3 charts which illustrate the future of the legal industry
The legal industry is being disrupted. It is of course not alone in this but it is a rare industry in that it has not yet been irrevocably changed by the spread of digital progress over the past two decades. The legal industry has held on longer than most, walled off by a combination of its status as a protected, regulated industry and the large amount of training and learning that goes into becoming a qualified lawyer. However with key markets such as the UK deregulating, and the continued growth in the capabilities of software and machine learning techniques, the industry is on the cusp of a structural realignment.
Up The Consolidation Curve
One standard model of looking at how industries mature is the ‘Consolidation Curve’, first published in Harvard Business Review and seen in the chart below. The Consolidation Curve is a framework, based on extensive historical data, which predicts that all industries move from a fragmented state (a plethora of smaller firms) to one of consolidation (fewer, much larger firms) as they mature. The impetus for consolidation generally comes either from deregulation or new technologies entering the market – both of which are a clear current reality within the legal industry. The way in which accountancy, a similarly knowledge based and regulated industry, consolidated first to the Big Eight and then the Big Four is a telling historical example in this case.
In the coming decade, we expect the number of traditional law firms to shrink through increased consolidation and as software replaces more standardized processes, the demand for more efficiency will likely lead to a search for synergies between existing players.
A squeeze to the system
New players are emerging and increasing pressure on incumbents. This squeeze will be particularly felt by mid-tier and smaller law firms, whose work tends to be less strategic and high value, and most at threat from commoditization by software tools or low cost software-enabled outsourcers such as Legal Process Outsourcers (LPOs). The Big Four and the LPO sector are a threat to the current establishment and the industry will need to adapt quicker than some may think.
So will law firms have to re-evaluate their services proposition? Top-tier firms are likely to increase their focus on high-end strategic counsel even further whilst outsourcing or replacing ‘lower-value’ tasks. Mid-tier and smaller law firms must find ways to specialise their services to protect their client base whilst embracing automation and fixed-fee billing.
From ‘Pyramid’ to ‘Rocket’
Furthermore, a new organisational structure is likely to require a drastically different staffing model. As we move from the ‘pyramid’ to the ‘rocket’ structure, first coined by BCG & Bucerius Law School in their report How Legal Technology Will Change The Business of Law and adapted in the chart below, a leaner pool of permanent legal staff will work closely with non-traditional and temporary employees. BCG & Bucerius Law School sees a significant change approaching: the traditional model of a high ‘junior lawyer to partner’ ratio will be replaced by one that sees an evaporation of entry-level legal jobs and an increase in non-legal staffing needs.
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With traditional barriers to entry being broken down; technological innovations creating new playing fields and clients wanting to see their costs reduced, this sector will be a fascinating one to watch in the coming years.
This blog post is a short summary of an insights project conducted in 2016 by FreshMinds which explored the future of the legal industry. As part of this, we conducted extensive desk research as well as a series of expert interviews with senior leaders in the industry.
If you would like to hear more about our research into the legal industry or any of our other industry sector reports, please get in touch.