The legal industry faces a changing landscape with swiftly changing market dynamics. Pressures include cost containment, client-focused investments in technology platforms and cybersecurity, the disruption of artificial intelligence, and relentless competition. It’s time to rethink the business of law by embracing new opportunities and addressing old challenges. Law firms need to jump the S-curve.
Every Business Grows and Plateaus
All businesses, including law firms, go through four phases: Startup, growth, established and transition. Every phase includes distinct challenges. Startups must become viable. Growth companies must create a consistent operating model. Companies in transition must bring on new leadership and investors. However, complacency can make companies particularly vulnerable to disruption. Change is coming. Competitors are disrupting the industry with new business models and technologies, and inventing new S-curves.
Why does this matter? Because the new innovations attract clients—and clients may jump first. The market share for established companies begins to erode as they watch clients go to competitors. Failing to jump the S-curve limits growth—and may make business obsolete. Familiar examples include Kodak and the inability to navigate digital camera technology; Blockbuster and the inability to navigate streaming technology; and the Sony Walkman obsolescence in the face of the iPod—one story in the music innovations that created multiple S-curves.
Four Disruptors to the Legal Industry
Many legal firms are in the established phase. But they cannot be complacent. Change is happening now and is accelerating. Legal firms must reconsider their century-old partnership model, the cash-based model, the impact of artificial intelligence, and industry consolidation.
The Partnership Model
The partnership model has been in place for over a hundred years. Young lawyers enter with the hope of becoming partners, partners provide input, and the chair makes decisions. The chair must manage competing interests to maintain control and weather multiple reelection cycles. This short-term view may focus the chair on “What will my partners support?” rather than “What’s needed for my firm?” The hierarchical structure can stifle innovation, hinder innovation, and accelerate burnout. Innovators are shifting to limited liability partnerships, nonequity tiers, public ownership models, and multi-disciplinary practices to create flexibility, reward top talent, and leverage teams.
“Partnerships are for partners. Corporations, especially in the digital age, are becoming responsive to a wider stakeholder group— workforce, customers, society, and the planet.”
The Cash Basis Financial Model
Law firm financial models typically run on a cash basis. This model encourages firms to focus on revenue with the purpose of maximizing profits per equity partner. This model has advantages: Compensation increases for partners and “profits per partner” industry benchmarks may sway top law school graduates’ choices of law firms. However, this model impedes the ability to invest in the firm itself.