Structural changes are needed in law firms of the future

The recession has had a big impact on law firms. The volume of work declined post-Lehman and, although firms shed staff faster than they had done in previous recessions, there are still too many firms for the work currently available in the UK.

With supply greater than demand, prices have fallen over the past three years. Clients have taken steps to reduce their legal spend and law firms have had no option but to agree to lower prices. Panel reviews (often conducted by procurement specialists not lawyers) and beauty parades continue to force prices down as equally competent law firms which need the work are pitted against each other.

This process is likely to establish new norms for pricing for the foreseeable future. These norms will not be based on law firms’ traditional approach which is still, essentially, a cost plus model (‘how much do I need to charge to make a margin based on the lawyers I employ to do the work?’). Instead, the norm will be a market-driven price that increasingly sees law as a commodity purchase.

As a profession, we need to find new and more efficient ways of delivery that will do what the client needs for the price that the client dictates. This approach requires us to start with the price and reengineer the way that work is done to produce the margin. The problem for most law firms, of course, is that we start with a lot of history and baggage that makes this difficult.

The challenge we face is likely to be far greater after liberalisation and the introduction of alternative business structures in 2012. New entrants to the market don’t start with the same history or baggage and can bring a completely different mindset to service delivery. They may start with the high street but these changes in approach are likely to percolate up the value chain faster than many lawyers expect as a large company approach rewrites the law firm model for the 21st century.

There is still time for law firms to respond. Consolidation is long overdue amongst law firms, which generally remain too small to extract economies of scale from their operations and to invest in the technology and processes needed in the new market we are facing.

The key to success rests with the leadership teams in law firms. Their strategy, vision and ability to implement the changes needed to overcome the challenges ahead are likely to determine which firms emerge as winners rather than losers over the next five years.

Who knows, maybe the best leadership teams will become highly sought after by competitors and investors who are determined to make their law firms bigger and more efficient businesses? There’s certainly plenty to play for in a market worth over £20bn a year. 

tim.aspinall@dmhstallard.com