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Australian Legal Market Trends – Reading the Pulse

Overview

By Justin Atkinson

I always read with interest the legal market reports in anticipation that they will give me a good overview of general sentiment, trends, and ideas for new opportunities I can pursue. As a Sales Director for a Legal Process Outsourcer, I want to know how my market is responding to the developments in what is fast becoming a very dynamic industry. Cynically I used to say these reports rarely varied from one publication to the next – a desire for lower fees and greater innovation, firms cutting back on support staff, and annual increases in profit per equity partner.

With the recent release of the CommBank Legal Market Pulse it was interesting to read how this edition focused on three key issues in the Australian legal market: the rise of outsourcing; investment in efficiency; and the challenges of price negotiation. All of which I believe are integral components in the function of delivering quality service to the end-user.

Despite the fact that clients are demanding that firms incorporate LPO as part of their processes, many of these firms are still reluctant to do so. When I speak with firms and General Counsel, it is interesting to note what drives their decision to use an LPO. While some firms are instructed by clients to use an LPO, the more proactive ones are incorporating LPO services as a point of difference in their pitches to clients.

The Legal Market Pulse indicated that of the Australian top tier firms 45% were being driven by clients to use an LPO. Some of the larger global firms are choosing instead to expand their own captive lower cost delivery centres and are more likely to push for these centres in the first instance. An example is Herbert Smith Freehills’ announcement of a low cost legal team in Melbourne. However, a sophisticated corporate counsel knows that the cost of using a firm’s captive LPO is still going to be more expensive than an actual LPO. LPO providers like Integreon have pioneered delivery of more highly efficient services such as outsourced document review in litigation, while maintaining continuous process improvements to hold a competitive edge.

Notably 58% of mid-tier firms are saying that they will be the key driver for promoting outsourced legal work, and what I find interesting here is that the decision to offer LPO has a two-fold effect - improve internal efficiency and deliver a more effective service to clients that proactively demonstrates that you’re listening to them.

Many of the mid-tier firms are more likely to operate lean teams, and as data sets grow exponentially these firms may not have the resources to meet the demands required for larger litigation matters. Using an LPO thus presents firms with the perfect opportunity to scale-up (and likewise easily scale down) resources as needed to help them with the various routine aspects of legal work. In a document review in litigation, the LPO can deliver a refined and manageable data set that enables the firm to then focus on the responsive documents.

Legal costs continue to represent a key issue for corporate counsel who want their firms to manage these costs more effectively. According to the report, the biggest challenge facing firms is around negotiating prices. This is an issue that has increased across both top and mid-tier firms since the last CommBank survey. So it makes sense that the report notes that the more innovative firms are looking to the likes of LPO providers to reduce cost, increase efficiency and aid in the delivery of greater value to clients. For years clients have been asking their firms for alternative fee structures and innovative pricing models, but the response has been less than ideal. Instead, firms often provide literal responses and talk about the likes of “cap and collar” pricing and “reduced fees to demonstrate investment in the relationship”, but this just amounts to a missed opportunity in which the firm could have focused on demonstrating real value. Reducing rates does not equate to delivering value. Lower rates may not even be sustainable, so you have to consider whether you are actually delivering your services efficiently. Clients do want their firms to be profitable, but they also want to see their firms deliver value. Regardless what you’re selling, or what services you deliver, if you can’t demonstrate value then clients really don’t care. As a Business Development professional, I find it astounding that when a client asks for something, some providers simply don’t listen. Clearly articulating value is the very best way to minimise those tough discussions around fees. Colin Jasper, a leading consultant to law firms on pricing strategies, describes value as:

“…the relationship between the benefits obtained by the client and the price they pay. All clients are trying to maximise the value they obtain.”

John Chisholm, a highly experienced legal and accounting executive and thought leader on Value Based Pricing, proposes that pricing has the greatest effect on a firm’s profitability. According to Chisholm, traditional time-based billing effectively caps earning potential and restricts any efficiency gains. In other words, the more efficiently you complete a task, the less time you spend on it and therefore the less you can charge for it.

Under a value-based pricing model, firms will work collaboratively with clients to gain a thorough understanding of work scope, and comprehension of what is valuable to the clients. Value pricing advocates believe that this approach makes it easier to provide up front pricing that reflects that expected value derived from the work. After all, this is what happens in the real world and it is what clients want. Firms can also augment their value proposition through improved process efficiency, technology and outsourcing.

Increasingly, clients are asking firms if they have a relationship with an LPO provider. There is a reason for this – because it is something they value. The CommBank Legal Market Pulse report highlighted that the firms who are making effective use of outsourcing can realise positive effects on profitability and an opportunity to deliver greater value to their clients. There are benefits for the law firms too. At a recent Australasian Legal Practice Management Association conference, Dr. George Beaton of Beaton Research + Consulting outlined how outsourcing is a becoming a key strategy to improving firm competitiveness.

“As downward pricing pressure continues, more legal firms are taking advantage of outsourcing to reduce costs and offer greater value to clients or maintain margins”

One of the challenges for firms is finding who to talk to and how to on-board and incorporate an LPO as part of the client offering. If LPO is an opportunity to improve your own profitability and demonstrate greater value to your clients, then why not demonstrate that you are thinking about their business and how you can increase the value you deliver to them?

Integreon has been a trusted leader and pioneer in delivering LPO services to law firms and major corporations around the world. With all that is happening in the legal market, there is a great opportunity here for firms to embrace this change and incorporate LPO services in their business.

Justin Atkinson is Sales Director, Australia and New Zealand, at Integreon. He has previously held Business Development Management roles at leading Australian law and accounting firms. Through his experience of working in law firms and dealing with corporate counsel he has a strong understanding of the challenges in the Australian market. Justin has a Masters of Management from the Macquarie Graduate School of Management.