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Legal Industry Meets Porter’s Five Forces

July 12, 2012

I have enjoyed reviewing non-traditional enterprises through the lens of Porter’s Five Competitive Forces over the years. Some have included Wall Street Firms, the NFL and Hollywood. It is with great interest to focus the framework on the industry of law.

The news of the Dewey Lebouef implosion has interested me in how a 100 year old firm can collapse so spectacularly. While most of the attention is on the one company, very little attention is paid to the questions of what is happening within the industry to lead to this. Most of the autopsies I have read have alluded to the partners sprinting away to other firms and taking clients with them. Yet there are things happening on a larger scale which should continue to impact the industry of law ongoing, specifically the competition for industry profits.

Quick review of the 5 Competitive Forces

Threat of New Entrants. 

An article from the WSJ http://online.wsj.com/article/SB10001424052702303444204577458411514818378.html reports 10 of 200 law schools in the country are reducing their planned enrollments for this coming fall. The reason for this? The employment rates of law school graduates is at an 18 year low. The barriers to entry have traditionally been the LSAT, a Law School degree and two parties at odds. With the doorway of law school narrowing, the threat of new entrants declines ever so slightly. Referring to the Bureau of Labor Statistics (http://www.bls.gov/ooh/Legal/Lawyers.htm#tab-6) analysis of the profession of law, the expected increase from 2010 to 2020 for the number of lawyer positions is an increase of 73,600. Compare that to the number of entrants to law school this coming year of 65,119.

With so many lawyers being minted each year, employment opportunities declining, expect there will be increased competition from new entrants to handle your legal affairs.

Update: The WSJ published an article on 7/16/12 addressing the unemployment of law school graduates. The situation is dire enough that a high level task force is gathering to address the issue. With employment rates of 55%, and increasing tuition, law schools have much at risk. http://online.wsj.com/article/SB10001424052702303612804577528741894308830.html

Threat of Substitution.

There are 5 alternatives to court actions 1) settlement 2) mediation 3) arbitration 4) negotiation 5) state/federal organization. Each of these are typically easier, speedier and less costly than court actions. Already in more of the commoditized legal areas such as divorce, wills, forming business entities, there are the low cost provider options available.

With the recession in place, expect parties at odds to look for less expensive, less disruptive and speedier resolution opportunities.

Bargaining Power of Buyers.

The bargaining power of buyers has increased in areas where volume exists. For example in corporate law, a large Fortune 500 company is going to have more bargaining power than an individual. Immigrants working toward citizenship will have a handful of choices among lawyers to choose from and their rates are likely be similar within a geographic range.

If you are a corporation, expect and fully use your increased bargaining power! As individuals, there will be a less expensive pool of legal talent to choose from, and the expectation would be as experience and skill increases, expect the bargaining power to shift but not as much as in the decades prior.

Bargaining Power of Suppliers.

Suppliers to the legal profession include publishers of research books which is available digitally, and information resources. Other than that there are typical costs of running an office and hiring employees. Paralegal pay has not been increasing dramatically.

Update: WSJ article from 7/16/12 illustrates law firms are beginning to realize there is more use they can wring from real estate, their largest line item. http://online.wsj.com/article/SB10001424052702303612804577528940291670100.html

Intensity of Rivalry.

The only tangible evidence of rivalry is displayed in advertisements either on TV, radio or occasional print ads. None of the ones I have seen have made price or a track record of awards a competitive point. It has been based on personal service, speed of processing,  and attention to the injured. Or in other words, customer service. So from an intensity of rivalry (within a business definition) the real competition is to find a source of resources to afford media blitzing, and less on proving to potential customers, the advertising party is the best choice to hire.

Expect as the the legions of unemployed and disgruntled lawyers increases, there will be pressure placed on the ABA to modernize the rules on the business of managing a law practice and soliciting. Combine this with the decline in lawyers occupying federal and state legislative positions, laws and regulations protecting the industry profits are easier to modify.

Summary: The industry profitability of the legal profession will decline overall over the next decade.

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