One of the five factors in Porter’s Five Forces model, a framework for evaluating a competitive environment, is the “threat of new entrants.”
The 2015 Law Firms in Transition study by Altman Weil finds this “threat” is a broadening category. “Eighty-three percent of law firm leaders say they believe competition from non-traditional service providers is a permanent change in the legal market,” according to the research.
The Five Forces framework also examines the “bargaining power of buyers” which is where this study gets interesting: what happens when the buyer is also a new market entrant?
According to the Altman Weil study, “Sixty-seven percent of law firms say they are currently losing business to corporate law departments that are in-sourcing legal work, and another 24% of firms see this as a potential threat going forward.”
Corporate Legal Continues to Take Work In-House
The report suggests the trend toward taking more work in-house continues to grow. For example, a LexisNexis survey of corporate legal operations in December 2014 found 54% of legal departments plan to manage outside counsel spend by bringing more work in-house.
Likewise, a 2014 survey by BTI Consulting found large companies “are on track to move another $1.1 billion in legal spending in-house” which is in addition to the nearly $6 billion brought inside during 2013.
The 2015 CLO Survey by the Association of Corporate Counsel released earlier this year had similar findings. “The fully loaded costs of doing work in-house average about 50 percent less than many of the company’s outside counsel,” as reported by Law360.
There’s anecdotal evidence from large corporations as well. At 2015 LMA Conference, Joe Otterstetter, managing counsel at the 3M company noted during a panel that in 2012, roughly two-thirds of the company’s legal spend was on outside counsel (and mostly for litigation). At the time of the panel in April 2015, he reported that split is about half and half.
Moreover, legal departments are beginning to share, and even export, what they’ve learned about efficiency. For example, the ACC announced this year a dedicated member section for legal operations professionals — and the award winning legal department at insurance giant American International Group, Inc. is creating a legal ops consultancy.
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A Call to Action
In an article published by Adam Smith, Esq — Leadership: And How to Squander It — the consultancy underscores the top reason (63%) law firms say they aren’t doing more to change the way legal services are delivered, is “clients aren’t asking for it.”
It’s a sentiment D. Casey Flaherty shared in an interview with the Business of Law Blog last month — Legal Tech Evolution: Discomfort and Lasting Relationships:
“For the most part, I put the responsibility on clients. Legal has been a buyers’ market for quite some time. Deficiencies are for buyers to remedy through the power of the purse. To the extent the market is not changing, clients have themselves to blame.
Firms, however, can still initiate structured dialogue. They don’t. Neither side likes uncomfortable conversations. Yet the ability to have uncomfortable conversations and address the root cause of the discomfort is an important element of lasting relationships. Firms can’t force clients to care. But firms can, at least, gauge their client’s interest in having the conversation.”
The second and third barriers to change in the study are “not enough economic pain” and partner resistance, which placed close together at about 45% and 44% respectively.
Change is a continuing and underlying theme of study according to the report:
“Partners’ resistance to change is an ongoing theme of the survey and is also a persistent threat to law firm success. Forty-four percent of firm leaders cite partner resistance as one of the reasons their firm is not doing more to change. As the economic outlook improves and demand returns, firm leaders will need to work harder to guard against partner complacency.”
“Most Big Law firm partners resist transition because it vests younger attorneys with the power to claim a share of client billings,” wrote Steven J. Harper in an American Lawyer article titled Making the Playoffs: Baseball and Big Law. “Likewise, most firms offer no financial incentive for partners to mentor young attorneys. There’s no way to bill that time.”
It’s worth noting there are examples of big law innovation and some law firms do in fact recognize the market is shifting:
“I think firms are recognizing the importance of having a firm hand at the pillar in an environment where there is intense competition and a need to sometimes rethink how certain services are being offered,” according to Eric A. Seeger, a principal at Altman Weil, in an interview with Gina Passarella for The Legal Intelligencer.
Indeed reaction from inside law firms published publically echo the sentiment:
“Of the many law firm management studies out there, I have never read a report that so convincingly argues for law firms to define a strategic vision,” wrote Leah Schloss, director of marketing at Sullivan & Worcester, in Bloomberg Big Law Business.
Additional Highlights from Law Firms in Transition
The report also highlights other significant findings:
- “Increases in law firm profitability are clearly linked to strategic changes in lawyer staffing, efficiency of legal service delivery and pricing approaches.”
- “Overcapacity of equity and non-equity partners, especially in larger firms, is endemic and a drag on profitability.”
- “In 63% of law firms, partners aged 60 or older control at least one quarter of total firm revenue, but only 31% of law firms have a formal succession planning process.”
The survey polled managing partners and chairs at 797 law firms with 50+ attorneys, “including 47% of the 350 largest US law firms.” The full report is freely available online (PDF) without registration.
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