Over the past years, the legal market experienced some drastic changes due to – among others – to the significant growth in non-law firm competitors.
Accordingly, law firms have been challenged from day to day to adjust to the innovative reality of the legal market in order to keep their abilities to compete effectively.
The Center on Ethics and the Legal Profession at the Georgetown University Law Center along with Thomson Reuters Legal Executive Institute and Peer Monitor – recently published the 2020 Report on the State of the Legal Market detailing their views of the dominant trends impacting the legal market in 2019 – and key issues likely to influence the market in 2020 and beyond.
This Report departs from the idea that, from the last three or four decades, the legal industry has operated on a model that has been essentially “law-firm centric”, a model that allowed senior partners at law firms to decide how legal services were defined, priced and delivered.
However, over this same period, there has been mounting evidence that the underlying model itself is changing. Clients, non-law firm competitors and even many Law Firms are nowadays operating with very different assumptions about the role law firm services should play in the legal ecosystem and how such services should be delivered.
The analysis begins with a review of the performance of U.S. law firms in 2019.
Current State of the Legal Market
(1) Key Performance Measures: During 2019, most firms in the U.S. legal market experienced fairly steady overall financial performance.
(2) Growth in Demand for Law Firm Services: Since 2012, demand growth for Law Firm Services has been slightly up in some years and slightly down in others, creating a growth pattern that is essentially stagnant. That stagnation continued in 2019, with demand growth virtually flat from the preceding year.
(3) Demand Growth by Practice: Demand growth was positive in most practices. In particular, on one hand, Litigation continued to experience positive demand growth, reversing a long trend of negative performance. Growth in Bankruptcy moved from negative to positive. On the other hand, Tax practices, which had grown slightly in 2018, returned to a negative growth territory.
(4) Key Performance Indicators by Segment: Am Law 51-100 Law Firms outpaced Am Law 1-50 Law Firms in demand growth and in fees worked.
(5) Lawyer Replenishment Ratio: Law Firms have experienced positive headcount growth in every year, although the growth rate has accelerated in recent years.
(6) Replenishment Ratio by Lawyer Category: Headcount has grown consistently in recent years only among Associates and Senior/Staff Counsel. In both Partner categories – Equity and Non-Equity Partners – growth in headcount has been negative since 2012.
(7) Lawyer Growth by Practice: the data shows primary lawyer growth in the following practice areas:
- Technology, Transactions & Licensing
- General Corporate
- Real Estate
By contrast, the Tax Lobbying, Regulatory, Bankruptcy and Patent Litigation practice areas showed negative lawyer growth during the same period.
(8) Average Daily Demand per Lawyer: Considering lawyers in the three major market segments in each of the past three years, such three categories experienced a decline in average daily demand from 2018 to 2019.
(9) Lawyer Rate Progression: During 2019, Law Firms continued to steadily increase their rate, with all categories of rates rising –Standard rates by 4.4 percent, Worked rates by 3.8 percent, Billed rates by 3.9 percent, and Collected rates by 3.3 percent.
(10) Worked Rate Growth by Proportion of Firms: Am Law 100 ranked Law Firms imposed the highest rates of increase, followed by Am Second Hundred Law Firms, and then Midsize Law Firms.
(11) Worked Rate Growth by Practice: Technology Transactions & Licensing showed the highest growth in worked rates, followed by Antitrust, Patent Litigation and, Copyright & Trademarks, and Tax. General Corporate and Litigation ranked in the middle of the pack in terms of growth.
(12) Collection Rate Realization against Worked (or Agreed) Rates: As firms have continued to raise their rates, clients have continued to push back. Nevertheless, on the past years, clients push back does not appear to have become more aggressive: the collected rate realization as measured against worked (or agreed) rates has remained stable in the general range of the 2019 rate of 89.3%
(13) Expense Growth: Both direct and indirect (or overhead) expenses continued to raise in 2019, reflecting the pattern of the past three or four years. Law Firms continued to incur significant cost increases for Recruiting and Professional Services, as they had in 2018, although both of these categories represent fairly modest percentages of overall Overhead expenses.
(14) Leverage (Lawyer to Equity Partner): The ratio of Lawyers to equity partners has increased steadily over the past few years. However, the shape of Leverage looks very different for Am Law 100 Firms than it does for Am Second Hundred firms or Midsize Firms.
In summary– during 2019, most U.S. Law Firms continued to perform reasonably well in the face of challenging market conditions. However, the results from the past year also highlight some worrisome trends, including:
- Flat performance in demand growth;
- Continuing negative performance in productivity;
- Increasing rate of growth in expenses;
- Singular reliance on rate increases; and
- Limited resources to deal with any serious economic downturn in the future.
Evidence of an Emerging New Model in the Legal Market
Over the past decade, law firms have adjusted their existing service models sufficiently to product respectable results. While hints of these adjustments – the strengthening hand of clients, the growth in non-law firm legal competition, and increased innovation by law firms in response – have been evident for some time, they have now come starkly into focus.
Dramatic Changes in the Role of Clients
Clients are now effectively exercising their newfound power over the market in ways designed to push improved efficiency, predictability and cost effectiveness in the delivery of legal services.
Evidence of this trend includes – among others- the following:
- Imposition of more vigorous budgeting and billing processes that require law firms to operate in a more ‘cost effective’ and accountable manner;
- Increased reliance on legal operations professionals to manage outside counsel relations; and
- Increased reliance on in-house lawyers to provide many of the services previously obtained from outside law firms
Significant Growth in Non-Law Firm Competitors
Alternative legal service providers (“ALSPs”) constitute a dynamic and growing segment of the legal industry.
When talking about ALSPs, it is crucial to refer to the Big Four accounting and auditing firms, which are now delivering services in a broad range of legal fields.
To cite only some of the more recent examples of Big Four expansions into the legal market:
- In 2018, Deloitte launched Legal Management Consulting to help corporate legal teams “keep pace with the commercial needs of the business” and “to do more with the same or fewer resources”;
- In 2017, PwC launched ILC Legal, a U.S. law firm intended to assist clients on international matters; and
- In 2018, EY Legal acquired Riverview Law, a managed legal services provider previously owned and funded in part by DLA Piper;
It is also important to mention a large-scale top tier legal outsourcing Company located in Israel – LawFlex (https://www.lawflex.com/). Lawflex provides quality legal solutions for short-term legal assignments. Lawflex counts with 300 independent lawyers, working around the globe on a flexible basis, at competitive rates.
Innovative Responses by Law Firms
In response to these market changes, in recent years, Law Firms have been adjusting to new ways of doing business.
Some of the strategies addopted by Law Firms are the following:
- Increased Reliance on Allied Professionals and Specialists: in recent years, many firms have increasingly used specialists as important members of client-facing teams, relying on them for expertise on topics as pricing, project management and technology adoption.
- Improved Internal Systems: in recent years, Law Firms have improved their internal systems, taking signigicant steps to improve efficiencies in the delivery of their legal services, to support their pricing strategies and to make better use of proffitable data.
- Expanded Partnering and Outsorcing of Services: during the past decade, Law Firms recognized that, for cost decisions and quality reasons, it is often more desirable for a firm to outsorce certain services closely related to its legal work rather than to provide the services on its own (e.g.: E-Discovery, Non-legal Research, Litigation & Investigation, etc.).
- Creation of “Captive Subsidiaries” for Legal Related Services: some Law Firms have formed in-house subsidiaries that provide a wide variety of law-related services (e.g. risk consulting, government strategies-for lobby and governance relations).
- Expanded Use of Technology to Improve Legal Work Processes: for the last few years, Law Firms have been adapting to Technology (LegalTech) driven change, creating, among others, consulting services designed to encourage innovation in legal technology and on-line services to assit clients in substantive legal areas;
Elements and Challenges of the Emerging New Model
We can notice that the fundamental changes currently at work in the legal market are rapidly replacing the ways of delivering legal services. The new model moves away from traditional law-firm centric model – in which unique legal expertise was seen as the primary service clients purchased on a fee-for-services basis, and towards an “integral solutions” model characterized by value-based pricing.
In the long run, the fundamental choice that most law firms face is to adjust to the new realities of the marketplace or face an increasing erosion of their abilities to compete effectively.