Each year at this time several annual or quarterly reports on the state of the legal industry are released. Of course, no snapshot in time can reveal the complete picture. However, trends over time shape a compelling story of the health of the industry.
This year the reports are cumulatively unpleasant. The patient is not simply ill, it is on life support.
Long term shrinking revenues, “profitability” driven primarily by cost cutting, pervasive fee discounting, a personnel talent drain and market pricing confusion all lead to a troubling diagnosis that the legal services industry has fundamentally changed its economic foundation. In contrast, little preventive health is being practiced. The absence of initiatives to generate profitability through efficiencies, managing projects with shared resources like a process (legal project management), understanding and serving client objectives, and major structural revisions to the partnership model allow the illness to spread unhindered. Without major surgical procedures, and soon, the patient cannot survive in its current state of disease.
Where’s the data? Try these diagnostics.
Despite this life threatening condition, the legal academy is not performing CPR. Innovation in the law schools is glacial in response to this crisis. Standing by and watching the patient arrest without calling Code Blue is tantamount to malpractice. There are small pockets of law school innovation like Dan Katz and Renee Knake at Michigan State University College of Law, the newly inaugurated legal technology initiative at Suffolk University Law School and University of Miami School of Law’s Law Without Walls program. However, legal education as a system seemingly does not realize or care about the condition of the patient which it birthed.
One year later, only 56% of 2012 law school graduates are employed in positions which can be said to be genuinely legal in character. Last year’s 45,000 law school graduates are being succeeded by this year’s 45,000 law school graduates trained almost exactly like my law school colleagues who graduated 35 years ago this week. Experiencing only 56% success in placing graduating law students in legal jobs should inform the law schools that something is radically wrong and must be changed . . . now, not 2020. However, business as usual suggests that next year the law school mills will churn out 45,000 more graduates with roughly a 50% chance of landing a legal job for which they have “trained”. The data visualized is even more startling as posted by Aaron Kirschenfeld.
On May 1, Above the Law (ATL), the daily rag for all things legal, released a new ranking tool to compete with the annual U.S. News and World Report and other law school lists by which most law schools are judged by aspiring law students (and alumni givers). The index uses outcomes based metrics to rank law schools in terms of what matters most in the new normal: success in placing students in legal positions, alumni ranking, cost (as a proxy for student debt load), and the quality of legal jobs obtained by graduates.
A close analysis of the two rankings reveals the metrics do not precisely line up. Appearance does not match performance in every respect. As law schools face declining admissions, the ATL metrics will become far more important than the sheen on the brass plate bearing the law school name.
Hildrebrandt’s Quarterly Peer Monitor Index also was released on May 1. It reports:
The THOMSON REUTERS PEER MONITOR ECONOMIC INDEX (PMI) fell 6 points to 50 in the first quarter. This marks the fifth decline in the past seven quarters – further indication that the market for legal services continues to be flat at best. Demand dropped 3.4%. Worked rates were up 3.1%. Expense growth declined but not enough to offset the fall in demand.
What’s the doctor’s diagnosis?
As we enter 2013, the legal market continues in the fifth year of an unprecedented economic downturn that began in the third quarter of 2008. At this point, it is becoming increasingly apparent that the market for legal services in the United States and throughout the world has changed in fundamental ways and that, even as we work our way out of the economic doldrums, the practice of law going forward is likely to be starkly different than in the pre-2008 period.
Each year the AmLaw 100 law firm rankings report is eagerly anticipated to see who’s No. 1. This year the power of Tymetrix’ Big Data analytics was applied to the glowing data report of increased profits per partner (PPP) to reveal a much darker truth. The patient is cannibalizing itself. The remarkable growth in PPP as reported in the AmLaw 100 rankings is attributable to law firms “relieving” young associates of employment and de-equitizing partners. To prop up PPP for public bragging rights, firms are gutting their capacity to get the shrinking pool of work done at less cost, increasing the price of services to clients and sharing the spoils among the survivors without investing in reserves (people and capital) for the future. This is suicidal. See AmLawDaily 5/3/2013 Life cannot be sustained if the patient merely eats what it kills without replenishing reserves. Bloomberg Law calls it a BigLaw Crash Landing.
Surely, someone is doing something to solve this crisis. Indeed, law firms proudly announce their innovative alternative fee agreement creativity. A seemingly limitless number of AFA models are cited as proof that law firms are aggressively solving the problem of client demand for cost controls. However, the reality is that most of the AFA types are merely masks for discounting rates. This shell game neither predicts price, nor protects firm profits. It is equivalent to throwing a dart in the dark. Be careful where you are standing.
What is the diagnosis?
The American Lawyer Magazine recently released its first annual survey of law firms and corporate legal departments use and understanding of alternative fee agreements. Paul Friedmann on reading the survey of AFA respondents found significant confusion about what an AFA is defined to be. Apparently, apples and oranges are hard to find. Another commentator, Jean O’Grady, makes a similar observation amazed at the large number of fee arrangements that are called AFA’s. Basically, any non-standard hourly billing arrangement qualifies as an AFA (that would include hourly discounts and conceivably write-offs of time billed). O’Grady observes:
A careful reading of the report shows that the real drivers of the AFA movement are not the GC’s but the corporate executives and often the procurement departments who have been charged with rationalizing and reducing legal spending using the same tools they use for the procurement of office equipment.
Amazing! General Counsel are not driving the use of AFA’s. Their in-house corporate clients are.
Further, O’Grady observes that Legal Project Management is critical to the success of AFA’s:
The most significant take away is that right now many firms are treating AFAs as a loss leader with the expectation that it will bring in more work from the (outside) counsel. But if firms don’t have the discipline and the tools for managing their own efficiencies it is likely doomed to failure. So the real question is whether firms will invest in the development of real LPM specialists who have sufficient authority to establish best practices which become the firm’s standard procedures.
When law firms and corporate legal departments learn what their institutional clients learned long ago, surgery can be performed, rehabilitation can occur and health can be restored. Moving from a business model which profits from waste (billable hours benefiting a shrinking number of “haves”) to one profiting from efficiency and sharing with a broader constituency, the necessary “fundamental changes” in the industry will be addressed.
Legal Project Management is such a tool and one which pays back time to the user, price predictability to the client and profitability to the firm. These are not mutually exclusive benefits. Lawyers using LPM today can attest to this new normal.
How can a patient be this ill and do nothing to regain its health? Does the patient want to get well?
Sounds like dangerous self-destructive psychotic behavior. But, hey, I’m no doctor.
Perhaps we should simply move our offices to a location from which a jump from the window will not result in injury.
To learn more about our solutions, for an online Product Demonstration of Lean4Legal PM®, or if you wish to Discuss How Legal Project Management Applications Can Assist in your work environment, please call us at 615.585.7563 or submit your information via the Contact Us form.