by Mike Henley, outsourcing expert at PA Consulting Group.

In the first of a two part series, Mike Henley, outsourcing expert at PA Consulting Group with 20 years experience in the legal sector, discusses how, in the light of fundamental and permanent changes in the legal market, the greatest issue is whether legal firms and their people can accept and deliver revolutionary change.

The last 18 months to two years have been difficult for most law firms. A minority of firms have managed to do well in terms of maintaining revenues and profits, but most have seen revenues and profits drop in the recent past, in some cases quite alarmingly.

Many firms have been reducing staff numbers and trainee intake and most are trying to reduce cost and control expenditure much more tightly. Some are being looked at very carefully by their bankers, who no longer regard law firms as being immune to catastrophic failure. It has not been a pleasant time for many partners, some of whom have been managed out altogether, whilst others have been demoted from equity status. For those remaining in the equity, many are being asked to take on greater personal risk with the prospect, at least in the short to medium term, of less reward. They are being required to contribute more capital at a time when their drawings and profits are reduced.

What makes this a period of fundamental significance for law firms is the fact that the economic turmoil of the last two years is only one of a number of dynamics which together will reshape the legal marketplace. What are those dynamics?

• Substantial reductions in revenues and profits, caused by lower volumes, particularly in corporate finance and real estate sectors,, have weakened firms. The position is made worse by the fact that many current and prospective clients have been experiencing serious financial troubles, and in reviewing their spending categories are looking to pay their lawyers less.

• Clients are asking, where is the value for money? It is becoming increasingly difficult for law firms to justify their fees when balanced against the tangible value they add to a client’s business. Law firms are being asked whether their activities are making a difference, whether the fees are proportionate to the difference made or how easily an alternative comparable service could have been procured for similar or lower fees?

• Competition is increasing, most notably in the form of increasingly powerful in-house teams and ambitious new entrants to the market in the form of providers of legal process outsourcing (“LPO”).

• Liberalisation of the legal market will drive commoditisation. Non lawyers are entering the market place and are bringing proven business tools, technology and techniques to deliver consistency and reduced cost.

• There are too many law firms. Competitive dynamics, fee pressure, the current trend for clients to rationalise and manage their relationships with firms more actively and the contraction of the economy all point to significant overcapacity in the market.

In the second of this two part series, Mike Henley will demonstrate how law firms must react to these changing dynamics to secure their future success.