Panel Discussion – Profitable Practice Management

I was honored to be asked to speak at Dye & Durham’s October 6, 2016 “Here and Now of Legal Innovation” event in Vancouver. I participated in the panel discussion on “Profitable Practice Management for Partners and Business Managers”. Here is the text of my presentation at the event:

“I’ll be talking about some of the major trends that impact Canadian law firms today. My focus is on changes in the business model and how law firms must respond to the current challenges to maintain their profitability.

So, what’s changed in the last 10 years?

The first big change is the dramatic arrival of the global law firms in Canada, marked specifically by Norton Rose’s blockbuster move in 2011 when it acquired Macleod Dixon and Ogilvy Renault in one fell swoop and has now completed its sweep across Canada with its recent acquisition of Bull Housser here in BC. The arrival of global law firms like Norton Rose and Dentons has changed the Canadian legal landscape in a big way. This trend is leading to more consolidation of law firms in size and fewer firms, as regional and midsized firms are being gobbled up and shrinking quickly in numbers.

The second big change is the re-awakening of the Big 4 accounting firms in the legal market, with examples such as Ernst & Young moving into commercial law work and Deloitte’s recent acquisition of Conduit Law. The Big 4 accounting firms are ten times the size of the biggest law firms and will be a major force in redefining the legal industry in the coming years.

The third big change is the movement towards forming NewLaw firms such as Cognition and Conduit law. These firms focus on being outsourced general counsel and have reduced their overheads dramatically by working in client offices or virtually as required. They are aggressively using fixed fee billing to cut legal fees and are taking work away from large and small firms. Of course, Conduit is now affiliated with Deloitte, so this partnership will have even more disruptive impact now, and law firms of all sizes should be concerned.

The fourth big change is the rise of alternative fee arrangements (AFAs) and fixed fee billing. This trend has been picking up steam in the US and Europe since the 2008 financial crisis, but not so much in Canada until recently. With the continued proliferation of global law firms and Newlaw firms, fixed fee billing should continue to build in Canada and we’ll catch up fairly quickly.

The trend toward more fixed fee billing also puts much more emphasis on efficiency and has driven the trend towards more legal project management in large and small firms.

How can your firm lead in the next 10 years?

To respond to the above changes, Canadian law firms of all sizes must do the following:

  1. Centralize your management structure and give more power to your Managing Partner to drive strategic planning and execute the firm plan. Firms must recognize and compensate for firm and practice group management in a much bigger way. Firms must focus their practices to meet specific client needs, be more client-centric and be much more selective in the clients they take on to maintain their profitability.
  2. Restructure your business model in response to the new competition from global, accounting and NewLaw firms. You need to carefully examine how to reduce your costs and change your staffing mix to optimize use of the technology. The days of levering work down to junior associates at high billing rates and getting clients to train law firms’ junior lawyers are over. Processes must be re-engineered in conjunction with the technology.
  3. Hire business savvy lawyers, not just brilliant academics. Clients want lawyers who can help them solve their business problems, not just their legal problems.
  4. Offer value based and fixed fee billing to your commercial and litigation clients. Firms that hesitate will be quickly overtaken by the new competition and will lose their best clients.
  5. Revamp your compensation system to recognize partners’ firm building tasks such as training, project management and building the systems required to increase efficiency and effectiveness using all this new technology.

And finally, firms must consider client goals and KPI’s and focus on helping clients achieve their business goals, not just the law firm’s profitability goals. Your focus should be on attaining a long term strategic partnership with your clients, which means offering better value and innovative ways of delivering legal services.”

 

Predictions for the Legal Industry in 2015

Here’s a round-up of predictions for the legal industry in 2015 from some of the top thought leaders in the business:

 

 

 

 

 

 

 

 

10 major trends impacting Canadian law firms in 2015

Global firms such as Norton Rose and Dentons have moved into Canada and more are on the way. They have swallowed up mid-tier law firms such as Macleod Dixon, Fraser Milner and Ogilvy Renault. Heenan Blaikie is another casualty of the competition being created by these global giants as corporate and securities deals now have more major players vying for fewer deals. These global mergers also create breakoffs of groups of partners who don’t want to be part of a worldwide firm run from New York, London or Brussels. This creates opportunities for small and midsize firms to absorb these disaffected partners, with their institutional clients, which are greatly desired by small firms, and can be run profitably from a smaller, more efficient platform.

Since the financial crisis of 2008, clients are demanding fee discounts of 10% to 50%. They are under pressure from their CEO’s to cut their legal costs and discounts are the easiest way to accomplish that.

Clients are also pushing for alternative billing as they want fixed fees and some certainty on their legal costs and as a result firms must focus on becoming more efficient.

There’s also a rise of innovative NewLaw business model firms providing legal services with much lower overheads, up to 50% lower than large firms and they are stealing work away from large firms because their charge-out rates and fixed fees are also up to half as much as large firms. This puts a lot of strain on maintaining realization rates and profitability in an increasingly competitive legal market environment.

Legal services are increasingly being commoditized in line with the competition created by more players in the legal market, and more lawyers are being pumped out of law schools that aren’t needed to meet the demand. Clients realize that often lawyers aren’t needed to do many simpler legal tasks, and they’re pushing for work to be outsourced to other cheaper jurisdictions or countries, or pushed down to paralegals, contract lawyers or outsourced general counsel to be done more cost-effectively. The mystique of law firms being the only ones who can do legal work is fast fading. There are many other non-law firm competitors in the legal industry now.

Realization rates are dropping. In the Georgetown Law 2014 Report on the State of Legal Market the average overall realization rate in 2014 was 83.5%, which was down 8% from the 92 percent rate reported in 2007, so that’s a big drop in realization over the past seven years. Clients are rebelling against law firms’ steady increase in their charge-out rates over the past decade, and they’re fed up and just will not take it anymore. Large firms have increased their charge-out rates much more than small and midsize firms, so that’s another opportunity for small and midsize firms to steal clients away from large firms.

Technology focus – LegalZoom and other automated legal service providers are quickly picking up market share and commoditizing most routine legal forms and documents. Law firms are automating more of their predecents and routine legal documents to increase their efficiency for fixed fee quoted commodity work.

Client focus is a term you’re hearing more and more, as clients demand that law firms think about client needs and profitability, not just their own. Clients want law firms to focus on their KPIs and their strategic goals.

Finally, mid-tier law firms are under continuing cost pressures as global firms are pushing hard from the top and NewLaw firms are nipping them from underneath. Mid-tier firms such as Heenan Blaikie, Macleod Dixon and Ogilvy Renault didn’t have the sophisticated management structure or the resources needed to compete with the global firms, and the NewLaw firms have cut their overheads in half. So mid-tier firms are increasingly in a Catch-22 situation, with nowhere to run. They will either be swallowed up or blown up, unless they change their business models.  Again, here’s another opportunity for small firms and midsize firms under 50 lawyers to steal clients away from their larger counterparts and hold the NewLaw firms at bay by reducing their overheads and updating their business models.