By Jeffrey A. Lowe
For the last several years, law firms have been trying to determine whether the current state of affairs is the “new normal.” As recently as 2010, a promising start to the year gave some firms hope that there was some small chance of returning to the pre-2008 method of doing business. Those hopes were soon dashed, however, by a disappointing end to that year, followed by uneven performances over 2011 and 2012. In January 2013, Citi Private Bank Law Firm Group and Hildebrandt Consulting released their 2013 Client Advisory and put the “new normal” debate to rest, declaring that “it is time to let go of any lingering notion that the industry will revert to the boom years before the Great Recession anytime soon. With profit growth and other financial indices reaching lower setpoints in the past four years, we anticipate that the current state of the industry will remain the norm for the foreseeable future.”
Major, Lindsey & Africa agrees with this assessment, and offers the following additional thoughts:
(1) The global demand for legal services, at least those services traditionally provided by BigLaw, has contracted. Supply exceeds demand, clients are fully aware of that fact and have grown increasingly comfortable demanding rate concessions from law firms. Competition for clients is fierce and will continue to grow.
(2) New entrants to the legal services market, such as Axiom, are taking market share away from BigLaw and expect to make significant inroads over the coming decade. This will put enormous pressure on BigLaw, especially those firms which do not do premium work. These new providers have typically started by eating away at the bottom of the pyramid of work (document review, etc.) but have no intention of stopping there.
(3) The expansion era of BigLaw is not over, but is more focused on filling in the gaps (i.e., key geographies and emerging markets). The clear takeaway from law firm leader conferences that we have attended in London, Washington and San Francisco is that the U.S. is no longer seen as a growth market, with the possible exceptions of New York, Washington, D.C., Silicon Valley and Texas. Firms, especially the Magic Circle firms, seem almost exclusively focused on Latin America and Asia. Toward that end, even though most firms are suffering considerable losses in Asia, they believe it is necessary to do so now so that they are ready to capitalize on this growth as demand continues to grow. These losses are seen as a necessary evil, much the same way losses from London operations were previously incurred in the prior two decades.
(4) More and more clients are exploring alternative fee agreements (AFAs) and expect their law firms to be more proactive in developing them. These AFAs can take many shapes, such as flat fees, success-based fees, auction-based fees, etc. Ironically, the empirical evidence seems to suggest that, like law firms, many clients are equally uncomfortable using AFAs, and what they really want at the end of the day is a discount off the rack rate. So, although the death of the billable hour has been greatly exaggerated (apologies to Mark Twain), the impact of the AFA is clear: if you want to continue to serve as a go-to legal provider, you better start getting more creative about your fees.
(5) Practices are increasingly becoming commoditized to some degree. Over time, this results in firms being able to retain a smaller portion of the former practice at high billing rates. Examples from ten years ago include labor and employment, real estate and insurance. Today, even high-profile practices such as patent litigation and securities litigation are experiencing increased rate pressure.
(6) The non-partner track will continue to grow and become an acceptable career track at many firms. Many young lawyers entering the legal profession have no desire to become partner. Accordingly, firms will continue to reduce the size of their incoming classes and explore non-traditional staffing options such as project attorneys and staff attorneys. One long-term effect of this change will be that those young lawyers who pursue the partner track will become even more highly-prized, as they will increasingly be given the sexier, more high-profile projects. Similarly, the growth of this separate class could lead to increased tensions within the firm.
(7) More firms will experiment with off-shoring and on-shoring back office services, as well as project attorneys and staff attorneys, to lower wage geographies such as West Virginia and Tennessee. Firms such as Orrick, WilmerHale and Reed Smith have already embraced this concept and others are following their lead.
(8) While firms have become better at controlling expenses and have shed many of their most unproductive partners, they are still carrying many unprofitable partners and will need to deal with this issue. This will result in significant reductions in the partner ranks, and will continue to broaden the compensation divide between rainmakers and service partners. To their credit, most firms seem to be genuinely distressed by this reality, and have been slow to deal with it because of their true affection for their partners.
Similarly, partners will be forced to become more savvy about the business aspects of their profession. Firm leaders universally lament the large gap between the financial realities of running their law firms and the perception of their partners. Many partners simply don’t understand basic business concepts, such as the difference between revenue and profit. They are unaccustomed to running their own practices as a business.
(9) Changes in technology will continue to drive changes in the legal market. Firms will need to make significant investments in technology to keep up with these changes. These changes in technology will continue to change how and where people work, as well as the type of work that is handled by BigLaw versus new entrants to the legal services market and other, lower-cost providers.
(10) Firms will require less “Class A” office space to accommodate their personnel, and will continue to explore ways of re-configuring office space (e.g., hoteling, elimination of partner offices, etc.) in an effort to control costs.
(11) The competition for lateral partners will continue to remain fierce, but will continue to be skewed toward those with significant portable practices. Firms will continue to be reluctant to make investment hires. Firms that are more strategic about their hiring, and/or employ professionals (lawyers or otherwise) dedicated solely to recruiting will have a significant competitive advantage.
(12) Now more than ever, firms that lack competent leaders, sound strategies or both will be extremely vulnerable. Some firms have already begun to gravitate toward more professional managers/leaders, forcing partners to cede some measure of control to professional business men and women who are more accustomed to managing in these types of competitive environments (though this has not always been successful). Succession will be a huge issue in the decade ahead, and it is unclear whether the traditional “player/coach” model can survive in the 21st century.
(13) The number of dissolutions and mergers will increase, and rainmakers at weaker firms will continue to move upstream, putting significant stress on these firms.
* * * * *
Any several of the factors listed above would be enough to keep firm management on its toes, but taken together the message is clear: BigLaw, it is time to adapt or die.
Jeffrey A. Lowe is the Global Practice Leader of Major, Lindsey & Africa’s Law Firm Practice; the Managing Partner of the firm’s Washington, D.C. office; and the leader of the Washington, D.C. Partner Practice Group. He is the author of the 2010 and 2012 Major, Lindsey & Africa Partner Compensation Surveys, the most comprehensive efforts ever undertaken to identify ranges of partner compensation, the criteria law firms use in determining partner compensation, and the satisfaction of law firm partners with their compensation and compensation systems. He is regularly quoted by leading legal newspapers and periodicals, such as The American Lawyer, Law 360 and The Wall Street Journal, and his articles have been published in the D.C. Legal Times; The New York Law Journal; The National Law Journal; the Law Firm Partnership & Benefits Report; and the Texas Lawyer.