The coronavirus pandemic and its negative economic effects could force law firms to embrace ways of working more efficiently after long avoiding major changes to how they serve clients, according to a new survey by legal consultancy Altman Weil.
“Law firm complacency has run into the brick wall of the coronavirus pandemic. This is an opportunity for a reset if firms are willing to take it,” said Eric Seeger, survey co-author and Altman Weil principal.
Law leaders responding to the 2020 “Law Firms in Transition Survey” said they had been taking steps to boost profitability. These include jettisoning underperforming lawyers, transitioning to smaller, cheaper offices and reducing staff.
“We expect more firms to pursue each of these options this year,” said Thomas Clay, the survey’s co-author. “But a lot of it depends on whether the pandemic is over and everything is back to normal at the end of the summer, or if it goes on a lot longer.”
The survey is based on data gathered from leaders at nearly 200 firms, about one-quarter of which are on the AmLaw 200. The data was collected in March and April of this year, just as the pandemic was beginning to affect firm operations.
Many law firms took immediate steps like compensation cuts and furloughs to counter the drop in demand for legal work caused by the Covid-19 crisis, but longer-term structural changes are harder, the survey found.
It noted that for the past seven years, managing partners gave the law firms in general low marks for efforts to improve the efficiency and value of services for clients.
At least through early spring, the majority of firms still characterized their current progress as “zero or early-stage development in the areas of pricing, staffing and efficiency.”
About 70% of the managing partners and other firm leaders responding to the survey said they had been taking steps to increase profitability by eliminating lawyers who were not pulling their weight.
Yet, at the same time, 31% of firms said their equity partners were not sufficiently busy, and non-equity partners were not busy enough in 50% of firms.
“It’s something that’s hard to do, cutting back on people,” said Clay. “Yet the number of legal hours in the legal profession has been shrinking every year, but people are still measuring by 1,800 or 2,200 billable hours a year.”
Another top strategy law firms cite to bolster their bottom line is higher billing rates, but Clay warned that few firms outside of 50 or so largest firms are going to be able to pursue that avenue as corporate clients, battling their own budget issues, focus more on that aspect of spending.
Reacting to the current crisis, clients are going to push more aggressively for lower pricing along with predictable budgets and other efficiencies, Clay said.
Even back in early spring, many law firm leaders in the survey, nearly 70%, said they were losing work to corporate legal department in-sourcing. ‘
As the Covid-19 crisis continues, more legal departments will likely withhold even more billable work from law firms as they try to save money by slashing outside counsel costs.
Other competitors for legal work haven’t gone away either. According to survey respondents, they were, in descending order of threat level: client technology tools, alternative legal services providers, non-traditional law firms, and the Big Four.
To counter a downturn, law firm leaders agreed that increasing cash reserves, cutting overhead, and reducing hiring of first-year associates were all good options. They also favored stronger client relationships.
The survey findings cited partner resistance as the top reason firms were not doing more to change the way they deliver services.
Altman Weil began the survey in 2009, as law firms were adjusting to the fallout of a major economic recession. This year’s survey, Clay said, “highlights the persistent disconnect between what firm leaders agree they should have done in intervening years and what they actually accomplished.”