For the last several years law firm leaders have debated the staying power of Alternative Fee Agreements (AFA’s), fixed fees and initiatives such as legal project management (LPM). Some have steadfastly maintained that the economic downturn beginning in 2008 would ultimately be reversed and the practice of law would return to the “good ole days”. Perhaps more hopeful than informed, these optimists have predicted the demise of efficiency initiatives and “the client revolution.”
As recently as 2010, one survey of U.S. law firm leaders revealed only 52% believed permanent change in the law firm business model had taken place. That sentiment now has solidified substantially. AltmanWeil has just released its fourth annual “flash survey” of law firm leaders revealing a vastly different degree of conviction that the practice of law will not return to the halcyon days. Remarkably, the difference in law firm leaders’ view of permanent change since the first survey in 2009 has increased about four fold across many different economic indicators from competitive price sensitivity to commoditization and outsourcing of legal work.
In the midst of many indicators of fundamental and irreversible trends, the survey concludes:
This is an exciting time in a profession not prone to exuberance, a time when risktakers
have the potential to capture attention, talent, momentum and market share.
Firms that wait for perfect conditions, ideal timing or the best plan will fall behind.
We look forward to seeing firms embracing innovation and flexibility and pushing
ahead with optimism and confidence.
“Sure”, you say. “These are law firm consultants. They’re just selling services. Of course they would say that.”
Hold on. The most compelling data comes from the law firm leaders themselves. Respondents from large, mid-size and small law firms alike (although to varying degrees) all see a fundamental change in the practice of law has arrived and it isn’t retreating. First of all, the response rate was remarkable with over 30% of those surveyed responding. Of the 792 firms with 50 or more lawyers surveyed 238 provided a response to this significant assessment of law firm business trends. The survey was conduct over March and April, 2012. 40% of the NLJ 250 firms responded and 34% of the AmLaw 200 firms responded. The responses illustrate the current state of U.S. law firm economics like no other data available today.
When asked what the greatest concern facing the respondent firms over the next 24 months, the following “word cloud” resulted:
Clearly, clients are in the driver’s seat in terms of growth and the future of the practice of law. The “client revolution” has certainly taken hold. Among the disparities in the survey was the disconnect between what level of seriousness the law firms believe they are providing to satisfy client expectations of efficiency and price control. Law firms believed they were taking this issue very seriously. A survey of legal departments by AltmanWeil in the Fall of 2011 revealed that in house counsel are not convinced.
Among the growing and perceived permanent trends in legal practice are increases in the outsourcing of legal work to other lawyers and non-lawyer providers. Clearly, the advances in e-discovery have illustrated how technology can more efficiently and accurately perform tasks historically viewed as the work of lawyers. Legal Process Outsourcing companies (LPO’s) are making significant inroads in providing low cost legal services traditionally performed by law firms. Also, commoditization of legal services is viewed as a permanent and growing trend leaving less high quality and higher priced work for lawyers in law firms to provide. These trends coupled with significant expense increases over the last year paint an economically dangerous picture for the status quo minded.
80% of respondents see the growth and permanence of non-hourly fee billing arrangements. Clearly, AFA’s are on the rise and they constitute a larger proportion of law firm revenue each year. However, only 14% report that AFA’s are more profitable than standard hourly billing arrangements. Clearly, a disconnect between alternative fees and profitability continues to plague the industry. 67% of respondents reported that they are reactive to client demands for AFA’s, rather than proactive. Those who are proactive (33%) believe that AFA’s are a competitive advantage and welcome the trend. In other words, two thirds of the firms are being drug into the AFA arena unwillingly. Fully 94% of the firms reported they provide non-hourly billing alternatives.
More than half the firms reported the analysis and use of profitability data at the matter, practice group and client levels. Yet 91% reported that price competition will only increase over time as a permanent feature of the legal business landscape. Almost half the firms reported that the slowdown in the growth of partner profits will be a permanent trend into the future. As a result of these significant changes, the respondents were asked if they would recommend the law as a profession for their own children. Only 36% responded affirmatively. The remainder replied in the negative or simply were unsure.
Change in the business of law? It’s no longer a fortune cookie prediction.