Lawyer, author of ‘How To Thrive In A Commercial Law Firm’ Jonathan Watmough, has spent years researching  – and living through – changes in the legal sector. Across two posts, he summarises his findings and examines what the future looks like for the sector and for business services teams in particular.

Last week, I set out the first three of six predictions for big picture law firm change over the short- to medium-term. In part two, I reveal my remaining three predictions as well as my thoughts on what these types of transformational change will require of business services professionals in law firms.

A perfect storm is brewing in people markets

Law firms exist to interface and manage the tensions between two markets – client demand and lawyer supply. By far the most important of these two markets, however, is lawyer supply or ‘the war for talent’ – because everyone, clients and people, always follow the talent in the end.

The pandemic has been a disaster on all sorts of levels, and we are only now starting to understand the implications for our mental health and our attitudes to work. Added to this is the trickle-down effect of rampant pay inflation driven by the elite US firms in London, major inter-generational differences around expectations and an unusually tight labour market more generally.

The lawyer supply market is, in effect, continuing to say to firms ‘I want it my way and for more money’ (and some might even be arguing ‘I want to do the same or less for more money’) but at precisely the time when the client demand market is softening and competition is increasing. The elite firms might be able to manage this tension by continuing to increase charge out rates, but that’s not going to work for the rest of the market.

This is a perfect storm for law firms. In time, the tide will go out somewhat on lawyer demands as client demand softens further, but I’m not convinced that any sort of happy balance will be found by law firms while they are operating the current ‘drive short-term partner profits’ business model. The inter-generational differences are now too great.

I suspect that a new business model will emerge in time of a range of firms who step off the ‘growth-for-growth’s-sake treadmill’ that is showing signs of becoming unsustainable for all except the elite, and sacrifice some degree of profitability in exchange for quality of life and sustainability. This could well be a compelling competitive advantage in the war for much of today’s talent with very different priorities.

AI will inflame things in the immediate short term but will not yet be transformational

AI is nothing new. But it would seem the latest chatbots are not an evolution but a significant leap in technology – because there is a viable user interface for consumers for the first time. Commentators are starting to panic about the potential longer-term consequences for humanity, never mind lawyers.

For all of the noise, however, no one knows. There is enormous heat being generated by the inordinate amount of speculation but only a little light. It is too early to tell or even make any meaningful predictions. So many questions remain to be addressed, even around the basics of the responsible use of AI in a legal context (for example, trust, misinformation, provenance of content, confidentiality, security, ethics and many other regulatory concerns), let alone how it might come to be used, by whom, in what way and to what end. These questions will start to be addressed gradually, however, as experimentation continues and the technology (and above all, the human training of the technology) improves.

There is no doubt that in relatively short order, however, more and more routine lawyer tasks will be automated. Research, document review, data extraction, drafting, and keeping up-to-date on regulation, for example, are all time-consuming and often relatively mundane but crucial lawyer tasks which are vulnerable to a lot of time and cost being removed.

Quite how far and how fast this automation goes remains to be seen, but for the time being, at least, a significant amount of human oversight will be required. So, it is hard to envisage that AI will materially de-leverage the profession over the next five years, even if in the short term it will start to change the shape of the lawyer and non-lawyer skill base which firms will need to be able to marshal and take full advantage of useful and reliable legal AI when it does arrive in earnest. For all except those very brave early adopters and those with very deep pockets, this next period is about preparation and being able to move quickly once the fog starts to clear.

Private practice will both consolidate and fragment

All of the economic and commercial bases are now loaded for material consolidation of private practice firms, at all levels, and primarily for defensive, not strategic, reasons. For many firms, ‘strength in numbers’ will be an obvious and strongly advisable course.

A lot of merger conversations are happening already, but I don’t predict material actual merger activity for at least another 12 months. Whilst all firms are feeling the pressure, inertia is a very strong force to overcome in law firms and so it usually takes some form of material interruption to business as usual to force firms to act. Most firms would also prefer not to invoke that sort of material change unless they have no choice. And many firms are probably hoping that they can keep their heads down for another year or two and weather the storm until some degree of the good times might return – even though for most firms, most of the signs seem to suggest otherwise.

This sector-wide consolidation will not all be by way of merger, however. The stronger and more independently-minded firms will likely increase their targeted partner lateral hiring, perhaps dramatically, especially of partners at firms that are perceived for whatever reason to be vulnerable. Cherry-picked team hires in particular can be an incredibly valuable and low-risk way of forcing growth without all of the dangers and downsides of a merger. This could force some firms into very defensive mergers or, in a worst case, even to collapse as partners run for the door.

Firms will also seek to protect partner profits by increasing their management of the equity – potentially by de-equitising some partners or even asking them to leave. A combination of this active equity management and the inevitable knock-on consequences of some mergers, means that many partnerships will fragment to some degree – partly in terms of partners actually breaking away and partly in terms of the bonds between the remaining partners becoming increasingly frayed. Some of the partners breaking away will retire (having done well as a consequence of the prolonged period of good times) but many will move into consultant/platform firms and seek to maintain a smaller business with a different lifestyle.

What all of this might mean for business services professionals

All of this might happen, some of this might happen, none of this might happen and a lot of other things will definitely happen. I am no Nostradamus, but I know that a reasonable understanding of history and an objective assessment of where the world seems to be heading suggests that, one way or the other, some of the key long-term fundamentals which have underpinned natural market growth have shifted and we are likely heading into a world of change as a result.

Things will be quite different for many commercial law firms and lawyers within five to ten years, potentially very different. It’s far from doom and gloom, however, and for some it will also be an exciting period of immense opportunity. But what got us here, won’t get us to where we’d like to think we might get to in that world of change.

This will require a sea change in approach on both sides of the law firm professional divide. Although the importance of business services has been gradually increasing over the last ten to fifteen years, in nearly all firms individual partners tend to know best and have the final say and in most firms, even now, business services are still perceived as ‘middle or back-office’ providers. Most firms could get away with this in markets which had been growing naturally for so long – the biggest challenge for most firms has been keeping up with client demand for ever more lawyers with ever more specialisms in ever more places to do ever more complex work in ever more joined up ways.

Not so when the music stops. Every firm will have to become more efficient in every respect to preserve the bottom line while top line growth slows – not just in terms of hygiene to stop the bucket needlessly leaking, but also to improve the firm’s health through innovation to increase productivity. ‘More for less’ will start to translate into ‘A lot more and a lot different for a lot less’. And those firms which want to get ahead will increasingly regard efficiency, innovation and change as the key battlegrounds.

But we lawyers are incapable of doing this for ourselves. We will be entirely reliant on COOs and specialist professional directors and their teams to both equip our lawyers with the tools to change as well as encourage significant behavioural change in lawyers who are neither used to change nor enjoy it. The best business services professionals will no longer be ‘supporting’ the lawyers but will be embedded with them helping them to change, and some will be leading them in every sense.

Here are just a few examples where business services professionals (and in some cases, a new breed of business services professionals), will need to come to the fore:

• AI is going to dominate a lot of law firm thinking for a long time, but not just in the sense of technology specialists. AI will permeate every aspect of law firm business design and so will require the combined efforts of every business services discipline. I suspect that in five years’ time, when headhunters are seeking to seduce lateral hire lawyer partners, a firm’s ‘technology platform’ will be as important a selling point as the size, scale, reach and ratings which typically define a firm’s ‘platform’ now. And law firm lateral hiring will migrate into crucially important business services roles too, especially at director level.

• ‘Change’, and in particular the willingness and ability for lawyers individually and collectively to accept potentially material change in all sorts of ways, will become the defining watchword. In the short term, that change might manifest itself by virtue of firms consolidating and fragmenting and competition increasing. In the medium to longer-term, that change might manifest itself by virtue of the impact of AI on business design. This is going to be new and stressful. I expect law firms to start absorbing change/transformation specialists from other industries before long, and for these people to become embedded across all areas of business services in order to support the implementation of widespread business redesign.

• The war for top legal talent, especially at partner level through lateral hiring, will intensify as a fight for market share develops. Genuine, high-level strategic people expertise will be required to design and operate an environment which is capable of attracting and retaining highly-mobile and highly-demanding top talent. Those firms with that degree of expertise at both managing partner and chief people officer level will have a significant competitive advantage.

• In an era of change and technological disruption, strategic thinking, leadership, communication, commerciality and people and relationship skills will increasingly start to define the most successful lawyers and law firms, and technical legal ability will become simply a threshold skill. Given that most of those who select into the profession do so because they are naturally equipped with an abundance of the latter skills and a dearth of the former skills, recruiters will need to start attracting a quite different type of candidate going forward.  And Learning & Development professionals will need to be hard at work in the meantime to try and fill the gaps.

• In a fight for market share, brand and communication professionals will start to come to the fore in a fight for both client and talent attention.

• Mental health, wellbeing and differences in intergenerational expectations are major headline concerns now in the profession, and will only become magnified with potentially very material changes in what we do, how we do it and levels of competition. Every lawyer has to take personal responsibility for managing this as best they can on the ground, individually and collectively, but not much will likely change until partners and partnerships make better collective decisions about redefining what success looks like for them. This will be the ultimate strategic leadership challenge for most firms, but in the meantime, HR and L&D professionals have to be at the forefront of both raising awareness and managing the risks as best they can.

This next period is going to be a challenging time for everyone, not least business services professionals. But it will also be a period of enormous opportunity, when lawyers and law firms will be crying out for a new breed of business services professional to help them map out and then steer their way through these choppier waters. And we will all be the better for it.