As 2014 draws to a close, Mark Smith, market development director at LexisNexis, looks at how the legal sector has fared over the past year and what to expect in 2015.
What have been the major challenges for large firms in 2014?
2014 has been an interesting year. Towards the back end of the year the amount of activity has picked up.
On the one hand, firms are starting to feel better, become busier and have begun gearing up for growth again. One of the challenges for teams that got very lean during the recession was suddenly they were having to find talent. There are certain practice areas in which the competition for talent is already getting quite hot. In the last few weeks I have heard partners saying that if they see someone they like at interview they need to offer very quickly. Good quality people aren't hanging around.
However, at the same time the genie isn't going back into the bottle insofar as the way that big corporate clients are buying. Over the last five years, they have become a lot more sophisticated. They've driven the prices down through panel reviews, disaggregated work, or just by negotiating harder. The work that firms have been doing to meet these needs is going to carry on regardless.
So there is optimism that things are better and that they are going to continue to get better. But, at the same time, the gravy train is not about to leave the station again.
How have large firms dealt with the challenges thrown at them?
What you have seen in 2014 is firms becoming more sophisticated in their responses to challenges. In the early part of the recession, the obvious quick wins were around cutting waste, restructuring, getting rid of unprofitable practice areas and generally trimming things down.
The middle period saw people very tentatively trying to experiment with new business models –do we want to north shore or offshore work? Do we want to adopt Lean Six Sigma principles?
What we are beginning to see is that those models that have worked are becoming more established and part of firms' fabric. For example, models like:
Those elements that have been tested and work are being blended to create services that are fundamentally different.
It has all happened quite slowly but the operational models by which firms are delivering services have changed fundamentally. 2014 was the year in which there was greater acceptance of the bits that have improved work for firms.
What is the market like in terms of competition among the biggest players?
The market is intense. I do not see the increased amount of economic activity fundamentally changing that situation. There is a sense that the recession has seen the gap open up with the “magic circle” and the rest. They seem to have weathered the storm very well. There are firms among them which you might have thought were more conservative and which have taken some very radical steps in terms of changing their business model whether it is north shoring, using legal process outsourcing or the Lean Six Sigma push by Clifford Chance.
Outside the “magic circle”, between firms 70 and 20 in the law firm rankings by revenue, there is very intense competition with some of the smaller firms punching above their weight. At the same time, some of the larger firms are being a bit more innovative in the way they deliver their service. The market is getting squeezed.
Is 2015 likely to be a good year for larger firms?
The answer is – that depends upon the sort of firm you are.
If the firm has reconfigured their business model, tried some new ways of working and found that they have worked and are continuing to accelerate change, then they can win a larger share of the growing amount of work.
If you are a fairly conservative firm (that has dealt with the recession simply by cutting costs and which hasn't tried out anything new) then 2015 might be better than 2014 because there is more work. But I think the legal services market is still going to be a fairly tough place to be.
The other big issue is international spread. It helps if the firm is a truly international firm and revenue is not just focused on the UK and Western Europe. While things are better than they have been in the UK, a growth forecast of low single digits is not a happy position compared to other places in the rest of the world. That need for international reach is going to continue to drive consolidation activity. We have seen a lot of merger activity in the last three or four years and I think that will continue. We will see more of that in 2015.
Mark Smith, market development director at LexisNexis, (interviewed by Jon Robins).
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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