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Altman Weil 2018 Law Firms in Transition - Summary

Altman Weil 2018 Law Firms in Transition - Summary

Introduction

In 2009, US law firms were faced with the effects of the Great Recession as well as market dynamics they had never confronted before. 

Born out of the anxiety of the Great Recession, Altman Weil’s Law Firms in Transition Survey had an aim to shed light on the nature and disruptive influence of the recession and its aftermath. 

However, in 2018, law firms face a different kind of threat. Unlike the ‘known’, pre-emptive impact of the recession, the threat in 2018 is in large part due to the sweeping forces of technology from which an increasing number of legal services have been commoditised and commercialised. 

Although few law firms have recovered to pre-recession levels, most have achieved a reasonable level of ‘comfort’ on the rising tide of economic recovery. 

This, therefore, creates a false sense of security and a misdirection of focus in many law firms. In reacting to the last crisis, they fail to recognise the next. Most law firms continue to plan for short-term, incremental improvements in performance, while deferring or slow-walking more forward-looking actions to address longterm, systemic threats. 

Most law firms have been able to achieve or maintain moderate performance gains by just keeping on. Practising firms have taken full advantage of technological disruption as an opportunity to set themselves apart.  

It is clear that being a thought leader and early adopter of new methodologies and technologies is a significant differentiator of which few firms have taken on board. 

This begs the question of how law firms can sustain their current position over the long term. Or will external market forces beyond their control ultimately induce a tipping point?

Market Forces

An overwhelming majority of law firm leaders believe more price competition, commoditisation of legal work, new forms of practice and smart technologies to be permanent changes to the legal market. There is, however, a glimmer of optimism:

  • Only 51% of firm leaders expect smaller annual billing rate increases to be a permanent trend, down from 64% last year 
  • Only 39% of firm leaders expect slower profit per partner growth to be a permanent trend, down from 47% last year

Most firms failed to put together three consecutive years of demand growth or revenue per lawyer increases:

  • Only 40% of law firms reported positive demand growth over the last three years

Revenue per lawyer gains that were driven by substantial rate increases may cause continued erosion of demand, absent corresponding increase in value delivered:

  • Corporate clients doing more work in-house and continued erosion of demand are seen by 65% of firm leaders as permanent trends 
  • Corporate law departments continue to redirect work from outside counsel to in-house staff, with 70% of law firms reporting that they have lost business for that reason

Differentiated firms significantly outperformed non-differentiated firms, but only half of law firms think they project a distinct and compelling value that differentiates them from other law firms.

Leading Change

The last decade has seen law firms’ general unwillingness to lead clients rather than merely responding to client requests:

  • In 69% of law firms, partners resist most change efforts, by comparison to 44% three years ago 
  • 59% of law firms are not feeling enough economic pain to motivate more significant change 
  • Only 38% of law firms are actively engaged in experiments to test innovative ideas or methods 
  • 50% of law firms do not believe they project a distinct, compelling value that differentiates them from competitors 
  • 69% of firms believe the pace of change is increasing. This number has remained at 60% or higher since 2012

As partner resistance increases, innovation decreases:

  • 6 in 10 firms are including innovation initiatives in firm strategic plans or budgeting time and/or money in support of innovative projects 
  • Generally, the larger the firm, the more likely they are to be engaging in structured innovation, as such acquiring and retaining large corporate clients and maintaining desired margins 
  • Only 5.6% of law firm leaders express high levels of confidence in keeping up with the challenges of the new legal marketplace, down from 24% in 2011 
  • Further to this, law firm leaders expressing low levels of confidence has sharply increased from 8% in 2011 to 33% in 2018

Productivity

The survey suggests (continued) high levels of overcapacity and underperformance:

  • Equity partners are not busy enough in 51% of law firms 
  • Overcapacity is diluting profitability in 58% of all law firms 
  • Almost 40% of surveyed firms attribute chronic lawyer underperformance to partners who are ‘coasting into retirement’ 
  • Nearly half of all firms failed to meet their total billable hours target for 2017 
  • 90% of firms are trying to deal with underperformers by reducing their compensation; this fails to address root causes of underperformance 
  • • Removing underperformers has resulted in significant performance gains in 84% of firms that have done so, compared to 39% effectiveness in firms that reduced underperformers’ compensation

Law Firm Profitability

Firms that use profitability data for management decision making outperformed firms that do not, in terms of PEP gains. Yet only half of law firms use this data as a practice group management tool:

  • Investments in improving profitability have delivered significant performance improvements in only 37% of firms

Lawyer Staffing Strategies

Notwithstanding high levels of overcapacity:

  • 60% of firms say growth in lawyer headcount is a requirement for their firms’ success 
  • 60% reported actual growth in lawyer headcount last year 
  • 59% of firms staff for average annual demand rather than for peak demand (10%) or an expectation of growing demand (13%) 
  • Furthering this, 14% staff for average demand with contract or other temporary lawyers 
  • 58% of firms are using part-time lawyers, while 55% are using contract lawyers to some extent which is more prevalent in larger firms.

Efficacy of Legal Service Delivery

Across the board, law firm leaders see the need to focus on improved practice efficiency, by means of more assertive efforts to realign pricing, staffing and efficiency with client expectations. However:

  • Only 19% of firms are systematically reengineering their work processes. Doing this has already resulted in significant performance improvement in 43% of those firms 
  • Only 13% of firms are routinely diligent about sharing or replicating their improvements to benefit clients.

Pricing Strategies

  • 62% of firms reported discounting their rates on at least 21% of fee revenues 
  • 21% of firms reported discounting their rates on at least 50% of fee revenues 
  • Only 42% of firms reported a linkage with discounted, capped, or alternative fees to how the associated work is staffed and delivered 
  • Only 29% of firms have seen developing data on their ‘cost of services sold’ translate to significant performance improvements

Financial Performance

  • Firms that said their revenue per lawyer was up in each of the last three years were more likely (84% vs. 44%) to report increased profit per equity partner in 2017 
  • 38% of firms reported gross revenue increases of +4% or more in 2017—32% reporting gross revenue was flat or down 
  • 29% of firms reported revenue per lawyer increases of +4% or more in 2017—35% reporting RPL was flat or down 
  • 35% of firms reported PPEP increases of +4% or more in 2017—39% reporting PPEP was flat or down 
  • Realisation against standard rates was up in 2017 in 38% of firms, flat in 45% and down in 17%, with no material difference between larger and smaller firms

Executive Summary

The legal market has become less stable and much more challenging. Law firms must be able to clearly distinguish themselves from competitors in ways that matter to their clients. 

To do this, law firm leaders need to step out of their post-recession ‘comfort’ and remain paranoid about the permanent changes they have foreseen.

Author(s)

Sasha Jurac
Sasha Jurac
John Colvin, Sasha Jurac

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