Competitive legal landscape to change forever?

AS they look back on the "noughties" at the end of 2010, leaders of many Australian law firms are no

doubt breathing a sigh of relief.

This, given they have weathered the storm of the global financial crisis and emerged in pretty good shape.

But many will be oblivious to the signs of impending seismic shifts that will change the competitive legal landscape

forever.

In terms of life cycle, the legal industry is well into maturity. At the top end of town, partner incomes are falling in

real terms.

Purchasing power parity has declined at least 15 per cent in the past decade for the average partner, with knockon

implications for the rest. A chasm is beginning to open up between the most and least profitable firms in each

strategic group.

Deep down, stresses are building. Contestable volumes of high-end legal work are now clearly in decline compared

with GDP, and all of the key profit drivers are moving in the wrong direction.

Although revenue continued to increase through the decade 2001-2010, growth came from increases in price and

not volume.

Profits were preserved in the 2009 and 2010 financial years, in the course of the GFC, through continued

reductions in expenses but there's now little or no "fat" left. Some firms may have cut too much.

And, to cap it all, many firms are starting to realise that their balance sheets are at risk.

Sustainable cashflows and steady growth trends of the past decade led banks to lend readily against little or no real

equity. That era has ended and many geared law firms can expect tough times from their bankers.

Firms will either have to retain earnings or make calls on capital. Either way will be very difficult, especially for

those with personally geared partners.

Taking soundings of the industry reveals all the ingredients for disruption: underlying structural problems, resources

and earnings under tension, clients flexing their buying muscle, and powerful global forces at work.

Compared to other service markets, law is highly fragmented. The top 10 firms in Australia command barely 10

per cent of industry revenue and the largest firm has only 2-3 per cent market share.

This creates high levels of competitive intensity in which clients have significant power, demanding and receiving

very high levels of service, and the near unchallenged capacity to exert downward price pressure.

Among local players, there is good evidence that many firms do not have an ear to the ground.

Some are watching and wondering what's happening, but others -- surprisingly -- are still wondering what the fuss

is all about.

Beaton's 2010 peer studies showed that few understand or recognise the strategic options that are open to them or

those being pursued by their close competitors. This absence of market orientation -- the modern necessity for a

firm to be constantly gathering client and competitor intelligence, and then interpreting it and co-ordinating strategic

responses across all functions of the firm -- leaves many at risk.

New business models are now well established as viable substitutes for the traditional way of doing things.

The internationally based Axiom Law, the Australian business Advent Lawyers and the Indian legal process

outsourcing providers such as Pangea3, recently bought by Thomson Reuters, are just the first wave of companies

to demonstrate radically different ways to play the game.

The rules of "the club" have been broken and there is nothing members can do about the upstarts except respond.

The impact of the global financial crisis in Europe and the US has accelerated trans-Atlantic consolidation, with the

firms of Hogan Lovells, SNR Denton and Squire Sanders Hammonds among the most recent examples.

Northern hemisphere firms have also turned their gaze towards the Asia-Pacific region, and we have seen growing

interest in Australia from global players this year with the entry of Allen & Overy and Norton Rose.

For Australian firms, it is not a question of if, but when -- and across which ocean -- the wave will come; yet few

have lookouts watching the horizons.

Fewer -- possibly far fewer -- large local firms, given the shape they are now in, will continue to perform as they

currently do in the coming decade.

Something has to give, and those firms weakened by the GFC look to be most at risk. At the other end of the scale,

winning firms will lift their profits sustainably above $2 million per partner and thus remain globally competitive.

Across the industry, corporate-style merger and acquisition activity is likely to become a fact of competitive life.

The middle tier of law firms will be restructured in ways that might be seen as radical, especially by those who do

not see the signs and exploit the opportunities.

As another wave of industry restructuring occurs, more firms will strive for distinctive positions and re-engineer

aspects of their business. Large firms will probably divest entire practices, much as they did with family law and

insurance in decades past. This time it will be more about practice economics than strategic fit.

A few middle-tier firms will emerge as truly credible challengers for large chunks of the choice work of the largest

firms, with some even earning comparable profits per partner.

The winners will be those with strong, visionary leadership, coherent cultures and robust balance sheets. Some will

come from quarters regarded as unlikely by their peers. And there will be more global alignments, possibly many

more. In five years' time, we may be redrawing the map of the Australian legal industry.

UNQUOTE [© MarketWatch, Inc. 2008]

The change is well and truly on the way, and some of us are not only very keen to see it happen, we are already engaged in making it happen.

If you are wondering what to do or where to go with your firm, speak with me.

I have several ideas and suggestions worth considering.

Some smaller firms tend to wait until it is too late to consider an exit strategy or succession plan. The reality is, no-one will buy your firm if you are not there. Harsh but true. Unlike other professional services firms where there is a high degree of continuing work, lawyers are often involved in transactional matters only, or providing advice on certain issues. Once the problem has been resolved, the client's work is over - where is the continuity in the business?

As I mentioned above, if you are wondering what to do or where to go with your firm, speak with me. I have several ideas and suggestions worth considering.

There is no cost, other than your time, for a conversation.

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