Eight Reasons for Optimism
There has been no shortage of pessimistic predictions for the future of legal practice. Issues such as graduate oversupply and underemployment, digital disruption and increasing disintermediation, increasing price competition coupled with increased cost of delivery, greater client empowerment and price sensitivity seem to dominate the legal media.
In addition to these now perennial issues, firms are now living through significant changing generational demographics among the partner / director base. Some firms now have three generations within their partnership, and the Millennials are on their way! The Baby Boomers, Gen X, Gen Y and potential millennials all have differing views around collective endeavour and entitlement.
Although all of these issues and challenges are real and here, there remains cause for optimism, certainly in Australasia.
FMRC data indicate that many firms are growing, increasing revenue and profit, retaining excellent clients and enthusiastic, capable talent. Having served the profession since 1989, I have seen significant change – but change rarely manifests in the degrees of profundity championed by many ‘black hat’ commentators. Change in the legal services market has been a constant, sedimentary process, never a cathartic baby – bathwater – footpath scenario.
1. The ‘disrupters’ don’t seem to be disrupting
There has always been space in the Australasian market for firms of all shapes and sizes. In recent years we’ve seen a number of alternative models emerge. What we have not seen is a rush of clients away from existing firms to the providers of ‘new law’. Nor have we seen market incursion by non-lawyer providers or new entrants in significant numbers. The profession is, in fact, remarkably stable. Lawyers may be practising inside alternative structures or under international brands, but the number of practising certificates relative to total legal market has been remarkably constant for many years.
2. An increase in shareholder class actions should prompt a swing in the insourcing / outsourcing cycle
When I started working with lawyers, two percent of practising certificates in NSW were held by in house lawyers; it’s now about 32%. This has been a significant structural change.
The insourcing of legal work was thought to be a cyclical phenomenon, and perhaps it still is. I suspect that company directors (and their insurers) may become increasingly risk averse as class action litigation increases. This may see significant work returning to the private profession as a matter of good governance and risk minimisation.
3. Price has stabilised (but watch the discounting)
I recently read an article reporting on a large survey of corporate lawyers that concluded that 70% of respondents felt that they received ‘fair value’ from their current providers. This is good news.
All of the segments surveyed by FMRC in Australasia show modest annual increases in price, and have done for the last three years. That said, all you have to do to get a discount is ask for it.
I am seeing more firms investing significantly in improving the client experience, explaining and delivering value and building their brands through trust-based relationships, all the while maintaining pricing levels and providing clients with choice of pricing methodology.
4. ‘Big law’ has left the GFC behind; they are by and large succeeding, employing and innovating
Far from facing a predicted death, large Australasian firms are doing well. Some are dealing with on going challenges, but most are increasing graduate intake, salaries and profit. In the main, partner and lawyer productivity is up and expenses are being contained: a good recipe for on going business success.
5. ‘Mid-tier’ firms are stable as a market segment, although competing for talent and clients
I have studied this market segment for a long time. We’ve listened to advisers predicting the demise of the mid-sized firm for decades. The remarkable truth is how stable this segment has been, for decades. The size of the market, productivity measures, profitability measures, and graduate intake are all remarkably stable.
Within the segment, there is significant competition for both clients and senior talent, but this is actually beneficial to the market as a whole. These firms are having to provide greater value, innovative solutions, better employment conditions and opportunities, and more innovative profit-sharing approaches.
6. Small firms continue to do well, particularly those that collaborate
I’ve watched and measured groups like Law Australia and Law Link in New Zealand as they have developed over the years. I am utterly convinced of the merit in small firms collaborating to achieve success. Sharing resources, pooled buying of expertise, advice and services delivers an economy of scale that many small firms could only dream of.
Outside such groups many smaller firms are doing well. Commoditisation remains a constant challenge but technology and international process outsourcing are returning profit margin to offerings that stopped being profitable some time ago
7. The quality of the next generation of leaders and lawyers
WOW, interviewed any graduates recently? I don’t know whether to be excited or terrified, but for my money the future of the profession is in good hands. These people are very impressive.
8. Economists and futurists seldom hit the bull’s eye
We’ve seen some bold predictions in the legal media in recent times, some predicting the end of days for lawyers. Who knows? One day we might all be digitised out of work, but I doubt it.
Predicting booms and busts relies on a set of considered assumptions. Many get it wrong because they assume that markets behave ‘perfectly’, informed consumers making rational purchasing decisions. The thing is, they don’t. In fact, the very essence of consumer marketing is to get ill-informed purchasers to make irrational purchasing decisions. How can a $7000 handbag exist when it does exactly the same thing as a supermarket shopping bag?
Markets don’t behave perfectly and consumers don’t usually buy the quickest, cheapest alternative, even if it’s better.
There is little doubt that commoditised, repetitive tasks are being digitized out of the hands of lawyers. Its also likely that some people in some market segments will choose to purchase from those with whom they have developed relationships over many years. What ever happens, it’s highly unlikely to be all or nothing.
Change has been and will continue to be sedimentary, layer upon layer. Change can be and should be managed, indeed it is being managed right now. Good firms will continue to be good firms. The emerging digital economy presents opportunities that will enable many firms to thrive. I remain extremely optimistic.
Neil Oakes
Director, FMRC
P +61 2 9262 3377
E enquiries@fmrc.com.au