When law firm leaders think about the nature of competitive advantage, a few common themes typically come to mind.
A successful firm’s competitive edge often results from attracting and retaining top talent, delivering superior client service, offering unmatched practice area expertise, and adopting cutting-edge legal technology. With the rise of alternative fee arrangements (AFAs), firms’ ability to provide and deliver on specific client budget requests has also become a key differentiator.
Though each of these qualities can be components of a competitive advantage, many law firms do not have a formal, documented competitive strategy. Instead, they rely on resources that are difficult to protect. Superstar talent can leave the firm at any time. Similarly, client service and firm expertise are fundamentally subjective assessments at the mercy of client perception. Even firms that focus on business development face limits on resources and gaps in strategy. Winning the competitive battle requires an integrated, holistic approach.
Shifting your perspective
Developing a unique, differentiated and protected position — and securing a true competitive advantage — requires an analysis of your firm, industry and competitors. For law firms today, the question of exactly who their competitors are is paramount.
As the legal market evolves and clients become more likely to unbundle their legal work, firms must recognize that “competitors” are no longer just peer firms. Large law firms are seeing increasing competition from medium-size rivals offering lower rates and AFAs as a strategy for taking market share. Likewise, alternative legal service providers (ALSPs) have begun delivering pieces of the legal services firms would otherwise provide. Already a major force in the UK, these providers are making headway in the US ALSPs in America represent a $10.7 billion market, with nearly 13 percent compound annual growth (Legal Executive Institute. 2019 Report on the State of the Legal Market).
And though the very nature of legal services encourages clients to shop around, the best firms succeed by offering something their clients can’t get anywhere else. In years past, this kind of differentiation was largely qualitative. Firm reputation, talent, and promises of superior client service attracted many clients who were comfortable with the standard billable hour as the going rate for these intangible assets. Today’s legal client is much more concerned with quantitative measures. In fact, 58 percent of surveyed chief legal officers (CLOs) cite greater cost reduction as their top service improvement wish for outside counsel (Altman Weil. 2018 Chief Legal Officer Survey).
As clients push for increased clarity, law firms’ ability to respond in kind is key. Increasingly, clients demand that firms provide clear budgets, stick to them and scope future services on a portfolio level rather than matter by matter. In support of these requests, they are also asking questions about the firm’s use of legal technology to deliver on these promises and basing their decisions on the responses.
Clients have begun viewing their outside counsel as legal businesses – partners and vendors whose charge is to demonstrate increasing value for cost. These expectations increase competition and make differentiation more difficult. But in an evolving legal market, standing out from your competitors may well be the difference between success and failure. The firms thriving in five years will be those who have crafted and executed a comprehensive competitive strategy. Firms only “getting by” will see their practices and revenues shrink in a market where competition is increasing.
Competitive positioning is more important than ever
Thomson Reuters’ David Curle once described the legal market of the time as the “Betty Crocker Era.” Using the analogy of baking, he described three ways to get cake (legal services).
1. Bake it from scratch, which is labor intensive but cheap.
2. Bake it from a mix, which is convenient and a bit more expensive, but you save by not needing to keep ingredients on hand.
3. Buy it from a baker, which is expensive but offers personalization and convenience.
Years later, this analogy is perhaps even more apt as clients are employing a mixture of all three methods to cover their legal needs. In 2018, an average of 48 percent of corporate legal budgets were earmarked for internal work. Of those surveyed, 54 percent indicated this is an increase over the previous year (2019 State of the Legal Market). These clients “baking from scratch” have already cost firms, with more than 70 percent of firms surveyed indicating they’ve lost work to corporate legal departments (Legal Executive Institute. 2019 ALSP industry trends).
For those “baking from a mix,” ALSPs are the common choice. Alongside many small- and mid-sized providers, this group includes the Big Four accounting firms. Considering the reach and resources of these large firms, it’s no surprise that 23 percent of law firms report losing work to the Big Four. Furthermore, 77 percent of corporate law departments of more than 50 lawyers indicated that outsourcing is a primary strategy, indicative of the larger unbundling trend.
And while many large law firms pride themselves on being the client’s chosen “baker” in the “mix” scenario, the outlook is not entirely positive. CLOs surveyed estimate that only 24.7 percent of their outside counsel fees went to work so important that cost was not a factor. As cost pressures increase and alternatives abound, fewer and fewer clients will choose their most expensive option.
Even across law firms, the landscape is changing tremendously. Across several major U.S. markets, 35 percent to 53 percent of partners made lateral moves to competitors and other organizations between 2010 and 2017. While some degree of mobility is to be expected, one commenter declared that such movement had “never been this aggressive.” Likewise, the legal industry saw a record 102 mergers in 2017. This movement and consolidation impacts firms’ ability to retain the knowledge and client relationships present in the lawyers and partners they rely on.
But all is not lost. The 2018 Dynamic Law Firm Study notes an encouraging trend for firms considered dynamic rather than static. A majority, 74 percent, of dynamic firms reported increasing corporate demand growth.” In contrast, only 51 percent of static firms reported positive growth. While the factors contributing to these metrics are complex, they serve as a clear indication of the stakes involved. Firms who are taking a proactive approach to their business and competition will continue to win.
