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.