The decaying carcass of a law practice? Legal market trends

Posted on: January 21, 2014

Vulture Jan 2014Rather than death by a thousand cuts, law firms are having large chunks of them bitten away by a variety of forces and one wonders how long some of these carcasses can survive. Some media refer to these as Zombie firms – but I would suggest that in business there is no return for the dead.

From cost cutting

Some firms started the process themselves at the start of the recession. They offloaded hard to manage and expensive to market practice areas (e.g. personal injury) to consolidators with deep pockets. The cost cutting continued as firms looked at outsourcing an increasing amount of support services to shore up dwindling profits.

To defections

But then they found that some of their ambitious specialist super-performers decided to break away and form niche boutiques where they could obtain a double-whammy profit enhancement by charging higher prices and enjoying the lower overheads of a smaller outfit.

To foreign raids

It’s hard for firms to keep track of the ever-changing international chess board – which territories on the wane and the wax? They follow the fickle flow of client money around the globe and try to dodge or retreat from those territories which suddenly slap on some protectionism.  But the global pack eyes up hungrily and stalks the small but beautifully formed teams established in new offices which were designed to take advantage of the superior growth opportunities in developing markets overseas. Why form your own team when you can pinch someone else’s? And the legal media stories of bed-hopping are now commonplace.

To loss of leaders and rainmakers

Then there is the leakage from other reported departures – some are minor and weakening whereas others are clearly life threatening. Team leaders, department heads, key rainmakers and foreign office managers are those either being enticed from or scurrying away from the mother ship. Larger firms can bear the losses, but for some smaller firms it is the final fatal blow.

To client commerciality

Clients are having an impact too. Their rigorous panel reviews and external adviser management practices have forced prices down whilst demanding a slew of extra “value added” benefits. Clients add further pain by taking wholesale slices of some of the best work in-house – for example, Shell creating a unified global team (4 Nov 2013 http://www.thelawyer.com/shell-taking-the-power-back/3011742.article)

To innovative new competitors

And what’s this? Forget the damage wreaked on markets by big brand ABSs – look at the new kids on the block with big appetites. Local and fire authorities are following their health sector fellows by joining up to provide services. Once they get into their stride, they will further erode the available work.

To lacklustre laterals

The analysis of the failure of many laterals – hired in haste to plug the gaps left by the defections – would indicate that many do not fulfil their promises. So firms are then burdened with extra bodies who can’t wipe their faces or cover their costs.

To expensive mergers

Whilst some firms bathe in the warm self-satisfied afterglow of increased income after a merger (use interchangeably with “takeover”) they might take their eye off the external market ball. But they quickly feel the cold shock of reality when they then examine the damage such transactions have on morale and, more importantly, their PEP figures.

To cash flow and insurance fails

And even if firms manage to survive all these cuts and hits, the regulatory changes and dearth of chunky work means that cash flow might suffer and attract the attention of the previously vulture-like banks who are now watching their legal clients like hawks. And then the insurers may declare game over and effectively hog-tie firms when they refuse to renew professional indemnity insurance.

So what do you do?

It used to be that your options were to get big, get niche or get out. But it’s not quite so simple anymore. You could find yourself swallowed whole by an alien or a galactic behemoth. Those law firms that aren’t tempting enough to be consumed by others can either hone their turnaround and exit strategies or take the Star Trek approach – to boldly go where no law firm has gone before.

So it’s innovation time – whether this is in the products and services provided, the way they are priced and delivered or in a whole new beast of a business model. I’d like to be surprised, but it all feels way too familiar to the situation described in May 2011 titled “Are law firm leaders in denial about the perfect storm or holding on for the final big catch?” http://kimtasso1.wpengine.com/law-firm-strategy-are-law-firm-leaders-in-denial-about-the-perfect-storm-or-hanging-on-for-the-final-big-catch/

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