TOP TRENDS IN THE LEGAL INDUSTRY Industry Knowledge

TOP TRENDS IN THE LEGAL INDUSTRY Industry Knowledge a Strategic imperative BCLMA Managing Partner Luncheon Auberge Vancouver Hotel November 1, 2016 Stephen Mabey 902. 472. 3032 26 Wilewood Drive - RR # 2, Falmouth, Nova Scotia B 0 P 1 L 0, Canada 1

SESSION FACILITATOR Stephen Mabey CPA, CA Managing Director Applied Strategies, Inc. (Come From Away) www. appliedstrategies. ca • Fellow of the College of Law Practice Management (one of 13 Canadians) • More than 29 years in a senior management role with “Atlantic Canada’s Law Firm” • Over 80 articles on law firm management published in legal periodicals in the US & Canada • Presented at conferences put on by various legal associations OBA, CBA, LMA, ALA, MPF, BCLMA 2

LEGAL DISCLAIMER First Take Away Steve www. appliedstrategies. ca 3

Lawyers should not fear the changes going on in the legal profession today, but rather should really fear their inability to change. - Anonymous - 4 - -4 - 4

NO LONGER A TREND RATHER A FACT OF LIFE: COMPLACENCY Complacency Inducing Phrases • What are the other firms doing? • That is not the way we have done it in the past! • The Partners will never approve it! • You want me to pay taxes on money I won’t receive! • I am not the issue it is the other partners! • My clients …. . www. appliedstrategies. ca 5

THE GREAT WHAT IF? www. appliedstrategies. ca 6

TRENDS IN THE LEGAL INDUSTRY • Client focus on cyber security • Increased competition of internet delivered legal services • Productivity - too much supply – too little demand • Continuous pricing competition • Creeping commoditization of legal work www. appliedstrategies. ca 7

TRENDS IN THE LEGAL INDUSTRY • Succession Planning • Millennials changing the perspective of the profession • Innovation • Expanded field of competitors • Delivery of legal services www. appliedstrategies. ca 8

CYBER SECURITY • 2014 Cost of Cyber Crime Study – cost has grown by 96% over past 5 years in the US • 2014 an ABA survey reported viruses more common that encryption e. g. Goodwin Proctor estimates they are hit with 400 to 500 third-party bots or denial of service PER WEEK • Law firms are seen as the weak spot in a corporation’s data security arrangements with 89% of attorneys surveyed using unencrypted, unsecure emails by default for client communication. This includes data on unsecured thumb drives and unencrypted email on unsecure i. Pads. This is why hackers target law firms for intellectual property data and trade secrets. • Clients are starting to react! For example CIBC requires a specific security on all lawyers’ cell phones that work on their files • Estimates place the cost of cybercrime at between $445 billion to $2 trillion worldwide www. appliedstrategies. ca 9

INTERNET IN PERSPECTIVE – CANADIAN THAT IS Two legal tech start up incubators in Toronto: • Legal X@ Ma. Rs • Legal Innovation Zone In Toronto currently over www. appliedstrategies. ca 60 legal tech start-ups! 10

INCREASED COMPETITION VIA THE INTERNET Do-It-Yourself • Legal. Zoom – Offers low-cost legal forms online in the areas of small business, wills & trusts, and personal & family, trademarks & IP, taxes, etc. • Rocket Lawyer – Legal. Zoom competitor that offers assistance with legal forms for consumers and small businesses, in areas like family, estate planning, landlordtenant, bankruptcy, personal injury, incorporation, business operations, and IP. Offers referrals for lawyers to provide legal services at prenegotiated rates. www. appliedstrategies. ca Do-It-Yourself • Clerky – Helps start-ups quickly complete necessary legal work (e. g. , incorporation, employee documents, NDAs, etc. ) with a forms library, automatic document assembly, online signature capabilities, and more. • Shake – Mobile app that generates contracts (e. g. , related to freelancing, confidentiality, buying/selling, renting, and loaning money) based on answers you give to questions it asks. 11

INCREASED COMPETITION VIA THE INTERNET Finding Legal Services • • Plain. Legal – Businesses and startups can describe a legal issue in plain English on the Plain. Legal site and be connected to a database of vetted lawyers who can help with that legal issue. The business and lawyer can then work together through Plain. Legal‘s workflow tools, and the business can choose to pay the lawyer through Plain. Legal‘s platform. Daily General Counsel – A startup whose lawyers play the role of inhouse counsel for a day, solving as many problems as they can in eight hours for a flat fee of $1, 500. www. appliedstrategies. ca Finding Legal Services • Legal Hero –Provides vetted lawyers for small businesses at affordable, fixed prices. Services cover common areas like intellectual property, real estate, employment, and immigration law. Clients can track the status of their project on Legal Hero’s dashboard, and aren’t charged until the project is complete. • Up. Counsel – Customers with small business legal needs can post jobs on this site for lawyers to bid on. Customers can also track their matters and pay for services on the site. 12

GROWTH IN DEMAND FOR LAW FIRM SERVICES Y/Y% Change 1. 2 9% 1 6% Growth 0. 8 3% 0. 6 0% 0. 4 -3% 0. 2 -6% 0 -9% Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Oct + Nov 2007 2008 2009 2010 2011 2012 2013 2016 Report on the State of the Legal Market All segments Source: Thomson Reuters Peer Monitor www. appliedstrategies. ca 2014 2015

BALANCE OF DEMAND CAPACITY 2% 1 135 1% 130 0. 8 0% 125 0. 6 -1% 120 0. 4 -2% 115 0. 2 -3% 0 -4% Q 1 Q 2 Q 3 Q 4 Q 1 2012 Q 3 2013 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 2014 2015 2016 Report on the State of the Legal Market Demand growth Source: Thomson Reuters Peer Monitor www. appliedstrategies. ca Lawyer growth Q 3 Productivity Q 4+ Oct Nov 110 Billable Hours per Month 140 Productivity Lawyer & demand growth 1. 2 3%

PRICING Pricing in the client’s mind is normally driven by one of three perspectives: • Looking to simply mitigate its risk; • Cost focused; or • Value focused. The following chart – which I adapted from my colleague Stuart Dodds - Director, Global Pricing and Legal Project Management, Baker & Mc. Kenzie LLP - lays out a number of pricing arrangements and the sense of focus that is driving the clients to embrace them. www. appliedstrategies. ca 15

Client Driven Pricing Arrangements Hourly Rates Blended Hourly Rates Capped Fees Monthly/ Annual Retainer Reverse/ Contingent Fees More Traditional Less Traditional Discounted Hourly Rate “(Minimum) Collar & (Maximum) Cap” “Mitigation of Risk” Fixed Fees “Cost-Focused” “Performancebased Billing “Value Pricing” “Value. Focused” - 16 - -

COMMODITIZATION OF LEGAL SERVICES Legal services fall into three fairly broad categories where the demand will be differently impacted by price: • Unique Services are those which require a specialised knowledge. Clients will seek specific practitioners based on their expertise. These unique services are price inelastic, meaning price will have very little impact on demand - in effect, lawyers practising in these areas are price setters. • Branded Work is where the firm or a practice group has a specialisation or you have a relationship with your clients that extend beyond price. Clients will be prepared to pay a premium for this expertise or relationship. • Commodity Services are process based. In the eyes of clients it is very difficult to demonstrate value based on the work performed. These services have the lowest barrier to entry (in that they are not complex) hence there a significant number of providers in the market. www. appliedstrategies. ca 17

COMMODITIZING OF LEGAL SERVICES Unique services • Knowledge based • Few providers in the market $ Branded work • Firm has expertise in a particular area of law Cost of production Commodity services • Process work • Many providers in the market Quality demanded www. appliedstrategies. ca

WHAT HAS CAUSED THE CONTINUED COMMODITIZATION OF LEGAL SERVICES? There are three elements that have converged on the legal profession at the same time that clients are flexing their financial power (something that have always had but didn’t understand they did). They are: 1. Over supply of lawyers 2. Technology – automation of parts of legal services reduces costs and eventually creates a “race to the bottom” scenario 3. Fixed fee pricing – makes it easy for clients to do comparison shopping www. appliedstrategies. ca 19

WHY IS SUCCESSION PLANNING GETTING SO MUCH ATTENTION? Did you know? An analysis of US and Canadian Bar Demographics conducted By Altman Weil found 30% to 40% of practicing lawyers are at an age where they are beginning to retire, phase down or contemplate phasing down www. appliedstrategies. ca 20

SOME EVEN THINK THE SUCCESSION TRAIN HAS ALREADY LEFT THE STATION “Many of us in the commentarial tried to persuade law firms in this direction; not many firms tried, and few succeeded. Now, because succession planning didn’t occur, we’re entering a period of “succession management” — and you can read that in the same sense as “crisis management” or “disaster management. ” This will prove to be a significant, and ultimately transformative, development. ” – Jordan Furlong – September 2016 www. appliedstrategies. ca 21

PERCENTAGE OF FIRM REVENUE CONTROLLED BY PARTNERS AGE 60 OR OLDER 13. 2% 12. 8% 11. 4% 11. 0% 9. 6% 8. 5% 7. 8% 7. 5% Median: 30% 3. 9% 4. 3% 3. 6% 2. 5% 1. 1% 0% 2. 5% 0. 4% 0. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 5% to 10% Succession planning not yet critical unless key clients are involved. 15% to 25% 30% to 40% Over 40% Retiring partners will impact the bottom line. Start planning a systematic transition process. Retiring partners The firm may be captive to its senior lawyers. could damage the Immediate firm's future intervention is required. prospects. Begin actively managing transitions now. Partner succession Diagnostic guidelines Source: 2015 Altman Weil, Inc. www. appliedstrategies. ca 22

PERCENTAGE OF REVENUE CONTROLLED BY LAW FIRM PARTNERS AGE 60 OR OLDER 32. 7% 28. 0% 18. 2% 19. 2% Percentage of revenue controlled by partners age 60 or older in law firms with 50 -99 lawyers 1. 9% www. appliedstrategies. ca 0% 5% - 10% 15% - 25% 30% - 40% Over 40% Partner succession Not yet critical Start planning Manage actively Intervene immediately

BARRISTERS' SOCIETY TARGETS AGING LAWYERS • Succession Plan Task Force struck to help growing number of aging lawyers come up with succession plans • 30% of practising lawyers in Nova Scotia with 27 plus years at the bar • In response to complaints, access to justice and a growing dearth of lawyers in rural areas www. appliedstrategies. ca 24

SO WHAT IS STOPPING FIRMS (WHICH ARE MADE UP OF BRIGHTER THAN AVERAGE FOLKS) Inertia or aversion to planning Historically, things have worked out over time; we’ve never had to plan this before; we’re busy enough with the day-to-day pressures of serving our clients and running our business without worrying about what might happen; Concern over lawyer retention We have seniors who are highly productive, at the top of their profession, and they are not receptive to discussing phase downs, transitioning their clients, or becoming lame ducks – we don’t want to antagonize productive partners; �Concern over client retention We’ve been going above and beyond to retain and serve our clients, be completely reliable and responsive; if we broach the topic of transition, we are by definition, raising the prospect of change and potential instability; www. appliedstrategies. ca 25

SO WHAT IS STOPPING FIRMS (WHICH ARE MADE UP OF BRIGHTER THAN AVERAGE FOLKS) Lack of viable successor(s) Our next-in-line, or our next generation, might not have the high-level expertise, client and industry knowledge, or the requisite “fire in the belly” to take the baton; Over-reliance on compensation systems Our (formulaic or subjective) compensation system provides for decreasing compensation as individuals reduce production—therefore, our transitions are covered automatically www. appliedstrategies. ca 26

WHY MUST YOU OVERCOME THE OBSTACLES? Succession planning is essential for firms that want to ensure the continuation of a strong, healthy firm for many years to come. Practitioners deserve to be rewarded for their hard work in building a practice within the firm. Likewise, the new generation of partners waiting in the wings deserves the opportunity to grow within the firm. www. appliedstrategies. ca 27

THE START, THE MIDDLE AND THE END SOLUTION COMMUNICATION Some simple conversational starters: Do you have a plan for your retirement from the full-time practice of law? If you do, what specifically have you considered to date? What support do you need from the firm to ensure a smooth transition for yourself and for your practice? What attributes, experience, skills and knowledge do you believe your successor needs to possess? If you have someone in mind to handle some or all of your clients, can you determine areas in which this person will need further development, training, coaching or mentoring? If you don’t have anyone in mind now, let’s determine a strategy and timeline in which we can find and develop your successor. www. appliedstrategies. ca 28

MILLENNIALS ARE CHANGING THE PERSPECTIVE OF THE PROFESSION The Crux of the Matter We can misspend a lot of energy debating if this new generation has our “same work ethic” or “our commitment and loyalty”, but frankly it doesn’t matter if they do or they don’t. The reality is that 100 per cent of a law firm’s assets (its lawyers) walk out of the door every night – you need to understand what brings them back in the morning. www. appliedstrategies. ca

MANAGING MILLENNIALS Somethings to keep in mind when you are seeking an understanding of the do’s and don’ts for managing your Millennials! • Realize they will probably leave – they entered the profession when many firms through their lay offs confirmed hard work / loyalty is not enough! • Feedback is critical and its absence is unacceptable – they are use to instant gratification and quick feedback (internet and Nintendo). • There is a difference between working hard for meaning and to meet expectations – highest educated generation results in a desire to work for a purpose and know their education is paying off. www. appliedstrategies. ca

MANAGING MILLENNIALS Somethings to keep in mind when you are seeking an understanding of the do’s and don’ts for managing your Millennials! • Embrace their love of technology – they have been at the forefront of every technological change in their personal life and they want that in their work life! • Give them flexibility in doing their work – they are not interested in “getting a good nanny” but rather opportunities to work from home; Starbucks; ducking out early; squeezing in a workout in the middle of the day! • Transparency, clarity, openness – if you are to be their leader they want accessibility and answers to pointed questions! www. appliedstrategies. ca

INNOVATION “We can freely admit that the idea of innovation is easy — it’s the work of a moment to imagine any number of ways in which law firm operations could be improved. Implementation — the successful, sustainable execution of the innovation — that’s what’s hard. And the law firm landscape is littered with the remains of many failed innovations that couldn’t cross the bridge from idea to implementation. ” _ Jordan Furlong www. appliedstrategies. ca 32

HOW TO EXECUTE YOUR INNOVATIONS Successful Approach • Have an fact based answer to the fundamental question that will be asked - Do clients really want innovation, or do they just want cheaper legal services? • Everything you do must be focussed on driving the success of the firm's core business activities - Oh and don’t sell to hard. Lawyers don’t like it. You have to find the right moment to pitch an idea – when a lawyer needs specific help. www. appliedstrategies. ca The Alternative 33

HOW TO EXECUTE YOUR INNOVATIONS Successful Approach • Change resistance that comes from the top can be the most damaging, because it has the most ability to derail a change initiative – you must get to the root of the problem, and address it head-on, as the only way you'll be able to keep a project on-track for the positive results you've worked for. • Engage the non-lawyers in your firm in the “what if process” – they bring more objectivity to the exercise and more likely to be on the execution team so the earlier the involvement the higher likelihood of success! www. appliedstrategies. ca Common Innovation Department in Law Firms 34

INNOVATION – IT IS REAL! A Real Life Canadian Example Students at the University of Toronto were asked to find a useful application for IBM’s Watson, the cognitive technology famous for answering trivia questions on television show Jeopardy. They came up with Ross, a legal research service. Lawyers ask Ross legal questions, which it answers by sifting through huge quantities of legal documents, cases and legislation. Ross’s answers are sophisticated: they include legal citations and links to articles for further reading. Because Watson has the ability to learn, Ross refines its responses based on experience. www. appliedstrategies. ca Such a tool could do much of the work that has been left to junior lawyers — work that, as billable hours, has traditionally been profitable. The Toronto group, which has now relocated to the Silicon Valley, has launch a company that offers Ross’s services. The range of users runs from solo practitioners to mega firms like Dentons, Latham & Watkins and Baker. Hostetler. 35

INNOVATION – IT IS REAL! A Real Life Canadian Example Legal Process Remapping (Field Law) • Provided a training session on the what, why and how of legal process remapping • Proceeding on a practice group basis (as not all will benefit as much) • Innovation Partner (Stewart Mc. Kelvey) • Took a full time practising corporate partner out of practice and made him responsible for innovations in all practice areas in the delivery of legal services • A new internal portal that both enhances access to intellectual capital but also to collaboration on files • Equity investment in a US technology company to assist in the delivery of innovations to various practice groups Hired a full time Director skilled in Lean Six Sigma www. appliedstrategies. ca 36

WHO ARE YOU COMPETING WITH TODAY Both the Numbers and Nature of Your Competitors are Changing • The Big “ 4” accounting firms - So far, they have focused on mid-tier, process-oriented work rather than the big deals and lawsuits that elite law firms chase – oops that is where most law firms live! • In-house counsel - Close to twothirds of chief legal officers are now “in-sourcing” legal work that they used to send out to law firms or other service providers, according to a report released earlier this year by the Association of Corporate Counsel, an industry group. www. appliedstrategies. ca 37

WHO ARE YOU COMPETING WITH TODAY Both the Numbers and Nature of Your Competitors are Changing • Large technology companies focused on artificial intelligence – Google, IBM, Thompson Reuters, etc. are all working with artificial intelligence that will have a direct impact on the delivery of legal services. www. appliedstrategies. ca 38

DELIVERY OF LEGAL SERVICES “What lawyers actually do has not changed very much, however, there is a tectonic shift going on in terms of the way the services that they are performing are being delivered” - Mark Cohen , Legal Mosaic www. appliedstrategies. ca

DELIVERY OF LEGAL SERVICES We have spoken about how legal services will increasingly be delivered – via advanced technology and we have even spoken a bit of the who – technology companies; CPA firms; and in-house counsel. But there are others who will be directly involved (and are already) in the delivery of new and more cost effective legal services in the not too distant future including: www. appliedstrategies. ca 40

DELIVERY OF LEGAL SERVICES Smaller law firms are poised to “eat Big law’s lunch” - One of the misconceptions typically maintained in both business and law is the idea that being smaller means you are unable to compete with larger organizations. In reality, it comes down to thinking big in terms of how you’ll approach your practice, instead of feeling outgunned by the number of lawyers and areas of practice available in these larger firms. www. appliedstrategies. ca 41

DELIVERY OF LEGAL SERVICES Lawyers Are Becoming Freelancers - Transforming the delivery of legal services is the fact that many lawyers are becoming independent contractors. In recent years we’ve seen the solo/freelance segment grow to what now represents the largest portion of the market, dwarfing the in-house corporate and law firm segments. More and more clients are willing to hire independent lawyers as their loyalty to law firm brands ebb. www. appliedstrategies. ca 42

DELIVERY OF LEGAL SERVICES Rise of the Virtual Law Practice - Along with the rise of freelance lawyers, we have also seen the rise of the virtual law practice. Technology liberates lawyers to work remotely more often, a trend which is embraced by today’s lawyers, especially millennial lawyers, who prefer to collaborate online versus in person. www. appliedstrategies. ca 43

DELIVERY OF LEGAL SERVICES Social Selling and a Strong Online Presence Are Integral - What’s required is a “social selling” approach. This means mastering the art of authentic engagement with prospective clients via social media. At its core are principles of authenticity, relationship building and professionalism. However, while a strong online presence is a necessity, for the first encounter, however, nothing beats a face-to-face meeting. After all, law is a relationship business. www. appliedstrategies. ca 44

DELIVERY OF LEGAL SERVICES Para-professionals - The role in the delivery of certain legal services by non-lawyer professionals such as paralegals is likely to continue to increase as much as a result of client demand as an attraction to the career field. www. appliedstrategies. ca 45

CLOSING THOUGHTS A legal priesthood may have intimidated earlier generations, but clients today are more likely to interpret such a style as affected and pompous. Professionals are not valued as they once were, so get over it. Lawyers must be much better communicators both internally and externally. Lawyers need to be tech savvy. Services delivered in point 1 of an hour is the Dodo bird of this next decade. www. appliedstrategies. ca 46

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