Advisory Suggests Pace of Change is Impacting Law Firms’ Bottom Line Now

Originally published for Thomson Reuters Legal Executive Institute on December 16, 2014

I just read the most recent, and excellent, Client Advisory published by Hildebrandt Consulting LLC and Citibank. It contains several observations suggesting that the trends everyone keeps talking about are beginning to have measurable impact on the financial results of some of the largest law firms. If that is so, it may accelerate the pace of change.

As I have written previously, one of the principal reasons large law firms are not moving faster to optimize efficiency is their continued financial success. It is hard to feel pressure to change your business model radically when your profits per partner are in seven figures and appear to be stable. Indeed, the Client Advisory projects that their surveyed firms (most of the AmLaw 200) are on their way to average increases in revenue of 4% and average increases in partner profits of 5% to 6% for the 2014 calendar year.

The Advisory is, as always, rich in data. It also offers a list of sound, albeit familiar, observations about effective management practices.

What struck me about this report was its emphasis on several factors that are new, or at least less familiar, and appear to provide important learning opportunities:

The variation among law firms’ financial results—The Advisory reports significant “dispersion” in the revenue and profit outlook among firms. While the numbers may be up on average, about 40% of the firms surveyed actually have seen “demand” (the amount of billable work) decline in the first nine months of the year. According to the Advisory, the data suggests a “significant percentage of firms with year-over-year profit declines.”

Pricing pressure on all segments of the market—The Advisory emphasizes that transactional practices are not affected as severely as litigation practices, but concludes that all large firm practices are experiencing significant pressure for lower fees. It also reports that realization continues to decline, and the use of alternate fees and negotiated discounts is on the rise. Whatever the bottom line is, this means that the client’s voice is speaking forcefully, and is reducing how much the market pays per unit of value.

Litigation work is moving to alternate providers—The Advisory reports that large law firms are experiencing a declining amount of litigation work, on average. It further reports that one of the reasons for the decline is “the proliferation of lower-cost providers who have taken market share from traditional law firms.” The Advisory quotes a recent Altman Weill survey finding that the market share of “non-law firm vendors” increased to 6% in 2013, from 3.7% in 2012, according to the CLO’s of 207 corporate law departments. While relatively small, this market share data suggests momentum is increasing.

Three new recommendations—Among a set of “evolving trends” that the Advisory said it believed would “set apart the successful firms from the rest” going forward, there were three which I don’t recall seeing in such a report in quite this way before:

— sophisticated management of the delivery of legal service (how the work is actually performed);

— adding non-partner track lawyers to the traditional professional talent model (accessing less expensive human resources to do the work); and

— leveraging technology (“look[ing] for ways that technology could enable [firms] to deliver quality legal services much more efficiently”).

The emphasis on these trends appears to reflect that they not only make sense to the Advisory’s estimable authors, but that they are gaining traction with a material portion of large law firms.

The news here is that there are signs that, at least around the edges, BigLaw is feeling the effects of the market demand for greater efficiency. A material number of large law firms appear headed for declining revenues and profits in 2014. Clients are pushing all segments of the market to reduce their prices, and are exacting increasing concessions each year. Market share is moving away from traditional law firms to new entrants to such an extent that it is now beginning to hit the industry’s scoreboards. And, in a quite important development, some of the “new tools and new methods” that the voices of change advocate are now seen among the “evolving trends” that will accompany success.

Sounds like the pace of change may pick up steam in 2015.