As the legal services market becomes more competitive, law firm strategy—or lack thereof—will have real consequences.
If we polled business school professors, all would agree that long-term strategy beats short-term strategy, at least over the long-term. If true, the following two statements ought to be in tension with one another:
- The traditional law firm operating model is designed to maximize profits for ownership over the short-term. See, e.g., Jonathon T. Molot, “What’s wrong with law firms? A corporate finance solution to law firm short-termism,” 88 So Cal L Rev 1, 5 (2014) (noting that law firms have “a decidedly short-term bias”); Jordan Furlong, Law is a Buyer’s Market 63-65 (2017) (noting that “most partners prioritize their short-term financial interests ahead of the firm’s long-term well-being, sometimes to absurd lengths”).
- Large corporate law firms remain remarkably profitable, even during a global pandemic. Nicholas Bruch, “Law Firms Are More Profitable Than Ever. How are They Doing It?” Nat’l L Newsletters, Nov 2018 (attributing growing profitability to higher rates and higher leverage, albeit the pull on each lever varies by firm); Gina Passarella & Patrick Fuller, “Will 2020 Be Law Firms’ Most Profitable Year Yet?,” Law.com, Nov 12, 2020 (reviewing data that suggest higher profits during global pandemic, due in part to large reduction in expenses).
Even a gifted lawyer would struggle to make the case that the law of supply and demand doesn’t apply to the market for legal services.
Thus, a more plausible explanation for the success of short-termism in law, advanced in this essay and other Legal Evolution posts, is that the massively complex and segmented legal services market is slowly evolving in the direction of greater transparency, see Post 209 (Raj Goyle discussing how the advent of AI-enabled price transparency is the first step toward competition among large law firms), and that the benefits of the long-term are beginning to come into focus, particularly in the area of client-facing technology, see Post 213 (Zach Abramowitz reviewing bullish signs for law firm tech ventures).
We know the legal services market is becoming more competitive when clients have more and better choices. The early stage of pressure on law firms has been the movement of work in-house, see, e.g., Casey Sullivan, “Law Firms are Seeing Renewed Competition–from Clients,” Logikcull Blog, July 9, 2020 (noting that “66% of law firms with 250 or more lawyers are losing business to law department in-sourcing”), and the migration of more work to ALSPs, see Alternative Legal Service Providers 2019, Legal Executive Institute (2019) (noting $10 billion market that is growing at 12.9% annual rate).
One of the next waves of client choice, which is being accelerated by the global pandemic, will be between (1) a relatively small group of firms who make strategic investments in technology designed to improve the client experience and expand overall client value, and (2) a larger group of law firms who forgo such investments in favor of ever more short-term profit. Cf. Stein’s Law (“If something cannot go on forever, it will stop.”).
This essay makes the business case that now is the time for law firm technology roadmaps with a client-centric design. As discussed below, technology roadmaps are strategic planning documents with a multi-year time horizon. Likewise, client-centric design requires immersion in the needs and experience of key firm clients rather than the opinions or views of powerful partners.
We make our business case in three parts:
- Part I draws upon market data on law firm demand to better understand the traditional law firm operating model and its fixation with short-term financial results;
- Part II looks at data reflecting the voice of the corporate legal departments, identifying potential opportunities and sources of competitive advantage for proactive law firms;
- Part III provides an exemplar of a technology roadmap that is tied to a realistic law firm strategy and reviews some of the fundamental steps to implement a client-centric design.
I. Short-term law firm strategy: the beginning of the end
Law firms’ fixation on the short term has been thrown into sharp relief by how they’ve responded to the global pandemic.
To illustrate, let’s break down some of the performance trends among some of the largest US firms, aggregated by Thomson Reuters’ most recent Peer Monitor Index report (Q3 2020).
A. Declining demand
Demand is perhaps the most significant revenue driver. As shown in the graphic below, through Q3 2020, 67% of firms have had demand contraction. Last year through the same point in time, 60% of firms (nearly double of the firms this year) had demand growth.
Although it’s possible for some firms—particularly larger firms—to sustain profitability through diversified practices with countercyclical demand (e.g., Real Estate-related services work negatively correlated with Restructuring), see, e.g., McKinsey & Co, “COVID-19: Implications for Law Firms,” May 4, 2020 (discussing effective law firm strategies during prior recessions), law firms cannot escape the fact that in comparable periods in 2019 and 2020 (Jan-Sept), aggregate demand at the average firm declined 2.1% on a year-over-year basis.
B. Higher billing rates
In times of flat to declining demand, law firms have offset revenue gaps through higher billing rates, more effective realization (collected fees), and by shifting work to higher fee earners (especially partners).
Notice that all these measures are aimed at protecting profitability but do not necessarily create a better client experience. In fact, some of them carry collateral implications that could impair the client experience and the long-term sustainability of the business.
For example, we can read in the chart below that worked rates continued their rise in the latter half of 2020, increasing by an average of 5.0% year over year. Additionally, fees worked, fueled by higher average worked rates, increased by 2.7% in Q3 and is now up 2.6% year-to-date.
C. Trimming expenses
Moving from revenues to expenses, as shown in the graphic below, law firms have continued to aggressively reduce overhead expenditure through Q3, with average overhead spend down 3.7% on a rolling 12-month basis. Included in overhead, however, are sizeable year-over-year cuts in recruiting, marketing, and business development, which is likely to impact a firm’s future operations and performance.
Moving from overhead to direct expenses (i.e., the cost of performing legal work for clients), non-partner timekeepers are, by far, the biggest component. Direct expenses are still growing year-over-year (1.1%). Yet, if current lawyer staffing trends persist in Q4, we are likely to see overall direct expense contraction. This all demonstrates that firms are beginning to reduce lawyer headcount and relying on partners to pick up most of the work.
Reducing the number of salaried timekeepers is, at best, a stop-gap solution. All service-levels at least equal, one could expect that partners and more senior lawyers directly servicing clients could lead to retention and client satisfaction–that is, if clients are not price-sensitive. However, this approach opens the door to a competitive response from smaller large law firms who are willing to provide similar partner-led service at lower price points.
In fact, we’re already seeing some evidence of this. According to Thomson Reuters’ 2020 Legal Department Operations (LDO) Index, Amlaw 1-50 firm partners and associates increased their rates on average by ~3.6% from 2019 to 2020; the same fee earners in the Amlaw 101-200 band decreased them by ~1.4%, signaling a willingness to compete on price for the same book of business. See p. 14. What this all means is that law firms are successfully stopping the bleeding caused by a drop in client demand with measures that risk commoditizing their services and endangering long-term growth.
In the not-too-distance future, the levers of short-term strategy are destined to impose real costs on law firm profitability. Cf. Stein’s Law (“If something cannot go on forever, it will stop.”).
Client-centric firms would still be concerned about managing expenses in an economic downturn. However, instead of cutting expenses across the board as a stop-gap measure, law firms could be re-allocating investment into categories that are more likely to yield differentiation, a better client experience, and ultimately strengthen the baseline for sustainable business growth. In order to do this prioritization, they need to look externally and listen intently to their clients, mapping their investments directly to impact in their experience.
It may well be that some client experience accelerators are in technologies or non-billing employees of the law firm. When a firm is more focused on profitability and not tracking which non-revenue generating activities have the most impact to their clients’ satisfaction, retention, and conversion into other practice areas, they risk impairing future revenue drivers.
II. Finding the voice of corporate legal departments
For the last several decades, corporate legal departments have undergone a major growth spurt. See, e.g., Post 003 (between 1997 and 2016, the number of salaried lawyers in legal departments grew by 203% compared to 27% in law firms). Much of the benefit of this approach came through simple labor arbitrage of bringing law firm associates in-house. In the current era, however, ongoing cost pressures have forced legal departments to become more sophisticated, including how they engage with outside counsel and how they utilize and leverage technology.
A. Areas of accountability
Corporate legal departments have many areas of responsibility. In addition to delivering legal services for their enterprise stakeholders, they need to mitigate and manage risk for the corporation while consistently demonstrating efficiencies in delivering value to the business. As a result, they are focused on costs, transparency, and demonstrable impact.
The graphic below provides a snapshot of areas of accountability for corporate legal departments.
Law firms seeking to obtain more work from in-house lawyers need to zero-in on the pressures and pain points that surround each of these areas of accountability.
Indeed, to better manage these areas of accountability, corporate clients seek partnership from their law firms. Yet, a substantial number of in-house counsel tell us that it’s relatively rare to find a true strategic partner who understands their business and uses that business knowledge to be more proactive and more collaborative. Not surprisingly, firms that fit this bill are awarded a greater portion of overall legal work.
As an example, in a recent discussion among a cohort of large corporate legal departments ($10B+ annual revenue), participants noted how law firms typically position the economic environment to justify annual rate increases. There was agreement among several large corporates that had a law firm been proactive in acknowledging the pandemic-related impacts to their business, reflected in reduced rates or other new tools or resources to help them deal with the reductions they are being asked to make internally, the in-house lawyers would be significantly more likely to award those proactive firms with more work now and into the future.
Based on the discussion in Part I, perhaps it is not surprising that no law firms — literally none — had taken a more proactive, client-centric approach to the challenges of the pandemic. After all, in the face of a downturn in demand, the largest firms are relying on price increases to maintain profitability. Given their perceived lack of options to maintain profitability, law firm leaders and partners may be burying their heads in the sand to avoid listening to the clients on this point. Indeed, this is all anecdotal hearsay until clients begin engaging with competitors in the next market tier who have reduced fees to capture market share.
At the same time that law firms are preserving profitability through higher rates and the shedding headcount and overhead, their in-house counterparts are experiencing a different set of stressors. As shown in the graphic below, legal departments report increasing workloads and a need to deliver the same level of service with fewer resources—all while increasingly dealing with matters outside their normal areas of expertise due to the pandemic.
Notably, 27% of surveyed corporate legal departments are using more legal technology, while 35% report increasing use of outside counsel. This picture illustrates how the COVID-19 pandemic has amplified the need for law firms to be closer to their client-base, who are more willing to spend on the right matters and engage with technology.
B. Growing use of technology and data
Increasingly, corporate legal departments are relying upon technology (and the data it collects and processes) to help them operate more efficiently, effectively, and better mitigate risk.
In Thomson Reuters’ 2020 State of the Corporate Law Department report, 70% of today’s corporate legal departments identified use of technology as a high priority. See p. 16. Likewise, in our 2020 Legal Department Operations (LDO) Index, 56% of legal departments reported a rate of process or technology advancement that was either moderate (“demonstrated progress each year”) or fast (“large-scale advancement each year”). See p. 9. Technology and data ultimately help corporate legal departments better demonstrate their value and act as a business enabler. How many law firm leaders and partners are keeping pace with these changing dynamics?
Although the use of technology may have been accelerated by the pandemic, legal departments are not adopting technology haphazardly. Like other functions within the enterprise, even before the pandemic, they have incrementally defined legal technology roadmaps aligned with business strategy to help control cost, and drive efficiency and effectiveness.
For example, the 2019 Corporate Legal Operations Consortium (CLOC) Report identified technology as a key area of focus among legal operations professionals, with the goal of improving transparency, data analytics, efficiency, quality, consistency of work, and speed of execution. Of CLOC members surveyed, 72% reported having a technology roadmap. See p. 16. We should expect continued growth of technology alongside the evolution of legal department processes.
Technology roadmaps in corporate legal departments are being planned and deployed by expert talent brought in to leverage adoption accelerators. Gartner recently predicted that by 2023, 33% of corporate legal departments will have a dedicated legal technology expert to support the increasing automation of core in-house workflows. Jim Murphy & Nader Henein, “Predicts 2020: Corporate Legal and Compliance Technology,” Gartner, Dec 17, 2019. Additionally, as Jason Barnwell points out in Post 210, technology adoption costs have plummeted due to cloud services, no code low code platforms, and natural language machine learning models bridging the gap.
The most common technology used in corporate legal departments today is an eBilling/Spend and Matter Management system, but there is rapid expansion in the corporate legal use of technology, including contract management solutions designed for the legal work within the legal department, document management solutions, and the expanding the use of legal-specific productivity and workflow solutions.
An example of COVID-19 accelerating tech adoption can be seen in the use of e-signature technologies, which typically started with a few subscribers in the legal department, but in an all-remote working environment has expanded to all signers and members of the legal department within the corporation. Indeed, this was an opportunity for in-house lawyers to be true business enablers. Law firms that enable similar outcomes will find themselves in a true long-term partnership with their clients.
III. Technology roadmaps that proactively meet client needs
Other posts on Legal Evolution have made the case that the legal services market is destined to become much more multidisciplinary, primarily because one-to-many products and solutions can only be built by combining law with expertise from other allied disciplines. See, e.g., Post 190 (“By their very nature, one-to-many offerings require multidisciplinary teams.”); Post 128 (Anusia Gillespie discussing multidisciplinary nature of legal innovation); Post 126 (noting that “[o]ne-to-many legal solutions are built by teams of multidisciplinary professionals”); Post 088 (Liam Brown discussing Elevate as a “1,200-person, multidisciplinary organization of lawyers, engineers, consultants, data scientists, and business professionals”).
One of these essential disciplines is technology.
A. Technology roadmaps: an example
A technology roadmap is a plan that identifies the specifics on how technology can support the organization’s strategies and priorities over a specific time period (typically a three-year window).
Within corporate legal departments, technology roadmaps are being designed to address the strategic needs of their business stakeholders. Likewise, in designing their own technology roadmaps, law firms would be wise to work with their clients to identify shared needs and opportunities to build in collaboration functionality, an enhanced user experience, and interoperability between systems employed by the law firm and their core clients.
Too often, law firm technology roadmaps are based exclusively on imitation of technologies used by competitors and in response to requests from internal firm stakeholders. If the development of a roadmap is approached as a client-centric design with implications for firm strategy rather than a planning exercise done for budgeting purposes, an organization has the opportunity to explicitly identify and reconcile internal stakeholder needs with client expectations.
In addition to understanding the technology roadmaps of the law firm’s key clients (i.e., at corporate legal departments), technology leadership at law firms should work closely with key Personas at their clients (i.e., legal operators and technologists) to understand the source of their priorities and challenges. By collaborating with true empathy, they may be able to stage technology investments at the law firm in a way that aligns the desired experience for internal and external ‘clients’ with feasible deployment and adoption schedules.
To help make the concept of a technology roadmap more concrete for lawyers working in law firms, consider the following prototype, which we built based on themes and data collected by Thomson Reuters. We start first with the known needs and desires of our clients.
According to a recent Insight update by research firm Acritas, the top 5 law firm improvements most desired by clients were the following:
With this knowledge, a law firm’s technology organization should frame assumptions and hypotheses around how their technology roadmap decisions could impact clients and vice-versa. For example, if key client organizations are facing a significant need to control costs, should the law firm’s roadmap include investments in structuring and managing data that can help demonstrate the value and predictability of alternative fee arrangements? Another example: Should the firm invest in financial management systems and processes to proactively show adherence to client billing guidelines and technologies to reduce clients’ internal time in invoice review?
The image below illustrates how we can take the top 5 client priorities for 2020 and translate them into strategic objectives for the firm:
In turn, we use these strategic priorities to inform the action component of the firm’s technology roadmap:
This example is based on general trends, which are a good source of information to form assumptions and hypotheses around client needs and expectations.
That said, a law firm’s technology roadmap should be designed around the specific needs of their key stakeholders, including internal practitioners and the firm’s clients. All law firms are different: from their internal planning and budgeting cycles to their risk appetite, technology maturity, and their client portfolio and relationships.
The key takeaway is that we’ve provided evidence for why embedding client-centricity in technology roadmap planning makes strategic and business sense for the law firm. We’ve also laid out how technology initiatives can be directly tied to discrete client priorities and expectations, in addition to internal law firm stakeholder expectations. The crucial piece for law firm leaders is to frame the roadmap planning process as a business service design exercise, where the output is a roadmap capable of aligning client value expectations with the law firm’s strategic goals and priorities.
B. Benefits of technology roadmaps; risks of not having one
The value of an aligned and communicated roadmap is that members of the firm understand the mid-term direction and technology strategy making the change management journey simpler. Corporate clients continue to look for firms to be more proactive in demonstrating value, and a technology roadmap that is focused on client needs is a valuable way to differentiate.
A clear roadmap can also reduce the risk of deploying the wrong technology at the wrong time, reduce the risk of lack of connectivity between tools, and ensure resources to demonstrate technology success. Finally, without a technology roadmap, there could be a competitive disadvantage, compared to firms who demonstrate client value through their technology strategy, as corporate clients are looking to award a greater percentage of work to firms that are proactive in value demonstration.
Below is a graphic we created at Thomson Reuters to remind stakeholders of the immense risk we take on when we fail to create a detailed client-centric roadmap:
C. Designing a client-centric technology roadmap
There are several principles that law firm leaders, working with their own technologists, can draw on to make their technology roadmaps more client-centric. Many of these principles can distilled from the application of Design Thinking methods on the planning process.
In this final subpart of our essay, we offer the following three pointers:
1. Contextualize and prioritize the problem
The clients’ biggest pain points and challenges are often the law firm’s biggest commercial opportunities.
One way to identify these problems/opportunities is to conduct a simple survey of the firm’s core clients. From there, build assumptions and hypotheses that can be validated through client discovery interviews, quick experiments and pilots. In addition, set up advisory board sessions with key clients and a representative group of law firm users (e.g., early adopters) to narrow down and prioritize investment opportunities.
What we are trying to build here is a methodologically strong sounding board to define problem and opportunity spaces before defining technology initiatives on the roadmap.
2. Map the Journey
Before a full-blown exploration of technologies and applications available in the market, it is imperative to understand the people, processes, and systems currently in place.
We can accomplish this by listing out systems utilized to form a clear picture of our technology stack, including contract renewal dates, available updates, and active utilization levels of technologies available to the firm. We also want to Identify the most common internal requests for new products or technologies and understand common client requests for better collaboration or technology harmonization. For all existing and desired technologies, we want to place them into context within the existing workflows and evaluate how well they are working.
Mapping the journey should be about plotting scenarios where specific technologies can improve predetermined use cases, workflows, and metrics. This is because we want to identify entry-points to the technology for users in the process as well as interoperability opportunities with existing systems for the technology investments under consideration.
The journey mapping process is also a golden opportunity to actively engage with clients. Legal departments are always looking for ways to proactively monitor and assess business risk, and increase speed in business transactions to act as a better business enabler. We should be exploring how the firm’s technology investment and better data can help drive a client’s business objective. For instance, one of the best-case scenarios is when a potential technology investment by the law firm can help position the client (i.e., legal department) as a revenue generator to offset the perception that legal is only a cost center.
Finally, as we go a level deeper and map processes that could be improved by technology investments, we need to define requirements and success measures along the way, including metrics that track the impact on the overall client experience. Setting these benchmarks will allow us to better plan adoption and monitor how the investment is trending.
3. Plan for implementation and/or procure solution
Technology roadmaps don’t always have to result in the procurement of new technology—indeed, we may have a system in place that needs to be optimized versus replaced. With a map of priorities and processes, it will be easier to stage initiatives in ways that build on each other and demonstrate value along the way. It will also allow us to allocate resources for deployment.
In summary, if a law firm invests the time and resources into creating a high-quality client-centric technology roadmap, they are likely to be repaid many times over through the time saving and reduced risk of actual technology purchase.
The graphic below provides a quick recap of the process for creating a client-centric technology roadmap.
Engaging customers in the technology roadmap journey is a true opportunity to gain a greater share of overall corporate work. In addition to producing a truly differentiated client experience, over the long-term, it is sure to equate to greater law firm profitability and the future sustainability of the law firm operating model.