MANAGING PARTNER SERIES

The Importance
of Porters Five Forces

By Patrick Fuller

Its been more than thirty years since a young Harvard associate professor profession. First, the increasing number of corporate legal departments
of Economics published his first Harvard Business Review article, How which are not outsourcing large amounts of legal work to outside counsel,
Competitive Forces Shape Strategy. That single article has since led deciding instead to leverage the oversupply of legal talent in the market
to multiple books and has completely redefined how organizations view to staff their own departments in a much more cost-efficient manner.
and approach competitive strategy. And, as the market for legal services For many firms, this can be a very uncomfortable scenario, when the
continues to grow in complexity, never before has this simple treatise client is also the competitor. Second, about five years ago, many buyers
been more relevant to the legal profession. of legal services stopped paying for research charges firms typically
passed on to their clients, on top of hourly rates. For many firms, this
The Five Forces consist of the Bargaining Power of Suppliers, the
change immediately resulted in millions of dollars of added cost,
Bargaining Power of Buyers, the Threat of New Entrants, and the Threat
making a sudden and intense impact on profitability.
of Substitute Products & Services, all which surround the most powerful
force, which is the Rivalry Amongst Existing Competitors. In the years The third market force is the threat of new entrants, and this can be
since the article was first published, the propensity for all five forces to applied in a variety of ways. For the last decade, technology has been
simultaneously impact the legal profession has not happened, until now. leveling the playing field between mid-size firms and larger firms,
creating an additional layer of competition that also distributes market
The first market force is the bargaining power of suppliers. While this
forces to the rivalry amongst existing competitors. Mid-size firms are
means different things to different industries, for the legal profession,
posing a threat to larger firms largely because the perceived value derived
supply is all about talent. In the last three years, the legal industry has
from mid-size firms is being seen as equal to, if not greater than, larger
seen a growing surplus of talent, leading to lower-cost associates, staff,
firms in the eyes of many buyers. Additionally, an increasing number of
and contract lawyers, enabling more adaptive firms greater opportunities
international firms are making growth in the U.S. a strategic initiative,
to introduce alternative fee arrangements. This provides greater efficiency
which is creating greater complexity in markets and sectors traditionally
and predictability for the client and profitability for the firm. At the same
dominated by U.S.-based firms.
time, the competition for talent amongst lawyers with established books
of business has never been stronger, leading to rising lateral recruiting The fourth market force is the threat of substitutes, and like the threat of
costs and increased risk relative to the portability of client relationships. new entrants, this market force continues to exert increasing leverage in
the market. Legal Process Outsourcing (LPO) and the Legal Services Act
The second market force is the bargaining power of buyers, and this is
are the primary drivers of this market force. More and more companies
where the greatest power is being leveraged. While many in the industry
are utilizing LPO as an alternative to both growing their in-house staff
will rightfully point to the ACC Value Challenge, or the increased
and handling work internally, as well as an alternative to some legal work
involvement of procurement departments in the hiring of outside counsel,
that has traditionally been handled by outside counsel.
or just overall price sensitivity, I believe there are two under-the-radar
changes which have unleashed a great deal of transformation in the legal
 The Importance of Porters Five Forces WHITE PAPER

The final market force, the hub from which the other market forces extend, is still
the most powerful for the legal profession, and thats the rivalry amongst existing
competitors. While the explosion in mergers over recent years has eliminated some
historic rivalries, the market forces discussed earlier, specifically the threat of new
entrants, the war for lateral talent, and the bargaining powers of buyers, all provide Mid-size firms are posing a threat
additional complexity to the rivalry amongst existing competitors. Firms continue to
compete against each other for existing demand, creating commodity offerings with to larger firms largely because the
little differentiation, leading to increased buyer power. Unfortunately for the firms,
as more legal work continues to be kept in-house or handled by LPO, the competition perceived value derived from mid-size
amongst firms will continue to intensify.
firms is being seen as equal to, if not
Moving forward, firms need to combat these five forces to by uncovering, creating,
and eventually capturing new demand. The differentiation firms seek to establish greater than, larger firms in the eyes
may not be in new products, so to speak, but in new service models that create
separation from rivals and provide the uncontested market space necessary to
of many buyers.
limit the impact of Porters Five Forces on their operational strategy.

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