The legal market place – carnage or opportunity?

7 10 2011

When you look at the legal marketplace, what do you see?

With the implementation of the far reaching Legal Services Act finally happening in the UK (albeit with some fairly significant delays in related regulation), it seems the right time to step back and assess the state of the market.

Talking to people in the profession about this, from partners to in-house lawyers, business development directors to IT professionals, through to trainees and law students, one thing is clear.

There is no single opinion on the state of the market right now.

In fact, nothing could be further from the truth.

Opinions are strong and polarised.

Is the glass half empty or half full?

The world of pain

One group see the profession as an industry in decline.

Painful struggles with increasing firm overdrafts and personal debt are symptomatic of underlying structural problems with the profession, and the cash flow challenges facing many firms are just another indicator that it’s time to get out before the interest rates rise and bankruptcy looms large.

With lawyers at both small and large law firms working harder than ever, increasing competition from overseas firms and LPOs becoming more visible, and constant talk of a new wave of competition, does not fill them with hope that easier times are ahead.

Small firms worry about hyper efficient, large scale competitors with a resource base, national reach, consumer brand and technology platform  that they simply can’t match. Large firms worry about transactions being disaggregated and large chunks of profitable work being placed with legal service providers with a cheaper cost base. Mid-sized firms talk about being squeezed, with larger firms looking for work in new markets just to keep their associates busy while they weather the current economic storm, and about smaller, more agile firms  punching above their weight.

These people can often see the need for change, but despair of the pace of change in many law firms, pointing out that the culture and consensual nature of partnership often make decisions glacial when they need to be made at the speed of the digital world we now live in.

They look at the management of their firm, and question whether they have the right skills and experience to thrive in such a turbulent environment. Management themselves wonder how they can free themselves from operational fire-fighting to spend time focussing on the strategic questions that will define their firm’s future.

The lawyers lower down the pyramid see equity structures remaining in some firms that encourage low performing partners to sit back and coast, while the best talent works their asses off and often still finds it impossible to break into the club.

Below them are a generation of students who have made a huge financial and personal commitment to enter the profession, and are finding training contracts like gold dust. Those that are lucky enough to find work may be confronted by suggestions that the legal training system is in need of reform and is not equipping graduates with the skills they need to excel in the profession and exceed client and colleague’s expectation.

They may also be confronted with a linear career path, and find that if that’s one they are willing to follow, then the demands made by the firm are at odds with a generation Y philosophy that puts greater emphasis on work/life balance.

Those who see the world in these terms often point to clients showing less loyalty and who have ever increasing expectations in terms of service standards, yet in the same breath are looking to pay less for that service. A widespread rejection of the hourly rate billing model leaves many firms struggling to come up with a viable alternative and without the capability to re-engineer their business model to support these new fee structures.

The downward fee pressure squeezes profit margins further, and even after several rounds of morale-sapping restructurings and redundancies, with economic growth in the core western markets slow at best, there’s no end in sight.

Pretty grim huh?

Now those that know me know that I’m on balance, a pretty upbeat person, so let’s try and bring a bit of balance to the picture.

There are plenty of people out there in the profession who don’t think like that. Who see the current time of change as tremendously exciting. These are the people who see

A world of opportunity

First and foremost they see an incredibly profitable sector that has weathered an unprecedented recession and shown real resilience with relatively few high profile casualties.

They see businesses with the ability to offer a broad portfolio of services that add real value to clients at critical points in their lives or organisational existence. Many of these services are counter cyclical (helping manage difficult economic conditions) and many of which allow the lawyer to genuinely claim that coveted position of trusted advisor.

It’s not hard to point to law firms that have access to senior people at some of the best and biggest companies in the world and advise some of the most influential people who are shaping society.

For those in the UK, having a core competency in the English language and the common law system that underpins many other legal markets means firms are well placed to support global businesses and expand intro higher growth international markets (as indeed many UK firms have done very successfully).

While there would be an acknowledgement that the bar for client acquisition and retention is being constantly raised (particularly by increasingly sophisticated business development professionals and practices) this is raising standards in the profession and represents progress. There is still a huge opportunity to win by being ahead of this curve and setting the pace.

For those with one eye on the future, advocates of the profession will point out that the chance of a career offering not just the potential to earn big bucks, but one that can offer a lifetime of intellectual challenge and stimulation, will always attract its fair share of top talent, and that the training and development opportunities within law firms have improved massively over the last ten years.

Those who see opportunity see the ability to innovate as being a genuine source of competitive advantage, and are looking at technology, process and efficiency as ways of maintaining and indeed improving profitability in a fast changing market. The ability to change quickly is a key enabler, and they recruit the people with the ability to adapt and thrive to make this a reality.

They also see that market consolidation can offers opportunities. Low price acquisitions, the ability to pick and chose individual teams, to make strategic acquisitions of particular clients or relationships, and the clearing out of some of the noise in the market place.

Yes clients are demanding “more for less” but that’s a common refrain across all business these days – the change facing the profession is not unique and in  many other industries there are organisations that came out as big winners.

A somewhat simplistic categorisation, but I urge you to reflect – which messages resonate most, and critically, what are you going to do about it?





What’s the end game?

30 09 2011

I was with a group of law firm partners from different City firms this week, listening to them discuss a case study about super-profitable US law firm Wachtell, Lipton, Rosen & Katz. Aside from their phenomenally successful business model and profitability (with the Amlaw100 reporting profit per partner of over $4m), one of the points that provoked most discussion was the idea that many of the partners would retire from the firm in their early forties.

Doris was overjoyed to hear she'd finally made partner

One response from the group was “that’s just coming into your lawyering prime”, which really got me thinking about careers in the legal profession, how they’re changing and ultimately what the end game is for many lawyers.

It used to be simple.

When I entered the profession in the mid/late nineties you joined a firm, did your training contract, hoped you’d get kept on, and if you did took your place on the conveyer belt. In the larger firms this often meant increasing specialisation and more often than not, increasing your hours.

In particular it was understood (albeit often unspoken) that the years between two and five years post-qualification were the proving ground. Where firms got to weed out those who were not suitable for partnership, and consequently lawyers were competing to prove they were up to the job.

This ethos, coupled with the leverage dynamic (with a smaller number of equity partners generating huge fees from supervising and managing junior lawyers) and chargeable hours model saw associates happily prepared to work all hours as they strived for partnership. The pot of gold at the end of the rainbow.

Every year their increased experience meant law firms could up their hourly chargeout rate, meaning in turn that as long as their chargeable hours stayed high, a nice chunky payrise was available, thus providing a short-term incentive for the associate to stay in the game.

Now this approach certainly had its faults, but it was largely understood and accepted and as a result it worked. Hell, early in my career I was certainly prepared to play by those rules.

But things have changed.

That model is breaking.

Firstly, the concept of work/life balance arose. Slowly, softly at first, it began to gnaw at some of the Generation Xers. Marriages came and went and at both points, people began to pause for reflection. Children brought matters into even sharper focus. None of these events were new, but society’s attitudes were changing and the legal profession was not immune from this.

With the emergence of Generation Y, the trend began to accelerate. I vividly recall a conversation with a managing partner of similar age to myself a couple of years ago, where he shared his frustration that many of his assistant solicitors wanted to leave work at 6pm. He understood this, but having put the hours in himself at that stage in his career, found this attitude difficult to reconcile with the drive and focus he expected from his young lawyers.

At the other end of the spectrum, change was also afoot. Many of those partners who had put in the hard yards and had been through the grinder were looking round and asking “is this it?”. Some had migrated into management as this was seen as the only upward progression, but either didn’t like it or weren’t suited with it. Others began to see the downside of their high levels of specialisation by craving a broader workload.

The model was also being tested by the market. A growing rejection of hourly rates, and more sophisticating procurement of legal services caused clients to question firstly whether hourly rates were suitable, and secondly, if they were, why they should be paying more for a particular resource than they paid a couple of months ago (simply because they had another year PQE and their rate went up) when the value delivered was exactly the same.

As the career model began to crack, the consequences began to emerge. Moves to in-house roles, into venture capital and private equity companies became more common, and law firms began to adapt by creating different career paths and non-partner senior roles such as “Of Counsel”, “Legal Director” and of course “Consultant”.

But with the structure of the profession fundamentally changing due to trends such as outsourcing, technology, commoditsation and globalization, is this enough?

While the supply of law students far outsrips demand, the answer I suspect is that the slow changes to the status quo will probably be sufficient in the short term, but ultimately as the profession reconfigures to meet the changing needs of the market, new and better career structures must emerge or I believe traditional law firms may begin to lose heavily in the global war for talent.

 





What’s your career ROI (return on investment)?

9 03 2011

A couple of interesting articles on the Careerist recently about law schools and their responsibility to law students. In particular there is a debate about the responsibility schools have to accept students (and their fees) when, in the current climate, job prospects can be slim.

Paying back the law school fees was never easy

Here in the UK, there is another dynamic that has come into play. With the advent of a serious hike in tuition fees, particularly at the top-end universities (that will undoubtedly attract a high percentage of aspiring lawyers), I think it is time to take another look at the cost of entering the profession, and see whether the end justifies the outlay.

The corporate world has shown me the value of pulling together a business case for any serious capital expenditure – the sums might not turn out to be 100% accurate, but the discipline of going through the process forces you to ask some sensible questions and can stop you wasting serious money.

But aside from my current struggles with the Spousal Budget Approval Committee (required in my house for gadget purchases), this rigour rarely makes an appearance in home life.

But should it?

While fees this side of the Atlantic remain below those in the U.S. a three year law degree will soon cost just shy of £30,000, with a year at law school costing £10,000, plus living costs, gives an overall investment of well North of £50,000.

In my book, that’s certainly the sort of money I’d want to stop and think about before spending.

In assessing the value of the education, there are many more factors than simply the straight forward ROI (return on investment), but the basic maths can’t be ignored. If you assume that you are going to come out and join a solid City firm, then chances are you’re on a salary of around £35,000, shifting to say £55,000 when you qualify two years later.

The traditional City law firm career sees salary then increasing every year (subject of course to the economy) with bonuses and perks thrown in, suggesting that it may take a while, but the debt for the not-insubstantial investment will be paid off in relatively short order (subject to any extravagant lifestyle choices!) and the investment then moves into the black and produces serious returns in the long term, especially if partnership in a profitable firm is achieved.

There is of course a “but”. These projections of profitability and a solid, predictable career path, a very much based on some assumptions about the legal market place. Assumptions which have been challenged over the last few years. Profitability at many firms has tanked and the annual salary rise was predicated not just on nice fat profit margins, but on a rise in the price of the lawyer based on higher levels of PQE (post-qualification experience). But if the hourly rate model is dying, and firms can no longer simply hike up fees because a lawyer has another year of experience (and arguably, it’s time served, rather than actual meaningful experience), then where does the annual rise come from? More chargeable hours anyone? In the efficiency-focussed law firm of the future, that might not be an option either.

Speaking of chargeable hours, the lifestyle is also something to factor into your decision. Lawyers in the firms that pay serious money work hard. Really hard. If you’re driven, motivated and enjoy the job, that might not be a problem. But while when my generation (qualified late 1990s) expected to clock serious hours in pursuit of partnership, conversations I’ve had with many partners these days suggest the current generation of trainees and newly qualified lawyers have very different expectations of work/life balance, which can lead to some firing the ejector seat early.

If that’s the case, then the return on investment is not looking quite so straightforward.

For time immemorial there has also been the question of what happens to those who don’t make it. Every year there are plenty who make the financial commitment, and either don’t make it through, or do get the qualifications and can’t find a training contract. Clearly this is particularly relevant in the current environment. If things take a while to pick up, and the graduates haven’t managed to build other experience and contacts in the meantime, then there is a real risk they’ll be passed over for fresher blood when the economy picks up again. Another situation when the initial investment is not looking so sound.

On the positive side, there are other ways of making a return which don’t involve the long game of partnership. As a lawyer, you’ll build up some great transferable skills. Because the profession can be quite insular, it can often be difficult for lawyers to identify these, but trust me, they are there and they are valued in many different arenas (one of the books I found most useful in assessing my skills when looking to career change 10 years after I qualified was “what colour is your parachute“). That said, it’s through the practice of law you will build these skills, rather than the academic training, so I don’t think it’s a question of a law degree opening a huge variety of doors, but in the medium term, other options become available.

Finally, the profession is changing. Big time. This will have implications for all of us in the profession, both the grey hair and the young blood. Given these changes, it also adds another angle to consider when assessing the law as a career. Some may see it as risky, others may see a wealth of opportunity. Much like any other investment, your tolerance for risk will play a part in your decisions, and is just one more component to factor in.

So, no answers, but hopefully some things to think about for both aspiring lawyers and any current or former lawyers feeling reflective. If you’ve just started on the path, I wish you all the best!








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