As per the companies surveyed, law firms also referenced the state of the economy as a key issue of concern; however, the size of law firms was a key factor in their responses, with many of the mid-sized firms believing that if they did not grow considerably larger they would risk their position going forward. In addition to the economy, the challenges of managing ‘Generation Y’ (born mid-1980s to early 1990s) recruits, compliance, rate pressure and streamlining of process/ efficiencies were also mentioned. Some spoke about the challenges of replacing the partner model that they felt could endanger progression going forward: ‘We need to create a more sustainable way of rewarding partner aspirations, as well as taking a cold, hard look at vanity turnover,’ said one respondent.
What are the biggest challenges facing law firms over the next two years?
(Top four replies)
State of the economy
Legal Services Act
Mergers and acquisition/consolidation
Talent retention and management
When it came to internal management, virtually all law firms said that the way they managed staff recruitment and retention had changed unrecognisably over the past 10 years. Indeed, the topic of recruitment and talent management was cited as a huge issue and, in many cases, cause for concern. Demand for flexible working hours and the ability to work from home, along with bonus schemes were all driving changes to HR and management approaches.
‘The apprenticeship as we knew it just isn’t part of young lawyers’ thinking anymore and we have to respect that,’ said one managing partner.
Which areas of work do you expect to expand over the next 12 months?
(Top three replies)
Which areas of contract to you expect to expand
over the next 12 months?
(Top three replies)
Mergers and acquisitions
General transaction-based work
When it came to areas for future growth or contraction, responses varied by industry sector. The dive in property-related work has hurt firms enormously, particularly where diversification had not been a clear priority.
What are your most important areas of focus over the coming 12 months?
(Top three replies)
Client retention and satisfaction
Internal process and efficiency
Talent management and retention
Most law firms also said that general transactional and M&A work is in decline (at least in terms of what is being outsourced to them), but they also said they were seeing an uplift in general litigation, corporate recoveries and insolvency work which has been smoothing out the dip in work elsewhere. ‘Thank goodness for corporate recoveries and litigation. We would be in a whole heap of trouble if we had not seen an upturn in these areas,’ said one respondent.
Managing partners were clear about the need for their firms to be client-focused and for their lawyers to act as all-round business advisers. Many spoke of the need to provide ‘valuable advice, which goes beyond the hourly rate’.
In the competitive midmarket sector, firms say they are adding further levels of service, such as client intranets, billing and document management systems, to retain business. ‘We need to be better at understanding what our clients want, how they want it delivered and to do that at an increased speed. We need to look at all areas of delivery and best practice, and pass that on,’ said one managing partner. When it came to client spending, four-fifths of respondents said there had been some impact on legal fees as a result of the current economic uncertainty, and that negotiations over rates had been more aggressive.
Said one managing partner: ‘We are having to balance the work we need to do to retain our clients with the pressure to cut costs and increase market share against our competitors so that we are prepared to act quickly when we emerge from the recession. I don’t want to cut my hourly rates as it will be difficult to reinstate them afterwards, but we are under pressure to do just that.’
Many respondents said they were having to take on board more requests for fixed pricing and more project-focused billing, although they said that the number of actual projects was in decline. While most firms believed that this pressure on fees was likely to continue for some time, they also said that it was being offset by a rise in ‘discretionary’ spend, through unforeseen litigation and corporate recoveries.
‘We are seeing some decreases in spend, which is to be expected, but we are getting it back in other, less planned and unpredictable areas,’ said one respondent.
As well as pressure on rates, law firms said that companies had become more watchful of the entire billing process; however, when asked whether clients were demanding more innovation in the way law firms provided services, for example via new technologies or outsourcing, the answer was a categorical ‘no’. This contrasts sharply with the comments of the general counsel that were surveyed who unequivocally stated that they needed more creativity in both cost and service provision from their law firms.
In which areas do you feel most under pressure from clients?
(Top three replies)
Credit terms and billing
A changing industry
When asked about the impact of the Legal Services Act, just over half of all respondents said that it was too early to tell. The other respondents spoke of the possibility of securing new investment or funding, or saw the potential to streamline their practices and concentrate on more volume-driven work. But, as one managing partner said: ‘Many will decide to do nothing and just wait and see. For many, it will be too late.’
When it came to their views on the commoditisation of legal services, there was a 50/50 split between those firms that believed that the current set-up and role of law firms could not be replaced, and those that took a more pragmatic view saying that although their services were important, parts of the process could and are being managed by other skilled legal service providers.
Said one managing partner: ‘I can see a raft of specialist, competitive, well-geared companies coming into the market and picking off my loans or corporate recoveries divisions, for instance. It could happen across the whole practice. It is going to have a big impact and those that don’t see that are not living in the reality of the marketplace.’
When asked what other strategic measures they thought the legal sector should adopt to increase profitability, respondents’ answers varied from the need to streamline processes across the sector; the work necessary to ‘aggressively consolidate’ current practice areas; the desire to focus on what it is that ‘lawyers are good at’, namely, bespoke strategic advice; and the need to develop an efficient global business model.
About this research
This paper was compiled for Legal Strategy Review by industry consultant Michael Blakesley between September 2008 and April 2009. It represents the views of general counsel, managing partners and senior legal heads from the UK offices of 40 corporate legal departments and 20 law firms.
This article first appeared in Legal Strategy Review, Issue 4