The Survey of Small Firm Economics

Last week we looked at the survey of the 250 largest U.S. firms, and this week we'll look at The Survey of Law Firm Economics, a joint project of ALM Legal Intelligence and The National Law Journal, for which the majority of respondents were firms with fewer than 150 attorneys.

Consistent with the largest firms, the small and mid-size firms also saw an historically unprecedented double dip.

According to law.com:

In 2008, revenue per lawyer declined by the largest percentage in 25 years — nearly 5%. In 2009, the figure dropped again, this time by less than 1%. Although the decrease was slight, a two-year drop in revenue-per-lawyer figures is unprecedented for firms taking this survey.

And yet, according to the report, small and mid-size firms actually increased profitability by:

• Aggressive cost cutting.

• Expense per attorney dropped by 5% in 2009, the largest ever decrease in expense-per-lawyer.

• Expense-per-lawyer also dropped in 2008, making it the first consecutive year drop in that category since numbers have been tracked.

• Net income was also up by 2.7%.

• However, actual realization rates dropped 2%, and partners wrote off 7% more of their time than in 2008.

• Billable hours also dropped for both partners and associates.

So, if billable hours were down and clients were paying less of their bills, was aggressive cost cutting the sole component of the rise in net income?

No. According to the report, small and mid-size firms also compensated by raising rates.

Hourly rates for the average equity partner are now at an all-time high among surveyed firms.

Which means we seem to have a disconnect. Because most observers feel the balance of power has shifted to the client side. And, as we've discussed, the current ACC Value Challenge expects firms to drop costs by 25% next year.

It would appear that expectations on one or both sides of the equation will have to change.

Collecting Law Firm Data

Last week we discussed the ACC Value Challenge's latest initiative to reduce law firm spending by 25% in 2011.

One obvious question was what tactics will Law Firms ultimately embrace to tackle such a hefty directive?

Corporate Counsel reported last week on one interesting new tool that may factor into the mix.

ACC's longtime general counsel Susan Hackett announced the organization's new initiative to ask law departments to post their internal data -- anonymously -- on an ACC site so all firms can compare how their departments are performing.

The vast majority of law firms track internal data like:

• Outside Legal Expenses

• Actual Performance Compared to Amount Budgeted

• Department Spending as a Percentage of Revenue

But this data is of limited value if it can't be measured against other firms, and that's what the ACC's new database seeks to correct. According to General Counsel:

"Only 24 percent of the survey's respondents said they have the tools or capacity to benchmark their legal departments against others. And that inability to compare, Hackett said, is preventing them from making more effective use of the numbers."

Hackett said they hope to have something up and running, "even if not fully 'populated,'" by mid-2011.

The New Normal

The ABA Journal is hosting The New Normal, an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, and Patrick Lamb, founding member of Valorem Law Group, about the changes occurring in the delivery of legal services.

The phrase "New Normal" describes how technology and global competition are creating a new normal of relentless change, and this past discussion focused on the next wave of value demands from GCs.

According to the article, from GCs perspective, they are now coming from a place where "most things we buy are getting cheaper while law is getting more expensive."

Which leads GCs to question how can law firms can "say you’re putting our interests first when you don’t realize global competition could put us out of business if I don’t manage every aspect of my operations more efficiently?”

We've discussed the ACC Value Challenge before on this blog, but now according to its chairman, Mike Roster, “25% in cost savings for 2011 is the new target."

Roster continues, "I've spoken to many top GCs and this is what they're planning to get to next year, and it's achievable. And by trying to get there, they’ll actually do a better job.”

The New Normal wondered if a goal of a 25% cost reduction would be a "catastrophe or an opportunity", and they postulated that in their experience "seeking modest, incremental improvements usually changes little; seeking dramatic improvements (which requires simultaneously redefining objectives, resources and constraints) often – but of course not always – leads to breakthroughs."

25% cost reductions in 2011 is no doubt an aggressive goal. It will be interesting to see how adamant GCs remain, and what tactics law firms ultimately embrace to tackle such a hefty directive.