From the foregoing analyses, it is apparent that the financial performance of law firms over the past 10 years has been driven by only one factor: rate increases. As we have seen, demand gowth for law firm services has been essentially flat, productivity has been declining, expenses have been growing (albeit at a fairly modest rate), and leverage has remained essentially unchanged. In short, the only factor positively impacting revenue growth has been the ability of firms to raise rates 2 to 3 percent a year.
—Thomson Reuters Legal Executive Institute/Georgetown Law Center for the Study of the Legal Profession, 2017 Report on the State of the Legal Market (January 2017)
There are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second.
Your margin is my opportunity.
—Jeff Bezos
Just released is the annual Georgetown/Thomson Reuters Report on the State of the Legal Market, 2017 edition. What does it tell us?
Frankly, if you’ve been paying attention to these pages for awhile, nothing new. Rather, it reconfirms, recements, and underscores trends we’ve seen developing and commented upon and analyzed for quite a few years.
That’s not 100% accurate: There is actually one surprise, in the form of recasting and putting a valuable new spin on the debate about the durability of the billable hour, but to learn what that is you’ll have to plough ahead here. (Writer’s prerogative and besides, it’s only fair.)
What’s confirmed is this:
- The Great Financial Meltdown shocked the law firm world from a sellers’ market to a buyers’ market, and clients aren’t going back.
- The primary economic and financial consequence of that is unrelenting pressure on fees.
- Second order effects include a revealed preference by clients to avoid 1st and 2nd year associates wherever possible (with law firms responding, mirabile dictu, as rational service providers and cutting their professional ranks at that level).
- Enforced disaggregation of services away from the law firm as the all-purpose supplier to a mixture of what law firms are best at and what contract, staff, and temp lawyers are best at, as well as to: Legal process outsurcers; business model optimizers; technology; and more, is the order of the new day.
- New entrants and new competitors supplying legal services, of which law firms are only a subset cohort, are here to stay. Indeed, every plausible statistic I’ve seen on this is that the “non-law firm” segment of the legal services market is growing far faster than overall demand, meaning it’s doing so pretty much entirely at the expense of traditional law firms.
- Pressure on fees expresses itself in many forms, but the more familiar ones include steady erosion of actual billed and collected rates; productivity; realization; and profitability.
Another, more disturbing, message comes through unmistakably, at least to the attentive and open-minded reader: Much of what firms have been doing for the past decade to cope with the new world order amounts to digging the moat deeper and building the castle walls higher. In other words, we’ve devoted almost all our energy to protecting and defending the entrenched “business as usual” mindset and model, instead of exploring creative and unconventional approaches to adapting and being agile.
The athletes out there will know instintively or by hard experience that stiffening one’s spine (and everything else) in the face of an imminent impact accomplishes really only one thing: Dramatically raises your probability of injury. Smart athletes who plan to keep playing become supple, relaxed, and flexible. The wisdom of this, by analogy, is that when something bad is about to happen to you, relax and absorb the blow so you can devote your energy to recovering and re-entering the competition—having learned something about how not to get in that very situation again.
Maybe not enough lawyers are natural athletes.
Jim Jones (a friend) summed it all up nicely:
“It has been a difficult 10 years for law firms in many respects, and looking ahead, significant long-term challenges remain,” said James W. Jones, a senior fellow at the Center for the Study of the Legal Profession and the report’s lead author. “Actions that have helped sustain firm financial performance over the past few years, such as expense controls and reducing the equity partner ranks, are not likely to be as effective in the future. Firms need to embrace a longer-term, fundamental shift in the way that they think about their markets, their clients, their services, and their futures.”
So much, in other words, for reinforcing those moats and walls. Gunpowder has been discovered.
While I agree that law firms can learn quite a bit from the restructuring of the retail industry, so many of Sears’ wounds are self-inflicted that have very little to do with the market position it occupies . But Macy’s and The Gap are suffering similar setbacks, so point taken.
The dominant method for retailers to move out of the middle and to the “low cost provider” side of the spectrum is essentially an economies of scale play, primarily through pricing power/control over suppliers and keeping labor costs down. Except in the limited form of labor market arbitrage, no analogous methods currently exist for law firms serving the vast majority of SophisticatedLaw clients. Even if the motivation is there, not sure this is really an option for most AmLaw 50-200 firms as currently composed without a ruthless restructuring of most partnerships.
Skeptic: First, thanks as always for your thoughts.
Perhaps I shouldn’t have picked on Sears per se since they have been on a (largely self-inflicted, I agree) downward slide for a couple of decades, perhaps starting with the arrival of “category killers” like Home Depot and Lowe’s, to which they had no effective answer. And we can all draw distinctions where we choose–it’s something lawyers excel at!
I also agree that opportunities for labor market arbitrage in Law Land (the armies of staff and temp lawyers standing at the ready) are limited and essentially a holding action. Seriously cutting costs requires a clean-sheet-of-paper rethink of the business process model.
But perhaps, as you conclude (and as you’ll see in my forthcoming book, Tomorrowland), the greatest obstacle to fundamental change is our very own partnership model.