Market forces are converging to change the competitive environment for law firms. How can law firms thrive in this changing market?
In this article, we look at a case study of how one Australian law firm has been able to achieve fast growth, while simultaneously winning recognition for being one of the best places to work in Australia. We explore the importance of having the right organisational culture in place and how business model innovation could be the key to achieving success.
Changes in the market environment
On the buy side, organisations are becoming more sophisticated in their legal service procurement. Law firms traditionally held an advantage over clients, based on “information asymmetry”, where clients generally had to trust the law firm’s diagnosis of their legal problem. This era has long gone. With the growth in numbers and experience of in-house corporate counsel and the emergence of sophisticated legal procurement and legal operations functions, corporations have become more discerning buyers of legal services. Growth in corporate counsel numbers has also resulted in a “substitution effect”.
Corporations have become better equipped to handle their own legal matters internally, reducing demand for external providers. New technologies, such as contract automation and e-discovery software, have accelerated this trend, so that less tasks require the involvement of a law firm and tasks can be performed more efficiently. Corporations can become less frequent buyers of legal services.
At the same time, other emerging trends change the way that legal services are consumed. There has been a move towards the “disaggregation” or unbundling of legal services. Instead of a single law firm providing all the services flowing from a matter, each component of the project can be undertaken by the most cost-effective provider within the legal supply chain. Similarly, legal services are increasingly standardised, allowing for easier cost comparison and eroding firms’ profitability margins. Law firms are also confronted with new and vigorous competition, such as the re-emergent “Big Four” accounting firms, growing legal technology providers, nimble boutique law firms and the so-called “NewLaw” firms, such as those offering short-term legal staffing or secondment services.
The right culture for success
Against this backdrop of a rapidly evolving market for legal services, only those law firms with the right type of organisational culture will be able to respond and thrive. Studies have shown there is a relationship between workplace culture, organisational health and a greater likelihood of above median financial performance. However, culture is notoriously difficult to define and analyse. It can be thought of as the “way we do things here”, or the implicit values and assumptions that a group shares about how they will approach a problem, or respond to a change. Every law firm has its own workplace culture (and there are even likely to be many “micro-cultures” within a firm, across its different practice areas and in different geographical regions).
What is the right type of culture to win in a changing legal services market? There is no one answer to this question, but an environment that fosters creativity, innovation, learning and entrepreneurship is a great start. This means the firm must have processes and incentives that support and encourage these values. With more choice available to clients in the market, a culture of responsiveness to client need is also paramount. Diversity is an important component here too – firms that can tap into a wider breadth of different experiences and problem-solving styles among their lawyers are those that are the most likely to be able to create new approaches to helping their clients.
Moving away from traditional business models
Unfortunately, many of the attributes of a “traditional” law firm business model can make it difficult to foster an innovation culture. For example, a traditional partnership structure encourages current partners to withdraw profits from the firm (the prize for making it through to the partnership), rather than making deep investments into research and development or financing disruptive and innovative new ventures. Likewise, the pricing strategy of the traditional law firm business model is based on time-based billing, as are personnel strategies which measure and reward those lawyers who bill the most. However, time-based billing can deter innovation. It acts as a natural disincentive to working more efficiently, and it discourages investment in finding new, more productive ways, to work. Hours spent developing improved ways of working cannot be billed to clients and recording time emphasises the opportunity cost of time spent on “non-billable” matters, even if those activities may have represented a valuable investment in innovation. Although criticism of billable hours is not new, the problems become especially pronounced in a more rapidly changing market.
Case study – business model innovation success story
If the traditional law firm business model is an impediment to fostering the innovation culture needed to thrive in a changing market, could new law firm business models be the answer?
This has certainly been the experience of one law firm in Melbourne, Australia. BlueRock Law is the legal division of a multi-disciplinary professional services firm that services entrepreneurs and business clients.
The firm has adopted several business model innovations that are different to the “traditional” model of legal service delivery, including:
- An incorporated rather than partnership structure.
- Offering legal services as part of a larger multi-disciplinary practice, alongside tax, accounting, wealth management, HR and digital strategy services.
- Raising capital (including employee share participation) to fund further growth and invest in entrepreneurial ventures, rather than returning all profits to partners annually.
- Adoption of new technology solutions that support client requirements, through improved systems and standardised processes.
- Less reliance on hourly billing and more use of fixed or alternative fee arrangements.
- Partnering with alternative legal services providers that complement the firm’s service offering.
The firm has had financial success, growing from a team of eight in 2008 to now employing over 180 staff. The firm has continued to appear each year in the Australian Financial Review’s Fast 100 list, a list of the fastest growing companies in Australia. This market success has been achieved at the same time as the firm has been regularly featured highly in the Great Place To Work® Australia league table. This ranks the best places to work in Australia across all sectors of the economy, not just professional services. In 2018, the firm climbed to become the fourth best place to work in Australia. The firm has also won industry awards for its employee-first, creative and collaborative culture.
The firm credits this unique culture as an important reason for its success, acting as a source of competitive advantage in attracting and retaining talent and in developing strong relationships with clients. How has this culture arisen? Although not the only factors, it’s clear that aspects of the firm’s innovative business model have played a key role. For example, as a multi-disciplinary practice, the firm’s value proposition to clients is centred on being able to provide legal service solutions alongside any other type of professional service the client may need. Putting the client’s needs at the centre of the business model has inspired a client-centred culture and emphasised the need for effective collaboration, both internally and with clients. This collaboration had also allowed the firm’s lawyers to learn about how other professional disciplines approach problems, driving innovation and adoption of technology solutions. Likewise, the firm’s incorporated structure and involvement of investors, and allowing employees to participate in its financial success, have helped create a healthy risk-taking and entrepreneurial aspect to the firm’s culture.
What businesses should aim for
The competitive and technological playing field for law firms is changing, and the forces that have created that change are accelerating. Only those law firms that are equipped with the right people and culture will thrive in this new environment. Taking stock of the firm’s culture is a great place to start. If the culture is not suited to the changes going on in the wider market, then perhaps now is the time for firms to re-imagine how their business model could be adjusted, or even radically transformed, to better serve the firm’s employees and clients.