Why Canadian lawyers will be feeling the heat.
Few years in recent memory have started off with so much uncertainty. The new year opens up on a wobbly global economy, a fragile Canadian economy, ISIL rising, fearful investors, and an ongoing train wreck in oil and commodity prices. In this end- of-year series, we asked business leaders across Canada how they’re preparing themselves for the challenge: 2016.
Law firms are facing a challenge that has been around for years, but has probably grown more pronounced since the financial crisis and will certainly continue into 2016.
The challenge is competition. Other professional service providers, such as accounting firms, are taking on advisory roles that were traditionally occupied by lawyers, such as tax planning. Full service firms are hoping they have the agility and the cachet to meet this challenge by beefing up their resources in areas they continue to dominate, such as litigation.
Law does not have a reputation for embracing change with enthusiasm. Canadian law firms could once expect their competitors to be the mirror image of themselves: firms of the same size, all doing the same work for the same fees.
Fresh competition has emerged from a mix of sources over the past decade or so, and the disruption is palpable. Across the industry, newer, more agile legal firms are slashing fees by coming up with ways to deliver more work at fixed and lower costs. Clients are relying on in-house lawyers to complete tasks that used to be farmed out to external law firms.
Then there are high- end niche areas, such as tax, in which accountants are wellpositioned to grab a piece of the advisory business once locked down by lawyers. “Accountants have seen this is a field of opportunity,” says Ian Crosbie, a partner with Davies Ward Philips & Vineberg LLP in Toronto.
Crosbie cautions that some perspective is in order. It would be a stretch to exaggerate the amount of competition between accountants and lawyers over tax planning work. The big Bay Street law firms that have go-to reputations for high-end corporate work will always be occupied with deals, he says. “Our transactional tax practice is essentially as busy as it’s ever been.”
Still, Crosbie says there is some light competition out there. The big accounting firms are telling their corporate clients they have unique tools available to meet their multinational needs, such as comprehensive global networks. “On international deals, they will sell themselves on the basis that they have access to all the relevant information in the relevant jurisdictions,” Crosbie says.
David Spiro, who used to practise tax litigation with Dentons Canada, but who recently left to set up his own private investment firm, has seen how accounting firms might compete with law firms for tax planning work.
That competition, Spiro explains, might emerge out of something as simple as regular contact between, say, a company’s chief financial officer and an outside auditor. That CFO might regularly speak with the accountants about the company’s quarterly financial statements. Those regular meetings could give rise to questions that might have been previously addressed to the corporate client’s law firm, Spiro says.
“Yes, the competition is there,” Spiro says. “It may very well depend on who the client is more frequently in touch with, its law firm or accounting firm.”
Competition from lower cost firms and non- legal service providers is a trend that’s well under way in the United States, according to a report by Citi Private Bank and Hildebrandt Consulting LLC.
“We’ve seen the growth of lower-cost alternatives to traditional law firms that use technology and lower- cost staffing models to handle routine, lower-value work at the right price point for clients,” the report says. “We have also seen accounting firms in markets outside of the U.S. increasingly compete with traditional law firms.”
Profit growth for U. S. law firms has been growing in the lower single digits since the 2008- 09 financial crisis, Citi and Hildebrandt report. That’s down from average profit growth of roughly 10 per cent between 2001 and 2007. Citi and Hildebrandt say it’s unlikely for the U.S. legal industry to return to double-digit growth, but they do predict single-digit growth to continue.
“The challenge for law firms is to differentiate their brand from others, and to demonstrate that the value they bring to clients justifies their fees,” Citi and Hildebrandt say.
Besides this fresh competition, the legal business is facing the same challenge that has hit every other service provider in Canadian big business: the slowdown in commodities prices.
Canadian law firms are private organizations and their financial results are not pub- lic. “Full service” business law firms have an advantage when it comes to tough economic times. Demand for their securities, corporate finance and tax planning services might hum around the clock when markets are booming. But when the economy slows, Canadian lawyers will tell you their businesses are “recession proof,” because the overall demand for their services doesn’t necessarily disappear, but simply shifts over to their litigation and insolvency departments.
Such a shift is underway within law firm tax departments, lawyers say. The commodities slowdown has had an impact on the amount of overall securities and corporate finance business work at some law firms, and some of the tax planning work associated with those deals.
Yet this has not necessarily left behind less work for lawyers specializing in tax planning work. Lawyers say the Canada Revenue Agency has been aggressive in challenging taxpayers’ returns. This is creating fresh opportunities for not only tax litigators, but also those tax planners, Spiro says.
If their deal work slows down, the tax planners simply make up for it by getting involved with clients early in the dispute-resolution process. Perhaps they’re now helping clients prepare for a CRA audit, or maybe they’re helping draft the documents that could make or break the client’s position on a particular issue before the Tax Court.
“I think a lot of tax planners have taken on as part of their practice what was traditionally the sole jurisdiction of tax litigators,” Spiro says.
So the legal business is a bit like a waterbed. If you press down in one corner of the mattress, you cause another corner to rise. That’s happening in law right now, at least in the niche world of tax. Competition from accountants and pressures from the economy are pushing down on the tax planning business, and planners are responding to that challenge by shifting their workflow elsewhere.