A significant anniversary inevitably causes us to reflect upon the period gone by. The sub-prime mortgage crisis in the US started in 2007 and, after spreading to other countries, became the global financial crisis that caused the longest-lasting recession of the post-war era. This recession, in conjunction with other factors, triggered sweeping changes in the Hungarian legal market. In retrospect, clear, recognizable patterns have emerged in the ten years since then.
One of the main triggers of these changes in Hungary – as in other markets – has been the dramatic increase in clients’ cost consciousness. Alongside this change in attitude, demand for legal services has decreased or remained flat at best. Consequently, the market has shifted from a seller’s to a buyer’s one, where traditional pricing models no longer work. This has had a direct impact on pricing strategies but has also had the long-term effect of creating innovatory pressure, unlike anything in the past.
But what exactly are the forces behind that pressure? One of the obvious determinant factors is that clients have become increasingly cost conscious in recent years. This may explain higher expectations towards project and cost management, as well as the tendency to outsource high-volume, process-oriented work such as data management or legal research to other providers in order to reduce expensive hourly rates paid for legal services. The application of artificial intelligence in the fields of data management and contract analysis is an obvious response of law firms to the demand for reducing costs for services with less added value.
Meanwhile, efforts taken to improve data protection and cyber security are not just the results of cost-saving measures triggered by the recession. These efforts are motivated more by the necessity for law firms to address the challenges of technological innovation. These challenges force the players in the legal market to rethink the earlier, mainly lawyer-based models for legal services. The ability to combine high-added-value services with the application of innovative technologies in the case of more commodity-like tasks will be a crucial differentiating factor among competitors.
The evolution of factors previously thought to be constant is not restricted to the Hungarian legal market. The leading global law firms with Anglo-Saxon backgrounds could earlier rely on the assumption that in their home markets the fundamental conditions would remain steady. In 2016, however, world politics delivered two events that undermined this belief: the Brexit vote and the unexpected victory of Donald Trump in the US elections.
The pessimistic market predictions ahead of these two events have not yet materialized. President Trump’s program with its protectionist language did not cause the markets to collapse. On the contrary, the Dow Jones index peaked at new all-time highs in January. Fears about free trade and geopolitical risks seem to be outbalanced by promises made by the President on tax cuts and infrastructure investments.
The actual predictions about Brexit are characterized by uncertainty. This is partly because of the cabinet’s decision to go for a “hard Brexit” option, with the UK leaving the single market as well. The real economic consequences of this decision can only be assessed once the formal Brexit negotiations have started. On the other hand, the demand for legal services related to infrastructure and real estate investments, as well as to the new regulatory framework arising from Mr. Trump’s promises, could pick up.
These questions may have a significant impact on CEE, but not necessarily in a negative sense. CEOs in our region are confident about their companies’ growth prospects and the outlook for the global economy. On the other hand, they are also aware of the various geopolitical and environmental risks, as well as the fragility of economic growth in the foreseeable future.
The Hungarian market can be also described as confident. The World Bank raised its forecast for GDP growth to 2.6% in its January report from the 2.1% estimated previously, although it is still not a very impressive figure in terms of regional comparison. The strong deal flow in M&A and real estate seems to be continuing in both numbers and values, thanks to the activity of domestic and foreign investors.
Hungarian and regional law firms are faced with an important question: how can they adapt themselves to the increasing innovatory pressure as well as to the changes in client expectations? Some of the leading law firms, including DLA Piper, have at their disposal the devices necessary to address these challenges – for example, legal project management software that enables highly detailed reports of matters at the phase/task level, which we can share with clients regularly throughout a matter. Software that helps speed up and improve accuracy in due diligence and document review is another AI-based supporting device applied to legal tasks, as well as the document assembly software that automates the creation of agreements with predictable content, such as sales contracts, facilitating efficient drafting without sacrificing quality.
How the wider use of these technological devices will reshape the legal market in our region remains one of the big questions in 2017. Anyway, it remains certain that this year promises to be an exciting one for law firms as well.
By Andras Posztl, Country Managing Partner, Horvath & Partners DLA Piper
This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.