Law Firm Overview and Cost Reduction

Law Firm growth and decline, industry challenges, cost reduction trends and future trends.

High growth sectors suggested by several sources include but are not limited to M&A activity, IPO’s, real estate, technology, and healthcare.

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  • Law firms saw significant declines in the years after the 2007 recession, as clients cut costs and turned to in-house options, but they are showing modest although uneven growth again.

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  • According to IBISWorld, industry revenue is expected to grow by 1.9% in 2015 and “at an annualized rate of 1.4% to $292.0B by 2020. (Law Firms in the US, Sept. 2015, report 54111)
  • Growth is uneven in the industry and may correspond to a “practice mix that meets current needs or the geographic variables of local markets.” Altman Weil’s Law firms in transition 2015.
  • High growth sectors suggested by several sources include but are not limited to M&A activity, IPO’s, real estate, technology, and healthcare.
  • The Hildebrandt Consulting/Citi Bank 2015 Client Advisory published Dec. 2014 also called for lower growth, with a widening gap among the firms. Winners include “those with strong brand-name transactional practices, or firms who have demonstrated value to their clients by offering quality work at the right price, while creating a well-managed cost structure to maintain or improve their margins.” Factors including “ill-conceived growth strategies; too much dependence on litigation; and top heavy, expensive leverage models” may have contributed to other firms’ lack of growth.
  • The largest firms showed the most growth in 2014, while others saw a decline; that trend was expected to continue through 2015.
  • All sources expect transactional work to grow and litigation to remain flat.

What are they doing about cost reduction now:

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  • All the surveys find that firms should take “a longer range view of the changes impacting the legal market and restructuring their services to meet likely client expectations in the future.” (Georgetown study) Very few are taking this new strategic approach.
  • The most successful firms ARE changing pricing models, and improving efficiency and staffing models. (All sources report this, but see Hildebrandt/Citi report p. 9-10 for a good discussion.)
  • Firms have consolidated and reduced their summer associate programs as well as hiring of first year associates.
  • Some are now “responding to RFPs and participating in competitive selection processes,” are better at “developing and working under project budgets and in responding to client demands for alternative fee arrangements,” and “have begun to develop project management capabilities as well as the skills needed to partner with other providers in disaggregated service settings.” (Georgetown study and see more discussion at Hildebrandt/Citi report)

 

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What are the challenges/struggles the industry faces:

  • A shift from “a sellers’ to a buyers’ market, one in which clients have assumed control of all of the fundamental decisions about how legal services are delivered and have insisted on increased efficiency, predictability, and cost effectiveness in the delivery of the services they purchase” is cited as the most significant market change in the 2015 Report on the State of the Legal Market, published by Georgetown Law center for the Study of the Legal Profession.
  • Firms should expect to structure themselves “around their clients, innovating wherever possible, and showing clients how their firms are different from their competitors.” (Hildebrandt/Citi report)
  • Corporations continue move legal work in-house; over 90% of the firms surveyed see that as a current or future threat.
  • Potential clients also have access to technology they can use themselves, such as “online tools for drafting legal documents, that “reduces the need for lawyers and paralegals.” Well over half the firms surveyed see this as a current or future threat. (Altman Weil)
  • A third threat comes from “non-law-firm providers of legal and quasi-legal services.” (Altman Weil) These include legal process outsourcing companies.
  • Although the recession is over, many firms find that their partners still don’t have enough work. Despite “cuts made during the downturn, many firms” still have too many lawyers.” (Altman Weil)

What does the future look like for the industry:

Revenue for the Law Firms industry is expected to grow “at an annualized rate of 1.4% to $292.0B by 2020. This will be fueled by a “projected increase in corporate profit and a stricter regulatory environment, both domestically and internationally.” (Law Firms in the US, IBISWorld, Sept. 2015, report 54111).

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