Law Firms In Transition

Legal consulting firm Altman Weil's annual survey is appropriately titled "Law Firms in Transition 2010".

The survey reports that law firms are in the process of determining how to institutionalize large scale changes to both how firms are staffed and how work is delivered.

In terms of staffing, the survey found that:

• In 2009, 44 % percent of the firms laid off associates

• 53% reduced or discontinued hiring first-year associates

• 64% shrank their summer associate programs
  

For 2010:

• 10% of the firms plan to cut associates
  

• 38% plan to reduce or discontinue hiring first-year associates

• 54% plan to shrink their summer programs

In terms of how work is executed and delivered:

• 39 percent of the law firms used contract lawyers in 2009, while 53 percent may in 2010, and 52 percent expect that contract lawyers will become a permanent part of their staffing plans.

• Nearly 10% of firms outsourced or offshored legal work in 2009, and 28% of law firms expect outsourcing of legal work to be permanently adopted in the future.

According to the survey, many law firms do still remain skeptical of outsourcing and offshoring and will likely adopt them only when pushed by clients.

But, as the survey itself notes, this level of resistance that some firms feel towards outsourcing is similar in nature to the resistance firms previously felt towards alternative fee structures.

So, how do firms now feel about those alternative fee structures they once opposed? According to the survey:

• 94.5% of law firms offer some alternative fee arrangements (AFAs), and all firms with 150 or more lawyers do so.

Clearly, law firms -- pushed by the demands of clients -- moved past their early resistance to alternative fee arrangements.

Combine that historic precedent with the fact that last year 67 % percent of law firms made cuts in support staff, 43% cut paralegals, and 44% cut associates. Since much of the legal work that is successfully outsourced is associate-level work, additional movement on outsourcing seem likely.

The Under-Reported Story

Law.com recently ran a piece by Frank D'Amore, founder of legal recruiting and consulting firm Attorney Career Catalysts, discussing one of the questions he is asked most:

"Alternative fee arrangements, the decline of hourly billing and rates are being written about frequently. Is a lot of this more hype than substance, and how do you think things may shake out when the market stabilizes?"

According to D'Amore, alternative pricing is here to stay but, at the same time, the billable hour is not going to vanish, either.

"...there are matters that are just too important or otherwise defy being easily wedged into alternative fee arrangements. That's why I think that hourly billing is here to stay, even if its use declines somewhat over time."

But what is more interesting is D'Amore's opinion that the under-reported story here is the reductions law firms have made to their hourly rates in the face of more stringent client demands.

"As the balance of power swung to in-house counsel, they have been able to drive harder bargains on non-alternative fee work.

"Getting those discounts from large firms may prove to a be a watershed development, as it underscored that a new world order may be unfolding that will reward firms with business models that support greater pricing elasticity. These firms may be better positioned to get a broader range of work because they will be more suitable partners for their clients; their challenge will be to maintain a cost structure that keeps this lower end work within profit parameters. Firms that are inflexible or hyper-focused on rates may get hurt as a result."

As D'Amore concludes, it makes sense that firms that are set up to support pricing elasticity may be the long-term winners.

The Vanishing American Lawyer?

The Vanishing American Lawyer is an interesting new book weighing in on the future of the profession.

Authored by George Washington University Law Professor Thomas Morgan, the book discusses -- amongst many topics -- two items that have been frequent fodder in this blog: The the lag time that American law firms are exhibiting in adapting to the changing global legal climate, as well as the irresponsibly slow reaction from law schools to the changing nature of the profession.

Am Law Daily reviewed the book, and said:

Morgan doesn't think that lawyers or legal needs are about to disappear. Rather, he argues, thanks to a combination of technology, global competition, and client demands, today's fairly comfortable landscape will be transformed.

"What this book predicts," he writes, "is that the interaction of law with increasingly complex economic and social issues will make distinctively legal questions less common and make many of the skills now honed in law schools less relevant."

In his view, highly specialized lawyers—often working out of large globe-straddling firms—will serve their clients as one of many agents addressing a problem. Some of the work now done by lawyers will be done by others, and vice versa.

"For better or worse," he writes, "most of tomorrow's lawyers will resemble what we today call business consultants more than they will call to mind Clarence Darrow or Atticus Finch."

The Vanishing American Lawyer seems to be consistent with Richard Suskind's The End of Lawyers? in their shared conclusions that the future of the profession is facing profound changes brought on by technology, the commoditization of legal services, external investment, and legal outsourcing.

The Clients' Revolution, Part II

The Eversheds report we discussed last week is worth a continued look.

The British international law firm commissioned a study that included 130 General Counsel and 80 law firm partners, and one of their primary findings was this:

The legal sector is entering the modern world where, like every other industry other than health care and auto repair, the balance of power favors the client.

"76% of legal clients and 75% of partners say that the current balance of power in the client-lawyer relationship is now with clients. A majority of both groups believe the shift to a client-led market will be permanent."

"Many managing partners have recognised that they are becoming primarily service providers and that their previously dominant role at the centre of the client-lawyer relationship has irrevocably altered."

According to the report, this move into the "modern world" (one which other professions have been embracing -- or forced to embrace -- for years) has some overlapping and concurrent drivers.

• The recession has pushed technological innovation up the agenda.
  

When asked about their greatest challenge over the next ten years, partners rarely (< 10%) cited the effective use of technology in the Eversheds 21st century law firm report in 2008. The recession seems to have changed this: 48% of partners are now offering technological solutions
directly to their clients in order to streamline services and a significant number of managing partners said they were keeping up the investment in IT despite cost reduction pressures.

• Clients are actively outsourcing and using technology.
  

The greatest change over the past two years has been among clients whose appetite to outsource and use technology has increased. Just over a third (38%) of General Counsel were actively implementing or considering outsourcing low-level work to low cost jurisdictions and a further 29% were receptive to the idea of outsourcing provided they had suitable work. 58% of clients are implementing or considering technological solutions to standardise processes. However, their shift in attitude is not equaled by private practice: over half (56%) of clients reported that they had not received offers of alternative resourcing from their external advisers as a result of the recession.

• The recession is driving efficiency.

The drive to better and more efficiently resourced legal work has received a huge boost from the recession. 73% of clients said that they are implementing better and more efficient resourcing of legal work. A majority of law firm managing partners recognised that the need to be more efficient was key to being a sustainable business. Efficiency is the area in which they are driving the most change as a result of the recession.

Technology, outsourcing, and efficiency. It's becoming a familiar mantra.

The Clients' Revolution

Evershed's report on the post recession legal sector for 2010 confirms and expands upon the observation we posted two weeks ago: The recession itself was not the cause of current changes in the business of law as much as it was an accelerator.

The London-based international firm commissioned a study that included 130 General Counsel and 80 law firm partners, and one idea the study explores is:

"When the severity of the recession became apparent at the end of 2008, opinion was divided as to what this meant for the legal market. Would it bring about a new world order, or would the market revert to its pre-recession shape as soon as the cycle swung up again?"

Pursuing that question, the study asked if the participants thought the recession would have a lasting impact on the profession?

A resounding majority (78%) answered “Yes”.

But the study then puts the recession within the context of a greater, inevitable change for which the profession of law was due.

"However, the recession in itself was not thought to be the key driver of change. What it has done is accelerate other significant, long-term drivers of change. Some law firm managers believe that this change has been accelerated by as much as ten years."

Two of the primary drivers the report identifies are globalization and technology. To further underscore the profound effect of the influence of technology, though, it's arguable that the globalization of legal services would not be possible without the technology, making globalization more of a subset of the technology.

One of the key byproducts of these changes, according to the study, is that clients are now taking center stage. The three pillars of this change are seen in:

• Legal sector enters modern world -- 76% of legal clients and 75% of partners say that the current balance of power in the client-lawyer relationship is now with clients. A majority of both groups believe the shift to a client-led market will be permanent.

• Clients drive change in legal services -- Partners and clients said that the increasing power and importance of General Counsel was almost as important a driver of change as globalisation and the shift to the East.

• Fee levels set for long-term decline -- The vast majority (90%) of General Counsel said they were under internal pressure from their Finance Directors or equivalent to provide better value, efficiency and cost reductions. 60% of General Counsel said they had already reduced their overall external legal spend.

It would appear that we're now gaining proper perspective from the fall of 2008 to start talking in terms of "effects" rather than just "causes".