Thinking the Future of Law Firms - Venturis Consulting Group

Thinking the Future of Law Firms

Jun 25, 2020 venturis News 0 comments

“We were so successful for so long that we could never see another point of view. And when the market shifted, we almost went out of business.

[1], Sam Palmisano, 2004, the then CEO of IBM

Those who think about the future all too often fall into the trap of extrapolating the present in a linear fashion. You drive staring into the rear-view mirror.
Without clairvoyant gifts it is necessary to develop observation criteria to recognise and interpret “the signs on the wall”, to better prepare for the uncertain future and to increase the firm’s ability to adapt to expected but as yet unknown changes.

This is the subject of our final contribution, in which we

– introduce the Adaptive Cycle as a thought model.
– identify the drivers of long-term changes in the legal market.
– identify approaches to adaptability and resilience of law firms.

Stay healthy – we look forward to the next virtual or real contact with you.

1. The Adaptive Cycle

The Adaptive Cycle[2]
Law firms, like all organisations, are social systems and have strong inertial forces. Especially in crises, we first strive to restore the status quo ante and to make changes – as far as they seem unavoidable to us – from this position of supposedly regained security.

This path is described in the upper part of the Adaptive Cycle, outlined in the figure of the Lazy Eight. Its goal is the continuation of the same, the old game. It often works very well for a very long time – until a fundamental crisis occurs. If the crisis exceeds a certain magnitude, organisations realise that the resources of the past can only help to a limited extent but frequently develop new approaches reluctantly. This is the crucial moment for the further course of events: will the old game be continued with the measures designed for the situation pre-crisis, i.e. the stakeholders and the rules and relationships that bind them will remain unchanged, as will the associated business model? Or will we take the turn off to the lower part of the Adaptive Cycle because the partnership has recognized that the old game no longer has a future and a new one must be started?

If the firm takes the turn off, innovation and change are at the forefront: identifying new needs, finding new ways to meet them, thinking about new forms of organisation and cooperation, increasing value creation – and revising one’s own business model.

We believe that the Adaptive Cycle thought model is currently helpful because it raises the question of whether the Corona crisis is so fundamental that law firms need to think about whether the “old game” can be continued or not. And it makes it clear that a decision must be taken – and this very soon. After three months we still do not know the clear answer. However, many “signs on the wall” suggest that we should prepare ourselves to turn towards renewal.

[1] Hemp, Stewart, Leading Change When Business is Good, HBR, 2004

[2] The Adaptive Cycle, also called “Lazy Eight”, goes back to the work of Gunderson / Holling (2002). We use the Adaptive Cycle in the form further developed by the Zukunftsinstitut. See Zukunftsinstitut, The Economy after Corona, 2020.

2.                Drivers of long-term change

Against the background of the current uncertainty and simultaneous need for decisions, it is helpful to identify long-term drivers of change. We need an early warning system and indicators of how the situation might develop.

It is unlikely that everything will soon be the same as before the crisis, if only because the economy cannot be revived at the push of a button. Supply chains are interrupted, sectors of the economy have been affected to varying degrees and the timing of the crisis varies greatly from sector to sector and company to company. Hardly any industry will take off to new heights by merely insisting on “More of the same!” In short: Because the situation is changing on the client side, it will also change for law firms – and this regardless of how the need for legal advice develops. Many partners underestimate this development and its effect on their own business.

Already apparent drivers of change on the law firm side include

  • Concentration of growth on a few players and practice areas
  • Price pressure from clients
  • Operational Excellence & Digitization
  • Purpose – Sustainability – Culture – Leadership

2.1 Concentration of growth

Analyses show that before the Corona crisis, economic growth in the USA based on the development of costs took only place in the top 50 of the top 200 law firms.[3] In the other law firms, revenue increased less than costs, and profitability fell accordingly.

There are no comparable figures for the entire legal market in continental Europe. In discussions with various law firms, however, this development was largely confirmed to us for Europe as well.

Law firms thus need to understand exactly in which areas (practice groups, sectors, client target groups, countries) real growth is taking place. First of all, this data provides information on where restructuring should be considered. At the same time – and more relevant as an observation criterion in the context of this article – a picture will emerge of where a firm’s specific growth drivers lie. It will also show where commoditization is currently taking effect and which areas are experiencing declining margins or are already moving towards volume business. By analysing the economic structure of the firm and other data, this monitoring will help to quickly identify whether the existing business model can be maintained, i.e. whether the old game can be continued. Firms’ management teams that conduct these analyses systematically and promptly will be able to answer this question in good time and – to stay in the picture of the Adaptive Cycle – prepare the partnership for turning into the new game.

2.2 Price pressure from clients

It goes without saying that the current economic crisis is increasing the pressure on law firm fees. This would not be worth mentioning if it were not already apparent that the means applied to exercise the pressure are new or little known. Law firms are therefore sometimes badly prepared for this.

Legal departments follow the basic assumption that certain types of matters consist of comparable work steps that require more or less legal expertise and time depending on the complexity of the specific matter. If a legal department has the possibility to compare these steps and the related costs and offers of different law firms, the legal market becomes very transparent. In recent months, we have spoken to several well-known providers of such solutions:

  • The available systems already offer a large number of KPIs that create transparency.
  • There is already a good basis for comparing the steps and costs at market level, i.e. comparative data covering several law firms.  At least one provider is very successfully using AI-based tools for these analyses. Several other providers expect to do the same in 12 to 18 months.

To elaborate on this point here[4] would go beyond the scope of this article. But we know that very, very few law firms have a numerical understanding of their processes and the costs of providing legal advice. This means that the starting point in fee negotiations is not very favourable for most law firms – especially when each partner negotiates the fees on his / her own. We consider this development and its consequences to be so significant that we believe it makes sense to continue to follow it as an indicator of the current dynamics of change.

2.3 Operational Excellence & Digitization

In order to keep up with the pricing dynamics described above, it is necessary – and, as various law firms have shown, also feasible – for law firms to divide their services into clearly defined steps and allocate the necessary resources (number of people involved – taking into account expertise / seniority mix, technical support, involvement of third parties) most efficiently for the respective matter. For us this is Operational Excellence.

The connection between pricing and operational excellence is obvious. The associated potential can only be leveraged when looking at this at firm level, which in turn has repercussions for the individual partner and his or her self-perception.

Here, the question of so-called hybrid services also plays a role: When considering the resource requirements of matters, the question automatically arises as to whether and how alternative legal service providers are called in: from the involvement of project lawyers to dividing the provision of the advice up between several types of  firms. A prime example of this is the processing of customer complaints in the Volkswagen diesel scandal by project lawyers, document automation and the integration of e-discovery providers in internal investigations.

In order to be able to implement and administer all this, a massive leap in the firm’s internal IT systems is required.

[3] Exceptions to this are the law firms and partners who have a high degree of specialization. We call these law firms “focused law firms”. These are often not boutiques in the classical sense: Quinn Emanuel as an example is a highly focused law firm, but certainly not a boutique.

[4] If you would like to discuss this point in more detail, please contact Gerard Neiditsch, Venturis Consulting Group Frankfurt.

Source: adopted from Thomson Reuters – LegalGeek, LegalTech Startup Report, 19/10

A quick look at the legal tech landscape shows the relevant subsystems. In many law firms, including larger ones, these often exist only partially and then usually as independently operated systems. Last but not least, these systems, provided they are integrated, also provide the basic economic data to drive innovation in the provision of legal services.

We believe that the law firms that integrate these systems will have a decisive competitive advantage. They will

  • manage their resources more effectively and thus better maintain their profitability.
  • in fee negotiations, better grasp and make use of the available scope for negotiation.
  • have the necessary data and interfaces at IT level to best collaborate with their clients.

In a sense, “Operational Excellence & Digitization“ is the counterpart to the driver “Price Pressure”. Observing this development will quickly show law firms whether they run the risk of falling behind at a significant entrepreneurial level.

2.4 Purpose – Sustainability – Culture – Leadership

Law firms are social systems. Purpose – Sustainability – Culture – Leadership (PSCL) are often seen as soft factors – “nice to have” but not decisive. In social systems, however, it is precisely these factors that lead to commitment, outstanding performance and indirectly to above-average profitability. Anyone who denies this ignores decades of established scientific research on these causal relationships.

Those who stick with the “nice to have” often also think “we are in it only for the money”. Both are attitudes that affect the firm’s culture, employer branding and client relationships. They will result in a law firm not being able to attract the best people – and thus always remaining below its economic potential.

Even before the Corona crisis, questions regarding companies’ purpose, the sustainability of their economic activity, their management and culture dominated the economic and day-to-day political debate. Corona led to a brief and dramatic focus on how to deal with a concrete threat to the lives of many people. But although this latest crisis is far from being over, the topics related to purpose, sustainability, culture and leadership are back. This shows their significance. The current crisis acts as a catalyst for urgently needed, if not long overdue debates: they raise the question of what we are doing with the world right now, across all generations.

Regarding law firms, this raises the question of how firms define

  • their task and role in society.
  • the sustainability (economic, ecological, and social) of their business activities.
  • their underlying values and attitudes.
  • the associated image of man and the way we deal with each other.
  • the resulting accepted behaviours.

The answers given by a partnership to these questions will play an increasingly important role in determining which employees and clients the firm can win over.

The discussion of purpose, sustainability, culture, and leadership cannot be driven by a number-based catalogue of criteria, but it does make the DNA and foundation of a law firm visible. Unlike in the past it is no longer sufficient in today’s social situation to focus the purpose of a law firm on profit maximization and to substitute a lack of culture and leadership skills with money. Law firms today are too complex systems for that. Although the partners still play a major role, the importance of associates and employees in the business services functions has increased significantly.

Purpose, Sustainability, Culture and Leadership are the dimensions that are most difficult to observe and assess with existing and commonly used processes and criteria. At the same time, we consider them to be extremely relevant because they relate to the socio-economic context in which a law firm operates. Ultimately, it is about the “Licence to Operate”, the basic prerequisite for the continued existence and expansion of the business in the future.

3. Adaptability and resilience

Resilience describes the psychological capacity to endure difficult situations / uncertainty and to cope with them without psychological damage. Resilience can also be a characteristic of law firms: To the extent that the resilience of the people in the firm is increased, the ability of the firm as an organization to develop resilience also increases. This in turn allows the organization to deal effectively with the current demanding overall economic situation and the resulting consequences.

In order to achieve this, leadership plays a central role: a resilient law firm leadership will promote resilience in the partnership and the partners in turn will foster resilience in the way they deal with employees. The direct connection with purpose, sustainability, culture and leadership is obvious.

Resilience builds on seven attitudes[5]:

  • Acceptance: accepting current experiences and their irrevocability
  • Optimism: focus on the positive and control emotions so that reactions to a situation are managed
  • Self-efficacy: trust your own abilities, recognize your needs and act accordingly
  • Personal responsibility: knowing your own limits and taking responsibility for your own actions
  • Network orientation: building and maintaining stronger relationships with others
  • Solution orientation: Knowing values, basing the selection of the solution on these values and focusing on what will help
  • Future orientation: having a clear vision of the future and controlling short-term impulses in favour of long-term future orientation

Resilience is a skill that can be developed and not to be understood as a technique. People who adopt these attitudes will be better able to handle crises, take more appropriate decisions and ultimately achieve better results. Against this background, soft factors are once again the basis for hard results.

Thinking about the future is a mental activity that requires data derived, among other things, from the observation dimensions listed above. In order to be able to deal with these, additional analytical competence and in particular the ability to deal with uncertainty and to take decisions is required, i.e. resilience.

We therefore consider increasing resilience to be one of the keys to success in dealing with the Corona crisis in the long term.

This article concludes our five-part series on the Corona crisis, which has aimed to assist our readers in structuring their thinking around the crisis. We will continue to publish our thoughts on further developments and the various challenges in the context of the Corona crisis and the general development of the legal market.

[5] According to Heller, resilience for times of change, Changement, 20/03

The following members of the Venturis Consulting Group contributed to the five articles: Marion Ehmann, Peter Gerdemann, Stefanie Hoogklimmer, Wolf Kahles, Martijn Lesterhuis, Gerard Neiditsch, Rupprecht Graf v. Pfeil, Karl Radnoczy, Daniela Santo