Mid-size Firms: Key Trends Affecting Competitiveness and Profitabilityby Joel A. Rose
In conducting strategic planning studies and facilitating numerous strategic planning retreats, I regularly discuss long-term trends affecting law firms with dozens of members of executive committees and managing partners. These trends of interest differ somewhat, of course, for firms of different sizes. More importantly, sometimes the same trend has very different implications for firms of different sizes.
For mid-size firms in particular, the following trends will remain important for at least the next several years. Lawyer management in the more financially and professionally successful mid-size law firms will need to deal with most and probably all of these trends.
Eight External Trends
External trends are those over which law firms have little or no control.
1. Need for agility: Mid-size law firms are likely to see an upturn in the growth and profitability during 2013 and beyond. However, these firms will find the practice of law to be more competitive, concentrated and demanding, with greater emphasis on delivering high quality legal services faster, and less expensively.
2. Buyer's market: Mid-size law firms will continue to practice in a "buyer's market." This means that lawyers, and most of the services they offer, will be plentiful; buyers (clients) will have a wide-range of choices of high quality lawyers and law firms to serve them; fees and other conditions of employment will continue to be influenced by the buyers (clients). Competition for corporate, business and individual clients will cause traditional hourly billing rates to be replaced by variations of hourly billing arrangements, contingency and fixed fee and combination of these alternatives.
3. Profit squeeze: Mid-size law firms will continue to be affected by a "profit squeeze" resulting from (a) increased overhead due to higher associate and staff salaries and benefits; (b) higher automation costs, professional liability insurance and marketing expenses; (c)partners' unwillingness/inability to increase hourly fee rates for "commodity" type work to off-set higher overhead; (d) enhanced client scrutiny of hourly rates, hours to produce work and lawyer and paralegal staffing of work assignments; (e) pressure by corporate counsel for law firms to absorb more of the "soft costs;" (f) slower paying clients, that affect cash flow and hence the availability of distributable dollars for partners; and (g) a great many mid-size law firms are burdened with higher debt.
4. Consolidations of Clients: Mid-size law firms will see the continued consolidations of corporations and businesses, and the increasing number of bankruptcies of corporate and business clients.
5. Increased Competition - Traditional Sources: Mid-size law firms will continue to encounter increasing competition from national, regional, statewide law firms engaging in inter- jurisdictional client representation as the result of mergers and acquisitions of general practice and specialty firms, as well as from the increasing development of law firm networks and strategic alliances among smaller and other mid-size law firms as the latter attempt to compete with larger multi-jurisdictional law firms.
6. Increased Competition - Outsourcing Legal Work: Companies such as Borg-Warner, General Electric and others, will continue to out source to India and other countries more commodity type and legal research work to be performed at half the $150 and $200 hourly cost that would be charged by their domestic law firms. These lower hourly rates for commodity type work will affect the hourly rate structure of mid-size law firms competing for similar work. Paralegal firms owned by non-lawyers will continue to provide some commodity type legal services via the Internet. The number of Labor/Employee Benefits, Health Care and Environmental consulting firms will continue to grow. These consulting firms will hire more lawyers to perform many of the same legal/quasi-legal/administrative and preventative types of specialized services offered by mid-size law firms.
7. Competition From In-house Attorneys: Corporate and business clients will continue to employ in-house attorneys to perform day to day legal work and manage legal work referred to outside law firms.
8. Multidisciplinary Practices: The increasing number of multidisciplinary practices and the employment of non-lawyer professionals will continue to perform more of the administrative and quasi-legal services performed by law firms, but at lower cost, i.e., ancillary services, in private law firms of all sizes and specialties including human resources training outsourcing, real estate title services, wealth management services for money and investment management, etc.
Ten Internal Trends:
Internal trends relate to cultural and management issues that affect mid-size law firms. Unlike external trends, lawyer management does -- or should -- have a considerable degree of control over these trends.
1. Managerial focus: Executive Committees and Managing Partners in the more enlightened mid- size law firms will devote more of their time dealing with (a) delivering the most appropriate approaches for delivering high quality legal services faster, better and less expensively; (b) the basics of managing professionally and financially successful professional business service organizations; (c) attracting and retaining those lawyers who control profitable clients and who possess expertise in current and newer substantive practice areas that are essential to attract and retain existing and potential clients, (d) attracting and retaining a sufficient volume of profitable business from existing and potential clients.
2. Business-oriented culture: Partners' attitudes will continue to change about prevailing interpersonal values between and among partners, associates and staff. These changing attitudes will affect the personal relationships between and among partners, partners and associates and staff. These changes in firm culture(s) will cause changes in the personal and financial relationships, i.e., from "fraternal values" to "business values."
3. Every Partner a Working Partner: Mid-size law firms will have stronger centralized management, including (a) increased accountability and less autonomy for partners' concerning their actions/inactions; (b) greater emphasis on every partner to be a "working partner;"(c) more merit-based compensation decisions; and (d) diminishing feelings among partners about those "entitlements" to older partners by virtue of seniority.
4. Retention of More Profitable Attorneys: There will be increased mobility of partners who control significant amounts of client business, including those highly productive and profitable partners and experienced associates who support the former partners. As the result, Executive Committees and Managing Partners will devote more of their attention to developing strategies about how to attract and retain these more profitable lawyers.
5. Practice Management Focus on the Delivery of Legal Services: Executive Committees and Managing Partners in mid-size law firms will devote more of their time performing the strategic planning function and managing the substantive and business sides of their law firms in an effort to provide high quality, timely and cost-effective service to clients.
6. Enhanced Role of Non-Lawyer Business Managers: Mid-size law firms will employ more sophisticated non-lawyer business managers with special expertise in areas of financial management and technology, human relations and administration to relieve lawyer management of most of their involvement in day to day administrative matters. Lawyer management will delegate to these non-lawyer managers greater responsibility for preparing sophisticated financial analysis, addressing technology issues, etc.
7. Applying Technology to Substantive Practices: Technology will continue to enhance the speed with which legal services are performed, thereby enabling attorneys and paralegals to produce documents and communicate with clients at a much faster pace. At a minimum, voice mail, e- mail, Internet transfer of documents. Move to Word from Word Perfect. Document management is key. Computer file storage. Off site back up. Voice recognition software.
8. Enhanced Importance of Client Service and Marketing: Partners in most mid-size firms will become more sensitized about the enhanced importance of client service and marketing to attract and retain clients. The following have motivated Executive Committees and Managing Partners to make organizational/structural/procedural changes/management in the manner in which their firms organize and manage their client service and marketing activities: (a) an ABA study on the decline of the image of the legal profession. Ethics = Service ; (b) clients' perceptions concerning the services provided and how they are treated by outside law firms, not only the results achieved or the fees charged, i.e., (1) returning telephone calls and invoicing; (2) allowing clients to design their own invoices; (3) written service plans for major clients; (4) use of client surveys; interviews and mail surveys; (5) making it easy for clients to contact their attorneys by: E-mail; home phone numbers on business cards; 24 hour night service telephone answering, etc.; (6) Client status reports; (7) the notion of "guaranteed" service or reductions in the bill, (8) law firms adding value to their clients and educating corporate and business executives through newsletters, seminars, direct mail, web sites, etc.
9. Alternative Dispute Resolution: In an effort to contain legal costs, more corporate and business controversies will be resolved by Alternative Dispute Resolution, as opposed to Litigation.
10. Enhanced "partnering" between law firms and their clients": Law firms "partnering" will be fostered between law firms and many of their "better clients" concerning, i.e., creating a working relationship that results in a mutual value to both the law firm and the client, etc. Partnering requires risk-sharing in the areas of: (a) outcomes, (b) fees, costs and expenses, (c)investment in the matter with the client within ethical standards; etc.
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