The following post originally appeared on Forbes | June 17, 2014
The year is 1978. Roger Cleaver, a senior office-bearer of the Law Society of South Africa (South Africa’s bar association), is attending a business conference, and is listening to a lecture on a subject then quite foreign to the law firms: the principles of effective business-to-business advertising.
It was a timely topic, for him and for the legal market in general. The United States Supreme Court had just delivered a historic verdict in Bates v. State Bar of Arizona, one that allowed law firms to advertise to the public for the first time. The market was on the cusp of a fundamental and irrevocable change, helping to spur along its ongoing metamorphosis from the profession of law to the business of law.
The law society, loath to become mired in the politicization of the advertising judgment, was seeking to find a principled position on the issue and constructively guide its members on this aspect of market deregulation. Seizing an opportunity, Cleaver approaches the speaker—an entrepreneurial young advertising executive who operated his own subsidiary of advertising goliath, BBDO—and asks him, frankly, for his advice. The two get talking.
That speaker was Professor George Beaton. At the time, Beaton—now legal consultant, researcher, and current advisor to the two largest law firms in the world, among others—was largely unacquainted with the law. From Johannesburg, South Africa, curiosity and familial influences propelled Beaton into medicine at a young age, eventually turning his hand to the advertising of pharmaceutical products. However, his conversation with Cleaver was to seed a new curiosity and lifelong passion for researching, evaluating, and developing law firm strategy.
More than three decades later, Beaton thinks he is seeing the first barbarians at the legal industry’s gates. But this time, the barbarians are armed with disruptive technologies and more innovative business models. “NewLaw,” a term coined by Beaton, is the calling card of the business models that are strategically positioning themselves, hoping to disrupt the legal services industry. See our exchange below:
On the Growth of “NewLaw” Business Models
Parnell: You’ve been paying attention to the growth of various “NewLaw” business models. While I see that major law firm management is recognizing their existence, some management doesn’t see them as a real threat. What are your thoughts? Do you see them threatening the traditional model?
Beaton: I would say, not today, but in strategic-time, tomorrow—absolutely. Look at Axiom. Axiom is a legal services provider out of New York reported to be growing at 30% per year, compound. The industry of traditional law firms is growing—if they are lucky—at around 3%. Are the established NewLaw enterprises growing off a small base? Not anymore! Axiom is no longer small by any standard. In less than 15 years it’s comfortably into the AmLaw 100, in 10 offices around the world, and serving half the Fortune 100. And it’s not even a law firm.
David, when I was in New York in February this year, two things happened: On Tuesday [the] 5th, the prestigious Canadian law firm Heenan Blaikie collapsed. As you would know, number eight in Canada by size, fragile because of a lack of strong leadership, it had suffered two years—only two years—of 15% profit decline. Then, two days later on the 7th, Axiom, the alternative business model firm, announced it had won a contract from British Telecom—its biggest contract ever—for work related to commercial contracts and anti-trust in the UK, US, and Asia. So, on the one hand, you had this BigLaw collapse, and on the other, a significant win for a NewLaw pioneer.
We think all forms of NewLaw are still in the first phase of the innovation diffusion curve. They still have less than 1% market share; though, there is no hard data. The early adoption, and then, early majority phases, will occur when NewLaw proves the superiority of their value propositions for certain clients and certain work types.
Clients are inherently risk-averse when it comes to procuring outside legal services; they wait and watch others. If the risk is within acceptable limits, the early majority will jump in. If this happens, it’s less than a decade away.
NewLaw firms are small but potentially very dangerous, because they are teaching clients about new ways of buying. They are not lawyers for mom and pop shops. They are not.
On Clients and a “Kaleidoscopic” Future
Parnell: Based on your bio, you’re primarily a business strategist, an adviser, and researcher. Perhaps most interesting of your work is that you’ve modeled the market shifts to get an idea of what’s ahead. So what do you see for the future of legal services?
Beaton: We have visualized a scenario—and let’s say this is in about 2025, so, it’s close, just over on the horizon, but you can see the dots sufficiently now to connect them and know it’s there—and the main drivers of this scenario are, first, the rate of change in the way clients manage their procurement practices for legal services, and second, the capacity of the BigLaw firms to remake their model. So there is a race, if you like, and when you play this out—which we have done—we see a picture we call ‘Kaleidoscope’.
What will it look like? We see the traditional legal procurement model being substantially disrupted. The big corporate clients will have created captive suppliers, like the outsourcers which we now find everywhere: Mumbai, Los Angeles, Belfast, Cape Town, and Toronto. The corporates will be shareholders in them, so you’ll get a much more integrated supply chain. They’ll also be using NewLaw business model providers of different varieties, managed legal services, and temporary hire firms, to a much greater extent.
Clients will have grown their own classical in-house legal departments even further, and they will be even more specialized and more technology-enabled. For example, they will all have applied Six Sigma disciplines toward meeting their legal needs. And to some extent clients will be crowdsourcing—yes, crowdsourcing.
We think clients will also be hiring specialists, of kinds, that don’t now exist; for example, what I call legal diagnosticians, who will diagnose the problem—not solve it—and advise clients whether they should handle it in-house, or send it to outside counsel, or even that the risk is such that they should do nothing about it. These risk-related diagnostics—based on data analytics—will be managed by people who triage risk-adjusted decisions.
On BigLaw Sinking or Swimming
Parnell: The scenario you are painting could certainly take a material slice of BigLaw’s revenue stream. How do you think the industry will respond?
Beaton: BigLaw will have watched all this, and will have said, “Our natural place in this ecosystem is doing the most complex, mission-critical work for clients; work that needs teams of highly skilled, very experienced super-specialists.”
So the majority of the BigLaw firms that survive profitably in this environment will be enjoying very strong practices. But most will be smaller than they are now; they will be more global, and, as has happened in accountancy, we think we will see an environment where there might be the ‘Big 10’ firms.
The largest law firms now have revenues of $2bn to $2.5bn. So the size of the Big 10 may be around $10bn. And, crucially, all their volume work—maybe 60% or 70% of the work of many of the BigLaw business model firms now—will have either gone to in-house law departments, to client captives, or to NewLaw firms.
I believe the majority of the thinking-managing-partners of BigLaw firms know this is happening; their challenge is in what to do about it. Let me give you an example: On the back of an envelope, there are at least 20,000 partners in BigLaw firms in the U.S. earning more than a million dollars a year now. Our modeling shows that, unless these firms are remade, the profit per partner of a substantial majority will at least halve within a decade. And that applies to the U.K., Canada, Australia, and in many parts of Asia, as well. It’s already happening.
Now, we have actually modeled that profit decline, and when you show it to a managing partner, and you ask them to plug in their own numbers—their own assumptions—they look at it and say, “Oh my, it’s right.” The problem is, these firms are budgeting year-to-year—sometimes two years out—and they haven’t seen what’s coming. You know, it’s like the frog in a beaker over a Bunsen flame, where the world is getting hotter and it still feels comfortable.
Now imagine if those firms are damaged as profit-making machines; what is going to happen to these partners? They are not going to watch their million dollars a year evaporate. They are incredibly smart people whose entire business stake is wrapped up in their firms. There can be no doubt that they are going to do something—some have already started. They will endeavor to remake themselves; there will be those that succeed: the winners. But in my view on current signs, there will be many more that fail: the losers.
In the end, it seems the majority won’t be remade, [or] transformed; it’s not a phoenix-from-the-ashes story. Winners will remake themselves sufficiently fast to keep up with, and continue serving, their clients. They will drop off work types, offices, partners, and staff; they will take on new skills; adopt new technologies, and partially disrupt themselves. They’ll be doing things differently through business process re-engineering, but they’ll still be the same firm. The biggest danger is that the average partner thinks that a tweak here, or a nip and tuck there, is remaking—that they won’t understand how profoundly their work practices have to change.
On the Challenges of BigLaw Being Remade
Parnell: To what extent do you think structural and cultural obstacles will hold BigLaw firms back from sufficiently evolving?
Beaton: In his great 1997 book, The Innovator’s Dilemma, Harvard’s Clayton Christensen argues—convincingly I must say—that incumbents have great difficulty truly disrupting themselves. And that’s because, at the time they need to act, they are very successful—like Kodak and their film in a yellow box, which [went] in the cameras being used by the finest photographers in the world. They were too proud and anxious to make a cheaper Kodak film—a second-string Kodak—because in doing so, they might [have ended] up damaging their own brand and value proposition.
BigLaw has other challenges, though, and the main one goes back to the fundamental difference between NewLaw and BigLaw business models: BigLaw firms are structured as, and/or behave like, partnerships. Now, there is enormous strength in the collegiality of partnership. But it’s also an Achilles heel:
Large partnerships, by their very nature, are slow to make decisions and lack a balance sheet suited to taking risks. And in a fast-moving world, that’s a problem.
They are also biased towards those partners who have the least time left. You know, “I am making a million dollars a year—you can do something radical and risky when I have gone five years from now, because I still need those millions, thank you very much.”
Then there’s perfectionism. Lawyers are trained to do things as perfectly as possible, and to look for, and address, every risk they can identify, and then some. That’s why they have this reputation: If 10 drafts are better than nine, do 10 drafts of this advice. In fact in most cases the client is paying for it by the hour! But when you talk to Andrew Grech, the managing director of Slater & Gordon, the world’s first stock exchange-listed law firm, he will tell you one of his biggest challenges is getting lawyers to practice in what he calls “a requisite way.”
Some traditional firms are now running a portfolio of business models: both brain surgeons and factory workers; the first for specialized advisory, price-insensitive work, and the other for churning out commodity work. Whether one law firm can own and manage both of those—and I paint the extreme case here—I do question. I have worked with firms that have tried, but because they applied their conventional standards and customized approaches to the commoditized work, they failed.
On Mid-tier Firms Fighting To Survive
Parnell: It is hard to escape the thought that mid-tier, generalist firms are going to be most vulnerable to the market shift. How do you see them responding?
Beaton: In the kaleidoscopic future there will be many, many more tiers (or categories) of firm than there are now. If you go back 20, or even 10 years, tiers were quite easy to define and agree on. There were the top groupings of international and national firms, there was a clear middle tier of single city firms, and then there were the rest tailing away. Now, we already see there are the emerging global elite, very large firms, and at the end of the scale, small, truly focused and super-specialized firms in IP, in hotel contracts, in healthcare information systems. And a gamut in between.
This leaves the traditional, so-called full-service, middle tier firm that is striving to offer better value, based on lower rates and lower overhead. We believe this value proposition will ultimately prove illusory and that there will be no room for profitable generalists in the kaleidoscopic future we have modeled—no room at all.
Many middle tier firms will shrink, and many of them will try aggregation, the consolidation we are continuing to see in the U.S. and elsewhere, characterized by intercity and interstate mergers. There will come a point when these merged firms realize that bigger isn’t necessarily better for clients, and doesn’t create more value for anybody. They’re just more difficult to manage, and the clients don’t necessarily get a better deal. And then, after that, you’ll get fragmentation.
We see a component of kaleidoscope in what we call ‘back to the cottage’—specialist, small cottage industry firms, that are really, really good at something. For those with Scottish or Irish ancestry like me, look no further than Inksters of Scotland: A law firm thriving on its specialty related to crofting. Google Inksters and take a lesson in crofting, and [see] how any law firm can be differentiated!
Dr George Beaton works across Australia, Asia, North America, and the UK, speaking and advising professional service firms on clients, strategy, governance, capital, acquisitions and mergers. George has long been associated with the business and law schools of The University of Melbourne. He blogs at Bigger. Better. Both? and tweets as @grbeaton_law. He recently published NewLaw New Rules: A conversation about the future of the legal services industry.