george beaton: outside investment in law firms
TRANSCRIPT
Clio Cloud Conference 2014 #ClioCloud9
Outside investment in Law Firms:
The Aussie Exampleby Dr George Beaton
@grbeaton_law
@NewLawNewRules
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
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 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
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/