The Australian legal industry is in a state of flux as traditional full-service law firms jockey for position in a marketplace agitated by their upstart New Law competitors.
These start-up firms have challenged the status quo by brashly offering clients a business model that is the antithesis of the more established order.
They emerged after the 2007-08 global financial crisis with a mantra of transparency and value-based pricing, instantly striking a chord with cash-strapped consumers who wanted to avoid firms addicted to high overheads and fees.
Alternative business structures, especially incorporated legal practices, had a near-zero presence in the pre-crisis resources boom days. Today there are more than 2,000, representing one-fifth of all Australian firms.
And top partners and specialist lawyers have been moving to or setting up these firms in large numbers, taking clients and, increasingly, whole areas of practice away from Big Law.
Unless a client needs dozens of lawyers or a firm with global reach, moving to a new niche firm is a sensible business decision, according to leading legal industry consultant John Chisholm.
“New Law has materialized in a big way in Australia and it is no longer perceived that big is best,” says Chisholm, a former CEO of Middletons, now K&L Gates. “There was no heat at all until the last three or four years, but it is a hot burn now.
“Some of the most profitable businesses now are start-ups who carved a niche and let the market decide if their business models stood up to scrutiny. It actually makes your eyes water with what they earn. And barely a week goes by without a new model coming out; the smartest kids graduating law school today don’t want to join a traditional firm.”
A natural fit
Born in a mobile-friendly economy, the new boutique firms are a natural fit for technologically savvy professionals who want to avoid a life behind a desk.
These lawyers work in flexible, virtual offices free of partners, clock-watching, timesheets and boardrooms. They use the latest technology to drive the business and deliver clients what they want, how, where and when they want it with a tailored bill at the end.
The new paradigm encourages lawyers to think laterally and creatively to come up with the best solutions and build relationships rather than billable hours.
Bespoke Law special counsel Ben Krasnostein said budgetary certainty was the initial reason new clients engaged with the firm before they discovered the huge efficiencies created by lawyers working “in-house” and getting to know the business intimately.
“[Time billing] leads to uncertainty, prevents transparency and misaligns the client and the lawyer’s interests,” he said. “It also does not build the culture we are interested in; we need our lawyers to be ‘out of the box’ thinkers and sometimes as entrepreneurial as our clients,” he said.
“Sustainability comes from meeting clients’ ongoing needs and providing an indispensable service. Overhead stripping is the easy part and we develop relationships with clients which deepen over time as we work toward common goals without money as a distraction.”
The Legal Profession Amendment (Incorporated Legal Practices) Act, introduced in New South Wales in 2000 and used as a model laws for other jurisdictions, allowed for alternative business structures, such as incorporated legal practices. Few, however, embraced the opportunity to be legal pioneers as long as traditional models remained hugely profitable.
But alternate ideas have hatched big time since 2007 when Slater and Gordon became the first publicly listed law firm after using external funding to buy and consolidate smaller firms.
Specific and unique services
Large law firms have always sold themselves as able to provide any service, at any time.
The new incorporated practices are corporatized businesses offering specific and unique services and often financed externally by non-lawyers increasingly eyeing the large margins of corporate law and not just the scraps of the market vacated by those firms.
The start-ups only accept work that can be performed by specialists and offer triage-like speedy resolutions or long-term relationships.
• Melbourne-based AdventBalance uses an “insourcing” model to create a temporary workforce at the client’s place of business;
• At Sydney’s Keypoint, lawyers retain 70 per cent of brief fees and decide themselves how to bill clients;
• Bespoke Law offers “outsourced in-house counsel” and “insourced secondees;”
• Newcomer Hive Legal hires expert specialist lawyers who are proven project managers able to work with in-house lawyers or assemble a team to work with them.
“The most important thing is to understand our clients and their commercial and legal drivers and engaging the right resource for the right matter,” says Jodie Baker, managing director of Hive Legal.
She said technology was the most significant market shift that propelled the “work anywhere, at any time” Hive model where lawyers work on Wi-Fi-enabled tablets and in the cloud.
Similarly, Krasnostein said Bespoke invested heavily in the right technologies because “chosen carefully and implemented well, technologies are huge drivers of efficiency.”
Australia has not moved to a separate licensing regime for ABSs, as is the case in the UK; each principal must adhere to professional obligations and standards and provide appropriate legal services. Regulators have had few issues thus far.
Lately, firms like Hive are going full-circle, hoping to collaborate with larger firms on specific projects; Bespoke is using Australian-based, UK-experienced lawyers to undertake UK-based work.
Chisholm believes Canada will be the next legal market flooded by start-ups. Lawyers moving into New Law should safeguard themselves by building agility into their models because “client needs and expectations change quickly and they expect the same from service providers,” Baker adds.
But already reverse pressures are mounting as Australian disruptors face competition from a number of overseas-based firms; some large firms are cutting overheads and partner numbers (100 were shed last year), offering discounts for services like discovery and specializing even further.
Overall, however, the traditional law firm model is yet to fundamentally change and top firms still fight over the top tenth of the market. An Australasian Legal Practice Management Association survey of 122 larger firms released in July found while 80 per cent of customers were demanding alternative pricing strategies, only 18 per cent of firms surveyed were offering them.