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.

 

How Realization Rates Can Increase Firm Profit

Here is a white paper I wrote for Clio on “How Realization Rates Can Increase Firm Profit”. In recent years, realization rates have been dropping for law firms of all sizes as clients have pushed for lower rates and fixed fee pricing of legal work. The paper explains how realization rates and other key profitability metrics are calculated and outlines several strategies to increase realization rates and profitability.

Is this the “tipping point” for use of Lean Six Sigma in law firms?

Clifford Chance, a ‘Magic Circle’ firm in the UK, has decided to train all of its lawyers in ‘Continuous Improvement’ techniques. CI is a subset of Lean Six Sigma or Lean, a process improvement technique used by Fortune 500 companies for years, but has had minimal penetration in the legal industry to date. Seyfarth Shaw, a large US law firm, has been an innovator in Lean techniques for several years, but few other firms have committed to Lean in the way Clifford Chance is now doing.

Lean is a method used for increasing efficiency of processes, as explained in this article on legal process mapping. Seyfarth Shaw, one of the firms mentioned in the article, has used process mapping with its clients with good results.  They have reduced ‘waste’ in legal processes, which can range from 30% to 80% of the total work required.  It is surprising there is so much waste in how legal work is done.  Perhaps not that surprising; however, as hourly billing arrangements encourage wasteful working habits. You get paid more money the more hours you work on a file under hourly billing arrangements, so the temptation to over-work a file is there.

Hourly billing encourages inefficiency, while fixed fee billing encourages efficiency.  As law firms become more efficient in the way they work on files, they must switch to fixed fee billing to maintain or increase file profitability. If you don’t change your billing method, you will find your profits shrinking away as you get more efficient under hourly billing.

Many firms resist fixed fee billing since they aren’t willing to change the way they do the work. Why change when making good money under hourly billing arrangements? What will likely force the change is that the move to Lean techniques by firms like Clifford Chance will accelerate the move to fixed fee billing arrangements. As this happens, other magic circle firms and large US firms will be forced to change to compete for clients hungry for this more efficient way of working and the lower overall legal costs that result. Eventually the rest of the legal industry will follow suit.

Partner compensation systems will also need to change to reward partners for increasing efficiency instead of billing more hours. This will be a very difficult change for most firms, however, and there will be casualties along the way as partners battle to maintain their position on the compensation grid. So law firms need to prepare for these changes now, before it’s too late.