Uber-fixed Costs

Our regular readers will be familiar with our analysis of the majority of law firms as overwhelmingly fixed cost operations, and of the imperative for forward-looking firms to inject a far greater degree of flexibility into their cost structures. Given the very high proportion of law firms’ costs that can be attributed to ‘people costs’, introducing more flexibility in the way in which the firm employs its people is something we have long advocated and we believe for many will not be optional in the foreseeable future.

The recent recovery in the market, led by a property boom that has been particularly visible in the South-East, has led to a false sense of security amongst some partners. When times are good, a fixed cost structure is not a problem – as the firm can extract more from its permanent fee earners. However, the proportion of firms operating close to their breakeven point is concerning (in recent years this has been around 40% of firms), and the share of costs accounted for by people is often considerably more than 50% of overall expenditure.

This is not simply a problem for tougher economic times. Changing business models (to which we have referred many times) will continue to exert pressure on traditional firms to change their cost structures, and partners ought to be conscious of this imperative to change before it is forced upon them under circumstances in which they have a far more limited range of options.

The 'Uberisation' of Professional Services

One specific aspect of the aforementioned changing business models is what George Beaton has described as the ‘uberisation’ of professional services, and what has previously been termed by US academics as ‘eLancing’ or ‘industrialised adhocracy’.

The principle, inspired in its current incarnation by the company, Uber, that is transforming the market for taxi services, is that jobs are allocated (by a centrally managed system) to freelance, self-employed individuals. This has resulted in appreciably lower journey fares in major cities around the world, but its applicability is by no means limited to taxi drivers.

The objections – that such a model simply could not work in a profession that requires such high levels of training, experience and accuracy as the law – are not borne out by current trends. Indeed, top UK firms such as Allen & Overy and Pinsent Masons have already started to embrace the possibilities that such a distributed model could offer.

From Fixed to Freelance

The implications are clear. Highly educated, experienced lawyers who for whatever reason (perhaps they prefer the flexibility of working part-time, or from home, or perhaps they did not quite make it to the next stage in the unforgiving ‘up-or-out’ world of the city) decide to become effectively freelance, self-employed professionals will have the opportunity to do so. Free from the overheads and fixed salaries of traditional fee-earners, such a model promises significantly lower costs to the end-user.

With a theoretically almost unlimited workforce at their disposal and the realistic prospect of offering far lower prices than for their traditional work, such operations will be able to start pitching for work further down the market than before. This will start to encroach on the turf of mid-market firms who, as we have described before, will also be facing competition from below.

Our contention, then, is that medium-sized firms should be thinking now about how they can counter such moves, primarily by introducing much more flexibility into their cost bases – and this starts with the firm’s people. Firms that choose to continue to ignore these trends do so at their own peril.