As one of the last professional service sectors to harness the efficiency potential of technology, the competitive landscape of Australia’s legal sector has shifted over the past few years.
Virtual firms now use technology to deliver commoditisable legal work at fixed prices – making this faster and more affordable. There are also competitors to legal firms arising in adjacent sectors, including accounting and financial services. And the number of small, specialist boutique firms has grown. All are challenging the traditional tiered structures and billable hour models – which have been pain points for clients seeking fee certainty and service transparency.
The 'long tail' of an increasingly fragmented market
According to Joel Barolsky of Barolsky Advisors, the biggest structural change in legal over the past 20 years has been the growth of in-house counsel. But as the industry fragments and becomes increasingly competitive, the smaller end of the market will see significant opportunities.
Technology has lowered the barriers to entry. It’s possible to plug into a subscription-based practice and document management system for a few hundred dollars a month, and many specialised senior partners from mid-tier and top-tier firms have broken away to set up successful boutique firms – confident their clients will follow.
Fast-forward a few years, and we might expect increasingly flat, corporate structures and ‘freelance’ talent to become more prominent. Contract resources are growing rapidly: 89 per cent of large firms have told us they already use or will use flexible legal resourcing to scale, or access specific expertise, without employing permanent staff.1
This is driven by pressure to maintain or reduce costs – but it’s an increasingly popular way to work more flexibly. It’s also a way to access non-traditional legal skills, such as legal engineering or legal project management.
Meanwhile, the traditional partnership model is pivoting to corporate structures with employee share plans. Retaining profits (rather than allocating partner earnings) also allows firms to invest more in innovation and new business models.
“It varies from practice to practice, but we are seeing law firms looking less like a pyramid, with a few partners at the top, and more like a streamlined rocket, with lower cost freelance resources, paralegals and technology covering the more process-led transactional work,” explains Barolsky. Other practices could evolve to be more like an advisory ecosystem, co-creating with third parties and tech vendors.
The evolution of professional practice
Source: Barolsky Partners, 2018
Clients expect more, faster and for less
Increasingly sophisticated legal technology will become a baseline expectation for clients, with automated due diligence already making an impact on deals. In many cases, the quality and accuracy of AI-powered due diligence could accelerate deal settlement and lead to better outcomes.
“We’re seeing pockets of AI, for specific applications,” notes Barolsky. “For basic documentation, AI may have a substitution effect but that’s only half the picture. You still have to resolve or negotiate specific clauses or terms, which requires (human) business and legal acumen.”
In fact, this could also generate more demand. Many business owners may have standard non-disclosure or employment agreements – and an online review becomes an effective lead generation tool to reveal potential flaws and a need for more thorough advice.
At the same time, clients also expect more fee transparency. In the next 12 months, 67 per cent of law firms expect that clients seeking more competitive prices will have the biggest impact on their business.2 Bill analysis platforms are being used by larger clients to pick up discrepancies. Workflow analysis platforms can provide companies with visibility and control over the value of legal services they are purchasing.
The implementation, if fixed fee billing is continually on the rise, provides an opportunity to improve margin – but only if you leverage technology to deliver the same value and the same (or better) service at a lower cost.
Adjacent sectors make their moves
Macquarie’s latest benchmarking revealed 49 per cent of law firms believe low cost virtual firms, part of the emerging ‘NewLaw’ segment, will impact them most in the next three years.
And Australia’s lawtech community is small but growing with over 130 lawtech start-ups in Australia, many having launched in the UK, Canada or the US. ALTA (Australian Legal Technology Association) launched in 2017 to foster innovation at this intersection between law and technology.
Larger law firms still see the major accounting firms as a real threat, but we’re also seeing that cascade through to smaller firms. For example, accounting and financial services businesses are adding legal services to their client service offering – such as trusts, wills and estates as part of tax planning.
Make the whole more than the sum of the parts
Many mid-size law firms currently operate as a group of individual practitioners, each with their own clients. But the era of the ‘general practitioner’ within a mid-tier firm is under threat. Over time they will lose out to a combination of online law companies doing the commodity work, freelancers operating with far lower costs, specialist boutiques focusing on more complex matters, and clients insourcing.
"The idea of a single lawyer solving all legal problems is no longer sustainable as a firm," notes Barolsky. "The firm needs to be more than the sum of its parts, or it won’t survive. It needs to be more integrated and collaborative to make the most of its client relationships and technology."
Proving value as knowledge is becoming democratised
Look for new ways to push your firm up the value curve, because clients are now able to access self-service solutions online – from family law to contract templates.
Given this mass access to legal knowledge, a lawyer’s most valued skills today might be negotiation and advocacy – applying expertise, rather than the ability to access it. To give clients confidence, it’s more important to be a problem solver and strategic thinker – and use technology to support the client experience.
Use technology to boost margins and revenue
Take the time to understand your workflows, both back office and client-facing. Break down everything you do: what could be automated?
There’s already a lot of technology out there that can automate individual processes, such as workflow transparency, online client portals for document access and collaboration tools. Lawtech could also create passive annuity streams that build out client relationships. Think about what you could leverage to add value, such as apps that provide access to legislation or quick advice. You may be able to charge a subscription fee.
Lawtech: six pillars
A strategy for growth
Businesses are operating in a completely new landscape, dealing with uncertainty, volatility and an accelerated momentum of technological change. And that may mean re-thinking the way you define your strategy.
In 2000, McKinsey defined three horizons of growth based on the maturity and relative risk of different types of projects.^ We believe this is a useful way to describe the three growth initiatives that will need to happen concurrently in order to sustain business growth in this changing business landscape.
Re-frame your perspective
This is a time of opportunity, not threat. We believe business owners are in a strong position to thrive.
To grow sustainably and profitably, it’s important to acknowledge that traditional rules no longer apply. Business models have been democratised and boundaries have dissolved. Customer expectations are driving the pace of change.
Consider your innovation model and mindset, the broader business ecosystem you can tap into, and the capabilities you need to put in place.
We trust you found this report informative and insightful, and we’d be happy to continue the conversation with you.