Michael E. Porter, the renowned economist and academic published a framework for analyzing markets in the Harvard Business Review in 1979. Students of business get a good dose of the framework as a means to analyze competition in a given market — in order to drive the development of a business strategy.
The framework now known as Porter’s Five Forces, was updated by Mr. Porter and republished in 2008. He explains the basis:
In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.
And further, the importance of such analysis is:
Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influencing competition (and profitability) over time.
Legal Forces at Play
Before we dive into the Five Forces analysis for the legal industry, we’d like to provide some context. Consider the following quotes that all more or less focus on the demand for legal services:
– “One of the biggest challenges stems from the aftermath of the ‘big recession’ of 2007-2008. When the economy declined, clients became more sensitized to the need for improved efficiency and value, and most important, reduced cost,” according to a law firm CFO as published on this blog.
– “The office of general counsel has never faced cost-pressures from the C-Suite that it is experiencing today, even as their influence is rising. Strategic business partners are accountable for the efficient stewardship of finite budgets that accomplish corporate objectives,” said Michael Lipps in a Law360 article titled,Legal Evolution: Back To Business.
– “Fortunately, because the economic downturn has forced many companies to cut back on headcount, there are more options than ever before to obtain temporary legal help including temp agencies like Robert Half Legal or Axiom Global, and a bevy of former law-firm attorneys who’ve hung out their own shingle,” wrote VentureBeat in a 2011 post sponsored by Fenwick & West.
Competition in the Legal Industry
In a recent webinar, BTI Consulting pointed out that client feedback mechanism that doesn’t include the “competitive environment” is misleading. Much of the analysis was sound and reasonable, especially with regard to a firm’s own customers. However as Mr. Porter’s model shows us, from a higher vantage point, we can begin to see the influences of additional competitive threats.
That’s a key benefit of using models like Mr. Porter’s. Disruption in the legal industry, for example, may stem from clients, and it brings with it additional sources of competition. In other words, it’s credible to argue that law firms today are not just competing with law firms.
A turn at analyzing the US legal market according to Porter’s Five Forces follows below – we’d welcome your input and feedback in the comments!
Bargaining Power of Suppliers
- Bill rate increases have slowed – from a rate of 10% a year to just 3%
- More firms pursuing less legal work; BTI Consulting calls it a “predator’s paradise”
- Average revenue per lawyer dropped .4% in the recent Am Law 100 rankings
Bargaining Power of Buyers
- Corporate counsel is increasingly using to data and analytics to drive decisions
- Legal departments are consolidating the number of law firms used for legal services
- Consolidating work with “large enough” or super regional law firms
- Pricing is one factor as “large enough” firms are twice as likely to use AFAs
- Access to law firm talent moves more legal work in-house; roughly $6 billion in 2 years
Threat of New Entrants
- Alternative means to staff legal work: Axiom, Robert Half Legal, and UpCounsel
- Legal process outsourcing commodity legal work moving to “The Law Factory”
- M&A is a top trend among law firms and in essence forms a new competitive entity
Threat of Substitutes
- Validation of alternative sources of legal assistance such as Legal Zoom
- $45 billion opportunity in the “latent market” for online legal resources
- $458 million invested in legal startups – up from $66 million year-over-year
* * *
This analysis strives to look at the US market from a macro perspective. There are nuances to every business and certainly legal providers will have their own unique value proposition based on their positioning in the market. This of course will influence the weight, emphasis and interpretation of what each bullet means for a specific firm — and more importantly for shaping a law firm’s growth strategy.
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