By Kristin Walinski, founder and chief executive officer of Scribe
Law firms perpetually grapple with a variety of competitive forces. But the events of 2020 forced law firms to take a deeper dive into their traditional approach to doing business. In a recent webinar sponsored by Thomson Reuters, the Baltimore Local Group tackled these tough issues. Moderator Jason Lichter, principal at Troutman Pepper eMerge, was joined by Eddie Hartman, a partner at strategy and marketing consultancy Simon-Kucher and co-founder of Legal Zoom; Catherine Moynihan, associate vice president for Legal Management Services at the Association of Corporate Counsel; and Matthew Todd, vice president of ElevateFlex Services.
The Competitive Landscape Facing Law Firms as We Enter 2021
Numerous forces, both internal and external, have converged to force law firms to reconsider their business models, Todd observed. First, he noted the rise of alternative legal service providers (ALSPs), including the Big Four accounting firms that are taking market share from law firms. He also pointed out that corporate law departments have increasingly recognized the extent to which nonlawyers can perform some of the legal services that firms had been performing—and can do so more cheaply and efficiently. Todd anticipated trickle-down changes in firm ownership structures, predicting that a wave of states will adopt provisions similar to those in Arizona that now allow firms to bring in additional nonlawyer players from legal operations, knowledge management, process optimization, and the client service side. Finally, he forecasted that sourcing and procurement will continue to be influencers and buyers in the market, particularly with regard to panel and firm selection.
Meanwhile, the way corporate law departments engage with law firms has shifted. Though attorneys continue to have direct relationships with partners at law firms, there’s also a separate movement toward consolidating outside counsel management as a function within the law department, Moynihan explained. Whether with the help of procurement, sourcing, or a legal operations team, corporate lawyers are creating standardized processes to select firms, building law firm panels, and guiding their counsel to the right firm for the right matter. She added that buyers of legal services are becoming more sophisticated as well, pointing to value measurement as a key aspect of change.
Specifically, law departments are moving toward using objective scorecards and metrics to measure their law firms’ performance. Beyond discussions of cost, in-house counsel are focusing more on how matters are staffed. They’re considering which resources are used, both between partners and associates as well as the diversity of those resources, and whether they’re getting ongoing project management or process improvement assistance. Notably, many expect that project management services will be included as part of services rendered at no additional cost, but Moynihan noted that this remains an area of tension. In-house counsel also are paying attention to more mundane but important factors, such as billing guidelines compliance.
How Porter’s Five Forces Are Putting Pressure on the Legal Economy
Hartman discussed how Michael Porter’s classic Five Forces framework has given rise to new competition for law firms:
• The threat of new entrants: It’s never been easier to start a law firm, said Hartman. The pandemic has accelerated this threat, because young associates who are disenchanted with the law firm lifestyle can easily set up their own virtual law firm.
• Bargaining power of buyers and sellers: Hartman combined these two forces, noting that customers are increasing their share of bargaining power as purchasing responsibility moves away from general counsel. Purchasing now often permeates multiple layers, including legal operations and procurement, which report to the chief financial officer rather than to the general counsel. If procurement is responsible, their job is done when the contract is signed; it’s not clear how they’ll measure or whether they’ll understand the import of the outcome of a legal matter. They may be less convinced than general counsel that billing in six-minute increments is the right way to do things; they also may be looking for a discount.
• Threat of substitutes: The Big Four aren’t the only nonfirm options; Axiom and other types of ALSPs also are joining the fray. The ecosystem is heating up, and even if they aren’t taking share from your law firm now, it’s likely they will soon.
• Internal competition: As law firms increasingly avail themselves of loosened ownership requirements that permit nonlawyer investment, Hartman expects that we’ll see radically increased competition among these newly structured law firms. For example, when the UK liberalized ownership of law firms, law firms incorporated nonlawyers and adopted different funding models that improved their innovation and market position, blurring the lines between what services law firms and ALSPs can deliver.
Hartman believes that these shifting forces are going to attack the smaller and midsize firms in the market. The firms at the top aren’t being hired for legal efficiency, he said; they’re being hired for their brand name, reputation, and relationships. That means everyone else needs to watch out, given the impact of new entrants to the market, from the Big Four to ALSPs and LegalZoom.
How Law Firms Should Respond to Heightened Competition
Law firm marketing directors and managers that want to not just survive but thrive can take a number of steps to differentiate themselves. Todd suggested that law firms focus first on what they’re doing right: their partners, expertise, and relationships. He added that firms should look to who else they can partner with, whether that means other firms or ALSPs, to get jobs done quickly and affordably. That’s because general counsel and procurement alike don’t care who does the job—they just want the solution that gets the job done efficiently, effectively, and with the right outcome. Todd also recommended that firms that have consistently invested in diversity over the last five years—not just in recent months—highlight their commitment to inclusion. This approach can help them take work away from incumbents who are only now recognizing the importance of diversity.
Hartmann agreed with Todd and reiterated that firms need to consider how they can perform their work differently. Moynihan offered an example, suggesting that firms think about how they can become “stickier” with their clients. For example, law departments are excited about automation, but not every department can afford that technology. So, if a law firm can help an underfunded department apply automation to a chunk of their work, that firm will become more enmeshed with—and more valuable to—the client.
In short, the panel concluded that for law firms to prevail against these intense threats, they must invest now in new technologies and strategies that will position themselves to deliver results better than their competitors.