Nearly four months have passed since COVID-19 changed the way we work. Legal organizations that initially focused on operationalizing their remote workforce and managing costs associated with temporary office closures are now facing the reality that, rather than a temporary situation, the pandemic-related changes may be deeper and have longer lasting impacts than initially contemplated. From HBR’s perspective as longstanding advisors to both law firms and law departments, this is a defining moment for the legal industry. To successfully differentiate themselves, organizations must seize and sustain the moment to pull the future forward, unlocking value and accelerating the legal industry’s evolution.
The Driving Impetus for Change: Momentum and the Numbers
In individual conversations and roundtables with law firm and law department leaders, we repeatedly hear how the current situation has accelerated initiatives that were planned or in process, simply by reason of necessity. Organizations have quickly made their workforces mobile and have rapidly deployed communication and collaboration systems. The pandemic has rapidly overcome the legal industry’s historical resistance to change, forcing those within law firms and law departments to adapt quickly, even in environments where there had been perceived obstacles. Forward-looking law firm and law department leaders are eager to capitalize on this momentum.
The pandemic-related economic downturn is another impetus for change. While the financial impacts have been industry and sector-specific, most legal organizations are viewing the situation with continued caution. Law department leaders report that they are prioritizing cost and spending management, although with different levels of urgency depending on sector. Their cost management efforts will affect law firm revenues as well, as law departments more tightly control their outside counsel budgets.
In the decade since the Great Recession, law departments have made strides in how they get legal work done. With the maturation of the legal operations function, they are better managing their internal and external legal work, for example, using technology and artificial intelligence to automate processes and create self-service options and better relying on data in their management of outside counsel. Where, most legal work was predominantly sent to outside counsel, law departments have begun sending work to alternative legal services providers and brought more work in house: HBR’s 2019 Law Department Survey results show that law departments have increased spending by 11% on other service providers over the two prior years. In-house headcount has also increased significantly over the past decade – approximately 40% in the Fortune 500, based on historical data from HBR’s Law Department Survey combined with analysis of Fortune 500 revenue changes over the same period. With cost and spend management as a priority, departments will continue to find ways to deliver their services more efficiently and effectively. For example, their increased headcount suggests that they may be better equipped to do work that might otherwise have gone to outside counsel, but at the same time corporate CFOs are likely to apply pressure to rationalize and optimize headcount.
Comparing the current economic downturn to the 2008 downturn suggests a significant impact on law firms. HBR’s annual Law Department Survey showed that law departments spent 6% less (median) on outside counsel in 2009 compared to 2008. There are significant differences between the current environment and the financial crisis of 2008, and most economists expect a sharper economic contraction in the current environment with more dramatic and lasting impacts across the economy. Simply extrapolating 2008-09 data would suggest a 2020 decrease in aggregate Am Law 200 revenues by at least $7 billion off the 2019 base of approximately $120 billion.
These impetuses augur greater transformation for the way legal organizations deliver legal services and create the opportunity to strategically accelerate changes that will help them differentiate and deliver greater value to their clients.
Strategic and Tactical Levers for Change: Planning for the Future
Legal organizations have a number of strategic and tactical levers to thoughtfully accelerate change, several outlined in the table below. Both law firms and law departments need to ask essentially the same questions, despite their different roles— emphasizing the benefits of changing service delivery to collaboratively advance their organizations in mutually beneficial ways.
Differentiation as an Outcome of Change: “Pulling the Future Forward”
In the current environment, the most important of these levers may be “differentiation”: identifying and focusing on the things that set a legal organization apart in its clients’ eyes and delivering differentiated value. Change is slow within the legal industry; we have seen it evolving in a number of incremental ways, including re-evaluating ways of working, right-sourcing the work and digitization to enable a number of advances. The current environment provides the opportunity for forward-looking legal organizations to accelerate that evolution and differentiate themselves.
Law firms and law departments of the future will embody three overarching characteristics that can drive differentiation:
At HBR, we help leading law firms and law departments evolve their operating models through our wide array of services. We see tremendous opportunity for legal organizations not just to seize the current moment, but sustain it—embracing and accelerating the changes that will differentiate them for years to come. Please email me or any of my colleagues if you would like to discuss how your organization can begin pulling its future forward.