Georgetown University recently released their yearly Report on the State of the Legal Market. And if you’re a lawyer it doesn’t make for a very fun read, to say the least. The report merits a read by all parties of the market: suppliers and buyers. Particularly the introduction where the following quote can be found: “The current challenge in the legal market. Is not that firms are unaware of the threat posed to their current business model. By the dramatic shift in the demands and expectations of their clients.
Instead, as in the case of Kodak, the challenge is that firms are choosing not to act in response to the threat. Even though they are fully aware of its ramifications.”
It beautifully depicts the inertia which often comes with success. And in my last article I mapped out some of the ways that traditional law firms could be challenged by new comers. I won’t go into any further detail about the report other than to say that the future doesn’t look altogether shining for law firms. Which leads me to the real topic of this article.
This lackluster future of law firms isn’t only a threat from above: i.e. that clients will move their business elsewhere. I think that it is time for partners to seriously consider the threat of getting the rug pulled out from under their feet. And this due to the meeting of two forces of nature: the typical law firm structure and the generation. ‘what’s in it for me?’ In this instance, the generation Y as it is more commonly known might. Even be more right than they realize, even though I might not be completely impartial, seeing as I belong to it…
The basic tenant of law firms and other owner-managed professional service firms is pretty straight forward. As a partner you will have a piece of a very juicy cake. And by dangling it in front of the eyes of the associates/junior accountants/.What have you, you manage to attract enough top talent to fulfil your needs and you get them to work their ***** off. And this, for a limited amount of time. Sure, there are different degrees to this model, for instance boutique firms don’t have the same concept of up or out.
But sport a rather cylindrical shape and a much larger ratio of associates becoming partners. But you still need a cake at the top of the structure to serve as a bait. Not only do you need a cake, with some calculations seeing how there are more associates than partners. And that partners retire increasingly late, you quickly arrive at the conclusion that you need. A cake that keeps getting bigger, like the proverbial bean stalk.
This has actually been the case for law firms for the last decades. The cake has kept on growing merrily. However, with a slump in demand, which most General Counsels think will remain for quite some time. The ever-growing cake just stopped growing, and worse still, it might even be shrinking.
The other aspect of owner-led organizations is that there’s not much of an impetus to secure the future existence of the law firm through investing in it. The system naked-in, naked-out means that you don’t pay anything to get into the partnership. But you won’t get anything for your shares when you leave. Even when you are able to receive some payment for your shares. The evaluation of them is often tricky and regardless of evaluation. They’re hardly what one would call a liquid asset.
What this means in practice is that you have all the incentives not to invest in the firm. Since you won’t be there to reap the rewards, and pay out as much dividends as you can while you’re still allowed to take part of it. This incentive only grows with age and approaching retirement, and since as a general rule. The older you are the more you have to say about what happens in the firm. chances are that the level of investment in education of the young, new IT-systems, new business models or innovation will be held at a minimum.
A shrinking cake and lack of investment might not have been such a big deal were it not for…
There are a couple of reasons why decreasing prospect and generation Y is such an explosive mix. The first of which is the predilection for instant gratification and aversion to working hard in the present for a hypothetical future outcome. When the cake is melting before their eyes, it becomes less and less likely that they will put in the work necessary to keep a law firm afloat. This will lead to fewer hours worked, fewer hours billed and ultimately a further decrease in the size of the cake.
If you want a typical millennial to put in the hours for you. You need to provide a sense of why, and that sense need to be present and explained from day one. As Deloitte’s millennial survey has found, one of the ways to do that is to let them develop our leadership skills. Lack of leadership development potential was the most cited reason for wanting to change works. Professional trainings, education and personal development while at the same time maintaining a work/life balance is what we found Generation Y to want when we conducted a survey about their ambitions and wishes.
The last reason is that Generation Y, and those coming after them, are seen as less and less loyal to their employers. I would argue that loyalty is a two-way stream and that there is a feeling that the loyalty has been breached from the employers’ side first. Regardless of the reason, millenials don’t expect to remain at the same company for their entire professionl life. Heck, they’re not even sure they’ll be working in the same field for the rest of their life.
So, to sum up, they require instant gratification or a very clear sense of why they are doing things. The cake isn’t getting any bigger, or worse, it’s melting, which means that the financial motivation is out the window. Investment in professional development and in the institutions is not encouraged by the typical law firm structure. The Generation Y, are fickle employees unafraid of jumping ship to try on that new speed boat that at the moment just is a dot on the horizon, but which is catching up fast.
Whether it is a legal startup, another type of law firm business model, or something completely different that will attract them, a perfect storm is brewing. And the risk of mass exodus of top talent from traditional law firms should be considered a real possibility.
And they might be entirely right you know…