The legal market is tighter than ever. In far too many instances, I hear firms and partners attribute underperformance to a tight legal market services. However, I believe it would be more honest to acknowledge that underperforming firms or partners may not effectively responding to this changing market. For example, traditional law firm thought is that increasing billing rates and/or hours are the primary drivers of profitability, and cost effective staffing mixes and efficient overhead structures are secondary components with limited utility.
Clearly billing rate increases are good, but what is to be done when clients simply won't continue to expand rates or when the competition is willing to work for less? Even more difficult is what to do when the competition is able charge less and also make a sustainable profit?
Before the falling into the trap of believing that underperformance is solely related to market conditions, consider the following:
- The estimated annual demand for legal services is $200 billion.
- There are an estimated 1,000,000 practicing lawyers in the USA, with about 75% working in private practice. This equates to an average of $260,000 per lawyer in annual revenue (see ABA 2012 Lawyer Demographics and the BLS Lawyers Classification for supply estimates). Clearly, there is plenty of opportunity to succeed.
- Recognize when clients are employing a "downshifting strategy" between firms of different sizes as they search for value. A recent study by CounseLink indicated a clear pattern of clients moving work from the top 50 (750 lawyer +) firms to next tier firms (501-750 lawyer range). These clients are expecting to receive the same value for less money. I believe this to be a strategy that is being, or will soon be, employed by clients at all levels.
- Recognize the opportunity for firms in the small to mid-sized category to attract legal work previously reserved for larger firms.
- Understand that small to mid-sized firms must provide exceptional value to hold on to this work when it comes. The opposite will indicate risk for a client and likely drive them back upstream.
- Identify clients that are employing such a supply strategy and consider incentives for attracting or keeping their work (alternative billing, blended rates etc.)
- Understand that the supply of lawyers is still above the demand curve. For instance, only about 51% of the 2012 graduating class found work as a lawyer. This over supply suggests that there will be continued pressure on rates. Increasing rates alone is not likely to be a winning strategy.
- Recognize that technology is a primary driver of much of the change in legal markets. Clients now have analytics and data to manage their legal spend on levels that law firms simply do not yet fully understand.
- Recognize that it is becoming progressively more difficult to cover cost inefficiencies and poor staffing solutions by increasing billing rates or hours.
Learning to function in this environment will ensure that a firm will have continued success, poise it to attract the best clients and people, and position it to take maximum advantage of a more robust market should it return.