A paradigm shift in legal business models. Lessons for law firms…

1. Attaining the ‘impossible’ dream:
differentiation that matters
Wayne Stewart
Director, Monte Rosa
A paradigm shift in legal business models.
Lessons for law firms…

2. 2 © 2014 Beaton Capital

3. 3
Hallmarks of the traditional law model
1. Top talent
2. Leverage full-time lawyers
3. Tournament for promotion
4. Few owners
5. Partnership
6. High hourly rates
7. A generation of growth
High salaries
High fixed costs
High utilisation
PPEP maximised
Profit today
Client bears the risk
Denial
A case of strengths becoming weaknesses…
© 2014 Beaton Capital

4. 4
Hallmarks of the NewLaw business model
1. Requisite talent
2. Fit-for-purpose standards
3. Separate selling and production
4. Corporate brands
5. Disruptive technology
6. Flexi-work practices
7. No tournament
8. Corporate ownership
9. Non-lawyer shareholders
10. Fixed fees
Effective division of labour
Culture of efficiency
Best use of talent
Not key person dependent
Provide ‘more for less’
Low fixed costs
Fewer inappropriate signals
Shareholder-value mindset
Long-term view on profit
Risk is shared with clients
SUBSTITUTE | NEWLAW BUSINESS MODEL
Some are BigLaw firms starting to conclude:
“If you can’t beat them, join them”
© 2014 Beaton Capital

5. The difference between NewLaw ( ) and Old Law ( )
Demand oriented
Client lock-in & referral
Clear (1) cost; (2) segmentation; or
(3) differentiation strategy
Subscription, fixed or product pricing
Fast invoicing/collection, no discount
Risk on law firm
Process optimisation
Service standardisation
Lean thinking
Investment “in the system”
Innovation culture
Supply oriented
Size and publicity focus
Serve and seek all incoming
clients
Hourly pricing
Slow invoicing/collection
Risk on client
Reinventing the wheel
Each matter unique piece of work
Bureaucratic thinking
Short-term profit
Avoid-the-mistake culture
5 © 2014 Beaton

6. But still early days….
• Not as pervasive as the slide may suggest
• Law firms will not continue to grow as before – they will have to be
managed as complicated ‘systems’
– Requiring massive behavioural change
– Too many still see ‘growth’ as underpinning ‘full service’
– Too many have ‘compromise’ management leading to the ‘lowest
common denominator’ in decision making
– Too many fail to have firm wide strategy – factionalism pervades
• The successful firms will have a ‘shockingly clear’ identity and cohesion
• Remuneration models will move towards salary+bonus+dividend
• Financial reserves will be accumulated for investment
….sounds familiar?
6 © 2014 Beaton Capital

7. Attaining the ‘impossible’ dream:
differentiation that matters
Wayne Stewart
Director, Monte Rosa
Unstoppable forces of change in the legal
market.
A summary…

8. Porter’s analysis of the market
New
entrants to
the market
Competitive
rivalry
amongst
incumbents
Client
demand for
services
Substitutes
for the
incumbents
Supply of
talent
8 © 2014 Beaton Capital

9. 1980s to the GFC was boom time for law firms in a
sellers’ market
9
Growth of cross
border referrals
Domestic
start-ups
Slow
globalisation
Formation of
national firms
Growth of
corporate
clients
Increasing
number of
practitioners
Increasing
demand for
corporate law
firms
No substitutes
Tournament
of lawyers
© 2014 Beaton Capital
New offices
- national and
international
Limited
poaching
Limited
discounting

10. Since the GFC – the pace of change is increasing
10
Globalisation
mainstream
Specialist
boutiques
Sophisticated
buyers (GCs)
Budgetary
constraints
Service levels
Rise of the
Supertemps
Virtual
workforce
New
business
models
Disruptive
innovators
© 2014 Beaton Capital
Fee
discounting
Team
migrations
Downsizing &
restructuring
International
‘mergers’

11. Supply of
talent CLIENT MARKET
Clients
• Lawyers going client side
• Poachers turning game keepers – slow trend that is growing
• Hardened attitudes during the GFC, not helped by law firms discounting
• Clients looking for more than rebates and discounts
• Fixed fees and risk sharing arrangements becoming more common
• All of business and embedded arrangements to create ‘certainty’
• Business intelligence services on the back embedded work streams
11 © 2014 Beaton Capital
New
entrants to
the market
Competitive
rivalry
amongst
incumbents
Client
demand for
services
Substitutes
for the
incumbents

12. Supply of
talent CLIENT MARKET
The trend to in-house is most evident in the rise of
number of corporate counsel
12
4,500
3,000
1,500
-
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Australian Corporate Lawyers Association
New
entrants to
the market
ACLA membership numbers
© 2014 Beaton Capital
Competitive
rivalry
amongst
incumbents
Client
demand for
services
Substitutes
for the
incumbents

13. New
entrants to
the market
NEW ENTRANTS Competitive
New entrants
• What is driving new entrants?
– Following clients globally
– The rise of Asia
– The rise in the need to address different jurisdictional law
– Specialisation over generalisation
• Specialists skimming the market of its cream
• Referrers now becoming competitors
13 © 2014 Beaton Capital
rivalry
amongst
incumbents
Client
demand for
services
Substitutes
for the
incumbents
Supply of
talent

14. Substitutes
• Slicing up the market, picking out the points of value
• Offering terms and relationships that are more commercial and appealing
to clients
• Impacting at different points of the old legal business model:
– New on-hire models (e.g. Axiom) – attracting higher value
transaction/project work
– LPOs – attracting mass discovery and commoditised work
– New embedded models (e.g. Riverview) – attracting long term
relationships, clever use of technology and go beyond being a mere legal
services provider
14
New
entrants to
the market
Competitive
rivalry
Client
demand for
SUBSTITUTES amongst
services
incumbents
Substitutes
for the
incumbents
Supply of
talent
© 2014 Beaton Capital

15. Talent
• No shortage of lawyers
• Prepared to join “substitute disruptors”
• Probably no shortage for the next generation
• Market changes and the GenY mentality
• Musical chairs for partners
15
New
entrants to
the market
Competitive
rivalry
Client
demand for
TALENTMARKET amongst
services
incumbents
Substitutes
for the
incumbents
Supply of
talent
© 2014 Beaton Capital

16. Competitive intensity
• Pricing strategies
• Differentiation strategies
• Geographic expansion – solo or merge
• Talent poaching and migration
• New delivery models
16
New
entrants to
the market
Competitive
rivalry
Client
demand for
COMPETITIVE amongst
INTENSITY services
incumbents
Substitutes
for the
incumbents
Supply of
talent
© 2014 Beaton Capital

17. New
entrants to
the market
COMPETITIVE INTENSITY Competitive
Major competitive trends in the global legal market
continue unabated
• The four major trends over recent years in global markets continues
– Market segmentation
– Pricing and work process efficiency
– Consolidation and scale
– Globalization
• In addition, some firms are working hard to improve their service delivery and client
relationship management processes across offices
– Seeking increased consistency in service levels – especially between offices
– Managing through practice groups across offices in an effort to ‘enforce’ standard processes
– Investing heavily in training, technology, knowledge management and standardising work
processes
• A number of US firms are following the trend in their UK peer firms by broadening
partner performance metrics
– Revenue/profit managed by a partner replacing personal billable hours as a major metric
– Including metrics on client relationship management and business development activity
(not just origination)
© 2014 Beaton Capital
rivalry
amongst
incumbents
Client
demand for
services
Substitutes
for the
incumbents
Supply of
talent
17

18. Market segmentation
© 2014 Beaton Capital
Old law
18
Old law – typified by the large
general practice firm covering
most if not all areas of law.
High margins from commoditised
work shielded within specialist
matters.

19. Market segmentation
• Then two distinct segments in the market:
© 2014 Beaton Capital
Old law
19
Old law (rump) – still typified by the large
general practice firm covering most areas
of law.
LPO – commoditised work taken by
LPOs and captive offshoring at reduced
margins
LPO

20. Market segmentation
• There are now three distinct segments in the NewLaw market:
© 2014 Beaton Capital
A
B
C
A. High value/High
risk/Specialised work (large law
firms, boutiques)
B. Sophisticated day-to-day work
(in-house teams, insourcing firms
and contract lawyers, mid-tier
generalist firms)
C. Large scale process and volume
work (Legal Process Outsourcing,
captive offshoring)
20

21. There will be a transition period in the long-term
market structure
A different structure is taking shape over the next decade
• More than 30 law firms are competing as International Business Law Firms – or aspiring to do
so
– The market cannot support such a number given the size they will need to be to compete
effectively across the globe
• We forecast that by 2020 there will be a leading group of around 10 or so firms with the
capabilities to compete effectively in all major regions in higher value work
– It will be a mixture of present Global Elite and IBLs
– There will be a second tier of firms who lack the quality and consistency to be in the leading group
but who nevertheless compete in parts of the market and can take market share from local firms
– This group will come to compete in a lower value position than the first group
– Both these groups will contain a number of merged firms including transatlantic mergers
• There will undoubtedly be more large law firm failures
– The competitive demands plus the financing problems faced by partnerships are creating a very
fragile environment
– Some others will decline in market position and survive only by a significant restructuring – with
many being forced into different ownership structures
© 2014 Beaton Capital
21

22. Forces – a recap
External
• Client knowledge, buying power and capability increasing
• Disruptive substitutes and new entrants
• Talent loyalty/disloyalty
Internal
• Leadership and governance – fit for purpose?
• Momentum and direction – consolidation/fragmentation?
• Balance sheet and finance – sufficient?
Remember - there are always winners and losers in every market sector
22 © 2014 Beaton Capital
New
entrants to
the market
Competitive
rivalry
amongst
incumbents
Client
demand for
services
Substitutes
for the
incumbents
Supply of
talent

23. Attaining the ‘impossible’ dream:
differentiation that matters
Wayne Stewart
Director, Monte Rosa