The Legal Market: Why this time is different

There has certainly been no shortage of articles debating the social and market outcomes of the Covid-19 pandemic (with the majority only disagreeing on the extent of the impact). Most of these articles, incorrectly in our opinion, simply project our collective lockdown experience, which represents a forced acceleration of technological adoption, into the post-pandemic market order.

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Yes, the post-pandemic order will result in profound structural reforms not seen with other crises (the most recent of which being the Global Financial Crisis (GFC)) but, at least in respect of the legal market, this will not be as a result of the lockdown itself.

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Instead, we believe two complementary, fundamental factors help explain why such a profound change is imminent. The first is the nature of both law firms and the legal marketplace going into the crisis and the second is the nature of the crisis itself.

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We explain each in turn.

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The Nature of the Law Firm & Legal Marketplace

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There is probably no better illustration of how law firms have changed since the GFC than to compare the winner of the UK Law Firm of the Year for 2008 with that for 2019. The 2008 winner’s headline reads “strong management and stunning financial performance” with the firm being commended on increasing net profits by 13.2%.

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Meanwhile, the 2019 winner’s headline reads “more than an impressive set of financials” with the firm being praised for its track record in “areas such as diversity/CSR, employee wellbeing, innovation and client handling” (none of these phrases appear in the 2008 write-up).

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Leading up to 2008, lawyers and law firms controlled all facets of the legal ecosystem. This asymmetry of information between legal service providers and legal consumers meant that law firms were price makers (as opposed to price takers) and could therefore respond to the GFC at the margins by making expense cuts, de-equitising partner ranks and increasing billable rates.

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A lot has changed since then, primarily driven by legal consumers, with new legal delivery models that reward efficiency, transparency, value and results. Technological innovation by law firms, entrepreneurs and corporations coupled with increasing competition from alternative legal service providers (who are becoming less “alternative” by the day) and the Big Four accounting firms have reduced the asymmetry of information and, by implication, the pricing power which once existed in the legal marketplace.

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Accordingly, law firms will not be able to rely on the same mechanisms to drive growth in a post-pandemic world as they did after the GFC. Instead, the law firms and legal providers that continue to prioritise efficiency through technology, continuous innovation and a focus on value and results will emerge (relatively) unscathed from this crisis.

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The Nature of the Crisis: External vs Internal Economic Shocks

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An internal or endogenous market shock refers to a shock in the market having an internal cause or origin. The GFC is an example of such a shock as its effects were brought about by the behaviour of market participants. As a result, corrective measures typically look to influence the behaviour itself by making an example out of a few bad actors, adopting new regulations and increasing regulatory oversight to monitor such behaviour. Companies make incremental changes in response, which in the case of the GFC, meant adjusting their behaviours by implementing controls and expanding compliance teams in preparation for the post-crisis market order.

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On the other hand, external or exogenous market shocks, the likes of which include the Covid-19 pandemic, have an external cause or origin. Corrective measures aimed at influencing behaviour are not adequate even though the economic outcomes can be the same, or in this case, worse. Incremental changes are not sufficient to respond to external shocks as there is no behaviour which a company can identify to explain the predicament it finds itself in.

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Instead, more fundamental change is required, the type where business models are reconfigured.

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Conclusion

Legal technology has never been about the technology itself, but rather about changing culture and changing processes. We believe that the confluence of the above two factors will act as the catalyst that propels the adoption and integration of legal technology, the reimagining of law firm culture and the delivery of legal services to a point which would have been inconceivable a decade ago.