Insight:

The Future of Law Firms: Deloitte and Altman Weil Present Their Visions

A lawyer contemplates a fork in the road.

“Change is the only constant,” the Greek philosopher Heraclitus observed. The Parthenon’s granite pillars are still standing today, but the foundations of law firms are being shaken. Recently, Deloitte and Altman Weil each released surveys into the trends facing law firms. Deloitte’s Canadian Legal Landscape 2017 will obviously be of greater interest to firms north of the border, while Altman Weil’s 2017 Law Firms in Transition concerns itself with the state of the American legal market. Different focus, same conclusion; the landscape is shifting below firm’s marble floors. Harbingers of an uncertain future, these surveys have one pressing message for law firms everywhere: change now, while there’s still time.

Are law firms in trouble?

A law firm office building below dark cloudsAltman Weil’s 2017 survey claims that “some of this year’s results should be disturbing to every lawyer.” At the heart of the troubles is a “decreasing demand for legal services”. A shocking “fifty-two percent of firms report their equity partners are not sufficiently busy, and 62% of firms said their non-equity partners are not busy enough.” Altman Weil’s survey makes for grim reading, too many lawyers doing too little work. 88% of firm leaders report chronically underperforming lawyers. And these aren’t small operations: 50% of the AmLaw 200 participated in this survey. A combination of reduced demand for legal services and an oversupply of lawyers makes for law firms that vulnerable to simple market logic. Altman Weil offers a tough, but effective, cure: cut underperforming lawyers and lateral hires sooner rather than later. Commit your firm to the “disciplined use of all available profitability levers.” If not, not only the lowest performers but the entire firm will be out of work.

Compared to the somber Altman Weil survey, Deloitte’s tune is close to upbeat. Deloitte prefers to highlight the “tremendous opportunity within the legal industry to increase efficiency”, rather than dwell on the “regulatory risks and so-called ‘unknown unknowns’” that are keeping lawyers awake. Where Altman Weil sees overcapacity, Deloitte foresees a “looming war for talent”. Abundance or scarcity, which is it? This difference could be down to differences in the Canadian and American legal markets or simply a reflection of national attitudes. But a closer look reveals that this discrepancy is largely a matter of positioning. Deloitte isn’t suggesting a growing demand for lawyers in general, but for “interdisciplinary and technically sophisticated” senior associates. Canadian law firms may be feeling more optimistic than their American counterparts, but a recent study out of McGill University titled “The Illusion of Innovation at Canadian Law Firms” is cause for concern. This study suggests that while partners are confident their firms are rising to the challenge, associates perceive their employers as lagging behind.

We see firms making only cursory investments where they should be aiming for broader, deeper transformations— Altman Weil

Both Altman Weil and Deloitte note the decline in equity partners. Altman Weil notes that 68% of respondents believe “fewer partners will be awarded equity status in the future and that this is a permanent trend going forward.” Deloitte notes that the number of non-equity partners has grown by “nearly 50%” over the last five years, and sees this as evidence of a shift in operational model. The traditional pyramid, with many junior associates at the bottom may be replaced by a ‘diamond’ model, “where a large percentage of a firm’s talent is comprised of more senior associates with greater technical expertise.” The demand for lawyers may be flatlining, but the demand for the experienced, tech-savvy lawyer is about to become insatiable.

Legal Tech is changing the rules of the game

Change may be constant, but we can blame this breathless pace on the tech-sector. Both surveys see tech as a disruptive force— at once a threat to the established order and an opportunity for future-minded firms. Altman Weil observes that “49% of firms are currently using technology to replace human resources with the aim of improving efficiency.” This is a bad news for newly minted lawyers trying to gain experience, as software eats into the work typically performed by junior associates. But it may lead to reduced costs for clients—a boon in Canada, where legal services remain out of reach for most citizens. This 2013 Globe & Mail article notes that “as many as 65 percent of individuals involved in family court proceedings in Ontario do not have a lawyer” and proceeds to make a case for giving paralegals an increased scope of duties. Today, a similar case could be made for passing more work over to legal AI systems like ROSS or LISA, which will sort and prepare documents ad infinitum without a whimper about work/life balance. While still more of a specter than a threat, Altman Weil cautions firms to keep a “watchful eye on competitors and technology companies that are investing in legal AI solutions.” The code that shakes the industry to its core may, even now, be germinating in some developer’s mind. Law firms appear to be aware of the coming shift, Deloitte reports that an overwhelming majority of respondents identified innovation as a “major game-changer in the marketplace.”

A law firm office building in the cloudsTech, especially the bugbear of automation, might seem a clear and obvious threat to the established order. Deloitte sees an opportunity in all this: “organizations that invest time and resources to integrate technology and legal services will weather many of the challenges currently facing the legal industry.” But this advantage will only go to the bold. And firms aren’t responding, or at least they’re not responding quickly enough. Even firms that are sensitive to the changing winds seem unsure about how to set their course. With new tech comes expanded capabilities, but there is no clear map forward. Nonetheless, both Altman Weil and Deloitte advocate adopting a proactive approach to tech implementation. Tech, Deloitte notes, is “arguably the biggest enabler of best in class status.”

The uncertain road ahead

When you step back from the percentage points, it’s possible to discern an outline of a future law firm. These will be agile, data-driven operation. A buyer’s market will drive firms to invest heavily in client retention strategies. First among these will be an increased focus on efficiency. Pricing and profitability benchmarks will allow for smarter Alternative Fee Arrangements, while software will provide solutions in contracts, compliance, and perform increasingly complex research. Many firms will try to avoid competing on price, especially as alternative legal providers proliferate. For that, they’ll need to provide not just legal services, but strategic insight and quantifiable results.

Traditionally, lawyers had to retain vast mental libraries of information. With easily searchable data and legal bots, lawyers and law firms will quickly lose their monopoly on this specialized knowledge. In the era of big data, information is ubiquitous and cheap. This may mean a lower demand for lawyers overall, and a shift to a model where lawyers are supported by a diverse array of experts including programmers, data analysts, consultants, and support staff, in a similar manner to how surgeons are supported by a team of nurses, anesthesiologists, orderlies, and other specialists. While legal information may be easily accessible, information should not be confused with knowledge. Strategic insights and creative solutions will still, undoubtedly, be in high demand.

For what it’s worth, my prediction is that Deloitte is right, there will be a “war for talent.” But law firms won’t be battling it out for the loyalty of the average law school grad. They’ll be desperate for anyone with a roadmap to the future. The hunt will be on for the elusive talent with both legal knowledge and tech-savvy— that rare associate who can advise the autonomous car industry on Monday and use the firm’s AI to solve problems on Tuesday. Larger firms have the bankroll to fund tech implementation, but giants with clay feet are notoriously bad at making fast pivots. The future may belong to smaller, more agile firms, who commit wholeheartedly to new business models.

Both surveys identify a need for a change and a hesitancy act. “There is a very concerning misalignment between what law firm leaders believe regarding the pace of change and what their partners believe or are willing to do,” cautions Altman Weil. Increased competition and tech are bearing down on the traditional model. The firms of tomorrow will be the ones that are making their preparations today.

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