2021 Business Planning. The 10 “Must-Haves” for a Digitally Savvy Law Firm
2020 has been a year to remember but not for the right reasons. Covid-19, lockdowns, Stock Market turmoil and US elections have tested the best of us and many will look forward to leaving it behind. As we all prepare to enter 2021 for many firms that means the start of business planning. This year it will be business planning against a very uncertain backdrop. Notwithstanding the news of vaccines emerging we are far from being out of the woods and as we all know the financial ramifications will be here for years to come. We all need to recalibrate, look at our operating models and continue to improve our efficiency. We need to refocus our approach.
On a positive though, for many firms technology has probably enjoyed its finest hour during the last 8 months. Many firms have been able to adjust to lockdown homeworking successfully. Zoom and Teams are now household names and technology has allowed firms to remain operational in a way that would not perhaps have been possible had the pandemic hit 10 years earlier. Ironically though this success has led to an increase in expectations and the acceleration of everything.
The world has changed forever and law firms who recognise this (and recognise their businesses need to change) now need to approach business planning in a very different way. The nature of our engagements with digitally savvy clients is changing and changing for good reason. From what we are seeing the 10 must-haves for any firm need to include the following (all of which are driven by very different needs):
As you will have read in the Death of LegalTech, LegalTech has not pushed out. To this day most LegalTech is tech with no legal in it (e.g. PMS, DMS and CRM). Whilst LegalTech has failed to expand we have seen the growth in PropTech, ConstructionTech, DisputeTech, IP Tech, DeathTech and more. Some of the solutions in these areas are game-changing. I know already of IP teams who are leveraging the leading IP systems and platforms on many areas of work. https://www.exizent.com/ for example shows great promise to completely transform the probate market. Some of the leading litigation firms are really leveraging some of the great DisputeTech products. My point here is simple. Any lawyer in any of these practice areas needs to understand these tools and what is happening in their market. These tools are now part of the market ecosystem – they need to be able to articulate a strategy for both efficiency and their strategy for interfacing best with these systems. If they don’t understand what is going on in the areas relevant to them they need to learn quickly or perhaps surround themselves with people who do as this is business-critical territory which needs to be taken into account in their strategic planning. . Also, does it affect how they develop products and pitch to clients? What is your competitive play and how does this alter your cost of delivery? Increasingly we are being asked to challenge business planning as this knowledge is simply not optional anymore.
Your Operating Platform and the Missing Middle.
Firms need to focus more on their operating platform. The demands we are seeing for automation, risk management and reporting are on the increase. Also, firms will increasingly need to collaborate with clients and third-party organisations as well as the multiple platforms we are seeing in PropTech, ContractTech, IP Tech and DeathTech – the list goes on. If in two years’ time all real estate transactions are done on two blockchain platforms with algorithmic valuations and auto-settlement how will your technology interface? If you have to automate the workflow in 60 teams in 10 countries how will you get the resource to do it? To us two things are certain: 1) A standard PMS/DMS setup won’t cut it alone. This operating model is 25 plus years old and simply won’t cope with the plethora of demands being thrown at it; 2) Firms need something more to help with this – some sort of no/low code orchestration layer which will allow firms and fee earners to build solutions and integrations quickly. We refer to this as the missing middle, but technologies have now emerged to help fill this gap. Without this firms will struggle to deal with demand, day to day operational costs will grow and dissatisfaction will rise.
We are lucky to work in a range of areas within the legal marketplace. Often this is for in-house clients and we run tenders and form part of assessment teams. We have 20 years plus experience in this space and what I can tell you with absolute certainty is that the nature of requests from clients and law firm’s offerings is very different to say 5 years ago. Clients are getting much savvier and the requests are getting more specific and sophisticated. No longer does a marketing department cutting and pasting an answer from a year ago cut it. We are seeing some firms put forward new operating models. They are demonstrating a deep understanding of the technology in particular markets and have appointed senior experienced people to implement and manage solutions. No longer is it a side job. One commercial partner blew me away recently as his knowledge of a product when questioned at length would have put many IT professionals to shame – this is the new standard. Lawyers need to learn how to talk like this and not just in pitches too. Pitch documents I have seen from the Big 4 and ALSPs also take things to another level. My message again is simple. To win work and market share (see 10 lessons for recessions) firms not already doing this absolutely need to raise the bar in their client offerings and how they present them – their lawyers need to walk the talk and increase their knowledge to enable them to have intelligent day to day conversations with their clients. There is nothing wrong with HighQ as a product (and indeed it is very good) but the days of just saying you will just “use HighQ” as your answer to a sophisticated client have long gone – you need a better understanding of how you will use it, what other tools you will use and what systems client themselves have. The classy operators too are recognising that to perform in this new era means “thinking solutions” and truly embracing multi-disciplinary teams on pitches that include “non-lawyers”.
Microsoft 365 Strategy.
The latest stats indicate there are now in excess of 260 million users of MS365. Some have wrongly assumed that MS365 is just an online version of Office. Those looking at it properly (including many of our corporate clients) have appreciated that it has huge capability. It has digital dictation, an e disclosure system, workflow, embedded RPA, translation services, telephony and video services, reporting and analytics software, apps, power apps and bots. The investment in AI is huge with projects like Project Cortex in the wings. There are several key points here including 1) MS365 is huge and for many of our corporate and law firm clients there are now options to retire off legacy products by leveraging the 365 stack whilst reducing cost; 2) There is really no limit to what you could use it for but as a business what is the right thing for you? What do you want to use and not use it for? You need to decide and perhaps redevelop your target architecture – if not people will make their own choices and it will cease to be in your control; 3) How does this affect what other products you buy? Should you favour application layer products that configure MS365; 4) What will your team need to look like? A power BI expert is different from a SharePoint expert. Whatever you decide our prediction is that firms will diminish the number of products in their tech stack and cost for “operational tech” if the corporates we work for are representative.
The Shift to Capability.
We have all seen the tsunami of solutions hit the legal market in recent years. More has happened in the last 4 years than the 20 before. Some of these are great and others less so and in fairness many start-ups have tried to really get under the skin of the delivery of law which many tech vendors have not been able to do in the past. Let’s face facts though: 1) Every solution like every asset adds to risk, maintenance obligations, complexity and increases the total cost of ownership; 2) No firm in the world has the bandwidth to manage and implement multiple solutions in multiple areas – firms have a large number of teams focussed on a wide range of offerings; 3) IT can be personal and so everyone will have their favoured solutions. In short, to buy everything would need every firm to have infinite time and money which they simply don’t have. Sensible choices need to be made – the model we have implemented which works well for this is to stand back and decide what capabilities a firm will need both now and in the next 5 years to run their business and serve their clients as efficiently as possible. You ignore product but focus on what teams need. You then prioritise and test against your tech stack and then form your budget, cost per user-run rate and timeline. This also helps you communicate and avoids random innovation-led products appearing. You move forward more efficiently and spend less money. In a tsunami, there is no other choice but to work and plan in this way as if not you are likely to get swept away.
Law firms typically only get paid for their work once. Fees are linked to hours worked or outputs. By contrast software companies now “rent” their software. Year after year they get paid for the right to use the software and any enhancements and upgrades. This is a very nice commercial model in that they get an annual recurring revenue and every new sale is additional annual recurring revenue. This combined with the ability to scale without regard to headcount is why software companies become so profitable and why venture capitalists like to invest in them. Law firms have no ARR which is why by contrast venture capital investment is so hard despite the relatively high margins. Many firms have realised this and are increasingly launching projects. Some could be described as software houses and one (who shall remain nameless) turns over £20mil in ARR every year. Imagine at the start of your financial year knowing you have £20 mil guaranteed income – in short, you can. Law firms are adapting like never before. They are launching products, reselling products and are launching Alternative Legal Service Providers (the fastest-growing segment of the legal market). Any firm interested in making money and providing a holistic service needs to decide if they want an ARR and if so, what their product strategy is? If they don’t, they will need to accept they may get left behind and won’t enjoy the financial benefits and broader service offerings of some of their competitors. Some of these products may become essential capabilities in the future too.
Running a law firm used to be pretty simple. It was a cost-plus model with high margins. Success depended on having the right number of people with the right skills at the right time and matching them with client demand. Sadly, things are now much more complex. Law firms are experiencing unpredictable (see a conversation with a carpenter and a conversation with a postman) and multifaced demand. Clients want services delivered in new ways, they want new offerings and prices to be lower. They also want firms to be more global. On top of this as mentioned above law firms need to understand and leverage market tech more and importantly, they need to build capability (see above). Very few firms can do this on their own – the investment and change are simply too much and too capital intensive. Increasingly firms are realising they don’t necessarily have all the skills they might need to. Digitally savvy firms (and even the big 4) are increasingly realising they need to partner and form alliances. We have seen it with ALSPs as well as service providers and software businesses. Firms like Hogan Lovells have been vocal about this and we are even seeing “Alliance of the Year” awards springing up at the annual awards dinners. The important thing though is the building of capability. Collectively we need to remember that our job is not to do things but more to “make the right things happen”. This does not mean you need to invest in, buy or do everything yourself. Given the multifaceted nature of many law firms you may need someone senior to be responsible for these deals and this is likely to become an increasingly strategic role.
Many businesses have a formal R&D programme and investment budget albeit many of these will be very focussed on products – the ability to launch a new product is linked to their ability to make a profit. Law firms are obviously knowledge-based businesses but historically they are different in this regard – they sell experience and knowledge and have been less product focussed. They also have invested in R&D by employing Professional Services Lawyers and buy-in intellectual knowhow from the publishers. Also, in recent years we have seen investment in innovation people. The challenge though is that as an industry we have not got this area bottomed. I don’t think many firms could say R&D is “sorted” and they have a clear plan, and the reality is that the bulk of profits are paid out every year. This is also in an era where we are seeing more automation and productization and when a firm’s ability to succeed will be intrinsically linked to increasingly focussing their efforts on a proper R&D strategy. Areas that many firms seem to need sorting still include:
1) Tensions between innovation and IT people;
2) Legal Engineers feeling they know all legal areas when they only have experience in one;
3) Salary changes or failure to change packages when a fee earner moves to a non-fee earning role which may command different rates;
4) Incentivisation models for fee earners spending time on non-chargeable work;
5) the shifting demands of IT teams and the make-up of their teams;
6) the lack of scalability in many of the models and the piecemeal delivery of some innovation-led solutions;
7) the changing role of the PSL;
8) Proper benefits realisation; and
9) Career paths for those involved in this area.
As an industry we need to professionalise R&D. We need to recognise it is here to stay and build a sustainable model. How will every group support this area as R &D and innovation can’t be “done” for them as they are experts in their areas? This may require a firm-wide reorganisation and long-term views rather than annual budgetary cycles – perhaps like some of the Big 4.
Cost per User.
For years we have seen percentage of turnover on IT figures and the latest being quoted is 4-5% on P&L and 1-2% on capital depending on size. For reasons previously explained these are not helpful as they skew actual investment figures and can cause firms to take the wrong decisions – the only metric that makes real sense is cost per user as it represents real spend irrespective of profit model. A high percentage of turnover figure may for example cause a firm to reduce spend meaning they become less efficient whereas the differences are caused by different profit models. It is now the time to focus on IT investment more and to really decide what your firm wants to be. There are many competing dynamics here: 1) Cloud systems can give rise to short term cost savings but become more difficult to control in the long term; 2) MS365 can make a big difference in reducing legacy spend and capability; 3) Spending on innovation (Products and People) is not free but should reduce costs in other budget areas but where does this sit; 4) Tech spend now has the potential to reduce real estate spend but again is this efficient displacement expenditure rather than an increase in cost per user; 5) Some spend on areas like AI can reduce the cost of delivery of jobs and people cost but will simply add to overhead if not priced correctly – does a team get the benefit for reducing headcount whilst an IT team gets additional cost or is this a completely new metric for innovation people by creation of a virtual P&L. 5) Best of breed systems and multiple products can give higher total cost of ownership figures than say combined all in one systems and so much depends on what you actually need. My point is that you need to understand this area and take conscious investment decisions which are balanced given the overall changing dynamics of your business – cost and benefits realisation needs to be understood to ensure displacement savings are properly understood and more mature cost allocation models developed. Three exemplar firms spring to mind for wider work they have done on costs management too. One is a small but fast-growing elite firm who are using a new breed of systems combined with MS365 to deliver a market-leading cost per desktop and are working with us focussing spend on more innovative projects. Another large firm has used non-legal industry systems to deliver a great, but again, market-leading cost per desktop but with greater capability – they don’t have a “missing middle”. A third has hugely reduced the cost of its day to day IT infrastructure and has diverted the funds and team (with some additional investment) to deliver revenue-generating products for its firm. So, I am not saying spend less – far from it. More understand the market dynamics and look at the detail of what your firm wants to do – really think about how you spend your money.
UI is the new Culture.
I am not going to repeat what I have said before but suffice it to say the world has changed forever. We don’t know the full stats yet, but we are going to see a material increase in home and agile working. Organisations will have to be bi modal with more than one operating model. People will interface with technology more than ever before and it is vital that we optimise the interface, both from an efficiency perspective but also from a well-being and talent attraction perspective. The casual conversations in the lift will be rarer as will be the ability to walk over to people’s desks when you see them looking upset. Knowledge will need to become much more accessible. The operating platform will become more important than ever before and firms will need to work hard at it and we are seeing a real uptick in demand in this area (for good reason) – to quote the above article:
In the past culture has never been about technology – apart from perhaps in the sense that individuals may want to work for an organisation which prioritises how they leverage technology. The world has changed now though. In lockdown, technology has become much more important and a greater proportion of our working day. It has gone up the pecking order. Screen time and engagement levels with technology have seen massive increases – daily Zoom sessions have scaled from 10 million per day to 300 million. Meetings have been replaced by Teams and Zoom, as has supervision and social. Where technology is great it stands out a mile – where it is not the cracks show much more readily given people’s exposure and reliance has increased so dramatically. For many (and despite the well-intentioned efforts of some organisations to engage with people) technology, together with its strengths and weaknesses, has become the face of organisations – their most dominant touchpoint.
The key point is therefore that technology has become much more important and is a much greater part of people’s experience of an organisation – it is what they live and breathe. If the IT interface or support is poor this will reflect to a much greater extent than before and vice versa. How can an organisation be regarded say, as supportive or caring, when information technology just focuses on the technology and not the underlying information or processes leaving people to fend for themselves? How will an organisation know when someone needs help, is struggling or stressed if the technology and processes do not provide methods of surfacing this – surely any platform should minimise any stresses and strains? How capable is the online platform from which you operate and how well does it support the different levels of fee earners and support staff? What do your people think? If a firm has just pushed out their previous on-prem processes and technology to an online format it is probably not enough as the needs of people (and how they judge your organisation) will be very different.
To conclude we all know there is no certainty in life but a firm that has clarity in relation to the above points will be well placed to succeed.
As a final note, I suspect there is a wider theme underpinning all of the above points. Those of you who have read the PWC survey for 2020 (I would recommend this to you as it spans the results of firms from £25mil to £700mil for YE April 2020), you will know that law firm margins for many are still declining. 30% of firms saw a decline in revenue and 40% a decline in profitability (meaning underlying profitability and not PEP which can be shaped) – there is obviously only a month or so of lockdown in these figures and so 2021’s survey may present a worse picture. This is not everyone admittedly and I know of a number of firms who are bucking the trend – if, however, your firm falls into this camp with declining margins a key question you need to challenge yourself with is “what’s the plan”? It sounds obvious but it is vital that you have one. We know some firms who have done exactly this and are now redirecting their efforts in this changing world. Hopefully, the points above will help you formulate your own plans. Personally, I think we will look back at this period (and Covid-19) as a time of real threat and opportunity – it will though be the era when the successful firms of the future will have made their key moves whilst others perhaps get left behind.
Every day in lockdown I find the quote of Jamil Qureshi ringing in my ears: “if you were the best in the world what would you do now” and suspect these are guiding words to take us into 2021.