State of the Legal Market: Are law firms failing to recognize and respond to a fundamental market shift for legal services?
Leading off with a fascinatingly detailed cautionary tail about Kodak's rise, reign, and fall when it refused to recognize and respond to the shift away from film photography, Georgetown Law Center for the Study of the Legal Profession's 2016 Report on the State of the Legal Market tracks and predicts changes to the legal marketplace. Reported trends from 2014 to 2015 include:
Overall demand for legal services has been flat, with the increased demand for real estate and corporate law balancing out the decline in demand for tax, litigation, labor / employment, patent litigation, and bankruptcy services.
The number of lawyers in firms grew slightly, but with the demand for services flat, the overall productivity per lawyer saw a decline. Productivity for law firm associates has actually been up, but that's been counterbalanced by more significant decline in productivity among of counsel.
Law firms continue to try raise billing rates slowly, but because corporate clients are really pushing back on bills, realization has dropped. Midsize firms are particularly hard hit.
Law firms have kept their expenses basically flat.
Overall, law firms saw revenue increase by 3.5%, revenue per lawyer (RPL) increase by 2.8%, and profits per equity partner (PPEP) increase 4.6% There was much more disparity among midsized law firms than among Am Law 100 and Am Law 200 law firms.
So what does this all mean for law firms? And for individual lawyers' career prospects in 2016?
Since the onset of the Great Recession, clients -- particularly corporate clients -- have "increasingly demanded more efficiency, predictability, and cost effectiveness in the delivery of the legal services they purchase. In the main, however, law firms have been slow to respond to these demands, often addressing specific problems when raised by their clients but failing to become proactive in implementing the changes needed to genuinely meet their clients’ overall concerns," says the Georgetown report.
Companies are have options, including moving legal work back in-house and using innovations like virtual law firms, management consultant firms, and alternative service providers (ASPs). That means, overall, that although corporate legal spend has gone up, traditional law firms' share of the legal services market has declined. As the report says, "Firms at the highest end of the market will always be sought out for critical bet-the-company work. And there remains a substantial market for firms that can provide highly professional and creative services to help clients navigate their way through difficult disputes, create new and innovative financing vehicles, or provide bench strength for handling a large and complex litigation or transaction." However, the routine work and labor intensive work may well be provided by others.
This means the gap between successful law firms (at the elite end of the spectrum) and endangered law firms has been widening. And is expected to continue to widen. The pressure on law firms to adapt or die is resulting in law mergers, investments in technology, alternative fee structures, and increased use of support staff, as well as in significant operational changes. Many senior partners resist these changes, particularly considerations of how to move away from the billable hour.
For individual lawyers thinking about their own career development and career paths, these changes mean more pressure to prove to cost-effectiveness and productivity -- both to internal and external clients.
Read Georgetown Law Center for the Study of the Legal Profession's 2016 Report on the State of the Legal Market