The licensing of the first Alternative Business Structure (ABS) on 6 October 2011 marked the beginning of the end for traditional law firms (TLF) by some commentators. Although this prediction is regularly bandied about, it seems to me that the survivor from the jungle of relentless and dynamic change in the legal services market is going to be RBM (Right Business Model).

The introduction of ABS enabled legal services businesses to have non lawyer ownership and management with the overriding objective to better meet the needs of consumers in the legal services market. The ability of ABS firms to access external ownership/capital and/or to better attract top senior management talent with the incentive of comparative status and influence of equity partners has the potential to make them more competitive than TLF. In addition, the opportunity for ABS firms to be well funded enables them to experiment (make mistakes and learn from them) and thereby resulting in the delivery of innovative legal services including the creation of new categories of legal services whereby they are quickly positioned as market leaders.

However, it appears that business structures and business models get conflated in the assessment of the emerging and future competitive landscape in the legal services market. Undoubtedly, ABS offers additional flexibility in the business structures that legal services businesses can adopt. Such flexibility offers ABS firms the opportunity to choose the right business model even if that means a departure from the dominant business models in some market segments in the legal services market.

However, an ABS firm that does not use that opportunity appropriately and chooses the wrong business model is not immune from challenging market conditions and may lead to its eventual demise (unless it pivots effectively) irrespective of the access to external capital and top executive talent. So it seems to me that the opportunity to choose the right business model is also available to traditional law firms.

Ownership of law firms by lawyers can in some cases be a barrier to innovation but changing the ownership of law firms alone is no guarantee of improved innovation in the legal services market. Interestingly, one of the emerging expectations from some institutional investors in public companies is for Boards to behave more like owners (i.e. have greater equity stakes and more closely align their financial interests with those of the owners) in order to maintain the primary focus on optimising shareholder value and thereby protect the best interests of the institutional owners (investors).

The debate about the appropriateness of the more interventionist approach of some institutional investors including activists is beyond the scope of this article but it highlights that what matters most is not who owns a business but the mindset of the owners. Owners with a strong mindset to achieve long term value would demonstrate behaviours that support sustained value creation which has rippling effects on key decisions particularly with regard to the right business model and the appropriate combination of people, processes, systems and  technology.

Right Business Model

A business model describes how a business creates, delivers relevant, significant and lasting value to its target customers and captures some of that value (through its pricing) to ensure its sustainability and for the benefit of the other key stakeholders.

A business model describes how a firm does business and the framework of key interdependent activities that a firm undertakes to create sustainable value for its key stakeholders (including target customers, employees, owners, investors and the wider community).

The right business model (RBM) should enable a legal firm to:

  • Create unique value for its target customers that is highly valued by those customers;
  • Be agile, nimble and appropriately and swiftly respond to the diverse and changing needs of the target customers;
  • Deliver better value to customers (subject to ensuring that the value offered is what customers want) relative to the alternatives in the legal services market;
  • Maintain its relevance in the dynamic and rapidly changing legal services market particularly by embedding the appetite and capacity to change in a firm.

The right business model usually arises by connecting the outputs of considerations on the following key questions in novel and diverse ways:

A.    Which target customers does a firm wish to serve?

    • Retail customers
    • Business customers
  • What types of relationships does a firm wish to develop with customers?
    • Personal
    • Digital
    • Omni-channel

B.    What unique or distinctive value (i.e. the job that the customer needs to get done) does a firm offer to the target customers?

  • What do customers want?
    • Pay as you go services
    • Packaged services
    • Integrated services
    • On demand services
    • Unbundled services
  • Is the target customer willing to pay for the value that a firm offers?

C.    How is that value delivered to the target customers?

  • What must a firm do well consistently to deliver the promised value?
    • Creating and delivering value alone
    • Co-creation and delivery of value through collaboration
  • Can a firm use its resources more efficiently to deliver value?
  • Can a firm deliver better value to customers with a lower cost structure?
  • What combination of delivery channels should a firm utilise?

D.    How will a firm capture value for itself?

  • Are the users of a firm’s services also paying customers?
  • Does a firm obtain payment from third parties?
  • Are services prepaid or after delivery?

The business model can therefore be summarised as follows:

  • Business model = A +B+C+D

Whilst the Right Business Model (RBM) for a firm could possibly be one of the following variants:

  • RBM = A1+B2+C+D1
  • RBM = A+B3+C1+D2
  • RBM = A3+B1+C2+D

Rethinking the business model

Some signs that may indicate that a review of a firm’s business model is overdue are as follows:

  • The revenue streams of a firm are becoming less predictable;
  • The cost of delivering value to customers (including costs to acquire customers) is on an upward trend;
  • No response to the threat of new entrants in the markets where a firm operates that promise to offer customers better value;
  • The appetite for continuous change within the firm is low;
  • Capacity and capability to manage change within the firm is low or underdeveloped;
  • No structured process to consider frequently (have strategic conversations about) the adequacy of the business model, particularly no review has been undertaken in the last two years.

It seems to me that the survival strategy for legal firms can be summarised as developing the capacity and capability for continuous transformation of the business model.