UU����ֱ��

The UU����ֱ�� report, “Are the Big Four reshaping the future of legal services?”, provides an excellent overview of the different strategies adopted by the Big Four accountancy firms and by the leading law firms. It also explains how some law firms are evolving in response to the development of a new world of legal services. But, as several commentators quoted in the report acknowledge, law firms are generally resistant to change. Why is this? There are some reasons given in the report, including inertia and the incentive structure of firms. I am going to suggest three more: cash, clients and competition.

Cash

Law firms are, for the most part, cash business.  Cash comes in and cash goes out. Typically the two biggest expenses of a law firm are salaries and rent. These are reasonably constant demands (with gradual increases over time) and a similarly consistent income is needed to pay for these – and then to pay out the profits that partners have come to expect, which functions as another salary bill on top. The model that law firms have developed to generate, measure and predict this income is the billable hour. The billable hour is all-pervasive and has become the reserve currency of law firm finances: even when a different fee structure is agreed with a client (lump sum or outcome-dependent), this is measured against the billable hour equivalent to assess its worth. That embedded financial structure is a powerful restraint on change. Some companies manage a complete volte-face in how they make money: Nokia shifted from producing toilet-paper in the mid-19^th century to producing mobile phones in the late 20^th century, for example. But mostly firms stick to what they know. Law firms know the billable hour and they stick to it.

Clients

Then there are the clients. The mantra for law firms is new business from the same clients or the same business from new clients. Law firms know that establishing relationships with new clients, or establishing new practice areas, is time-consuming and therefore – because the billable hours need to come from elsewhere in the meantime – expensive. Much better to build on existing relationships and practices, and that again tends towards law firms repeating what has gone before. Perception is important here too.  A married couple do not change their relationship day by day or month by month; sudden change is likely to cause a rupture. Law firms and clients, like couples, see each other in the same light and have the same expectations over time, allowing perhaps only a gradual change over that period. If a client wants something different it is more likely to look elsewhere than go to a firm that it has relied on for the same service for years. In the absence of radically different demand law firms are unlikely to radically change.

Competition

The nature of the competition in the legal sector, finally, keeps change in check. As the UU����ֱ�� report highlights, the Big Four are looking for run-the-company matters, not the bet-the-company matters that the law firms chase. This means that when law firms pitch for work, they are usually up against other law firms. There is no imperative for dramatic change when the only competitors are ones that look very similar to you. You only need be incrementally better than those other firms, not wholly different. This can be a successful strategy: the dodo, after all, thrived on Mauritius for millions of years when all it encountered was other dodos. It only became extinct after humans arrived with a host of other animals (dogs, cats and rats) in tow. It’s very unlikely law firms will ever suffer the same fate as the dodo, and we don’t know yet if the legal service market will fundamentally change through the expansion of the Big Four or for some other reason. But if the market does undergo such a change, law firms will have to follow.

Fox Williams LLP is a leading adviser to law firms, accountancy practices, and other professional services organisations.