Porter’s Five Forces are Actually Relevant to Law Firms

By Lisa Smith, Principal, Fairfax Associates

For years we have tried to adapt traditional business strategy to the law firm environment. Sometimes that worked and sometimes it didn’t.

Economist Michael Porter published his article on “How Competitive Forces Shape Strategy” in the Harvard Business Review in 1979. The article defined a methodology for evaluating the competitive dynamic of an industry and the resulting impact on profitability. Porter’s Five Forces quickly became a standard in corporate strategy development. And we certainly tried dutifully to apply the methodology to the legal industry. But the legal industry seemed to defy the competitive pressures outlined in Porter’s article, and experienced a rapid rise in profitability. That has changed dramatically, and perhaps it is time to revisit the five forces to help us understand the competitive market.

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We will explore some of these in more detail in future posts on Big Law Business, but just to highlight some of the differences we have seen in just the last few years:

• Buyer Power – The rise of buyer power has driven many of the changes in the legal industry over the last five years. Price sensitivity, discounting and alternative fee arrangements is the strongest evidence of the power of clients but it is accompanied by lower client loyalty and willingness to change firms, increased access to information about firm practices, and less dependency on “buying local” for legal services.

• Threat of Substitutes – The prospect of substitutes was unheard of a few years ago but now we see competition coming from legal process outsourcers, technology, virtual firms, even non-lawyer licensed law practitioners. In some jurisdictions outside investment will create new models, and accounting firms are once again providing legal services.

• Barriers to Entry – Barriers to entry are lower than in the past in all but the very top tier of legal work. New firms have risen quickly to prominence in some areas. Global firms have formed at a rapid pace using new structures. Firms have been able to differentiate themselves from competitors based on practice, price, and other factors.

• Supplier Power – The key supply for law firms is talent. The oversupply of talent in the market, along with increasing differentiation of the talent required (partner track associates vs. staff attorneys vs. paralegals) means that the dynamic has changed and law firms have more flexibility to adapt their staffing models than in the past.

• Rivalry – The historic growth of the legal industry diminished the impact of rivalry and rivalries tended to be quite genteel. As the demand for legal work has flattened out in the last few years increasing market share must come at the expense of competitors, while in the past it simply required capturing a share of the growth of the market.

Understanding the impact of these forces on your firm’s strategic options and profitability may be instructive as you look ahead.