Madrid legal forum

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A paradigm shift in legal business models.
Lessons for law firms…

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Madrid legal forum

  1. 1. Attaining the ‘impossible’ dream: differentiation that matters Wayne Stewart Director, Monte Rosa A paradigm shift in legal business models. Lessons for law firms…
  2. 2. 2 © 2014 Beaton Capital
  3. 3. 3 Hallmarks of the traditional law model 1. Top talent 2. Leverage full-time lawyers 3. Tournament for promotion 4. Few owners 5. Partnership 6. High hourly rates 7. A generation of growth High salaries High fixed costs High utilisation PPEP maximised Profit today Client bears the risk Denial A case of strengths becoming weaknesses… © 2014 Beaton Capital
  4. 4. 4 Hallmarks of the NewLaw business model 1. Requisite talent 2. Fit-for-purpose standards 3. Separate selling and production 4. Corporate brands 5. Disruptive technology 6. Flexi-work practices 7. No tournament 8. Corporate ownership 9. Non-lawyer shareholders 10. Fixed fees Effective division of labour Culture of efficiency Best use of talent Not key person dependent Provide ‘more for less’ Low fixed costs Fewer inappropriate signals Shareholder-value mindset Long-term view on profit Risk is shared with clients SUBSTITUTE | NEWLAW BUSINESS MODEL Some are BigLaw firms starting to conclude: “If you can’t beat them, join them” © 2014 Beaton Capital
  5. 5. The difference between NewLaw ( ) and Old Law ( ) Demand oriented Client lock-in & referral Clear (1) cost; (2) segmentation; or (3) differentiation strategy Subscription, fixed or product pricing Fast invoicing/collection, no discount Risk on law firm Process optimisation Service standardisation Lean thinking Investment “in the system” Innovation culture Supply oriented Size and publicity focus Serve and seek all incoming clients Hourly pricing Slow invoicing/collection Risk on client Reinventing the wheel Each matter unique piece of work Bureaucratic thinking Short-term profit Avoid-the-mistake culture 5 © 2014 Beaton
  6. 6. But still early days…. • Not as pervasive as the slide may suggest • Law firms will not continue to grow as before – they will have to be managed as complicated ‘systems’ – Requiring massive behavioural change – Too many still see ‘growth’ as underpinning ‘full service’ – Too many have ‘compromise’ management leading to the ‘lowest common denominator’ in decision making – Too many fail to have firm wide strategy – factionalism pervades • The successful firms will have a ‘shockingly clear’ identity and cohesion • Remuneration models will move towards salary+bonus+dividend • Financial reserves will be accumulated for investment ….sounds familiar? 6 © 2014 Beaton Capital
  7. 7. Attaining the ‘impossible’ dream: differentiation that matters Wayne Stewart Director, Monte Rosa Unstoppable forces of change in the legal market. A summary…
  8. 8. Porter’s analysis of the market New entrants to the market Competitive rivalry amongst incumbents Client demand for services Substitutes for the incumbents Supply of talent 8 © 2014 Beaton Capital
  9. 9. 1980s to the GFC was boom time for law firms in a sellers’ market 9 Growth of cross border referrals Domestic start-ups Slow globalisation Formation of national firms Growth of corporate clients Increasing number of practitioners Increasing demand for corporate law firms No substitutes Tournament of lawyers © 2014 Beaton Capital New offices - national and international Limited poaching Limited discounting
  10. 10. Since the GFC – the pace of change is increasing 10 Globalisation mainstream Specialist boutiques Sophisticated buyers (GCs) Budgetary constraints Service levels Rise of the Supertemps Virtual workforce New business models Disruptive innovators © 2014 Beaton Capital Fee discounting Team migrations Downsizing & restructuring International ‘mergers’
  11. 11. Supply of talent CLIENT MARKET Clients • Lawyers going client side • Poachers turning game keepers – slow trend that is growing • Hardened attitudes during the GFC, not helped by law firms discounting • Clients looking for more than rebates and discounts • Fixed fees and risk sharing arrangements becoming more common • All of business and embedded arrangements to create ‘certainty’ • Business intelligence services on the back embedded work streams 11 © 2014 Beaton Capital New entrants to the market Competitive rivalry amongst incumbents Client demand for services Substitutes for the incumbents
  12. 12. Supply of talent CLIENT MARKET The trend to in-house is most evident in the rise of number of corporate counsel 12 4,500 3,000 1,500 - 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Australian Corporate Lawyers Association New entrants to the market ACLA membership numbers © 2014 Beaton Capital Competitive rivalry amongst incumbents Client demand for services Substitutes for the incumbents
  13. 13. New entrants to the market NEW ENTRANTS Competitive New entrants • What is driving new entrants? – Following clients globally – The rise of Asia – The rise in the need to address different jurisdictional law – Specialisation over generalisation • Specialists skimming the market of its cream • Referrers now becoming competitors 13 © 2014 Beaton Capital rivalry amongst incumbents Client demand for services Substitutes for the incumbents Supply of talent
  14. 14. Substitutes • Slicing up the market, picking out the points of value • Offering terms and relationships that are more commercial and appealing to clients • Impacting at different points of the old legal business model: – New on-hire models (e.g. Axiom) – attracting higher value transaction/project work – LPOs – attracting mass discovery and commoditised work – New embedded models (e.g. Riverview) – attracting long term relationships, clever use of technology and go beyond being a mere legal services provider 14 New entrants to the market Competitive rivalry Client demand for SUBSTITUTES amongst services incumbents Substitutes for the incumbents Supply of talent © 2014 Beaton Capital
  15. 15. Talent • No shortage of lawyers • Prepared to join “substitute disruptors” • Probably no shortage for the next generation • Market changes and the GenY mentality • Musical chairs for partners 15 New entrants to the market Competitive rivalry Client demand for TALENTMARKET amongst services incumbents Substitutes for the incumbents Supply of talent © 2014 Beaton Capital
  16. 16. Competitive intensity • Pricing strategies • Differentiation strategies • Geographic expansion – solo or merge • Talent poaching and migration • New delivery models 16 New entrants to the market Competitive rivalry Client demand for COMPETITIVE amongst INTENSITY services incumbents Substitutes for the incumbents Supply of talent © 2014 Beaton Capital
  17. 17. New entrants to the market COMPETITIVE INTENSITY Competitive Major competitive trends in the global legal market continue unabated • The four major trends over recent years in global markets continues – Market segmentation – Pricing and work process efficiency – Consolidation and scale – Globalization • In addition, some firms are working hard to improve their service delivery and client relationship management processes across offices – Seeking increased consistency in service levels – especially between offices – Managing through practice groups across offices in an effort to ‘enforce’ standard processes – Investing heavily in training, technology, knowledge management and standardising work processes • A number of US firms are following the trend in their UK peer firms by broadening partner performance metrics – Revenue/profit managed by a partner replacing personal billable hours as a major metric – Including metrics on client relationship management and business development activity (not just origination) © 2014 Beaton Capital rivalry amongst incumbents Client demand for services Substitutes for the incumbents Supply of talent 17
  18. 18. Market segmentation © 2014 Beaton Capital Old law 18 Old law – typified by the large general practice firm covering most if not all areas of law. High margins from commoditised work shielded within specialist matters.
  19. 19. Market segmentation • Then two distinct segments in the market: © 2014 Beaton Capital Old law 19 Old law (rump) – still typified by the large general practice firm covering most areas of law. LPO – commoditised work taken by LPOs and captive offshoring at reduced margins LPO
  20. 20. Market segmentation • There are now three distinct segments in the NewLaw market: © 2014 Beaton Capital A B C A. High value/High risk/Specialised work (large law firms, boutiques) B. Sophisticated day-to-day work (in-house teams, insourcing firms and contract lawyers, mid-tier generalist firms) C. Large scale process and volume work (Legal Process Outsourcing, captive offshoring) 20
  21. 21. There will be a transition period in the long-term market structure A different structure is taking shape over the next decade • More than 30 law firms are competing as International Business Law Firms – or aspiring to do so – The market cannot support such a number given the size they will need to be to compete effectively across the globe • We forecast that by 2020 there will be a leading group of around 10 or so firms with the capabilities to compete effectively in all major regions in higher value work – It will be a mixture of present Global Elite and IBLs – There will be a second tier of firms who lack the quality and consistency to be in the leading group but who nevertheless compete in parts of the market and can take market share from local firms – This group will come to compete in a lower value position than the first group – Both these groups will contain a number of merged firms including transatlantic mergers • There will undoubtedly be more large law firm failures – The competitive demands plus the financing problems faced by partnerships are creating a very fragile environment – Some others will decline in market position and survive only by a significant restructuring – with many being forced into different ownership structures © 2014 Beaton Capital 21
  22. 22. Forces – a recap External • Client knowledge, buying power and capability increasing • Disruptive substitutes and new entrants • Talent loyalty/disloyalty Internal • Leadership and governance – fit for purpose? • Momentum and direction – consolidation/fragmentation? • Balance sheet and finance – sufficient? Remember - there are always winners and losers in every market sector 22 © 2014 Beaton Capital New entrants to the market Competitive rivalry amongst incumbents Client demand for services Substitutes for the incumbents Supply of talent
  23. 23. Attaining the ‘impossible’ dream: differentiation that matters Wayne Stewart Director, Monte Rosa

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