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Despite Growth, Report Warns Market Shifting for Law Firms

Jan. 6, 2020, 11:00 AM

Demand for law firm services registered its second straight year of growth in 2019—a feat accomplished only twice since the Great Recession. Still, law firm leaders should not overlook “fundamental shifts” occurring in the law firm market, a new report warned.

Clients have taken “decisive control” of who performs legal services and how they are performed, bucking the decades-old “law firm-centric” model, according to the 2020 Report on the State of the Legal Market.

Some law firms have begun responding to that change by outsourcing work to lower-cost providers, offering new services through subsidiaries, and expanding their use of technology, the report notes. But more needs to be done if law firms want to take back the market share they controlled before legal departments began bulking up to handle more work.

“Service providers going forward will need to be more multi-disciplinary, more integrated in the solutions they provide, more willing to think about innovative pricing strategies, and more focused on outcomes,” James Jones, co-author of the report and a senior fellow at Georgetown’s Center for the Study of the Legal Profession, said. “It seems to us the firms that are doing that now are doing very well.”

In 2018, Jones’ writing warned law firms about engaging in “consensual neglect” of the changes occurring in the legal market. And last year, the annual report said mid-size firms should not make the same business decisions, such as mass pay raises for associates, as the largest and richest firms.

In some ways, the report released annually by Georgetown Law and Thomson Reuters was more positive.

First, there was the data from last year, which mostly delivered an optimistic view of law firms’ performance. Firms billed nearly 5% more in fees thanks to average rates that grew nearly 4% and demand that ticked just shy of 1%, according to Thomson Reuters Peer Monitor data through November. Headcount grew 2% while productivity dipped by more than 1%.

In another positive note, some law firms have been making investments in efficient business methods, new business lines, and technologies.

More than 60% of large firms now use technology to replace human resources, reward efficiency in their compensation decisions, and provide project management training, the report said.

It also listed five firms that have developed “captive” subsidiaries to provide law-related services including Allen & Overy, Dentons, Eversheds Sutherland, Duane Morris, and Littler Mendelson. And even more firms are expanding their use of technology to improve their legal work processes, the report said.

The report does not suggest an ideal investment road map for law firms, but Jones said firms will have to make individual decisions about which new business models to pursue. For instance, in practice areas that face steep competition from lower-priced technology solutions, firms will need to develop lower-cost delivery models. Jones pointed to large labor and employment firms as an example.

“They are all about putting up self-help systems that clients can use to make basic determinations about labor and employment questions without a formal consultation process,” Jones said. “They have training subsidiaries that go out and do training. They are firms that clearly were driven toward technology solutions.”

Still, the report listed plenty of challenges law firm managers will face. Those included a lack of scale to compete against larger competitors such as the Big Four accounting firms, difficulty hiring new types of talent, and a lack of access to capital.

While law firms have traditionally not been capital-intensive businesses (firms largely empty out their cash reserves at year-end), Jones said firms will need to make larger investments in technology, new types of professionals and new business lines to compete effectively in the coming years.

One way those investments could become easier is if state bar regulators move forward with changes to professional ethics rules that limit ownership interests in law firms to lawyers. States including California, Utah, Arizona, and Illinois are considering such changes. Those restrictions “will come under increasing pressure,” Jones said.

“There really is a fundamental shift in the model for legal services that is well underway,” he said. “In the last year or two, the evidence for that has begun to coalesce in a way we have not seen before. And it is really pointing to a significant shift in the model.”

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Jessie Kokrda Kamens at jkamens@bloomberglaw.com; Rebekah Mintzer at rmintzer@bloomberglaw.com

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