6 Ways to Respond to Legal Market Disruption

Editor’s Note: The author is formerly a senior partner at The Boston Consulting Group and COO of Ropes & Gray.

By Hugh A. Simons

Law isn’t the first industry to undergo ‘disruption’, i.e. a dramatic reduction in demand caused by a new breed of competitor. A review of other industries faced with similar challenges identifies six general ways companies have responded; together they define a set of strategy options for law firms:

  1. Sell to someone who doesn’t perceive the disruption forthcoming.
  2. Merge into, or be acquired by, a larger entity.
  3. Pare back to a profitable core.
  4. Retreat to business segments that will endure.
  5. Disrupt your firm through a ‘skunkworks’ operation separate from the rest of the firm.
  6. Disrupt your firm from within the main organization.

A timely sale, Strategy 1, can be hugely successful for the seller. A great example is the U.S. Internet search business Lycos: it was sold to Terra Networks (a Spanish company) for $12.5 billion in 2010; Terra Networks sold it again in 2014 for $95 million—a 99 percent loss in four years.

It’s not practical to sell a law firm for regulatory and other reasons. The approach that comes closest is to be acquired by another firm, Strategy 2, and to secure for the partners of the ‘selling’ firm some form of compensation guarantee. There is evidence from data aggregated by Altman Weil that being acquired has become a common strategy for smaller firms over the past five years: acquisitions of 2-20 lawyer firms grew from 72 to 82 percent of total acquisitions between 2007-2011 and 2012-2016. It’s not a bad move for a small firm but it doesn’t obviate the challenge; it simply makes it someone else’s problem.

Paring back to a profitable core business, Strategy 3, is a standard response to disruption: as the core comes under threat, the company jettisons loss-making initiatives in order to shore up overall financial performance. Bausch & Lomb’s contact lens business is a classic example: they rolled back their 1990’s incursions into dental products, skin care and hearing aids as competitors started leveraging new lens technologies to disrupt the lens marketplace in the early 2000’s. The analog for law firms is to roll back new office openings, international growth, and incursions into new practice areas. While the response doesn’t obviate the underlying threat, it can shore up partner compensation and afford a firm more time to develop a fuller response.

Strategy 4, retrenching to segments that will endure, is probably the most viable strategy response for an elite law firm. The classic example of doing this is Netflix: as the mail delivery DVD business came under threat, they stopped promoting their physical disc delivery service and focused on their on-line offering; the classic example of how not doing this is Blockbuster—they stuck to their bricks-and-mortar rental business as online viewing came of age. From 2000 to 2010, Netflix went from fledgling to a $28 billion company and Blockbuster went from market leader to Chapter 11.

For law firms, enduring segments will be defined not by traditional boundaries of client type, service offering, and location but by the element of client need being met. These range from the basics of understanding the relevant facts, laws and regulations through to business judgment and providing assurance, i.e. the feeling their matter is being addressed in the best possible way. As disruption unfolds, the basics will increasingly be provided separately by new-breed low-cost competitors (including in-house) while business judgment and assurance will remain the province of elite law firms. Hence this strategy translates to refocusing on these elements of firms’ offerings.

Setting up a skunkworks, Strategy 5, is a common way for companies to develop new products that would cannibalize their core offering. The approach was conceived by Lockheed when it developed its first fighter jet 1943; it is followed today by companies as diverse as Google, DuPont and Nordstrom. However, the challenge law firms face is less about developing new products, and more about transforming the process by which the current ‘product’ is delivered. Thus, the law firm analog would be to set up a firm-within-a-firm where the new entity works on a radically lower-cost service delivery model. While appealing at one level, it’s hard to see how this could play out successfully—one can anticipate serious resistance when porting the lessons from a skunkworks back into the mainstream organization.

The new entrant ‘disruptors’ in the legal world compete with established firms based fundamentally on cost. Accordingly, it can only be a help for law firms to lower their cost of service delivery, i.e. to disrupt from within, Strategy 6. For those serving high value-added segments, a lowered cost position will help stave off competitors and slow continued erosion of the segment; for those serving lower value-added segments, a dramatic reduction in cost is vital to survival of the organization, albeit at a lowered profitability level. Lower cost delivery requires adopting prescribed methodologies, accelerating deployment of new technology, and changing career development models in favor of many more career attorneys. It requires too the removal of certain roadblocks. For example, measuring partners based on billed hours has to end as it rewards inefficiency; it should be replaced by separate measures for volume and profitability of work originated and for volume and profitability of work executed.

The history of disruption in other industries reveals another important lesson. In every case, the incumbent had the same knowledge of the market and access to technology that the disruptor had. The elements the incumbents lacked that lead to their downfall was the will to adjust their business models (e.g. Blockbuster’s dependence on late fees and high-cost bricks-and-mortar distribution) to the new realities of their marketplaces. Thus, the lesson for law firm leaders is that the challenge they face is not one of insufficient knowledge or access to resources; rather, it is simply one of will—of being willing to make the necessary changes to today’s business model.