or network of firms to sell a broader variety of legal services. Customer/ provider relationships are long-lasting and comprehensive because the costs of expertise location, project management and quality assurance have been shifted to the supplier. Customers are willing to pay a premium for the convenience of the shift in responsibilities and for the increased responsiveness. Firms are able to charge premiums for prompt delivery, increased risk for the firm, and the management of all subcontracting entities.
A disaggregated future will see a higher volume of legal-service purchases made directly from individual or specialty providers. Customers must actively search for providers. Customers have what appears to be a greater volume of providers because those providers proactively market their specializations across more areas to maintain a sufficient work volume. Law firms must continually reposition themselves to follow new trends and to keep up with faster turnover of their customer base. Customers push for industry specialization certification standards, but until then, they must develop their own criteria. Customers use price as a filter, paying premiums only for demonstrated exceptional expertise, forcing commodity pricing
Factors Driving Change
Over the past 30 years, the legal industry has been relatively unaffected by globalization, deregulation, and technological change. It has remained fragmented, in part as a result of the historical importance of local relationships and local laws. However, a flurry of mergers of unprecedented scale and geographic reach, suggest that the legal industry is losing its immunity to the macroeconomic forces that have propelled consolidation and stratification in other industries. Of the world's largest law firms, all but the most profitable are in some peril, and even the profit leaders, historically viewed as untouchable, will find it harder to maintain their flow of first-rate clients and talent.
T he Great Recession has also has been a major driver in the change of the legal industry. However, the recession in itself was not thought to be the key driver of change. What it has done is accelerate other significant, long-term drivers of change. Some law firm managers believe that this change has been accelerated by as much as ten years. Research has identified three major factors which are driving change.
The confluence of these factors, stimulated by the recession, has created a perfect storm in the legal market.
"The recession has accelerated the globalization of the legal profession). Cost pressures are forcing General Counsel and firms to look to low-cost jurisdictions to resource work, the inexorable shift of the economic fulcrum to the East means that many international law firm leaders are now starting to envisage moving their headquarters to manufacturing and business hubs such as China or India. The developing markets in the Middle East, Asia and Latin America are also attractive pools for new work (Combs, Gragg, Greenwell, & Pray, 2010)."
While there might have been some debate during the credit crisis as to the viability of the global law firm, the continued requirement for cross-jurisdictional expertise and the interconnected nature of regulation mean that the move to internationalize is un-halted. "Most law firm leaders think that emerging markets and the consequent need to develop a sophisticated international footprint were still as high on the agenda as before the recession. In fact, for law firm partners, globalization was considered to have the most transformative effect on the legal market (44% of partners put globalization first, compared to 31% of law firm clients) (Combs, Gragg, Greenwell, & Pray, 2010)."
The farseeing firms are building global practices of depth and breadth of expertise-practices that can support high profits per partner and significant growth. These strengths will set in motion a cycle in which these firms will be able to steal top talent from other, less profitable competitors and invest in geographic expansion and technology. New talent and investments will help the leading firms put even more distance between themselves and the stragglers.
Globalization of the legal industry is transforming the world into a single vast legal marketplace. A competitive legal climate, a need to serve transnational clients, the off shoring of legal work to low-wage developing countries and a drive to capture a larger share of the global legal market have contributed to the internationalization of law firms (Kane, n.d.).
What effect globalization will have on the management structures and practice strategies of multinational law firms remains to be seen. However, one thing is certain: globalization will continue to reshape the landscape of the legal industry.
Technological innovations have contributed to substantial changes in legal practice during the last 35 years. The Internet, mobile telephones and computer use generally have undergone seismic shifts during this period. This has eased communication, which in turn makes lawyers' advice more accessible regardless of their physical location. These same technological changes, coupled with reductions in barriers to trade, support increasing use of jurisdictional differences to support business operations and as a result, business is more likely to be multinational today.
"The recession has pushed technological innovation up the agenda. When asked about their greatest challenge over the next ten years, partners rarely. (<10%) cited the effective use of technology in the Evershed's 21st Century law firm report 2008. The recession seems to have changed this: 48% of partners are now offering technological solutions directly to their clients in order to streamline services and a significant number of managing partners said they were keeping up their investment in IT despite cost reduction pressures. Clients are actively outsourcing and using technology (Combs, Gragg, Greenwell, & Pray, 2010)."
The advent of electronic legal databases such as Lexis-Nexis and Westlaw has accelerated the commoditization of low-value-added legal work. Clients no longer need big, expensive firms to conduct ambitious research projects speedily and comprehensively. Powerful Internet-based research facilities make it unnecessary for clients to engage prestigious Washington, DC, firms to help them find out what is happening in federal regulatory agencies and on Capitol Hill. E-mail and virtual workrooms have reduced the cost and time needed to transmit information and to conduct business. Furthermore, the Internet is likely to intensify competition among law firms by making prices more transparent. Only firms that are distinctive and offer a high degree of expertise will escape the ensuing downward pressure on fees. ,a significant proportion of law firm clients and managing partners reported greater use of and investment in technology. "More than half of law firm clients interviewed (58%) had used technology to deliver legal services more efficiently as a result of the recession. A third of managing partners were actively investing in technology to either standardize legal processes or communicate more effectively within the firm and with their clients ("Law firms of the 21st century: evolution or revolution?," 2010)."
Most law firms today embrace technology that helps them conduct business. The Internet, email, handheld devices, and high quality video cameras are available and used in a lawyer's daily routine.Â Additionally, the advancement of communication tools, such as social networks, sophisticated online legal libraries and online jurisdictional systems, providesÂ easy access to comprehensive information virtually and globally.Â These high-tech advantages now enable lawyers to think creatively about new service and infrastructure designs.
Client Satisfaction & Specialization
The legal sector is still reeling from the impact of the credit crunch. It's not just that work has dried up or budgets have become tighter. General Counsel are demanding reduced costs and greater value from their legal advisers. They want accountability when it comes to how their budgets are being spent and more imagination when it comes to fee structures.
After years of discussion, the there appears to be shift towards alternative pricing. Numerous large law firms are reporting that they are entering into an increasing number of fixed-fee arrangements in litigation matters while a portion of transactional matters, which are often easier to predict, instead of using the traditional billable hour system. These pricing arrangements may involve risk-sharing, allowing the law firm to share in the gains if a matter settles early. Clients are looking for predictability regarding rates, not necessarily lower rates. Firms that can manage litigation so that costs are predictable will be well-positioned to benefit from this trend. With regard to collections, clients will be paying more slowly. If collection practices have not already been optimized, changes should be implemented now. It is not only beneficial for the law firm, but for client as well, since timely bills enable them to better manage their budgets.
The decline of hourly billing could have important effects on the structure of the legal industry. Law firms no longer would have the luxury of simply throwing more time into projects for which they can expect to get paid. The legal industry has been able to justify high hourly rates for associates in part by hiring associates with the right law school pedigrees. This has driven up the cost of talent. The cost pressures resulting from fixed fees may force large firms to be more creative about hiring and training talent. Moreover, as fixed fees replace monitoring of number of hours and hourly rates, law firms have an incentive to get more efficient work out of higher-paid senior lawyers. A shift from hourly billing also contributes to and reflects the commoditization of law practice. Firms may evolve from rendering specialized services to delivering products. This meshes with the alternative business models including trends toward legal products and research and development.
Focus on a client's "individuality" is essential. This leads to one undeniable conclusion: firms must create a tailored business management and relationship plan for each client of interest and, if necessary, for each client area of interest. The demand for specialization is increasing dramatically. This is partially a result of the sheer size of cases and the increased need for highly experienced resources. It is also the result of convergence-where clients look for one or a few firms to handle all litigation involving specific subject areas. A small litigation group within a general practice firm will no longer be chosen for significant litigation-no General Counsel can afford to do that. This is driving a clear trend for large firms to retrench from "full service" to "multi service" by reducing the number of practice areas and making the remaining ones larger, broader and deeper in experience. This will serve to lessen the number of competitors, but will also make the remaining ones more formidable.
Scenario 1: Mega-Law
In this world, law firms continue to consolidate. The global footprint of the top-ten leading law firms covers every continent. Yearly billings greatly exceed one billion dollars, and this one-stop mega-shops offer legal expertise across the entire spectrum of legal matters, supported by nearly 10,000 lawyers world-wide.
Large and mid-sized law firms that were competitive and successful a decade ago have been squeezed out of the marketplace. Many firms have had to decide between being purchased by one of the giants and slowly going out of business. Smaller firms who have focused on very unique specialty areas are advertising through legal marketplaces, creating a one-stop source in which General Counsel can access a large network of providers. While the firms in the marketplace have no formal connection to one another, the marketplaces themselves are networked together, serving as the sole competition for the mega-firms.
In this word, General Counsel are constantly challenged with finding a consistent quality of legal services in all legal and geographical areas. On one hand, they have limited choices, due to conflict-of interest rules and little ability to switch providers. On the other, through legal marketplaces, they have access to more variety, but no consistency across providers and more firm relationships to manage. The buyer-seller relationship can often be difficult, with limited loyalty on the buyer side. Within the firms, technology has had a limited role in shaping actual service delivery. Technology providers struggle with embedding the legal and regulatory content into the solutions because of change control issues and the simple fact that laws and regulations do not come with the information needed to convert them into business rules.
There is global competition at the top level of the industry. Transnational mergers of existing U.S. and U.K. law firms with Asian and European firms continue in an attempt to gain more global presence. Because of globalization, correctly sourcing within the mega-firms has become standard procedure to match price pressures throughout the global legal industry. On high-end specialized world partners are heavily involved. In mid-tier matters, there is a high degree of leveraging of lower-cost associates and managers, reserving the partner time for key face-to-face client meetings. Smaller legal firms around the globe have been subsumed by the practice, freeing their lawyers to become, in essence, an inexpensive (though effective) pool of legal talent. The local legal providers not only deliver more legal expertise for the buck but also valuable regional knowledge, statutory and otherwise.
Information systems for streamlining the practice's administrative aspects are critical. Global relationship partners in the firms can see across all the service provider teams from a revenue, time, and billing perspective. The promise of integrated, standardized legal content software has not been realized. Smart technology has not greatly impacted the profession. There no critical analysis technology that has supplanted the lawyer role .Relationship partners within the mega-firm find the expertise and match skill sets to deliver services. There is intensive use of knowledge management systems to enhance consistency. These tools are especially valuable to the mega-firms which operate like one giant island with its own internal technology and process management systems.
In this scenario, managing relationships with external providers is the key to the department success or failure, given the consistency risks associated with using single-source services. The customers of 2025 must contend with a complex purchasing model. They want assurance that their mega-firm or major network of choice can provide consistent service at every delivery level, throughout every legal practice area, and across all geographical boundaries.
The mega-firms initially need to prove themselves in order to establish an integrated and lasting relationship with customers. Mega-firms have no choice but to maintain a strong worldwide presence, as their corporate customers have established business in every corner of the map. The relationship between firm and client is increasingly complex. There is more scrutiny over fees and a greater demand for measurable results. Determining adequate benchmarks is a messy endeavor for both sides of the relationship. General Counsel face constant pressure to defend their law firm selection and justify every expense. Initial contracts between client and law firm become more critical as General Counsel strive to ensure good service through a stringently outlined agreement. Striving to retain customer business at every delivery level, mega-firms offer substantial volume discounts for low-end work.
Scenario 2: Legal Facebook
In this world, regulatory environments have created protectionism, thus preserving the legal market from a glut of providers making the landscape bountiful. Regulatory issues across governments have made the role of the General Counsel more important in organizations. General Counsel are responsible for all matters relating to compliance, legal strategy, and enterprise risk assessment for legal and compliance risks across all departments within the organization. Multi-national corporations have to engage a plethora of outside firms.
They couldn't afford to do that without the evolved Legal On-Ramp, Legal On-Ramp is the Legal Facebook, a tool that, through certification and credentialing, accurately rates the skill level of each attorney. Because each provider annually undergoes a rating-agency evaluation using standard assessment criteria, General Counsel can rely on their purchasing departments to do the hiring. Purchasing uses the organizations saved business profile together with the specifications from the General Counsel or the business client for the specific expertise needed, price tolerance, and quality rating. Litigation, due diligence, and other commodity type work is managed by the legal department and largely off-shored. Competition and margins fluctuate in waves depending on the "hot specialty" and the ratings system has effectively established a small range of rates in each band of expertise
Outsourcing is used for due diligence and litigation support work relegated to certified paralegals rather than attorneys. Restrictive regulations have severely limited the practice by foreign nationals of advertising any U.S. law expertise. U.S. experts experience extensive demand from international clients Asian and foreign markets are growing organically, building from the ground up and competing internally, but reciprocal restrictions prevent U.S. lawyers from physically practicing in foreign countries. Everyone must offer their services remotely. Most U.S-based attorneys lack international expertise. As a result" Legal Facebook is used as a global tool to find the international stars.
Technology is all in the form of software-as-a service. While most of the providers contract for all of their services through Legal On-Ramp, and Legal On-Ramp holds the purchasing power with the vendors, the providers are stuck with whatever is offered as a standard package. General Counsel are responsible for global compliance. However, in combination with the business subject matter experts, the outside legal experts hold the key to risk analysis. The providers have their unique interface with the corporate risk-assessment tools to enter risk analysis factors and data themselves.. Pre-recorded pay-per-view video briefings are deemed suitable for commodity issues and general advice.
The direct purchasing model is the way of the world. Since buying has shifted to the purchasing department and cost pressures reduce face-to-face contact, expertise and online endorsements with connections to the buying organization trump traditional personal lawyer referrals and relationships. Neither General Counsel nor business liaisons have time or budget for being schmoozed. General expertise has moved to a few in-house attorneys. Legal assistants are serving as project managers. Firms are seeking capability either from a low-cost capacity perspective or from the point of view of a specific type of legal expertise. With new regulations concerning foreign nationals practicing in the U.S. and vice versa, remote service is the norm. The need to sustain oneself between projects, combined with the need for the legal marketplace to have a standard way for all providers to charge for services, has perpetuated the hourly rate for price models along with the budget forecast.
SCENARIO 3: E- Legal
The global harmonization of the regulatory and compliance environment has led to easily codified rules, further enabling new software solutions. Purchasing legal services is standardized and accomplished via Legal OnRamp. The number of global providers and the variety of offerings has created an ultra-competitive environment. Price rules and expertise are greatly devalued. Most legal work is commoditized, aside from a few very specialized services. Law is no longer a high-margin profession. Some providers rely heavily on outsourcing to offer low-cost services; others play the technology card to lower their cost basis. Buyers' heavy reliance on technology has eliminated a number of traditional services. The General Counsel's role is now focused on securing value-added content subscriptions that feed into business process systems, transforming material not included in the subscriptions into actionable practices, deploying the legal content and rules consistently within the organization.
The Internet has continued to evolve into a global digital marketplace, and outsourcing
is so prevalent it is no longer considered "outsourcing." Often, the buyer is unaware of
the country in which the provider operates. Technology has proven to be a great equalizer across all continents. Thus, in many ways, legal markets around the globe emerge and expand. But, on the other hand, the legal profession is no longer a high-margin enterprise, and virtually no lawyers-in Asia, Europe, the U.S., or anywhere, are building very profitable businesses.
High-tech tools have been embedded with legal knowledge and can handle a large percentage of the matters that previously required a flesh-and- blood lawyer. The countless providers offering their services often boast of their own slightly value-added systems. Those with the highest market penetration have separated the content from the platform. Within corporations, the automation of many processes and the development of smart systems have greatly reduced the size of internal legal departments. Content aggregators push a daily, if not stream of alerts to modify legal content. Expressed in terms of business rules, the legal content is piped through the existing corporate infrastructure such as corporate Intranets or client Extranets with tremendous speed, delivering the right information to the right person at the right time.
The thinnest of relationships exists between the General Counsel and the standard legal service provider. The purchasing decision is driven primarily by price, aided by a system of online ratings and rankings. The General Counsel may bring repeat business to a provider, but will select another at the first hint of a problem, or if a less expensive provider can be conveniently hired. The General Counsel's primary relationship is with the legal content aggregator.
Scenario 4 - Technology is King
In this scenario, the world is a global marketplace. This is globalization gone right. Regulatory environments throughout the world are in greater alignment, enabling technology to streamline international legal work. Conflicts restrictions and multi-jurisdictional practice impediments have been lifted, allowing the mega-firms to provide a broad spectrum of services. The largest global firm is an Indian high-tech company that hired legal experts to devise a new product that eventually gained market dominance. The company sidestepped the content aggregators and went directly for direct feeds from the legislative and regulatory bodies themselves. Global technical standards clearly define each part of a law or regulation so it can be used in the law firm systems. The law firm can use scraping technology to acquire new material multiple times per day from all the government websites.
Competition for high-end work is fairly contained. The largest aggregators have embedded proprietary knowledge into their own IT systems, and all the client knows is what step needs to be executed at what time. The mega-firms now run enormous amounts of client data through their infrastructure on a transactional basis. The mega-firms provide a single point of contact for all legal services and operate in close collaboration with the General Counsel . Partnerships are created following a long and complex purchase cycle. The service level agreements are rigid. Relationships are closely monitored for performance, and the switching costs are very high. There is some pressure to keep costs down, which has led to the development of outcome-driven billing based on a risk/reward-sharing model. The billable hour is dead. New pricing models emerged as automation made everything more streamlined. Outsourcing is standard procedure, but new software provides seamless delivery and consistent quality in all regions
Technology has given an unexpected edge to the Asian market. In fact, one of the world's mega-firms is an Indian tech company that merged with an American law firm to broaden the reach of its proprietary legal software. There is rampant outsourcing, especially in specific areas, such as contract management and Intellectual Property prosecution."Smart" technology and the harmony between international legal systems and near-complete globalization allow for consistent quality and immediate and seamless delivery.
To reduce the cost of acquiring legal and regulatory content, both content and subscription transactions have been standardized. Information systems are data independent. Well-defined standards for data fields and how they transmit between firm and company enable company personnel to interact directly with the law firm's systems. Automation of many processes and the development of the smart system, through joint efforts of technology professionals and legal experts, have completely transformed the industry.
On one hand, the relationship between buyer and provider is quite traditional. On the other, much has changed, especially the focus on a law firm's technology, which will entail even further commitment from the buyer. The purchasing model includes lengthy RFPs and numerous early reviews. Once relationships are established, they tend to be very collaborative, lengthy, and strong. Pricing models are more creative, combining subscription fees for content, transaction fees for processes, and maintenance fees for infrastructure. Powerful software has rendered the billable hour obsolete.
The four key scenarios can be identified with two key uncertainties, regulatory environments, referring to the level of regulatory and legislative control in 2025, and channel of service delivery, aggregated or disaggregated. Scenario 1 and 4 are based on heavy regulatory environments and aggregated delivery channels. On the other hand, Scenarios 2 and 3 are based in hands-off regulatory environments and disaggregated channels of service delivery. For the legal industry, Scenario 1 would be the best. Yearly billings are high and the lawyers are in demand. The complexity of the regulatory environment allows the firms to conserve margins. Large aggregators have the power to limit deregulation and prevent new entrant into the market. Conversely, the Legal Facebook scenario is not a good for the legal industry. This is highlighted by high levels of competition creating lower margins and talents shortages. General Counsel and purchasers of legal services benefit from Scenario 2 due to increased access and affordability of legal service caused by the break-up of the mega-firms and disaggregated providers of legal services. Similarly, the E-lawyer scenario provides services via similar disaggregated channels. However, unlike the Legal Facebook scenario, there is a harmonized and regulatory environment which increases competition for non-lawyer services and causes high deregulation of the legal industry. The commoditization of legal services leads to more outsourcing and automated technological solution.
Having developed four scenarios to help explore alternative, plausible futures for the legal industry there are a number of ways to look at them. It's important to remember that the value of these scenarios has nothing to do with whether we accurately predict the future 25 years from now. Scenarios are useful because they help to see emerging patterns differently, and detect big risks or opportunities in advance, and to rehearse ways of managing unforeseen challenges. Global law firms will add value if they can stay on top of the rapid pace of change and adapt along with their clients. Although the precise evolution of the legal industry is impossible to predict, the use of scenario planning can help identify winning strategies that help firms navigate the future.