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INSIGHT: Law Firms on Sidelines of Structural Change While New Players Take Field

May 30, 2019, 8:00 AM

Last year saw the second straight year of strong financial results for BigLaw. The reason for this was pretty simple: Law firms exercised more control over headcount and passed through larger price increases to their clients. And clients paid. Thus, more money for BigLaw. At the end, it is not a complicated formula.

According to The American Lawyer, after a 5.5% increase in 2017, revenue grew an even larger 8% in 2018, revenue per lawyer was up 4.2%, and profits per equity partner were up 6.5%.

The most recent Altman Weil survey—“2019 Law Firms in Transition” —provides some interesting context for BigLaw in light of this financial success. The survey provides a wealth of information but several points stand out:

  • Increased use of profitability metrics in performance evaluation/compensation: 77% percent of respondents in the survey reported using profitability metrics in assessing partner performance/compensation. Measuring can certainly drive results (62% of those using profitability metrics reported “significant improvement in firm performance.”) One presumes that the data is also used to cull underperformers as 67% reported a reduction in the number of underperformers.
  • Continued increase in the use of hybrid staffing models: Contract lawyers, paraprofessionals, staff attorneys and the like continue to rise in popularity (roughly half of the Altman Weil respondents use these categories) and provide a source of profits that are clearly being tapped by BigLaw.

This all makes complete sense. If the market will bear price increases, why pass them up? If you value profitability, why not measure and reward it? If you have the opportunity to utilize different categories of lawyers and other professionals to provide services at a lower unit cost and add profit, why pass on that? Particularly in a strong economy, these tools are producing the desired result—additional profitability.

Addressing a ‘Serious’ Problem

What is missing in this picture, however, is serious, systematic improvement or change in service delivery models. It is true that 53.8% of respondents said they felt an increased “urgency” for change. Nevertheless, the survey also asked the question about how serious firms were about real change to their models. On a scale of 0 – 10, with numbers below five considered “not serious,” a full 65% of responding firms fell into the “not serious” category.

On a more granular level, only 22% of respondents indicated that they were attempting systematic process improvement. Only 28% of respondents indicated that they were working to improve their knowledge management systems.

Why? At a high level, law firm leaders saw few serious threats on the horizon (no threat rated higher than a 6, for example). Even more to the point, as is the response most years, law firm leaders responded that one of the top impediments to change was partner resistance. When asked for reasons behind that resistance, 66% of firms listed “not feeling enough economic pain.”

Given the economic results of the past two years, that response is completely understandable. BigLaw is a cash business and, as a result, remains focused on year-over-year results. We don’t remember when the model was broken (see, e.g., 2008) nor does it feel broken now. So, why fix it?

Perhaps there is no reason. Perhaps the economy will continue to grow forever. Perhaps the surveys of buyers—in which they express dissatisfaction with current providers—will not reflect actual buying patterns. Perhaps firms can continue to pass along rate increases forever—maybe the pricing of legal services is truly inelastic. Perhaps the years following the Great Recession were the aberration and Big Law is in for another stretch of uninterrupted profit growth.

Perhaps…

Structural Change Continues to Accelerate

… That could be true. The problem is that it bumps up against the reality: Different players in the market are actually driving structural change in the industry. The so-called “law companies,” alternative service providers, technology companies and others all play increasingly important roles in the industry (even if not viewed as a threat by BigLaw leaders).

As an example, take the continued investment by the Big Four into the legal industry. It seems that every few months some additional announcement is made by one of the Big Four. The most recent is Deloitte’s alliance deal with Epstein Becker, which is intended to provide a U.S. solution to employment law.

In fact, the Big Four now account for four of the top five global alternative legal brands, according to Acritas. They are hardly the only players, however: Thomson Reuters, Axiom, Elevate, Exigent, among others are finding different roles in the legal ecosystem. In the last 18 months, UnitedLex alone has struck legal services deals worth around $1.5B.

Judging by the performance of the industry over the past two years, these players have not yet taken inordinate market share from BigLaw (only 22% of firms reported losing work to ALSPs and 15% reported losing work to the Big Four).

Nevertheless, these companies continue to grow in size. They continue to grow brand strength. More significantly, they continue to grow in perceived safety for buyers (for more on this, read the 2019 Thomson Reuters report “Alternative Legal Service Providers”).

As a result, they continue to position themselves to take market share from BigLaw. The likely result at some point is a disruption of market position for a large number of firms (not all, of course).

The difficulty facing BigLaw is its short-term mindset. Change is not an instantaneous process. If a recession hits or these other providers continue to encroach on market share, a firm cannot simply hit the reset button and suddenly begin reinventing service delivery models or wisely implement technology tools.

Change in the good times is important for the long-term health of many BigLaw firms. Perhaps, though, there truly is nothing broken and the 78% of firms that are not systematically looking to improve their service delivery processes have it right. Time will tell, but as BigLaw waits and crowds the sidelines, new players are rushing the field to fill the void.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

J. Stephen Poor is chair emeritus of Seyfarth Shaw LLP, serving as an advisor to the firm’s leadership and as an executive sponsor of strategic initiatives focused on innovation and growth. He served as chair of the firm from 2001 to 2016, leading the transformation of Seyfarth into an international law firm at the forefront of innovation.

To contact the reporter on this story: Lisa Rockelli in Washington at lrockelli@bloomberglaw.com