Professional Services insightsMarch 2016

Legal services may seem an unlikely candidate for digital disruption, but the industry is not immune from disruption generated by cloud, data analytics and ecommerce technologies. In this traditional industry, digital is enabling previously unthinkable practices such as offshoring and ‘dial a lawyer’ style models, where specialists are joining in‑house teams on secondment for short‑term contracts.

As market turbulence hits new heights, 2016 is shaping up as the year that decides which firms will embrace uncertainty and prosper — and those which will fall by the wayside.

Digital disruption — in the form of virtual operations from both regional and off-shore hubs — is enabling the commoditisation of legal services and their delivery as web-based offerings. With continued improvements in data security, offshoring has become the norm. At the same time, data analytics is helping firms to streamline processes or harness business process outsourcing (BPO), further driving down the cost of providing legal services.

In this new reality, standard legal tasks are being charged at predetermined fees — not billable hours — putting law firms under pressure to transition to bundled offerings. In-house counsel teams are challenging the sorts of fees large law firms are used to. Large scale fees have rationally provided an opportunity for the training up of graduates, however, with an abundance of lower-cost alternatives, there is less interest in continuing to fund such activities.

Professional services under siege: how should law firms respond to digital disruption?ey.com/au/ProfessionalServices

2 | Professional Services insights Professional services under siege: how should law firms respond to digital disruption? March 2016

Law firms are under continual pressure to manage overheads. In response, even marble and glass firms are moving to open plan workplaces — with senior lawyers giving up corner offices — in a bid to cut costs. Others are seeking economies of scale through global and regional M&A. However, in many cases, these ‘marriages’ aren’t working as true partnerships, with cultural and language difficulties proving challenging. Such mergers may also squeeze out senior lawyers, who respond by setting up their own, low-overhead, boutique practices offering top tier services at half the price — increasing the pressure on margins.

Fees are being impacted on a number of fronts. Firstly, clients are making more use of ‘beauty pageant’ procurement processes, creating a hot house for fee arbitrage. So far, larger firms have proved willing to take write-offs to win work — a short-term response that isn’t doing the broader industry any favours.

Secondly, clients are getting more selective and specialised in the resources they’re prepared to buy — often cherry picking individuals from several firms based on their experience and skills for specific tasks.

In the current digitally-enabled environment, firms need to find new ways to differentiate themselves, whether through specialisation, new resourcing models or innovative ways of delivering legal services.

5 things traditional law firms should be doing now1. Leverage your relationships — find a professional

services provider that has already been through digital transformation. Talk to them about the process, harness their ideas and learn from their mistakes.

2. Harness data analytics — start using data to create a lean cost structure. An example of this could be using your data assets to track leakage, maximise profitability and margin and ensure early detection of potential financial hygiene issues.

3. Rationalise your supply chain — take a long, hard look at your end-to-end systems, from front-end delivery, right through to CRM, to payroll and billing. Test your business model to identify opportunities for offshoring, outsourcing, synergies and savings.

4. Manage your digital brand — expand your marketing and brand work into digital channels, work on your digital profile and harness the power of social media.

5. Stop being a price taker — enhance your margins by partnering with other professional services firms to complement your services and create innovative, new offerings.

The key to digital disruption is to maximise the opportunity not just in using new technology, but in responding to the rate of digital change. Law firms that sit on the side lines may find themselves under increasing pressure. It’s time to embrace the opportunities presented by digital, rather than responding to the threat it presents. Law firms should reassess their strategy and business model in the new regime and determine which firm they’re going to be — full scale or specialised, virtual or face-to-face, commoditised or value added — and act decisively to make it happen.

Campbell Jackson National Professional Services Leader Campbell.jackson@au.ey.com +61 3 9288 8182

EY | Assurance | Tax | Transactions | Advisory

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