Captive firms to smash status quo | The Australian

This article originally appeared in The Australian on 18 October 2013.

THE business model that dominates the nation’s law firms faces an impending threat from captive firms that are tipped to be established by the biggest corporate consumers of legal services.

Law firm consultant George Beaton said he had been involved in an attempt by a group of lawyers who tried to persuade insurance underwriters to establish a captive firm. He believed more attempts would follow.

“I have been party to discussions in the insurance industry and they fell over. But this has got to happen – it’s only a question of when,” said Dr Beaton, who is a principal of Beaton Research and Consulting.

He said a county council in England had already teamed up with a local law firm and was offering local government legal services throughout Britain. British construction company Carillion was also making expanded use of its in-house legal department by offering low-cost specialist services to other construction companies.

It made sense for enterprising lawyers to put forward proposals to part-own captive firms to provide low-cost services for industry groups, Dr Beaton said.

Ownership could be split between lawyers and industry groups that had easier access to capital and could finance a legal practice in a way that would be beyond the means of lawyers acting alone.

But while this business model would benefit those involved, he warned that it could devastate independent law firms.

They would find it difficult to compete in those parts of the market targeted by firms that are part-owned by the major consumers of their services.

Dr Beaton believed “all commoditised work that does not create a competitive advantage” would be vulnerable to acquisition by captive firms.

In Australia, he believed major consumers of legal services that might establish captive firms included the banks and the construction industry.

The prospect of captive firms is one of a series of factors challenging the dominant business model for law firms in Britain, the US and Australia.

Other factors include the rise of legal process outsourcing, the growing use of alternative billing systems and the arrival in Australia of international specialist firms.

US professional services consultant Ron Baker said there were now other ways of running legal practices that were completely different to the “outdated, anachronistic model that says ‘we sell time’.”

He said the re-engineering of law firms’ business model had clear benefits for consumers and lawyers who embraced the changes.

While British academic Richard Susskind has warned about the disruptive impact of technology, Mr Baker said he strongly disagreed with Professor Susskind’s view that legal services were going to be commoditised.

“You won’t see the end of profitable law firms,” said Mr Baker, who is in Australia advising firms on alternatives to time-charging.

“There will always be a place for lawyers. It is a relationship business, a people business. You will never be able to replace a lawyer with a computer.”

However, business models that made innovative use of computerised technology could erode the profit margins of those firms that did not accept the need for change.

Mr Baker is working with several firms in Australia, including Curwoods Lawyers, which specialises in insurance work. Managing partner Scott Kennedy said his firm now included alternatives to time-charging when pitching for work but still offered billable hours to clients who preferred this method.

Curwoods has also introduced an internal costing system that allows the firm to price its services based on the cost of production, not the number of hours lawyers spend on each matter.

“It’s still a work in progress, but that’s where we are heading,” Mr Kennedy said. Also being examined is the possibility of slashing one of the major components of the firm’s fixed costs – rent – by moving from Sydney to a lower-cost centre such as Canberra or the NSW town of Albury.

“This is something we are working towards,” Mr Kennedy said.

“We are engaging with some of our clients on this and saying: ‘This is where we see the future. Can we get you on board with it?’.”

In August, John Kain, the executive director of Adelaide’s Kain C+C Lawyers, told an industry forum that four factors were driving change within the profession: the removal of some of the statutory monopolies that reserved areas of work to lawyers; the removal of the ban that prevented non-lawyers owning legal practices; the rise of information technology; and the growth of globalisation.

“For the first time, in the long history of a venerable industry, we are facing competition … What we have experienced throughout our working lives has not been competition. It is what I would describe as the gentlemanly jostling for position in a protected industry,” Mr Kain said.

Dr Beaton told The Australian the rise of new business models was being driven by innovative lawyers.

But in Britain private equity was also being mobilised in the legal marketplace – with and without the involvement of lawyers. He cited the example of British practice Riverview Law, which had been launched by a non-lawyer entrepreneur who made his fortune in recruitment.

It charges fixed fees, has low overheads and makes extensive use of technology. But while successful, new business models were likely to emerge, he believed structural changes in the marketplace meant law firms that refused to adapt would face a more challenging future.

“Our modelling shows their profit per equity partner will halve within a decade,” he said. “This is structural change. It will drive some of the top talent out to create new boutiques. Others will just have to accept that their incomes will halve.”

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