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The global economy is likely in for some significant changes, and the players in this space are ill-equipped to deal with it. The choices that should have been taken in 2018 and in early 2019 have largely been ignored. With a change in economic circumstances, change by choice will feel a little quaint by 2020.
A new legal sector starts to take shape
After legal technology guru Richard Susskind's “End of Lawyers” was published in 2008, there was a chorus of disapproval and cynicism. For five or so years the resistance to change was impressive because, whilst the world knew the legal industry was committing spectacular and widespread overbilling and clinging to a pre-industrial model of self-serving inefficiency, there were no tanks on the lawn. Now there are. The Big Four and the Alternative Legal Service Providers (ALSPs) have not been wished away. Far from it. They now have extremely high brand recognition in the market according to Acritas, and are typically 10 times bigger that the world’s largest law firm. Yes, you read that right, 10 times. They have deep pockets and multi-disciplinary capability way beyond any traditional competitor.
Last year Thompson Reuters’ Alternative Legal Service Study revealed a seismic shift with 51 per cent of law firms and 60 per cent of corporate legal departments currently using Alternative Legal Service Providers for at least one type of service. And those numbers are expected to grow.
The all-too-often weak and old school management of the lower top tier of traditional law firms leaves them especially vulnerable and easy prey. In 2019 we are likely to see more deals like the alliance between Deloitte and Berry Appleman & Leiden LLP, as well as the break-up of at least one-second rate brand that has overextended itself. The Big Four will have a barbecue at the remains of these vanity projects similar to King &Wood Mallesons last year. Putting a brand above the door simply doesn’t transform delivery.
Expect a deal a month from the Big Four and continued merger activity with the traditional providers. There will be a few break ups divorces like the Deloitte Conduit Law LLP fall out. We foresee more activity from the accountants in consulting, process optimisation and staffing, as they ape projects such as A&O’s staffing and consulting solution.
Signs from the East are also ominous: PwC and EY have launched legal intentions in Singapore and Hong Kong recently, with Deloitte Legal International landing in Singapore as well. Similar regional assimilations will form over the next 12 months, with emerging markets looking good for a similar strategy. The simple truth is they can afford to make mistakes and have abundant financial resources to stick with it for the long term.
The private equity brigade storms in
Slow at the beginning and weary of the legal industry at first, the private equity tank formations have now arrived. They invest in sound cash-generative businesses in growth markets, so as legal isn’t growing, they focus on ALSPs. Private Equity funds have firepower and they won’t be investing in businesses that have limited ambitions or traditional management. This has the implication that with meaningful investment to back them up, ALSPs will soon be serious technology and subject expertise players. Consolidation will also be on the cards, of course. And a lot of it, too.
With its ‘scaling fast’ gospel, PE houses won’t leave in-house teams alone: they will be ‘acquired’. The acquisition of Lawyers on Demand, Prime Clerk, Williams Lea Tag and UnitedLex means consolidation will become a necessity in a 3-4 year timeframe. This will be the year that Axiom has to make a move, but I would think an IPO is pretty unlikely. The staffing model may suffer if there is a significant downturn, as they have in every other recession without exception.
The 2016 Deloitte Paper ‘Future Trends for Legal Services’ called out that 44 per cent of in-house teams consider ‘doing more with less’ as their biggest challenge, while only 11% regarded the appropriate use of technology as paramount. Look out for a big reversal in 2019 as tech consolidation and experience concentration starts making a real mark.
These two forces, the Big Four and ALSPs, together will reshape legal services provision. Everywhere. Law firms exist in a single-digit growth market, but the deals done are at 12-20x multiples, implying ALSP growth rates of 15-30%. You’ve got to believe the Private Equity funds have picked their winner, and it surely is NOT a law firm. Desperate to be relevant again, one or two law firms might float or try this at the top of the market. It will be a disaster.
Technology, but not as you think of it now
The technology sector in this space has long been touted as the next big thing. Lots of start-ups, flattered by the attention of law firms, announce the next big thing. Some will succeed. 90% if not more will not, for good reason. Serious tech start-ups don’t need legal advice, they need a long-term funding partner, an investment strategy and expertise. And that’s just to play. The focus for meaningful change and impact should be on combining corporate finance and technology expertise, not on small-scale law firm investment. That’s why not a single legal startup or accelerator backed by a law firm will come to market in 2019. Forcing legal technology onto clients simply for the sake of it is just not working. Technology integration is the key, but that requires experimentation, true innovation, and risk. None of these are and will never be associated with the traditional legal practice.
Corporates are likely to be the first ones to initiate change through technology, and more specifically through finally realizing the value of legal data. Corporate boards will recognize it long before their legal teams. There are massive multiplier effects from combining data across a company and breaking down barriers between skill sets. Cross-functional data will make all the difference and only teams with real interest in exploring neural network mapping, NLP, financial and legal data concatenation will succeed. The output emphasizes that legal is just one contributor to corporate success, and AI is only one element of success.
It’s the integration of systems and the design thinking that surrounds your innovation strategy that is required. Realistically, In-house legal will not sufficiently embrace this opportunity but will have it foisted upon them. GCs will gradually come under the control of finance and the COO and will lose corporate influence as a result, except for risk-related purview. They will continue to resist the notion that disciplines (law, finance, procurement, technology) must intersect and lawyers have to operate at these intersections. But 2019 will be the year of the data democracy, so brace yourselves if you are not friends with data.
It’s the economy, stupid
In many ways, the economy will be the biggest driver of change (twas ever thus). When you consider that growth in the law firm sector has been anemic since the 2008 financial crisis, while markets and tech have raced ahead, this sector has most to fear from a reversal in global growth. In truth, not much has changed in the model in the last decade. There will be casualties, not least of which will be debt-ridden law graduates. John Grisham’s “Rooster Bar” is a good holiday read that speaks to this.
As the US boom starts to fade, market consolidation will accelerate and failures will rise. The stimulus is designed to keep the road until the elections in 2020, but 2019 should be a year for putting the storm shutters up. Except, most firms will not. Rather, they will continue to inflate newly qualified salaries in a manner that would make Lewis Carroll proud.
In the UK, the anticipated post-Brexit shift of financial services to continental Europe will leave a gaping hole in many a legal timesheet. We’re likely to see some bold (dare we say, creative) service lines from the Magic, Silver or any other circle. The Blockchain band, eSports ensemble or even the Marijuana medley will cautiously slide into their seats next to the M&A and Tax teams. Look out for various collections of ‘disruptive’ young lawyers gracing the front pages of legal magazines as the new face of law and legal discipline. All of this while the average client simply pages through the mag to see if there are any software shootouts and some pricing if they’re lucky.
Driven by an urge to reshape the legal industry, Exigent's CEO and co-founder David Holme has been injecting innovative thinking into the way legal services are provided for the last 15 years. He founded Exigent in 2003, moving the needle of alternative service providers from the low-cost camp to smart, data-enabled business partners.