PwC's Law Firm Services Navigating uncertainty - Key issues facing law firms and strategies for growth

Transcription

1 An overview of the discussions and workshops held at Law Firm Services 6 th Annual Global Forum, May 9 to May 11, 2016 PwC's Law Firm Services Navigating uncertainty - Key issues facing law firms and strategies for growth

2 A discussion of the top issues facing law firms today The 6 th Annual Law Firm Services Global Forum brought together leading law firm executives and partners from across the United States and the world to discuss the key issues impacting law firms at a time of unprecedented global uncertainty. The Forum, held over three days, featured a special focus on cyber and related risk topics, alongside over 38 workshops and classes providing insight and guidance on some of the most significant challenges facing law firms today. A diverse set of PwC specialists, speakers and panelists with deep knowledge in cyber risk, pricing, data analytics, M&A, partner compensation, international and domestic tax, and other critical areas explored the opportunities and challenges ahead for law firms. They provided a range of perspectives on the specific impact of key issues and the strategic imperatives that will shape the future of the industry. The keynote address for this year s Forum was given by Rohit Kumar, Principal and Co-Leader of PwC s Washington National Tax Services Tax Policy Services Group. Kumar, who spent more than ten years on Capitol Hill in key leadership roles for the Senate Republicans including serving as Deputy Chief of Staff and Director of Policy for US Senate Republican Leader Mitch McConnell, spoke on The shifting political and legislative landscape - what to expect in this election year? Shedding light on the economic, regulatory, competitive and technological environment in which firms are currently operating, the Forum s topics and discussions provided a clear path forward for the law firm industry to evolve and ultimately prosper. The major themes of the Forum included: Cybersecurity and privacy The issue of cyber security risk in the legal industry has been discussed for a number of years. However, the rate at which cyber-attacks are increasing has driven a heightened urgency around the issue. As has been demonstrated by recent high profile breaches and information leaks, data within law firms is exceptionally valuable, with the potential to expose both sensitive firm and client information. This presents a potentially catastrophic event for any firm. Recent discussions with firms have revealed a fundamental lack of understanding around how and where confidential data is stored, and the security risk posed by any number of parties associated with the firm, ranging from vendors to employees all the way to nation states. Developing awareness of where potential threats exist is the first step towards firms being able to develop a cyber-risk plan, which in itself will likely reduce the impact of breaches. In developing an effective system to prevent significant cyber events, firms should investigate all viable options including solutions such as cloud computing and external support services provided by experts in the field. Such services do not adversely impact a law firm's clients -- every state bar to have considered the use of cloud services has issued an ethics opinion approving its use. However one chooses to proceed, the message to the industry is clear cyber can t be ignored, and it s time to get prepared. PwC 1

3 Global events Rarely has there been a time where the global business environment presented such uncertainty, as the United Kingdom considers an exit from the European Union (EU) and the US presidential election outcome threatens to impact the way in which the world conducts cross-border business and trade. Both issues may have significant and long-lasting impact on US law firms conducting international business. If the status quo remains, and the UK continues its membership of the EU and the US maintains the majority of its trade links, this will help create some certainty and reinvigorate the flow of crossborder transactions. On the flip-side, while a Brexit may result in a flurry of demand for legal services in the short-term, this scenario will nevertheless ensure that global uncertainty around trade agreements, rules and regulations remain, and transaction volumes will likely remain stagnant. However, law firms can expect to be involved as governments and companies try to wrestle with the aftermath new world as it relates to trade agreements, immigration and other issues should the exit come to reality. It is expected that this outcome will be somewhat replicated if the new US Administration decides to wind-back the country s participation in global and regional trade agreements. While ambiguity around key global events is causing some angst amongst the legal fraternity, it is important that firms stick to focusing on their long-term strategic objectives, while also considering their response in preparation for the various scenarios playing out. Continued evolution of pricing models The commoditization of services in the legal industry has been an ongoing theme for a number of years, and it appears that firms have now taken significant steps to adapt to this new playing field by focusing their efforts on providing high-value specialty offerings to clients. Subdued demand continues to be driven by an increasing number of companies expanding their in-house legal capabilities. The rise in Alternative Fee Arrangements (AFA) occurred in direct response to this increased competition and pricing pressure. This trend, however, seems to have stabilized somewhat recently. The unpredictability of some practices such as M&A also restricts the ability for firms to roll-out an extensive AFA structure. In order to improve the reliability of AFA s, firms are increasingly harnessing the power of data analytics to develop customized pricing models for individual client matters. As firms continue to raise rates on an annual basis, ongoing pricing and fee conversations have the potential to complicate client relationships. In this environment, it is critical that firms primary focus be on providing high quality service to their clients to ensure they can justify their pricing structures. PwC 2

4 Compensation and lateral moves The pressure of lock step compensation continues as some firms have lost talented partners to firms that compensate on a meritocracy system. This has resulted in some lock step firms adopting modified lock step compensation models that feature some lock step elements coupled with bonus plans to help address the risk of losing highly talented partners. Other firms are taking a different approach and are aggressively pursuing staff by paying above-market rates to attract talent. Most of this activity is particularly at the partner level. There is also an increasing belief that partner compensation should not be strictly tied to revenue generation. Rather, it should take into account a myriad of other factors including the individual s commitment to progressing firm initiatives such as profitability, client relationship management, diversity, inclusion, pro-bono work and culture. Innovation in the face of disruption The emergence of non-traditional law firms into the market is an ongoing evolution, however, it s now happening more quickly than ever before. In order to keep pace with new market entrants, firms must rethink how they look at functions such as talent management, strategy and client service. Law firms continue to trail corporate America when it comes to innovation, so it s important that the profession learn from the way in which other industries conduct business. The accounting profession, for example, has made a conscious move to ensure that all clients are engaged by the firm, as opposed to being quarantined to a specific partner relationship. This is an initiative that would greatly help law firms protect revenue in the event of lateral moves. Investments in business areas such as CRM (Client Relationship Management) will allow firms to develop a differentiated offering at a time when they are facing increased pricing and competitive pressure. In order to truly differentiate, firms are going to have to be more proactive in improving their Customer Relationship Management function. David Gaulin, PwC Partner, National Leader, US Law Firm Services Mergers and consolidation among law firms, meanwhile, are expected to continue as firms expand into new markets, add new capabilities, look to grow and even to remain relevant in the marketplace. However, unlike what has happened in the UK, and given the fact that the ABA did not take a position on opening the US legal industry to investors, there is not expected to be an influx of outside investment into US law firms. PwC 3

5 Domestic policy and regulatory issues Firms continue to take a wait-and-see approach to any potential shift from cash to accrual-based tax reporting, and this status is likely to continue until after the US election. The industry should remain cognizant of the impact such a move would have on operations. High level strategies should be developed to adapt to potential reporting changes and partners personal tax implications in the event that the legislation is ultimately passed. As part of ongoing forward planning, firms should also be assessing the potential effects associated with policy shifts in the areas of fiscal, social, immigration, climate change and trade that may come about following the election of a new US President. While these issues may appear on the surface to be relatively immaterial to law firms, each decision has the potential to have widespread ramifications on the local and global economic environment which impacts law firms. There is a sense that the US is becoming more inward looking and our willingness to engage globally is receding. Ironically, at the same time the world is getting ever smaller, future trade policy decisions will have significant economic impact and will affect the standing of the US on the world stage. Rohit Kumar, Principal and Co-Leader of PwC s Washington National Tax Services (WNTS) Tax Policy Services Group Managing a new generation of talent As millennials continue to make up a larger share of headcount within law firms, it is time for senior partners and management to undertake a fundamental shift in attitude when it comes to working with millennials and the talent management function generally. While the millennial generation is often viewed as a special area of focus for firms to deal with, the attributes of doing good, entitlement and the need to feel a connection to one s work are synonymous with many generations before them. What s different however, is the manner in which the millennials go about it and their responses when they feel their employers are not listening or worse yet, don t care. As such, firm leadership and its partners should focus on and embrace these issues and understand how they impact their workforce. As talent innovation continues to lag business innovation, talent management programs should be designed to best serve the needs of employees, not the business. This includes ensuring siloed internal HR functions are not inflicted upon staff. Instead, it s important that employees have a seamless experience when assistance is required. Firms don t actually have a millennial problem, they have a baby-boomer problem. The issue is in the way boomers view millennials. We should embrace and nurture the traits of this generation and not talk about them like they re a drawback. Rik Reppe, PwC Partner, Customer and Digital Experience OECD/BEPS reporting Tax authorities and cash-strapped governments have focused on enhanced enforcement of transfer pricing to raise revenues around the globe and are demanding documentation, often with little time for firms to respond to such requests. Accordingly, the Organization for Economic Cooperation and Development ("OECD") Base Erosion and Profit Shifting ("BEPS") project was created to address concerns regarding base erosion and to provide more tax transparency to countries worldwide. More law firms are accelerating the review of their transfer pricing policies and working now to implement the documentation standards required under the OECD/BEPS project. Conclusion An uncertain political and economic environment combined with a disrupted legal industry is forcing firms to innovate in order to position themselves for growth. Strategy, execution, talent management, technology and pricing remain key areas by which firms must continue to adapt. The Forum saw panelists and specialists emphasize that it will be those firms that develop long-term strategies and continue to evolve in line with changing market dynamics that will ultimately succeed. PwC 4

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