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Adapt or die – why the UK’s top law firms must embrace change to survive

10 June 2016

The article at a glance

Fear of the unknown is no excuse not to embrace change, says new research from Dr Kishore Sengupta. “People are paralysed by the …

Fear of the unknown is no excuse not to embrace change, says new research from Dr Kishore Sengupta.

Why the UK's top law firms must embrace change to survive

Dr Kishore Sengupta
Dr Kishore Sengupta

“People are paralysed by the unknown,” says Kishore Sengupta, Reader in Operations Management at the Cambridge Judge Business School, “and lawyers especially live in a world of certitude and risk avoidance.” But while embracing change does not come naturally to law firms, Sengupta’s recent research into the future of the legal market reveals it is more important now than ever if the top 50 firms are to prosper.

Over the past decade UK law firms have seen significant evolution. From the growing numbers of international mergers, to the impact of the Legal Services Act of 2007 and the pressures of the financial downturn, the top ranking firms have had change thrust upon them. This has largely been driven by ever-more cost conscious clients demanding extra value from their advisers.

However, the prevalent view within companies and clients across the legal industry is that the pace of change within law firms is not in line with the rest of the market. Sengupta says that this is driven by a number of factors, such as unwillingness to consider alternative business models and an inability to accept the need for change on an emotional level. But if risk avoidance is fundamentally counter to a culture of innovation and the consequences of failure to evolve threaten the survival of the top firms, why are they often so resistant to change?

“The imperative to change has historically not been as great for lawyers, which means they can be less ready to address the importance of emotional aspects as those in other sectors,” explains Mark Smith, Market Development Director at LexisNexis, which commissioned the report. This means that the urgency with which the law firm looks at issues such as traditional billing structures is not as pressing as it is for their clients.

“I found the ‘lawyer-client disconnect’ a really interesting finding in the report,” says Smith. “This is not necessarily a management structure problem, but a more fundamental operating model issue. The billable hours mechanism means that firms are still in a situation where for the vast majority of lawyers the number one metric for reward is still the amount of chargeable hours they have recorded irrespective of what the firms are saying about the importance of other factors such as behaviours and managing relationships with clients. So when a client requires the firm to do things that doesn’t necessarily correlate to this metric there is a fundamental point of tension.”

While addressing and embracing innovative new billing structures and other business models is a very tangible step that law firms can take, other, less concrete changes are harder to implement. Take the role of emotions in organisational change, for example. “It is important to understand what is going to make people initiate a change in behaviour,” adds Smith. “It is inherently scary for people as humans to change. Our neurology values safety and predictability and change threatens this.”

So what can be done to persuade law firm management that emotional acceptance is crucial? Sengupta says that the power of creating role models can be huge, and that those amenable to change should be elevated within the organisation. “We need champions to change behaviour – skilled leaders and natural defenders of change who will run with it. It is often the people at the forefront of change who leave firms that are hamstrung by their inability to evolve.”

Despite the Legal Services Act of 2007 that, in a move permitting significant liberalisation of the market, allowed alternative business structures (ABSs) where non-lawyers could take on ownership or leadership positions, the UK’s top 50 players still adhere to the traditional partnership model. But, as Doughty Street Chambers chief executive Mark Dembovsky points out, this is not conducive to a spirit of innovation. “Many partnerships fail to recognise the role professionally qualified support people can play or to recognise those who have the ability to perform certain tasks for which partners are not necessarily equipped. Look at how few of the top 100 firms have non-lawyer chief executives or management heads. Releasing control is not something that partnership managers are ready to embrace.”

This structure also primarily favours billable hours as the chief measure of reward. Alternative models are often met with suspicion and resistance as the potential short-term knock to annual take-home pay for the partnership is feared. But “the rules of engagement have changed,” says Dembovsky. “Anybody who thinks they can still operate by the rules of the past is living in a fantasy land.”

There’s also the notion of a lawyer’s own professional identity, adds Sengupta. “The skills that do help lawyers change and adapt – being better at business models, experimentation and innovation, embracing technology etc – don’t seem to be part of lawyers’ notion of their identity, and many of them see little point in investing in them (as opposed to getting better and better in the practice of some aspects of law). It’s not surprising, therefore, that while they acknowledge the need to change, they sometimes miss the chance to retool their expertise, perhaps because their professional identity has not evolved in response to the needs of the market.”

So while for many lawyers the prime motivator is hours billed and cash in the bank, the younger generation is increasingly fuelled by other drivers, such as building client relationships and less niche specialism. And firms have to recognise this if they are to thrive. As Dembovsky explains, “the Apple iPad wasn’t developed without experimentation, failure and retrying. What hope is there for an organisation that won’t invest in innovation?”