Book review - Remaking Law Firms: Why & How

Remaking Law Firms: Why & How by George Beaton and Imme Kaschner is a book which looks ahead at the changing shape of the legal market, and predicts a future in which the business models of successful law firms will have changed significantly.

It should be standard reading for anyone who is putting their own money at risk as a partner (or owner) in a law firm of any substance in the next 10 to 15 years. It is mainly deals with large commercial firms (BigLaw) but it has relevance for firms of all sizes. Some will be motivated by it, many may be uncomfortable, and some may dismiss it as pointless futurology – but all should take the time to understand its analysis – if only as insurance!

The authors have involved a wide range of law firm leaders, clients, suppliers and competitors in the compilation of this book, detailing clearly the main themes and impacts they see now, and emerging with greater force in the next 10 years or so.

For over 25 years the legal market has had a standard business model which has served its participants very well. David Maister described the objective as maximising profit per equity partner (PEP) using a simple equation based on the following four key factors:

• Utilisation – how many hours per fee-earner
• Rate – how much you can charge per hour
• Margin – how well you contain your costs
• Leverage – how many (salaried) fee-earners each partner supervises and manages

So the first question is, why would law firms want to change a successful model? The answer is quite simply they won’t want to, but they may have to, and the first part of the book explains with great clarity why this is. The PEP model was developed and perfected in an age when there was a seller’s market. The market for legal services was expanding faster than economic growth, there was a shortage of skilled practitioners, and regulatory requirements ensured that competition was between law firms, but excluded external finance in most countries.

But markets are not one-sided – they reflect a balance between sellers and buyers. Both parts of the equation have changed substantially. Regulatory changes, accompanied by technology, finance and globalisation have changed the supply side. Competition comes not only from other law firms but from a range of other entities (NewLaw) which have the capacity, finance and ambition to grow exponentially, providing services in new and different ways. And, just as importantly, larger clients have the will and ability to do in-house much of the work currently done by conventional law firms.

Meanwhile, buyers’ needs have changed. The larger the buyer, the larger the change (so far). They are far more sophisticated and multi-faceted. They are able to classify work according to its importance and difficulty, and apply different purchasing criteria to different parts of the work. This is neatly outlined and tabulated to create a decision matrix. Incidentally, the proportion of work which is sufficiently important as to not be especially price sensitive is put as low as 15 per cent. Much of the work can demonstrably be done to a satisfactory standard (client-defined) either in-house, or by new legal service providers.

The authors demonstrate, with examples, how the PEP model has ‘maxed out’ – and market conditions now mean that the historic recipe for success is no longer sufficient, and could be counter-productive – new model(s) are needed. They identify a range of options and create a checklist for law firm leaders to navigate a much changed future in which clients have the whip hand, and technology is used to its potential.

They identify 3 main areas of change:

• How legal work is won
• How legal work is done
• How law firms are governed

The authors and their contributors all foresee a far more ‘corporate’ legal world in which the contributions of individual practitioners (however skilled) will be far less significant in most cases than the ability of the legal supplier to deliver high quality, consistent transactions in a timely, controlled manner. In Maister terminology, there will be far less brain surgery and far more pharmacy.

This will mean that for most work, the brand of the firm will become more important than the brand of the lawyer. In turn, that means that the sales process will increasingly become the province of a specialist sales force. Far more attention in the sales process will go to demonstrating client value, which is measured by reducing legal cost, providing predictability in cost and process, significantly improving outcomes. Relationships will only count if the results support them. This poses some very tricky questions about market positioning.

The predictability in cost means fixed pricing. But since suppliers have to make a profit to stay in business, this in turn means far more proactive management of the cost of delivery, bringing a far more prominent role for legal project management and process improvement, with skilled estimators and cost accountants alongside. This will change the balance of skills and resources required to run a successful law firm. More sophisticated IT, more highly skilled non-lawyers, more outsourcing, fewer paralegals (the IT or outsourcers will do their tasks), and less scope to train junior lawyers on the job.

All of this will mean that the current methods of managing performance and development, heavily based on individual chargeable hours, billing and lockup, will not be fit for purpose. Likewise, PEP as a measure, if firms incorporate and cease to be partnerships.

The authors then move on to addressing the issues of governance – how will the changed market affect the way firms are run, and how easy will it be for them to adapt? Well, you’ll have to read the book to find out, but suffice it to say that treatment of this topic is as detailed and illuminating as the analysis of the need to change the traditional legal model.

There are big forces in play at all levels in the legal market. Beaton and Kaschner have provided a very valuable foretaste of what is to come. In the coming years partners cannot say that they weren’t warned.