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COO Outlook – Five Challenges Facing Law Firms in the Second Half of 2017

Recently, we spoke with a group of leading law firm Chief Operating Officers to see what trends they expect to continue and evolve through the second half of 2017, and the potential challenges and opportunities they envisioned as a result. Several consistent themes emerged:

Innovation & Artificial Intelligence
Beyond the platitudes typically associated with the term "innovation," one COO - from an Am Law 100 firm regarded as an "early adopter" - describes their firm's approach as "a dialogue around trying to be responsive to new technologies and ideas, but not irresponsible." Characterizing their mentality further, they are "betting on the technologies that are 'ready,' or understanding that when we bet 'early' on technology, it's not going to be perfect, to begin with."

Most see the burgeoning field of artificial intelligence as an intriguing concept with practical, though limited, current applications. "It's not really a robot associate - not yet," but representing "a technology at some point, not too far in the future, that is absolutely going to take hold of the legal arena."

Firms have found success implementing artificial intelligence solutions, particularly in the areas of document analysis and similar routinized work. However, that success represents a double-edged sword. Some predict that Ross, Watson, and other artificial intelligence adaptations could erode, rather than improve, law firm profitability - if in-house General Counsel offices displace the sub-set of lower-end legal services currently provided by law firms, by implementing artificial intelligence solutions on their own.

The highest tier firms and more sophisticated legal services, in general, are not currently feeling the competitive pressure of being displaced by artificial intelligence. But as one COO from a leading New York- headquartered firm notes, "while the 'water' hasn't risen to a level where we feel it's going to breach something that we're doing, we're still very much keeping an eye on it."

The Economic & Competitive Landscape
Another variation noted on that theme, is how advanced collaboration technology both benefits traditional law firms, but also provides new competition - in particular, the rise of the virtual law firm, or on-call legal networks/task force legal teams that provide project-based, transaction-based, or small-scale litigation-based services. Virtual law firms can charge rates far lower than their brick and mortar counterparts because they have limited overhead, the flexibility of scale and low stranded infrastructure costs.

These new hybrid business models could further push segmentation of how clients "buy" legal services in the coming years. As one COO from major, multinational firm states, "Sophisticated, large-scale transactions and highly consequential litigation will still go to 'traditional' law firms for the foreseeable future. However, the question is, will 'traditional' law firms shrink their spectrum of services as the amount of price-insensitive work gets smaller and smaller?"

Brexit and European political and financial market uncertainty are topics receiving significant analysis and focus. The COO from another global firm that has experienced significant European growth the past few years relates: "Do we adjust our commitment resources, the size that we have now? Do we adjust or change our growth strategy on the basis of where things stand, or do we stay the course?" Relatedly, "How will the US political situation, in particular on the trade front, impact cross-border transactional activity - whether in Latin America, Canada, China or wherever the case may be?" Some COO's are focusing on the opportunity potential, for example, in international arbitration, and the advantages of a "contrarian" approach, to be in a position to stake out market positions where and when competitors might recede.

Pricing & Client Efficiencies
A recurring concept connected to the competitive landscape is the importance, rise in sophistication, and strategic integration of a firm's pricing capabilities, and its corresponding elevation from a "back room" function to a "C-level" leadership role. Senior pricing executives' involvement ranges from coaching partners to negotiating directly with clients on behalf of the firm and ensuring that internal expertise exists to enable partners to more effectively engage with clients. Many law firms have or are in the process of, hiring pricing executives from outside the legal industry.

Even with these efforts, one US-headquartered, international firm's COO notes "still, most partners continue to focus solely on top-line revenue and have a relatively little understanding about the bottom line." An issue that will likely continue "until firms get more sophisticated about measuring and evaluating profitability, and establishing a direct link between the profitable operation of matters and partner compensation."

Real Estate, Mobility & Cyber Security
Another constant in relation to profitability is real estate - "an area of huge potential cost saving for probably every firm." One COO, with a significant number of global offices, indicates "some offices are doing a good job controlling costs. But motivating partners to give up their 300 square-foot window offices, even though 40 to 50 percent of those offices sit empty every day, is next to impossible." Many concede that the concept of "hoteling" offices - more common in the Big Four and other professional services firms - does not translate well to the legal industry. The consensus view is that the legal profession is still an "apprentice-master relationship," where associates would miss out on the development of working side-by-side consistently with partners and fellow lawyers, with that level of engagement being a vital component of a firm's success.

Another Am Law 100 global COO emphasizes leveraging investment in real estate as an employee engagement tool. "We are highly focused on creating great workspaces and building strong engagement with our employee base through the construct of the workspace," she said. This includes having "a consistent global design, look, and feel, learning from different properties around the world, balancing private and collaborative spaces, and soliciting ideas from all levels on how to create the best possible, structural work environment."

In addition to the benefits and challenges of "fixed" real estate, a common challenge is how to strike the right balance between mobility - enabling legal professionals to work remotely not just from home offices, but from client locations, on the road, etc. - and ensuring proper cyber security safeguards. From restricting access to personal email from firm networks, banning certain types of file sharing applications on mobile devices, and other preventative actions, a tension exists between providing firm stakeholders with the technological capability to "take their office with them" and the need for the highest levels of information security.

The adage that no matter how much you prepare and protect, "it's not a matter of 'IF' a cyber security incident will occur, but 'WHEN'" means that firms must anticipate and plan for the worst. Many COOs noted that they have robust communications plans in place - as a critical part of their business continuity and disaster planning efforts - to quickly and appropriately convey relevant information to clients and other key stakeholders, in the event of a cybersecurity emergency.

2017 has been a unique and highly consequential year in many regards. The developments that have unfolded thus far may have a lasting impact, beyond what we anticipate. The legal industry, in turn, will continue to adapt and evolve in both predictable and unpredictable ways in the months and years ahead.

You may also like: As the Billable Hour Model Fades Away, Senior Pricing Execs Emerge as Legal Industry Profitability Czars by William V. Lepiesza

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