Australian law firms

Medibank Idea Exchange

For my sins I am a member of Medibank Private Health Insurance. I understand it has something to do with having a young family and the Medicare rebate. Anyhow, regardless the reason I get a lot of emails from Medibank that have always gone to straight to my trash folder. That is, until this morning.

What makes this morning any different? Well, I received an email inviting me to join the Medibank Idea Exchange community. In part wondering why they were suggesting the singular rather than the plural, I thought I would take a look.

What did I find?

Well, while I have no intention of joining, what I found was an offer to join an ‘invite only’ community where I will be able to share my thoughts and ideas on a variety of different topics and issues and:

Contribute to discussions and surveys – so you can tell Medibank what you think and help shape future business decisions,
Talk with other members – so you can share experiences and handy tips,
Earn rewards for participating – that you can redeem on a great range of products and services.

and I thought to myself: “there might be something in this for law firms to learn from“.

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‘Best’ or ‘Preferred’?

Trish Carroll, of GALT Advisory, had an article of hers published recently (February 26, but I didn’t get the email notification till today) in the Australasian Law Management Journal‘s Law Management Hub titled: ‘Get up close and personal to improve your business development‘.

While Trish’s article contains a number of really useful tips, I found it notable because of the following very thought provoking line:

“It is not about being the best; it is about being the preferred.”

99 times out of 100, I totally agree with Trish. And it is a really important lesson for high achieving lawyers to learn: being the best at what you do is no longer a guaranteed successful business model. In today’s legal market there are a lot of average lawyers making very serious amounts of money because they are the preferred ‘go to’ lawyer.

The one exception I would make would be for top-end, bet the bank, niche advisory work where being the best still trumps.

So the question you need to be asking yourself everyday is:

“What will I do today that will make me my clients preferred lawyer?”

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Do you know your ABR?

There has been a fair amount written in recent days following an article published in the Wall Street Journal that ‘Legal Fees Cross New Mark: $1,500 an Hour‘. Most of the published articles I’ve read talk to the outrage of commanding such a high hourly charge-out rate, but this article by Stephen Harper caught my attention.

In the article, citing data from ‘The 2016 Report on the State of the Legal Market‘ by Georgetown University Law Center and Thomson Reuters Peer Monitor, Harper states that:-

“In 2005, collections totaled 93 percent of standard rates, the report found. By the end of 2015, the realization rate was down to 83 percent.”

Although US-based, this sad statistic very much reflects on an issue I touched on in my post on fixed fees in the Australian market yesterday; namely that 25% of Australian law firm revenue is now derived from “discounted” hourly rates.

If we say then that roughly 1/4 of a law firm’s revenue comes from discounted hourly rates, and that the firm is being paid approximately 83c in the $1, [compounded] we have a very serious profitability problem.

On these numbers alone, any law firm looking at its profit margin should be rushing into fixed fees – while admittedly upskilling themselves (including tracking data) on how to do this better.

And part of this process should also include an understanding of, as well as tracking, what each individual lawyer’s Average Billing Rate (ABR) is.

In the many hundreds of tenders I have done and the numerous conversations I have had with lawyers over the years, I have never once come across either a request for what the particular lawyer’s ABR is, nor heard the lawyer freely admit this rate. I have, on the other hand, heard daily the hourly rates that particular lawyers charge as if this were the reason why they were hired (there being an assumption that the higher your charge-out rate, the better value you provide!).

And therein lies the problem, as Harper says:-

“How much a firm bills doesn’t matter; what it actually brings in the door does.”

Too right. So the next time you hear a lawyer talk up their hourly rate, you might want to ask them what their ABR is – because that’s going to be a far better indicator of the value their clients see them providing. And if you get an answer, you might then want to talk to them about the benefits of fixed fee pricing.

Almost 20% of Australian law firms revenue is now coming from fixed fees

It has been a full six months since the last CommBank Legal Market Pulse (conducted by Beaton Research + Consulting) was published and from what I can tell from this latest publication, not very much has changed in that time.

While some members of the Australian legal publishing world have commented on the rising optimism (note this is “perception”, and this has gone from awful to not quite so awful), what grabbed my attention was a piece towards the end of the report (page 19) that states:

“Revenue is still predominantly derived from hourly rates. However, almost 20% of all firms revenue, irrespective of size, is now coming from fixed fees.”

I don’t have to hand data from 5 years ago that would allow me to do a comparison to see what this means in real terms, but given that IBISWorld puts the size of the Australian legal market at $23BN, that’s a lot of fixed fee generated revenue.

Somewhat surprisingly, there doesn’t appear to be a huge difference in the percentage of fixed fee revenue being derived at “top-tier” and “mid-tier” firms – with fixed fees accounting for 19.4% of revenue at top-tier firms and 19.2% among mid-tier firms.

The types of work for which fixed fees are being agreed/charged is also very similar – 88% for transactional matters at top-tier and 89% at mid-tier.

Notable, and surprisingly, is that top-tier firms would appear to be much more willing than mid-tier firms to offer fixed fees for litigation work – 50% to 33%.

But the test is always in the tasting (for wine lovers at least): so how good are Australian law firms at fixed fee pricing?

Well, not very if the data is to be believed. Asked for the margin on fixed fees relative to hourly rates, the responses were:

higher: 13% top-tier / 15% mid-tier;
lower: 0% top-tier (which seems a little hard to believe) / 56% mid-tier (which is probably being too honest)
about the same: 75% top-tier / 19% mid-tier; and
not sure: 13% top-tier / 11% mid-tier (which should be worrying some managing partners out there).

As well as finding out that Australian law firms are not very good at fixing fees, the report also tells us that over 67% of all law firm revenue still comes from standard hourly rates or discounted hourly rates. Here though, over 25% of revenue comes from “discounted” hourly rates – which begs the question: when do you start saying your discounted rates are your real rates?

Lastly, almost 3% of all law firm revenue now comes from retainer arrangements (2.6% for top-tier, 2.8% for mid-tier). Now that’s certainly something worth keeping an eye on!

Are we seeing the start of shared services within in-house legal teams?

Last Friday, 12 February 2016, the Australasian Lawyer published an interesting article detailing how the in-house legal teams at Telstra and Westpac had ‘swapped’ lawyers as part of a three-month pilot secondment program.

That this is a fairly novel and innovative approach shouldn’t come as a particular surprise: both Telstra – with its fixed fee arrangement with the law firm Gilbert + Tobin back in 2009 – and Westpac – most recently with its hackathon with legal teams from (again) Gilbert + Tobin and its legal start up LegalVision – are seen as being at the cutting edge of developing in-house innovation around legal services.

But… as pointed out in a tweet by leading legal market observer, Mitch Kowalski, on Friday night… what makes this recent arrangement between Telstra and Westpac particularly interesting is that it shows every sign of potentially being the start of shared legal services among Australian in-house teams.

If true, and I cannot see why it shouldn’t be, you have to wonder what the ramifications of this would be more broadly to Australian private practice firms?

Take on board the comment of Rebecca Lim, Westpac’s chief compliance officer & group general counsel that:

“Given the success of this pilot, we are certainly inspired to look for similar forms of ongoing engagement with other in-house legal teams. I believe there is much to be gained from collaborative programs such as this.”

Disruptive springs to mind!

When will a law firm have its Enron moment?

I’ve just read an interesting article about how disruptive Dyson has been. More specifically, the subject of the article was whether #NewLaw (as it is being called) will be as disruptive on the legal industry as Dyson was to vacuums?

But my outtake on reading the article was this: law isn’t ready for positive disruption (innovation), as we’re yet to have a really shockingly bad, client related, negative shock-wave (failure in client service).

What am I talking about?

Simply this, to my knowledge law has yet to have its Enron/Worldcom moment in the same way Arthur Andersen did for the accountants (anyone remember ‘Big 5’?).

More specifically, in our haste to be the “extension of your in-house legal team“, or “your trusted adviser“, or any one of about a million other fad terms out there today, I believe we may be forgetting one of the biggest (if I remember rightly it made #3 on the list) recommendations in the US Securities and Exchange Commission’s “Report of Investigation” into the collapse of Worldcom to [in the future] “… cure the principal failing that gave rise to the fraud: a lack of effective checks and balances on the power of senior management …“:

A corporate culture in which the advice of lawyers is sought and respected; and

So while, as a business developer, I whole support and encourage “getting to know your client better”, in doing so I would ask that you keep at the back of your mind this question:

Are we trying to “pillow talk” our clients?

Because almost two decades after the collapse of Worldcom, my takeout is that we need to have an Enron/Worldcom moment before we have a Dyson moment in order for the profession to move forward.

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Growth is not a strategy

I read with interest yesterday‘s news item in the UK’s The Lawyer that Jones Day intends to double in size in Australia – with a particular focus on its Corporate practice following the recent lateral hire of ex-Herbert Smith Freehills (HSF) deputy senior partner Mark Crean.

I am increasingly coming to the opinion that headlines like the one in yesterday’s The Lawyer represent as close as we will get to ‘clickbate’ in the legal industry.

Why do I think this? – because it is now well established that “growth isn’t a strategy, it’s a result“.

So, aside from being potentially good media exposure for the firm – in which case I do wonder why none of the Australian legal press picked up on this story – all this article does is highlight the misnomer that “growth is always good”, when all research around lateral hiring and aggressive purchasing of market share points to the opposite (think Dewey & LeBoeuf).

Going a step further, in a recent (23 November 2015) article in the Am Law Daily, Felix Oberholzer-Gee, professor of business development in the strategy unit at Harvard Business School, argues:

“If you start by saying that we want to grow our market share, or we want to be a particular size, as a strategic goal that is a terrible choice for a number of reasons”…

… “First, and most important, is that market share is not that correlated with profitability. The second is that the most natural way to gain market share is by charging lower fees, which is what we see throughout the industry in this misguided effort to gain size and market share.”

Have to say that I agree with Professor Oberholzer-Gee: – market share [ie, size] doesn’t matter, what matters is if your firm is profitable.

And therein lies the problem: I have yet to be convinced that any firm on an aggressive growth trajectory in Australia – and there are a few out there who are taking the same approach as Jones Day – are any more profitable for it. Conversely, I think that while being larger in partner numbers and office outlets many are probably less profitable with a lot more administrative headaches to boot.

So, while I feel for law firm partners who are continuously being told post-GFC that mergers and market growth are safe haven ways to continue their existence post-2020, I would caution this approach and recommend, at an absolute minimum, that the firm:

take an audit of their client base to see who they do profitable work for;
ask your most profitable client if your firm’s growth plans will have any impact on them giving you greater levels of profitable work and, if so, who you need to bring on board to do that work;
analysis what your increased cost-base (and there will very likely be an increased cost-base) is going to mean in the medium and long term;

and to share this information as widely as you feel comfortable doing with your top clients so there is transparency around your strategic growth plans.

Otherwise you could always remember the idiom:

“Marry in haste, repent at leisure…”

Report: ‘HSF bets growth on Asia’

The Australian‘s weekly Legal Affairs section is reporting (subscription required) today that global law firm “Herbert Smith Freehills will seek to more closely integrate its Australia and Asia practices.”

Sorry to be blunt, but what!?!

According to the Lawyers Weekly website, HSF officially merged on 1 October 2012 to open as the “largest fully integrated law firm in Asia Pacific based on number of lawyers“.

That was 3 years ago.

This begs the question: are all of the recent global law firm entrants to Australia going through the same issues?

My guess here is “yes”. Even though nearly all of them (arguable K&L Gates used US-Australia as its strategic reason for opening in Australia) made specific mention of using Australia as a springboard into Asia, pretty much none of them – to my knowledge – has a specific liaison Business Development Manger person (or higher) located in Australia who assists with joint business development activities.

As I understand it, there may be cost related issues involved in this (who pays for the resourcing – Australia or Asia). There may also be personnel issues involved.

Who knows; but the short answer is that for the life me I cannot understand how 3 years or more (in some cases) on from when the global firms arrived in Australia they still don’t seem to:

have dedicated Asia-wide practice and support teams
be able to tell you the number of referrals across jurisdictions (inbound and outbound)
be able to tell you which partners are referring work [championing] across jurisdictions
be able to tell you how many referrals are going to other firms within the jurisdiction where they have an office – particularly where there may have been a relationship prior to the merger (in Australia’s case, would you like to take a punt that Gilbert & Tobin gets referrals from international firms with an on the ground presence in Australia?)
know which of their clients are referring work to them across multiple jurisdictions.

To me, this says that both the back-end and front-end operations of the merged firm are still working in geographic and practice group silos (which they most certainly would appear to be from today’s article).

Don’t get me wrong, it’s great that HSFs is seeking to more closely integrate its Australia and Asia practices. I hope other firms follow suit. I’m just frustrated that this initiative is probably about 2 and half years late!

Who is this for?

Anyone who has followed me on social media (twitter and LinkedIn being my big social media platforms outside of this blog) for any length of time will know that I’m a fan of Seth Godin. I believe any business developer can learn a lot from Seth’s blog and so recommended it often.

Fortuitously for me, Seth’s post overnight (Australian time) was titled: ‘Who is this for?‘ I say “fortuitously for me” because this represents my 100th post, and as with any milestone it’s only natural that you take some time to consider what the purpose is behind the activity?

So I asked myself this morning: who is this blog for?

It’s true that I have struggled with regular post scheduling – something we are all told needs to be done in order to get a following. At the same time, I have more followers than I ever expected and have interacted with people I consider my peers as a result of some of the posts that I have put up on this blog.

Can it be said then that this blog serves a self interest purpose? I think the answer to that is most certainly a “yes”. But I hope that only tells part of the story. I hope the followers and readers of this blog also gain something from it.

Importantly for me though, I have really come to enjoy blogging. I believe it make me a better writer and more learned about what is going on in the world of business development and legal services.

As it gives me a lot more than it takes, I have made the decision to continue on with this blog into 2016. I can only hope you come along for the ride.

Forget the Gadens merger, the big news today is Olswang’s announced ‘Revenue Share Scheme’

Pretty much all anyone involved in the Australian legal sector will read about in the industry news today will be the reported three way tie-up between Global behemoth Dentons, Australian law firm Gadens and Singaporean firm Rodyk & Davidson, which is still subject to a partner vote but you assume is pretty much a done deal.

Although this may have a profound effect on the Australian legal market in years to come, in much the same way as the K&L Gates / Middeltons merger has hardly set the sector alight, I somehow doubt this merger will too.

There is, however, another piece of news being reported this morning that could very well have a massive effect on the local market – and that is the news that Olswang has established a ‘Revenue Share Scheme’ that it hopes will incentivise staff (it is being reported the scheme is open to all employees at the firm, from partners through to business services staff) to refer clients to the firm through a referral bonuses scheme that will pay an employee who introduces a new client who subsequently spends more than £20,000 in the first year instructing the firm, 10 per cent of the instruction fees in the next year.

I worked under a scheme very similar to this is Asia just after the Asian Financial Crisis and I can vouch that provided you get your conflicts worked out (because trust me, this leads to a lot more potential conflict situations), then this type of scheme can be very incentivising.

While I doubt this type of scheme will be introduced widely here in Australia too soon – after all, why do we get paid salaries, I can see this becoming more prevalent and certainly having a more profound effect on market practice globally.

It’ll be left to the test of time however to see whether – in five years time – everyone is discussing their 10 per cent bonus or the Gadens-Dentons tie-up!