The 2016 Citi Hildebrandt Client Advisory from Citi Private Bank (in partnership with Hildebrandt Consulting) is out. This is one of the major annual reports that takes the temperature of the legal marketplace, and it’s always worth a read.
The Verdict on 2015
The report’s take on the state of the industry overall can be summarized in one word: Meh.
And its one-word take on performance of individual firms: Dispersed.
After a 2014 that looked like a healthy uptick from earlier post-recession growth rates, the industry in 2015 has slid back to tepid growth rates in the low single digits. “Good, but not 2014” is the headline version — as if 2014 was some sort of high-water mark.
However, the report does establish that legal services demand, while relatively flat overall, is more dispersed across law firms than in previous years. Growth is more widely distributed, with more firms doing better and more firms falling behind. The share of firms seeing demand growth of more than 5% increased from 9.7% in the years 2009-2014 to 19.5% in 2015; and at the other end of the spectrum, the number of firms declining at -5% or more was up from 4.8% to 22.1%. So the number of firms at those extremes of demand growth is growing, while the number of firms in the tepid middle is smaller.
If you have followed Ralph Baxter’s posts here on the Legal Executive Institute blog, you will recognize this story. From the point of view of large law firms, it appears that the legal services industry is flat. Baxter’s argument is that, to the contrary, legal spend is up nicely, but the share going to law firms isn’t growing. Rather, it’s being spent on beefing up corporate in-house legal operations and on alternative legal services providers. (See The Emerging Legal Marketplace: Changing Client Behaviors & Implications for the Law Firm Model and A Framework for Success: The 21st Century Law Firm Business Model.)
In that environment, law firm “growth” is really just a market share play. Some firms are taking slices of business from others, but the revenue “pie” that law firms are fighting over is not getting any bigger.
Prescriptions for Growth
You have to look to the report’s prescriptions for success to see which strategies will really move the needle for the industry as a whole. Generally speaking, and somewhat paradoxically, Citi’s prescription for revenue growth will do little to help overall market growth; it will just rearrange the dollars already being spent on firms. Citi’s prescriptions for improving efficiency, however, are where the benefits accrue not just to the firms implementing them, but to the long-term health and growth of the overall industry as well.
Here’s what Citi prescribes for revenue growth:
Brand differentiation — establishing deep industry or practice area specialties and otherwise focusing on positioning a firm among its competition.
Focusing on client needs — by applying client teams, for example, or mining existing relationships for additional business.
Growing through lateral hiring — rather than mergers — for instant revenue growth in targeted practice areas or geographies.
Here are its prescriptions for improving efficiency:
Matter management — to better manage each matter against targets for price and profitability.
Knowledge management — to better leverage existing work product and know-how in new matters.
New staffing models — to right-size the resourcing of matters, and to find a better mix of professionals, including less expensive contract attorneys and non-partner-track lawyers where appropriate.
Efficient use of space — downsizing offices and more efficiently deploying workers in buildings that are often the most expensive real estate in town.
Here’s the paradox: Citi’s prescriptions for efficiency, which could well reduce revenue in the short term and on the individual firm level, is really the only way the total size of the law firm pie will expand. Why? Because these are exactly the sort of modernization and right-sizing measures that have attracted clients who “vote with their feet,” as Baxter would put it, and seek alternatives for their legal spend. Only by becoming a little more like the providers to whom the dollars are currently flowing (in-house operations or alternative providers) will the traditional firms reverse the growth curve and start to regain a bigger aggregate share of the legal spend pie.
The prescriptions for revenue growth, on the other hand, primarily arm firms to snatch market share from each other, but will do little to increase the total size of the pie.
There’s a lot more than this in the report, but Citi’s conclusion is that most firms are up to the task, despite the sense that current market conditions are the new reality for the foreseeable future.
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