Navigating the New Legal Frontier: Macro trends offering a glimpse into the Future of Law Firms

Authored by Jane Chinhua Allen , Vince DiMascio and Lawrence Ballard, CPA of 普华永道

The winds of change are sweeping through the legal landscape, reminiscent of the tumultuous aftershocks of the 2008 financial crisis. Law firms are an important part of the legal service delivery ecosystem for Corporates of all sizes. But as certain market dynamics collide - a continued uncertain economy and rising interest rates, an onslaught of game-changing technology, Gen Z workers and client base with different skill sets and buying patterns, significant Chief Legal Officer and General Counsel turnover, and massive corporate transformations designed to reposition into the future - corporate legal leaders are rethinking their own strategies and who and how legal services are best delivered.

Amid the unfolding narrative, many law firms are grappling with adjusting to market demands, emerging technologies, and seeking innovative strategies. A few key trends observed in this current transformation landscape:

The Evolving Market Landscape

The Tug-of-War Over Rates

Over the last six months, discussions about Law Firm rate increase trends have intensified. This appears to be somewhat different than the regular cycles of rate discussions. With law firms pushing for rate increments to meet their ambitious revenue targets, corporate clients already under cost pressures or mandates to reduce outside spend are increasingly showing their reluctance to accept these increases. A small segment of corporations are also starting to contemplate how the usage of legal-focused generative AI tools should play in their utilization of external counsel and fees. This includes mandating the use of a certain set of approved technologies for first-pass drafting and legal research, or eliminating payment for tasks that involve research, summarization, or even first-pass drafting. It's a dance of negotiation, with each party trying to find the sweet spot between value and cost.

Strategic Thinking Takes Center Stage

Today's law firms are no longer content with maintaining the status quo, and recognizing historic operating models and cultural aspects need to change in order to sustain and grow as the firms of choice for their clients. They're making bold strategic investments—be it in the realms of innovation and advanced technologies, business development, DEI, or even branching out into uncharted practice areas.

Reimagining the Structural Blueprint of the Modern Law Firm

The Rise of the Non-Partner Executives and a DE&I imperative

There's a subtle shift occurring within the power corridors of larger law firms. Non-partner executives, such as COOs, are being ushered in, not just for their operational prowess but as catalysts to challenge and disrupt the traditional law firm model (everything from pricing to compensation and sales models). Ever present is the underlying challenge of bringing in the right expertise for a complex mandate, that may be hindered to go toe to toe with leaders in a non-equity role.

Law firms are also increasingly looking inward, to better understand how their business practices, especially those concerning DEI and other social issues, are perceived by their myriad stakeholders—from attorneys and clients to the broader market. Increasingly pushed by their clients (including via buying decisions and measurements of team composition, including new partner classes), legal organizations, and a new generation of lawyers emerging from law schools, more meaningful changes in traditional mentorship, career guidance and supporting the pipeline for more women and minority partners.

Other Operational changes

With the structural changes and disruption to traditional models, law firms are reevaluating their business development strategies and investing in professionals to streamline their processes. Over the years some firms have hired a single or few individuals solely focused in this role, which has been an evolution to determine optimal ways of working with Partners who are also required to heavily leverage relationships for business development in their roles as well.??

Succession planning is also gaining prominence and rethinking, ensuring that the legacy of excellence persists, but new strategic thinking and willingness to lead to disrupt for longer term viability and profitability being top of mind.?In more transparent discussions, some law firms admit their reluctance or slow pace of change is in part due to Senior and Managing Partner influence, frankly outdated perspectives into the future, and lack of incentive in the shorter term.?Additionally, considerations as to different compensation structures continue to be of discussion, but haven’t been observed to be prevalent yet.

On the accompanying operational and accounting front, remote work tax considerations, changes in state tax market-based revenue sourcing rules and pass-through entity tax (“PTE”) and state tax elections continue to stir conversations, as firms evaluate the impact of these legislative changes. Operations based in certain foreign territories (or consideration to grow into new ones) are actively being evaluated given complex regulatory and geopolitical considerations.??

The Technological Revolution and Its Reverberations for the Legal Industry

The AI Wave Crashes In

Generative AI, primarily focusing on tasks like document generation (i.e., contracts, briefs, subpoenas) and knowledge work, looms large over the horizon. Its promise and potential might very well be the second most significant disruption to hit the legal world in recent memory. As firms scramble to adjust, there's a growing sentiment that, barring a few seasoned partners with niche expertise, the future legal market will demand agility and technical prowess, and less opportunity for highly leveraged work to paralegals and junior attorneys for research and drafting of documents.?

Platforms like Harvey, CoCounsel, and ContractPodAI’s Leah are creating ripples of excitement and opening lawyer eyes to the art of the possible. However, there’s an undercurrent of hope among law firms that the widespread adoption of such transformative technologies is more of a simmer than a boiling over. On the corporate side, there's a rising appetite for leveraging these tools either in-house (in lieu of leaning on outside counsel as much) or demanding more cost-effective applications from their law firm partners.

While many law firms are seen as stalwarts of legal wisdom and expertise, they aren't necessarily viewed as tech pioneers. Many have tried to create technology or data science teams with varying degrees of success. Periodic news of a law firm cyber breach is still also top of mind for many corporate legal leaders. This perception gap has opened doors for consulting firms to step in, melding their industry-specific insights and scale with tech savviness.

Technology infrastructure and Cybersecurity

Cybersecurity maturity within law firms continues to be a hot topic. Given the nature of their business and the volume of confidential information held within their walls, combined with the generalized view of being less-sophisticated or less focused on security, law firms have been increasingly targeted and CIOs are becoming more proactive about upgrading technology/security platforms.?This has also become important as more clients are requiring law firms to share information related to their internal processes and controls associated with IT security, and in many cases, meet specific standards.

Additionally, due to the shift resulting from post covid ways of working, law firms have invested in more collaborative workspace and technology platforms. It’s not that far in the rearview mirror that law firms were unwilling to abandon the model of assigned offices but that mindset is now changing as firms look for creative ways to work and also look to operating model shifts that will offer cost savings.

Peering Around the Corner

Law firms face a branding conundrum.?

In this era of unprecedented change and challenges, law firms are standing at the precipice of transformation - frankly not too dissimilar to some of their corporate legal clients. The winds of change are sweeping through the legal landscape, and law firms must adapt to the macro trends that are shaping the future of the industry. As law firms navigate these changes, they must also prioritize cybersecurity and embrace collaborative workspaces and technology platforms. The decisions made by law firms in the coming years will define their relevance and resilience in the evolving legal ecosystem. It is a critical moment for law firms to embrace innovation, adapt to market demands, and position themselves as leaders in the new legal frontier.?

Jane Allen is PwC’s Legal Business Solutions US Leader, Vince DiMascio is the lead partner for its Legal Technology business and a former Law Firm CIO/CTO, and Lawrence Ballard is PwC’s Law Firm Services Leader focused primarily in Assurance and Tax services.