Too Many Law Firms Are Still Fighting the Last War: “2018 Report on the State of the Legal Market”
January 10, 2018 —
Declining productivity costing firms an average of $74,100 per lawyer per year, according to new report from Georgetown Law and Thomson Reuters Legal Executive Institute
EAGAN, Minn. & WASHINGTON, D.C. – Law firms have spent much of the past decade fortifying themselves against anticipated challenges. But strategies based on how the market has behaved in the past may be leaving many firms unprepared for the rapid transformations that are sweeping the legal industry. Those are among the conclusions of the “2018 Report on the State of the Legal Market” just issued by the Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute.
The report compares the strategies of many firms to the French strategy of the “Maginot Line” – a seemingly impregnable fortification that provided a false sense of security until it was easily defeated in the early stages of World War II. Strategic blind spots, decision-making inertia and unwillingness to adapt strategies to changing conditions can lead decision makers to ignore signs that the world has progressed and current strategies may not be working.
In recent years, the law firm market has managed to sustain small annual rate increases and maintain profits per equity partner at acceptable levels, but the report warns these achievements may be masking weaknesses, and causing many firms to “fight the last war” rather than adapt to new challenges.
Flat demand for law firm services, declining profit margins, weakening collections, falling productivity, and loss of market share to alternative legal service providers and others, are gradually undermining the foundations of firm profitability. For example, the annual declines in productivity since 2007 may not have been sufficient to trigger alarm in any given year. But the average lawyer is now billing 156 fewer hours than they did eleven years ago. At current average rates*, this is costing firms an average of $74,100 in lost revenues per lawyer each year.
“The challenges facing law firm leaders in today’s market are daunting,” notes the report, “but the good news is that there are many positive steps that firms can take to address them. Over the last few years, there has been mounting evidence that law firms that proactively address the needs of their clients – e.g., by implementing alternative staffing strategies, pursuing flexible pricing models, adopting work process changes, making better use of innovative technologies, and the like – can achieve significant success.”
“Sometimes, it’s all too easy to succumb to ‘the lure of failed strategies’ that may have worked in the past, to the detriment of taking bold, risky steps to deal with new challenges, such as changing client needs and expectations,” said James W. Jones, a senior fellow at the Center for the Study of the Legal Profession at Georgetown Law and the report's lead author. “Firms that take proactive steps to address these serious market realignments have every prospect of doing well. Meanwhile, traditional strategies and models are increasingly unlikely to lead to future market success.”
The report also notes that many of the levers firms used to help counteract the last recession (expense cuts, de-equitizing partner ranks, rate increases, etc.) will likely be less effective during the next economic downturn. The current economic expansion is now the third-longest since World War II, and the impact of the next downturn on the legal industry could be severe.
“We are seeing some firms manage to achieve strong growth by breaking away from traditional strategies and better aligning with client expectations and increasing investments in business development and workflow technologies,” said Mike Abbott, vice president, Client Management & Global Thought Leadership, Thomson Reuters. “But for others, many key foundations that previously contributed to their success are now eroding underneath their feet, leaving them vulnerable to new competitors, further erosion of pricing power, or economic downturns. The willingness to make transformative changes is essential for ensuring long-term success.”
The report is jointly issued annually by the Center for the Study of the Legal Profession at Georgetown Law and Thomson Reuters Legal Executive Institute, relying on data from Thomson Reuters Peer Monitor. It reviews the performance of U.S. law firms and breaks down the new market realities that drive the need for firms to take a longer-range, more strategic view of their market positions.
*Calculated at the Peer Monitor average agreed rate of $475 per hour.
The Center for the Study of the Legal Profession at Georgetown Law is devoted to promoting interdisciplinary research on the profession informed by an awareness of the dynamics of modern practice; providing students with a sophisticated understanding of the opportunities and challenges of a modern legal career; and furnishing members of the bar, particularly those in organizational decision-making positions, broad perspectives on trends and developments in practice.