Legal Business Blogs

Comment: paradigm shift or just the mother of recessions? 2014 should answer the profession’s big question

It’s been obvious that something fundamental happened to the world economy during 2008, ushering in the worst relative trading conditions since the 1930s. It is, likewise, demonstrable that this shift has had a material impact on the legal profession in terms of reduced growth prospects, changing corporate buying habits and pressure on the conventional model of law.

The point that has yet to be resolved – and which has huge significance to the western legal industry – is whether that change represents a permanent structural shift underwritten by technology and the rise of non-law firm providers, or merely a severe cyclical depression from which the profession will in time recover.

Many, among them a growing rank of general counsel (GCs), some credible-but-neutral observers and (unsurprisingly) alternative service providers, contend that it is primarily structural in nature and the profession should get used to it.

Law firm leaders, in my experience, don’t think they know the answer. During 2009 and 2010, the working assumption was that this was extreme cyclicality at play and normal service would eventually be resumed. That confidence was broken down as the euro crisis wore on and evidence of hardening attitudes among GCs took its toll. The working theory now is that we are facing an ambiguous mixture of permanent change and a brutal downturn.

I don’t know the answer either – and there can’t be many individuals out there who have seen more law firm data than I – but I’d go along with the bit-of-both assessment now adopted by most managing partners. My hunch is that cyclical factors are still more dominant than any paradigm shift to the state of the post-2008 legal market.

There remain core factors supporting the demand for legal services – most notably the frenetic level of legislation and regulation being produced not only in western economies but increasingly in key growth markets. This hugely important driver of legal service demand isn’t just being sustained – it’s accelerating and proliferating, which is why a five-year slump in corporate and banking activity had such a modest relative financial impact on advisers.

But there is one claimed element of ongoing structural change that is, I believe, entirely justified. That is the growing impact of alternative service providers, a trend which can likely keep running even if the economy revives. If these providers can sufficiently satisfy major clients – and a sizeable group of clients are already reporting that they do – they will keep moving up the value chain. A market rebound will only slow that process, not stop it, so law firms should treat that threat seriously.

Either way, with 2014 looking to have the best prospects since 2006, the next 12 months will likely provide the first meaningful indication since the collapse of Lehman as to how much advisers can expect a return to the good old days. That will be defined by clients; as always law firms will be unerringly attuned to the most subtle signal that GC action isn’t matching up to the tough talk. Some things never change.

For more analysis on client attitudes to non-law firm service providers see ‘Here be monsters’