The fragmentation of the Australian legal market continues unabated, presenting competitive options for clients beyond the traditional "tiered market". This unbundling and segmenting of commercial legal services is an ongoing process which can probably be traced back some 40 years when lawyers started delineating who litigated and who did not.  The compass of business models through which legal services are sold provide clients with more options (and new attendant challenges) than ever before – certainly more interesting options than “small, medium and large”.  We no longer observe the neatly tiered market structure that has been the norm since large single city firms combined to form national law firms through the 80’s and early 90’s.The successful development of new firms and the arrival of new entrants is clear enough, but to take a view on whether recent changes are permanent or likely to wither, it is worth considering what has facilitated these ongoing developments.

BigLaw power

As recently as five years ago most of the premium commercial legal work in Australia was undertaken within the large national firms – they had specialist lawyers, deep resources and the clients that needed both. Their pricing sat within a reasonably narrow band and the service delivery model – relying in part on a partner to associate ratio in the order of 1:4 or higher was largely uniform. Corporations which required specialist expertise across a number of practice areas, and occasionally sizeable teams, never felt they could stray far from the major firms.But what happens when the experts opt out of the large firms – not a trickle but a regular healthy flow, as has been the case now in Australia over recent years. Substitutes emerge. Expertise relocates and there are opportunities to refashion the delivery model. (The migration of lawyers being driven mostly by dissatisfaction with the “partner tournament’ model of the large law firms and the realisation that alternative firms can compete for much of the same work). As the market fragments new possibilities emerge. Consider for example the pairing of an LPO with a boutique firm and the work scope permutations such a combination permits.

First generation substitutes

What we see now in Australia is the first generation of a suite of substitutes - low leverage national firms (such as Johnson Winter & Slattery), low leverage single city firms, large internal legal teams (frequently with high levels of specialisation), firms offering specialist lawyers for short term placements, and international firms - all providing specialist level expertise at what would typically be regarded as the premium end of the market. None of them could have gained a foothold but for the diaspora of experts once firmly ensconced in the large national firms. Now, the alumni of large firms are proving that alternative business and service delivery models are effective in competing with longer established participants – with everything up for grabs save for perhaps the infrequent mega deals requiring armies of experts.

The movement  of expertise

The movement of expertise from the large firms is important here – it is not abating and it means that the substitutes are not a passing whimsy. What we are seeing in Australia are permanent changes. The opportunities attracting experts from the large national firms (and now multinational firms) are supported by the presence of LPO firms and internal counsel who have come to acquire a taste for the range of choices – some even requiring their traditional firms to link with an LPO provider.The large “one-stop shop” may have been the best law firm model in Australia once but that was before corporations greatly enhanced their internal legal capability and expert lawyers realised there were alternative service delivery models (and alternative business structures). 

Corporates responding to wider choice

In responding to a broader range of options, corporations are reshaping legal panels and their own internal resources.  In this buyers’ market they are further demanding the unbundling of legal services. Labour intensive document reviews and routine work is sent to highly leveraged firms who have positioned themselves to handle such work efficiently, and operational work or predictable specialist needs are met by  internal specialists. Short term needs are met through secondments or the use of short term contractors, and then a range of firms vie for high value bespoke transactions and disputes which require the marshalling of a range of capabilities.

General counsel  need to think differently

Although clients can benefit from the options now available to them, and the price competitiveness and efficiency that flows from that (expect to see increasing price variability), they too need to approach things differently if they are to take full advantage of the range of substitutes.Of course to capture the benefit of these opportunities takes time and resources. Whether co-ordination costs (and attendant risks) are borne by a client directly or through the engagement of one or more external firms will be a question many general counsel will grapple with, particularly when an assessment of capabilities across jurisdictions is thrown into the mix.

The influx of foreign law firms

How the Australian market will settle down remains unclear, in part because we have not seen the end of the dance party being stirred up by foreign firms who think Australian offices can serve as a staging post for Asian operations – or Australian firms who think combining with an international firm provides a growth strategy not otherwise available in a mature domestic market with intensifying competition. For commercial law firms in Australia the emergent theme is to be clear about what you offer and price the offering appropriately. For example, is it genuine specialist expertise (the kind not easily replicated in-house by more than a handful of firms), large leveraged teams and the ability to digest mountains of documents, the efficient processing of predictable operational matters, generalist commercial capability, or a sector focus (yet another form of specialisation)? Whichever it might be it is going to be tough to convince clients that it should all be tackled under one roof. Sophisticated buyers know how to judge the complexity of legal services and how to segment the way they buy them. The market has fragmented. The ‘exclusive domain’ of the top tier is shrinking, in part driven by economic conditions and an appreciation by clients of the alternatives.

Peter Slattery is managing partner of Johnson Winter & Slattery (with thanks to Peter Deegan of L’Estrange Group for his comments)