In this series of articles by Yarman J. Vachha, Managing Director of YJV Consulting, he highlights the legal scene in Asia, the changes to the legal industry and the different resources available to law firms for expansion.
In our first article, he shared his thoughts about managing and growing a law firm. In part 2 of this series, Yarman shares thoughts about the global legal industry and its challenges.
At a micro level, the estimated USD600 billion global legal industry is very much in transition, with many different disruptors entering the legal markets.
Major Challenges faced by law firms
#1 Disruptors
Disruptors offering quality alternative legal services such as contract lawyers at a reduced cost, in my view is the biggest challenge. To counter this, firms like Allen & Overy have set up alternative businesses such as Peerpoint offering similar services to compete with these disruptors. There is also much evidence of this type of defensive strategy being adopted by other global firms to counter the threat of these disruptors. To drive down costs and still provide quality services, some of the larger global firms are also moving some of their process-driven commoditised products to centres of excellence. Examples of these include Allen & Overy, Baker McKenzie and Herbert Smith Freehills with significant paralegal bases in Belfast.
#2 Big four accounting firms
Another major threat is the Big Four accounting firms. Their core strategy is to complement their compliance and transactional businesses with a quality legal function. This multi-disciplinary offering creates a “one-stop shop” which is very attractive to clients. History tells us that the accountants attempted this strategy in the late 1990’s which failed. In my view, the reasons for that failure were; they were not fully committed to the strategy and the world was less connected 20 years ago. I do believe that there is much more resolve now and they have much deeper pockets than in the 1990’s. Furthermore, we now live in a global marketplace unlike the 1990’s. With that said, I do not believe that the accountants’ core strategy in entering the legal space is to directly compete against the quality global law firms. At least not yet! It is more to complement their existing core businesses of compliance (audit, tax etc.) and transactional work (mergers & acquisitions, consulting tax structuring etc).
#3 In-house legal departments
There is also a repositioning by banks and corporations who are creating sizable in-house legal departments which focus on providing commoditised services internally at a lower cost. These services are the staple of many small and medium sized law firms which are being slowly eroded. To put this threat in context, in effect, an internal legal department of 50 or 100 lawyers is a medium-sized law firm.
Opportunities
While there are challenges, there are also opportunities. Much like what the accounting industry went through in the 1980’s, over the next five to ten years, I see more consolidation of law firms, more alliances, and continued global expansion, particularly into emerging markets, such as ASEAN, Africa, Latin America, and India, if and when regulations are relaxed. The traditional markets of USA, Europe, China, Japan will remain strong, however, I am of the view that these markets are over-lawyered and oversaturated and the competition for quality work and talent is fierce. Firms need to look at new markets to grow revenues. The one note of caution to firms looking at a foray into the emerging markets is that they will require patience and deep pockets initially as an acceptable return on investment from these markets will take time.
From a micro perspective, small and medium firms have a part to play. Some firms may be experiencing a dip in revenues and profits as previously much of the “commoditised” work that flowed from global firms or which clients found too expensive for large firm to discharge is now being captured by the disruptors in the industry i.e. the alternative legal services providers and, to an extent, in-house legal departments. The one sweet spot for firms in Singapore and Malaysia would be to consider expansion into ASEAN markets and consider alliances with firms looking to enter our markets. As a general rule, global firms are not as nimble and not always geared towards emerging markets hence local firms are attractive to global firms looking to enter the ASEAN market.
Closing thoughts on countering these challenges
It is my belief that many firms are still living in the past. They need to focus on the present and plan for the future. To survive and grow, these firms need to take a step back and take stock. In this fast-developing alternative market environment, doing nothing is not an option as profitability and even possibly survival, is on the line for many firms. The first step is to perform a deep dive review into their core businesses and determine if service lines are still profitable and if there still exists a decent pipeline of work. They should then strategically review what can be done internally and externally to capture more of the market and consider an off-shore emerging markets strategy and / or a merger or alignment strategy with firms locally or internationally that is complementary to their core business.
The key to operating in today’s legal environment is to ensure a quality value based offering at all times, being nimble and innovative, and making an appropriate investment in experienced professionals to advise on, facilitate and drive this strategy.
This article is written by Yarman J. Vachha of YJV Consulting Pte Ltd.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.
