Altman Weil recently released an updated Law Firms in Transition Study – a sweeping 131 page report – that paints a rather challenging portrayal of the competitive legal landscape for large law.
Consider the following reactions in the press:
>>>Law360: “The lessons for BigLaw of recent years about tougher competition, commoditization of legal work and billing trends are sinking in for nearly all managers, but firms are failing to be the drivers of radical change, according to a survey released Wednesday.” New Industry Trends Not Translating To Action, Survey Says by Andrew Strickler.
>>>Philadelphia Inquirer: “Big firms – and many small ones, too – still sport hefty profits almost six years after the financial market meltdown unleashed tumultuous changes, from downsized firms and law schools to severely curtailed career dreams. But pricing pressure from clients and the corresponding need to cut costs have become lasting features of the legal landscape.” Law Review: Survey: Law firms expect price squeeze to continue by Christopher Mondics.
>>>Wall Street Journal Law Blog: “The pace of change in the legal profession could charitably be described as glacial, even as external forces hammer away at a business model better-suited for the 20th century than the present.” Law Firms, Market Pressure and Change: How Soon is Now? by Jennifer Smith.
However, law firms are increasingly looking at measures to improve efficiency through technology, process and pricing models. These conclusions are based on data provide in the survey, which polled 304 “managing partners and chairs” in March and April 2014, according to the demographics.
Nine Takeaways from Law Firms in Transition
“The sixth annual Law Firms in Transition Survey shows clear consensus among law firm leaders on the changing nature of the legal market in 2014,” says the study in the opening paragraph. Indeed in our own review of the study, we found there are nine areas of consensus that stood out in our minds:
1. Permanent Change Acknowledged. From pricing to commoditization – and from leverage to outsourcing, the data indicates acceptance that the legal industry is in fact changing. It’s not a new concept, since 90% of respondents have agreed “there is a permanent market shift requiring greater efficiency in the delivery of legal services” since 2011. However, this year it seems more and more sharp legal minds believe the pace of change is increasing:
Two-thirds of law firm leaders think the pace of change in the profession is still increasing. Another 30% believe it will remain at its current pace (which is not inconsiderable).
2. The forces of change. What compels change in an industry? Disruption in the legal industry flows from clients – the survey data seems to validate this principle and cites corporate legal departments as the catalyst for change:
34% of law firm leaders identified corporate law departments as the force most likely to lead change; 32% chose technology innovation; and, 15% selected non-law-firm providers of legal services. Only 10% of respondents believe that law firms will take the lead in reinventing the legal market.
3. Large law leans in. The larger the law firm, the more inclined it seems to be for making plans for adapting to the market shifts. The survey found that those firms with 250 or more attorneys are focused on service delivery and staffing strategies in response to market demands:
Nearly half of all firms with 250 or more lawyers report changing their strategic approach to pricing, while only 22% of firms with 50 to 249 lawyers are doing so. In the area of efficient legal service delivery, 54% of the large firm group was pursuing change, compared to 34% of the smaller firms. On lawyer staffing strategy, 59% of larger firms report making significant changes as opposed to 41% of the smaller firms.
4. Higher bill rates off set by discounts. Data in this survey shows a greater increase in overall billing rates than we’ve seen in other studies, including our own. One large law pricing strategists puts bill rate growth at about 3% and our own data suggests an increase of 2.7% but in any case it’s far lower than in previous years. The rate of increase may be a mute discussion since Altman Weil’s study suggests increases are being offset by discounts:
Law firms surveyed report a 4% increase in overall billing rates for 2014. Countering the increase, firm leaders report that, on average, their firms provide discounts on 21% to 30% of all hourly rates.
5. AFAs penetrating the market. AFAs are a recurring theme – they are continuously the subject of discussion in the trade press, conferences and social media discussions. Our own analytics on this blog finds tremendous demand for AFA-related content based on referrals to this blog from search engines. According to the data in this study, a vast majority of law firms are experimenting with AFAs but struggle with using theme effectively:
Ninety-two percent of firms are using some non-hourly billing, and nearly half of those firms report increasing non-hourly fees as a percentage of total revenue in 2013. Although alternative fee arrangements are hardly a new strategy, only 16% of firms that use them have been able to make them more profitable than hourly fees according to the survey.
6. Big data for big law. Big data is coming into its own in the legal industry – and it’s being driven by pricing strategies including AFAs. Inside counsel has an incredible volume of data at its disposal for understanding what matters should cost, how long those matters should last, and increasingly, an ability to make better decisions based on information. Large law firms are increasingly looking to develop such tools for their own use, according to the survey:
Seventy-three percent report they are developing data on the cost of services sold.
7. Tech and process the path to revival. Those that buy legal services are being asked to do more with less, so it’s a seemingly natural progression that those providing those services are also being asked to do the same. Technology tools and process, which are arguably two notions that work most effectively when in harmony, are the top measures by which law firms are responding:
The top two tactics to increase efficiency in 2014, each undertaken by about 60% of all firms surveyed, were using technology tools to replace human resources, and knowledge management. Project management training was offered in 43% of firms.
8. Focused on existing clients. BTI Consulting describes the current state of the legal market as a “Predator’s Paradise” where there are two strategies for law firm growth: Law firms can keep clients or “steal” market share. The Altman Weil Law Firms in Transition survey suggests the largest law firms are addressing the former while fending off the latter:
Larger firms were somewhat more likely to be driven by long-term considerations. Mega-firms – those with 1,000 or more lawyers – clearly broke from the pack on this question. Eighty-six percent of that group indicated that their decision making is long-term in nature and designed to lock in clients.
9. Renewed calls for law firm CRM. More than 60 percent of law firms surveyed in a CRM study we conducted last year indicated a high degree of interest in investing more in customer relationship management – both programs and technology. That sentiment is echoed in the recommendations Altman Weil makes in its report:
The only thing that cannot be commoditized is a very close and collaborative relationship with your clients. Embracing clients like never before should be common sense. Law firms need to lock clients in to closer relationships by demonstrating a thorough and ongoing understanding of the client’s legal and business needs. Key client programs must become more than simply a guise to sell additional services.
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Have a perspective on this study that wasn’t noticed? Please feel free to share it in the comments.
Photo credit: screenshot from the Altman Weil Law Firms in Transition 2014 study.
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