Clio Cloud Conference 2014 #ClioCloud9

Outside investment in Law Firms:

The Aussie Exampleby Dr George Beaton

@grbeaton_law

@NewLawNewRules

There is as much gold in the country I’m going to as there is in California

Edward Hargraves

There are 250,000+ practices in the English speaking world…

© 2014 Beaton Capital 3

-50000

0

50000

100000

150000

200000

250000

England and Wales 10,202

-50000

0

50000

100000

150000

200000

250000

Hong Kong 784

-50000

0

50000

100000

150000

200000

250000

Singapore 900

-50000

0

50000

100000

150000

200000

250000

Australia 18,059

-50000

0

50000

100000

150000

200000

250000

New Zealand 1,823

-50000

0

50000

100000

150000

200000

250000

Canada 34,900

-50000

0

50000

100000

150000

200000

250000

-1 0 1 2 3 4 5 6 7 8 9

USA 177,891

…in a substantial and vitally important industry-50000

0

50000

100000

150000

200000

250000

South Africa 10,595

The Beaton consultancies are specialists in the professions…

© 2014 Beaton Capital 4

LawAccountingConsulting

engineeringManagement

consulting

Bigger. Better. Both?Research. Reveal.

Market research

• Firm brands

• Client satisfaction

• Staff engagements

• Employer brands

• Strategy

• Mergers & acquisitions

• Owners’ exits and divestments

• Balance sheet optimisation

• Governance

• Executive coaching

• Transformation coaching

• Supervised coaching

• Transition coaching

© 2014 Beaton Capital 5

Introduced in the 1890s, the Cravath

system led to the emergence of the BigLaw model in

the 1950s

© 2014 Beaton Capital 6

10 Hallmarks of the BigLaw business model

1. Top talent

2. Technical excellence

3. Lawyers selling and producing

4. Personal brands

5. Sustaining technology

6. Leverage full-time lawyers

7. Tournament for partnership

8. Few owners

9. Partnership

10. High hourly rates

1. High salaries

2. Culture of perfection

3. Lawyer-centricity

4. Partner-centricity

5. Innovation laggards

6. High fixed cost paradigm

7. High utilisation drive

8. PPEP maximised

9. Profit today expectations

10. Clients bear the risk

© 2014 Beaton Capital 7

First rule of strategy: Understand what’s happening…

…to avoid short-term blinkers

Competitive rivalry

amongst incumbents

New entrants to the market

Client demand for

services

Substitutes for the

incumbents

Supply of talent

The perfect storm of supertemps and virtual workspaces are moving the workforce online…

© 2014 Beaton Capital 8

TALENT MARKET | NEW AGE KNOWLEDGE WORKERS

In a mature industry, price competition diminishes profitability…

© 2014 Beaton Capital 9

COMPETITIVE RIVALRY | PRICE COMPETITION WINS THE SPRINT NOT THE MARATHON

2008 2009 2010 2011 2012 2013 2014

Legal industry’s client perception of fees charged on the 0 – 10 point scale

Q: “How would you rate the fees charged by [Firm] over the last 12 months, where 0 = ‘extremely low fees’ and 10 = ‘extremely high fees’?”

6.81

6.92

6.80

6.726.69 6.68

6.62

…leading to progressive commoditisation

Source: Beaton Benchmarks, Australia

Clients are looking for long-term partners to meet their complex legal needs…

© 2014 Beaton Capital 10

CLIENT BUYING POWER | RISE OF PROCUREMENT

6.79 7.08 7.36 7.267.68 7.55

8.07

9.00

One Two Three Four Five Six Seven Eight ormore

Clients’ rating of their professional service firm on the 0 – 10 point scale

Source: Beaton Benchmarks, Australia

Practice areas used

….this also applies to the number of offices used

New entrants from the US and UK

© 2014 Beaton Capital 11

NEW ENTRANTS | ENTRY OF INTERNATIONAL LAW FIRMS

1983

2011

1997

2007

2010

2009

2011

1998

2006

2010

1989

2009

2012

2006

2012

20112003

2012

2012

2012

2013

2013

2013

2013

2013

1964

Technology and innovation are enabling ‘upstarts’ in the professions…

© 2014 Beaton Capital 12

2020s1990s 2000s 2010s1980s

Information Technology Outsourcing (ITO)

Business Process Outsourcing (BPO)

Knowledge Process Outsourcing (KPO)

Crowd sourcing

Artificial intelligence

Knowledge-intensive industries need to rethink cherished practices

Evolution of outsourcing

SUBSTITUTES | EVOLUTION OF OUTSOURCING

NewLaw firms only have 1% market share, but are growing rapidly in influence…

© 2014 Beaton Capital 13

SUBSTITUTES | RISE OF NEWLAW

Revenue ($m)

10 Hallmarks of the NewLaw business model

© 2014 Beaton Capital 14

1. Requisite talent

2. Fit-for-purpose standards

3. Separate selling and production

4. Corporate brands

5. Disruptive technology

6. Flexi-work practices

7. No tournament

8. Corporate ownership

9. Non-lawyer shareholders

10. Fixed fees

1. Effective division of labour

2. Culture of efficiency

3. Best use of talent

4. Not key person dependent

5. Provide ‘more for less’

6. Low fixed costs

7. Fewer inappropriate signals

8. Shareholder-value mindset

9. Long-term view on profit

10. Risk is shared with clients

Australia’s deregulation story

The Australian journey

© 2014 Beaton Capital 16

LEGAL PROFESSION (INCORPORATED LEGAL PRACTICES) ACT 2000

Jul 2001

May 2007

Aug 2007

May 2013

?

Slater & Gordon has grown at 32% CAGR from $45m to $418m and completed 38 acquisitions since listing

© 2014 Beaton Capital 172006

Maurice May & Co

2006Reid & Reid

2006Gary Robb & Assoc

2006Paul J Keady & Assoc

2008D’Arcys Solicitors

2008McClellands

2008Edwin Abdo & Assoc

2008Nagle & McGuire

2008Crane Butcher McKinnon

2008Blessington Judd

2008Secombs

2008Quinn & Scattini

2009John Micallef & Co

2009Carter Capner

2009Long Howland

2010Trilby Misso

2010Kenyons

2010McGlades

2010Stewart & Nobles

2010Adam Leylands

2011Rob Powe

2011Keddies

2012Russell Jones & Walker

2012Conveyancing Works

2012Bussoletti Lawyers

2012David Nagle Lawyers

2013JSP Solicitor

2013Clark Toop & Taylors

2013Marrons

2013Fiocco’s Lawyers

2012Hilliard & Associates

2013Gibson & Gibson

2013Taylor Vinters

2013Fentons Solicitors

2013Goodmans Law

2013John Pickering

2013Chadwick Lawrence

2014Pannone Solicitors

The outside

investment

debate

The debate

Those against say…

1. Competing duties to the Court, clients and shareholders are irreconcilable

2. Ethical standards are diluted

3. The risk profile of firms is disproportionately increased

4. The profit motive is emphasised even more than it currently is

5. The standing of the profession is compromised

© 2014 Beaton Capital 19

Those in favour say…

1. Access to capital

– improves access to justice

– enables economies of scale

2. External investment stimulates innovation

3. Governance of firms is enhanced

4. Broader range of services, beyond the traditional, is better for meeting clients’ needs

5. Wider ownership attracts, retains and motivates the best people, irrespective of discipline

Chicken Little is probably wrong

© 2014 Beaton Capital 20

In times of turbulencethe biggest danger

is to act with yesterday’s logic.

Peter Drucker

Options for traditional law firms

© 2014 Beaton Capital 22

1. Differentiate……Differentiate……Differentiate

– Reposition as specialists on work, client or sector logic

– Diversify into adjacent services

2. Reduce the firms’ fixed costs substantially

3. Re-engineer the firms’ business model

4. Investigate consolidation

5. Beware the lateral bubble

Better, not bigger…

BigLaw and NewLaw business models a continuum

© 2014 Beaton Capital 23

Top talent

Technical excellence

Lawyers selling & producing

Personal brands

Sustaining technology

Leverage full-time lawyers

Tournament for partnership

Few owners

Partnership

High hourly rates

Requisite talent

Fit-for-purpose standards

Separate selling & production

Corporate brands

Disruptive technology

Flexi-work practices

No tournament

Corporate ownership

Non-lawyer shareholders

Fixed fees

BigLaw NewLaw

We are just in the beginning of developing a 21st century answer to what it means to be a lawyer. Right now we have a 19th century answer and in many ways we do not want to throw the baby out

with the bath water.

David Wilkins, Harvard Law School

• Independent corporate advisory firm based in Australia and Hong Kong providing strategic and financial advice

• Specialised in advising professional service firms on:

+ Strategy

+ Mergers & acquisition

+ Owners’ exits and divestments

+ Balance sheet and capital optimisation

+ Governance

• Offices in Brisbane, Hong Kong, Melbourne and Sydney

• http://www.beatoncapital.com/

• Benchmarking, analytics and high-end market research house serving professional and financial services firms in the Asia-Pacific region

• Services include:

+ World-class benchmarks

+ Advanced analytics

+ Customised research

+ Evidence-based advice

• Pioneers of Beaton Benchmarks™ and the BRW Client Choice Awards

• Winner of Prime Minister’s Award for Business-Community Partnerships

• http://www.beatonglobal.com/