Many U.S. law firms have not adapted well to the post-recession legal market, but proactive, creative firms seem to be able to create their own opportunities.
Before the Great Recession, U.S. law firms enjoyed more than a decade of unprecedented prosperity – sustained growth in demand, revenues and profits. Since then, however, they experienced a sharp reversal in fortune as the legal marketplace underwent foundational changes.
That stark shift continued in 2017, according to the latest edition of the annual Report on the State of the Legal Market from Georgetown University Law Center and Thomson Reuters Legal Executive Institute. It found law firms continue to face flat demand for their services, static profit margins, weakening collections, falling productivity, and loss of market share to alternative legal service providers and others.
Now in its sixth year, the report examines the U.S. market for legal services and how law firms are faring as they try to traverse a rapidly changing landscape.
Legal market 2018: More competitive, less profitable
U.S. law firms face three major obstacles to sustained growth and prosperity:
Static demand for law firm services
Thomson Reuters Peer Monitor data shows demand for law firm services was essentially flat for 2017, as it has been for the past seven years. Certain practice areas, such as intellectual property, tax and corporate work saw modest increases, but all other fields – including “general litigation,” which accounts for about 30 percent of all practice activity – saw demand wane.
Rising headcount, slipping productivity
Despite the soft demand for law firm services, the number of attorneys at U.S. law firms actually increased 1.3 percent in 2017. While a small increase, it’s part of a longer-term pattern of adding more lawyers even when there’s less work to go around. All in all, the average lawyer is working 156 fewer hours than he or she was in 2007. Multiply those hours by the average hourly agreed rate of USD$475 and it amounts to a revenue loss of $74,100 per lawyer per year.
Unchanging profit margins
Thanks in large part to flat demand and declining productivity, law firm profit margins remained flat in 2017. While some of the AmLaw 100 – the 100 largest U.S. firms in terms of profits per partner, overall revenue and number of attorneys – are prospering, those select few firms are making the group overall look healthier than it is. Most AmLaw 100 firms experienced very modest financial returns.
2018 and beyond: What can law firms do?
Although we have seen several years of flat demand and underwhelming financial performance from U.S. law firms, the picture could brighten for firms that take a more contemporary and proactive approach to business.
Promote Alternative Fee Arrangements
By now, most U.S. law firms have the option of an Alternative Fee Arrangement (AFA), broadly defined as charging for legal services in any method other than the standard billable hour. However, there’s a difference between simply having that option and affirmatively engaging with a client to determine what fee model best meets its needs. Clients continually express dissatisfaction with service and bills that don’t match their value expectations; actively offering clients AFAs could greatly increase the perception of value and promote trust in the firm-client relationship.
Cater to changing client needs
It can be easy for firms to lull themselves into a false sense of security by believing they know what a client wants, regardless of whether a discussion has ever been had with the client to spell out their needs and interests. While most clients and law firms prioritize work quality equally, firms may underestimate the value of intangibles such as attorney responsiveness and predictability of cost. Given what we know about legal consumers’ needs and desires, a law firm that is able to increase its ability to meet those needs will fare well.
Clearer, more consistent communication
A November 2017 study by Thomson Reuters Legal Executive Institute found firms that had improved their financial performance the most over a three-year period were found to be proactive with communication around fee structure. Their higher realization rates and faster collection speeds suggested early and often communication with clients.
The result of a long-standing collaboration between Thomson Reuters Legal Executive Institute and Georgetown University Law Center, the 2018 Report on the State of the Legal Market is available for complimentary download.