Barbarians at the gate: the changing face of legal services

May 2013 | EXPERT BRIEFING | LEGAL SERVICES

financierworldwide.com

Unprecedented pressure on legal budgets (due in part to the financial crisis), the emergence of new and innovative legal service providers and remarkable advances in technology are proving catalysts for a significant reshaping of the global legal services industry. Clients are becoming more sophisticated and are demanding more from their lawyers, and intense competition in an already crowded marketplace means firms are clambering over each other to adapt (and be seen to adapt). But achieving meaningful change in law firms is notoriously difficult, particularly when that change involves disruption of a hundred year old business model.

Many purchasers of legal services (and a great deal of lawyers) have long held the belief that there is something fundamentally wrong with the traditional law firm business model centred on the billable hour (or perhaps more precisely, the six minute billable unit). Some go so far as to say that it directly conflicts with the interests of the client by encouraging (indeed rewarding) inefficiency and ‘over-lawyering’ both at an individual and institution level. Lawyers are typically judged, remunerated and promoted based on the number of hours on their timesheet rather than the quality of their work. The billable hour has also been accused of having a stifling effect on innovation: what incentive is there for a law firm to make significant investments in time-saving technology or to improve its processes and efficiency only to see a resultant reduction in its fees? Whilst other industries have evolved and reinvented themselves with the times, the legal services industry has generally struggled to keep pace.

But it seems real change is finally in the winds as overwhelming demand from clients and the threat of obsolescence has provided lawyers with all the motivation they need to innovate.

In the face of tighter legal budgets, almost all companies are rethinking their approach to dealing with legal issues. Those with their own legal department are performing more work in-house, and most are adopting a shrewder ‘horses for courses’ approach to using external lawyers. Companies no longer seem willing to pay top dollar to ‘Big Law’ to perform routine legal work when perhaps a smaller, cheaper firm will do. More interestingly, some companies are going further and ‘unbundling’ issues on which legal expertise is actually required from more process-oriented legal tasks which it makes sense to have performed elsewhere, perhaps using a lower cost resource (onshore or offshore) or by employing technology, or both. So the scope of work for the lawyers is narrowed to that on which they are truly expert and truly required.

Sophisticated clients, often on the advice of procurement professionals, are increasingly seeking new fee arrangements focused on outputs rather than inputs and the actual value delivered to the client. This is not just a matter of keeping fees down (although that is a key driver), but of incentivising law firms to develop their offering, to provide complete solutions and to share cost risks with their clients. It seems the classic law firm response to the question of costs, that is offering discounted or blended rates and perhaps some free secondees, is no longer good enough as this does nothing to align incentives and improve service quality.

These trends, fuelled by the liberalisation of the legal services market, have seen an incredible amount of merger activity between law firms seeking a ‘safer’ position in the market and the emergence of numerous alternate providers all eager to step in where the traditional law firm model is perceived to be limited. The variety of these providers is as wide as the market they are seeking to serve: large scale legal process outsource providers (LPOs) based in lower cost jurisdictions; new style law firms with vastly different structures and business models; virtual law firms; ‘body shops’ offering on demand legal resources; and legal knowhow and technology companies offering packaged legal products comprising interactive forms, DIY guides and optional access to remote legal assistance. In the consumer legal services market, a number of major retailers and insurance companies have developed their own legal offerings leveraging their brand and customer relationships, often as part of a joint venture arrangement with an existing law firm (now made possible in the UK by the Legal Services Act). Ignoring cost considerations, the reality is that in many areas these alternate providers are inherently more suited to delivering services historically provided by lawyers. For example, with respect to large scale discovery (disclosure) or due diligence exercises, LPOs can better leverage economies of scale, have more established processes based on lean six sigma principles and have greater project management expertise. Enlightened law firms have recognised this, and many have forged strategic relationships with LPOs and outsource this type of work to them whilst still managing the relationship with the client. The question remains, though, whether LPOs will be content to act as the ‘factory’ in these types of ‘managed service’ arrangements or whether they will use their increasing capability and experience to climb the value chain themselves.

The other key piece of the puzzle is technology. Stating the obvious, but advances in the speed and reach of communication networks, capabilities for the processing and exchange of huge amounts of information and so on have already changed the way lawyers interact with their clients and deliver services. More specific to the legal industry, new software capable of intelligent document analysis is making enormous efficiency gains possible, whilst arguably producing superior output not marred by human error. Document automation technology is enabling legal service providers and in-house legal teams (and indeed business units) to create standard contracts in a fraction of the time and at a fraction of the cost they previously did and to better collate and re-use their know-how. Better project management and matter tracking software has allowed clients to gain deeper insight into the progress of their matters. Algorithm-based software is influencing decisions on whether to litigate or settle a claim. Harnessing the power of technology can provide a significant competitive advantage to those legal service providers who choose to embrace it.

The new economic, technological and regulatory landscape (bringing down barriers to entry and finance) is making a reality of many of the predictions of ‘future law’ thinkers and challenging the traditional law firm model in a way it has never been challenged before. Some law firms, particularly those at the top end of town, may be able to survive perfectly well with only minimal change to their existing business. But for the majority of lawyers, innovation is imperative as clients look even further to achieve cost efficiencies and service improvements through better utilisation of technology and best practice resourcing. And with a global legal services market estimated at $716bn per annum (Reuters) up for grabs, there’s a whole lot of incentive to do so.

Jason McQuillen is a co-founder and principal at radiant.law. He can be contacted on +44 (0)7513 585 596 or by email: jason.mcquillen@radiantlaw.com.

Jason McQuillen

radiant.law