George Beaton: Outside Investment in Law Firms from ClioCloud9 Conference

transcript

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…

-50000

100000

150000

200000

250000

England and Wales 10,202

-50000

100000

150000

200000

250000

-50000

100000

150000

200000

250000

South Africa 10,595

-50000

100000

150000

200000

250000

-50000

100000

150000

200000

250000

Singapore 900

-50000

100000

150000

200000

250000

South Africa 10,595

-50000

100000

150000

200000

250000

-50000

100000

150000

200000

250000

Hong Kong 784

-50000

100000

150000

200000

250000

Singapore 900

-50000

100000

150000

200000

250000

South Africa 10,595

-50000

100000

150000

200000

250000

-50000

100000

150000

200000

250000

Hong Kong 784

-50000

100000

150000

200000

250000

Singapore 900

-50000

100000

150000

200000

250000

Australia 18,059

-50000

100000

150000

200000

250000

South Africa 10,595

-50000

100000

150000

200000

250000

-50000

100000

150000

200000

250000

Hong Kong 784

-50000

100000

150000

200000

250000

Singapore 900

-50000

100000

150000

200000

250000

Australia 18,059

-50000

100000

150000

200000

250000

New Zealand 1,823

-50000

100000

150000

200000

250000

South Africa 10,595

-50000

100000

150000

200000

250000

-50000

100000

150000

200000

250000

Hong Kong 784

-50000

100000

150000

200000

250000

Singapore 900

-50000

100000

150000

200000

250000

Australia 18,059

-50000

100000

150000

200000

250000

New Zealand 1,823

-50000

100000

150000

200000

250000

Canada 34,900

-50000

100000

150000

200000

250000

South Africa 10,595

-50000

100000

150000

200000

250000

-50000

100000

150000

200000

250000

Hong Kong 784

-50000

100000

150000

200000

250000

Singapore 900

-50000

100000

150000

200000

250000

Australia 18,059

-50000

100000

150000

200000

250000

New Zealand 1,823

-50000

100000

150000

200000

250000

Canada 34,900

-50000

100000

150000

200000

250000

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

USA 177,891

-50000

100000

150000

200000

250000

South Africa 10,595

-50000

100000

150000

200000

250000

-50000

100000

150000

200000

250000

Hong Kong 784

-50000

100000

150000

200000

250000

Singapore 900

-50000

100000

150000

200000

250000

Australia 18,059

-50000

100000

150000

200000

250000

New Zealand 1,823

-50000

100000

150000

200000

250000

Canada 34,900

-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

100000

150000

200000

250000

South Africa 10,595

The Beaton consultancies are specialists in the professions…

LawAccountingConsulting

engineeringManagement

consulting

Research. Reveal.

Market research

• Firm brands

• Client satisfaction

• Staff engagements

• Employer brands

consulting

Bigger. Better. Both?Research. Reveal.

Market research

• Firm brands

• Employer brands

• Strategy

• Mergers & acquisitions

• Owners’ exits and divestments

• Balance sheet optimisation

• Governance

consulting

Bigger. Better. Both?Research. Reveal.

Market research

• Firm brands

• Employer brands

• Strategy

• Mergers & acquisitions

• Owners’ exits and divestments

• Balance sheet optimisation

• Governance

• Executive coaching

• Transformation coaching

• Supervised coaching

• Transition coaching

Introduced in the 1890s, the Cravath

system led to the emergence of the BigLaw model in

the 1950s

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. 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

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…

TALENT MARKET | NEW AGE KNOWLEDGE WORKERS

In a mature industry, price competition diminishes profitability…

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’?”

6.726.69 6.68

…leading to progressive commoditisation

Source: Beaton Benchmarks, Australia

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

CLIENT BUYING POWER | RISE OF PROCUREMENT

6.79 7.08 7.36 7.267.68 7.55

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

NEW ENTRANTS | ENTRY OF INTERNATIONAL LAW FIRMS

20112003

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

2020s1990s 2000s 2010s1980s

Information Technology Outsourcing (ITO)

Evolution of outsourcing

SUBSTITUTES | EVOLUTION OF OUTSOURCING

2020s1990s 2000s 2010s1980s

Business Process Outsourcing (BPO)

2020s1990s 2000s 2010s1980s

Knowledge Process Outsourcing (KPO)

2020s1990s 2000s 2010s1980s

Crowd sourcing

2020s1990s 2000s 2010s1980s

Crowd sourcing

Artificial intelligence

2020s1990s 2000s 2010s1980s

Crowd sourcing

Knowledge-intensive industries need to rethink cherished practices

2020s1990s 2000s 2010s1980s

Crowd sourcing

Knowledge-intensive industries need to rethink cherished practices

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

SUBSTITUTES | RISE OF NEWLAW

Revenue ($m)

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

SUBSTITUTES | RISE OF NEWLAW

Revenue ($m)

10 Hallmarks of the NewLaw business model

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. 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

LEGAL PROFESSION (INCORPORATED LEGAL PRACTICES) ACT 2000

Jul 2001

May 2007

Jul 2001

May 2007

Aug 2007

Jul 2001

May 2007

Aug 2007

May 2013

Jul 2001

May 2007

Aug 2007

May 2013

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

Maurice May & Co

2006Reid & Reid

2006Gary Robb & Assoc

2006Paul J Keady & Assoc

Maurice May & Co

2006Reid & Reid

2008D’Arcys Solicitors

2008McClellands

2008Edwin Abdo & Assoc

2008Nagle & McGuire

2008Crane Butcher McKinnon

2008Blessington Judd

2008Secombs

2008Quinn & Scattini

Maurice May & Co

2006Reid & Reid

2008McClellands

2008Nagle & McGuire

2008Secombs

2009John Micallef & Co

2009Carter Capner

2009Long Howland

Maurice May & Co

2006Reid & Reid

2008McClellands

2008Nagle & McGuire

2008Secombs

2009Carter Capner

2009Long Howland

2010Trilby Misso

2010Kenyons

2010McGlades

2010Stewart & Nobles

2010Adam Leylands

Maurice May & Co

2006Reid & Reid

2008McClellands

2008Nagle & McGuire

2008Secombs

2009Carter Capner

2009Long Howland

2010Trilby Misso

2010Kenyons

2010McGlades

2010Adam Leylands

2011Rob Powe

2011Keddies

Maurice May & Co

2006Reid & Reid

2008McClellands

2008Nagle & McGuire

2008Secombs

2009Carter Capner

2009Long Howland

2010Trilby Misso

2010Kenyons

2010McGlades

2010Adam Leylands

2011Rob Powe

2011Keddies

2012Russell Jones & Walker

2012Conveyancing Works

2012Bussoletti Lawyers

2012David Nagle Lawyers

2012Hilliard & Associates

Maurice May & Co

2006Reid & Reid

2008McClellands

2008Nagle & McGuire

2008Secombs

2009Carter Capner

2009Long Howland

2010Trilby Misso

2010Kenyons

2010McGlades

2010Adam Leylands

2011Rob Powe

2011Keddies

2013JSP Solicitor

2013Clark Toop & Taylors

2013Marrons

2013Fiocco’s Lawyers

2013Gibson & Gibson

2013Taylor Vinters

2013Fentons Solicitors

2013Goodmans Law

2013John Pickering

2013Chadwick Lawrence

Maurice May & Co

2006Reid & Reid

2008McClellands

2008Nagle & McGuire

2008Secombs

2009Carter Capner

2009Long Howland

2010Trilby Misso

2010Kenyons

2010McGlades

2010Adam Leylands

2011Rob Powe

2011Keddies

2013JSP Solicitor

2013Marrons

2013Gibson & Gibson

2013Taylor Vinters

2013Goodmans Law

2013John Pickering

2014Pannone Solicitors

Maurice May & Co

2006Reid & Reid

2008McClellands

2008Nagle & McGuire

2008Secombs

2009Carter Capner

2009Long Howland

2010Trilby Misso

2010Kenyons

2010McGlades

2010Adam Leylands

2011Rob Powe

2011Keddies

2013JSP Solicitor

2013Marrons

2013Gibson & Gibson

2013Taylor Vinters

2013Goodmans Law

2013John Pickering

Maurice May & Co

2006Reid & Reid

2008McClellands

2008Nagle & McGuire

2008Secombs

2009Carter Capner

2009Long Howland

2010Trilby Misso

2010Kenyons

2010McGlades

2010Adam Leylands

2011Rob Powe

2011Keddies

2013JSP Solicitor

2013Marrons

2013Gibson & Gibson

2013Taylor Vinters

2013Goodmans Law

2013John Pickering

Maurice May & Co

2006Reid & Reid

2008McClellands

2008Nagle & McGuire

2008Secombs

2009Carter Capner

2009Long Howland

2010Trilby Misso

2010Kenyons

2010McGlades

2010Adam Leylands

2011Rob Powe

2011Keddies

2013JSP Solicitor

2013Marrons

2013Gibson & Gibson

2013Taylor Vinters

2013Goodmans Law

2013John Pickering

The outside investment

debate

The debate

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

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

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

In times of turbulencethe biggest danger

is to act with yesterday’s logic.

Peter Drucker

Options for traditional law firms

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

Top talent

Technical excellence

Lawyers selling & producing

Personal brands

Sustaining technology

Leverage full-time lawyers

Tournament for partnership

Few owners

Partnership

High hourly rates

BigLaw

Top talent

Personal brands

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

Top talent

Personal brands

Few owners

Partnership

High hourly rates

Requisite talent

Corporate brands

No tournament

Corporate ownership

Fixed fees

BigLaw NewLaw

Top talent

Personal brands

Few owners

Partnership

High hourly rates

Requisite talent

Corporate brands

No tournament

Corporate ownership

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/