Are Law Firms Thriving or Surviving?
Lawyers have never had it so good. The legal industry saw greater revenue growth during the first quarter of 2019 than it did at the start of a strong 2018, according to a recent report by Citibank. An impressive and somewhat surprising achievement given that most of the data points to a relative stagnation of the legal market in recent years.
Junior lawyers also have cause to celebrate. A recent study by The Lawyer revealed that the top of the UK salary market for newly qualified lawyers is approaching £150k, and more than a dozen firms now offer more than the magic £100k.
The success of these law firms and strong salary growth is hard to begrudge. Lawyers do important work, requiring deep knowledge and expertise gained through many hours of hard graft. Added to which, law firms are entitled to charge what the market will pay – or so the theory goes.
A tale of two sides
But a closer look at the Citi report reveals a different story. The revenue growth seen earlier this year came mostly in the form of cash collected for last year’s work. The demand growth that characterised much of 2018 gave way to a demand decline in the first quarter of 2019. This is consistent with a previous report published by Thompson Reuters: “Since 2008, the overall growth trend for demand for law firm services has (with certain spikes and dips) been essentially flat to negative in every year”.
Of course, it’s not just law firms that suffer in challenging markets. Few businesses have been immune to the effects of Brexit or Trump’s trade wars. What will concern managing partners, however, are reports that overall legal spend in large corporates has been rising steadily. Law firms, it appears, are losing market share.
A shrinking market for law firms?
In 2017, a survey conducted by HBR Consulting of some 300 corporate law departments representing more than 20 industries, found that 82% of respondents reported an increase in legal spending due to rising legal needs. As companies grapple with tougher regulation and a rise in corporate activity, the cost of doing business has soared. But instead of feeding law firms with more work, much of the increased demand is being serviced in-house. Spending on outside legal counsel has remained largely static.
At the same time, the emergence of new entrants is also having a profound effect on the legal market. As clients demand more value for their legal spend, they are increasingly willing to transfer work to smaller firms and alternative legal service providers (ALSPs) to achieve cost savings.
The success and growing popularity of ALSPs is underscored by the recent announcement that Axiom - self-styled as the “global leading alternative legal services provider”- intends to float on the New York Stock Exchange. While Axiom is not a law firm, it currently employs over 2,000 lawyers and other professionals globally, and in 2017 reported revenues of $300 million.
Is it worth it?
As law firms increase their spending on lawyer salaries, marketing and technology, efforts to control the uptick in expenditure through rate increases have been met with resistance from many clients. Firms are therefore having to adopt alternative cost-saving measures to maintain attractive partner profit share, such as: increased billing targets; reduced headcount among the senior ranks; and delaying partnership promotions over a longer timeframe.
Unsurprisingly, given the steady rise in workload expectations and long slog to partnership, lawyers are now abandoning private practice with increasing regularity. Whereas partnership was once considered the 'holy grail' of a lawyer’s career, more and more associates are starting to ask critical questions about whether the personal trade-offs required to ‘make it’ are really worth it. A senior ‘magic circle’ partner recently noted that many of their rising stars don’t even have the good grace to pretend to want partnership anymore. Next generation lawyers openly admit that they want the impeccable training and experience that top law firms provide - and then a great job at Apple.
Time to rethink the model?
Except for a handful of elites and specialist boutiques, it can be hard to differentiate between most BigLaw firms. After all, many offer the same full service, full geography capabilities at similar price points. The choice between one law firm over another often comes down to a client’s personal relationship with an individual lawyer, rather than brand loyalty.
A report issued jointly by the Center on Ethics and the Legal Profession at Georgetown University Law School and Thomson Reuters Legal Executive Institute, observes that the traditional law firm model, which has served law firms well for decades, is now largely broken apart because of new market realities.
The report goes on to suggest that, given the changed market realities, it is probably accurate to say that there is no longer a single legal market (if indeed there ever was one): “The services offered at various points along this continuum are subject to very different “rules” related to pricing, staffing, infrastructure and process support, use of technology, drive for efficiency, and the like... To be successful in this environment, it is critical for law firms to understand where along the continuum of services their practices fall and to design strategies that address the challenges posed by their unique market positions.”
The issue is exacerbated by the recent proliferation of new entrants to the legal market. While law firms continue to lead on “bet the house” cases and transactions, ALSPs are leveraging different business models and new technologies to address unmet client needs and attract high-quality legal talent with competitive salaries and more flexible models of work. Unless law firms can maintain their edge in an increasing competitive and diversified market, they could find themselves facing an existential crisis.
Conclusion
With all the hype surrounding ALSPs and legal tech, it’s important to keep things in perspective. The ALSP market was worth an estimated $10.7 billion in 2017, which is a fraction of the estimated $700 billion in global legal spending over the same period. That said, ALSP revenues are growing faster than expected, with a reported compound annual growth rate of 12.9 percent.
Similarly, while AI is unlikely to replace lawyers anytime soon, it is generally agreed that machine learning and automation will transform many aspects of legal practice. Only a few years ago talk of using AI to replace lawyers sounded fanciful and remote. Today, AI solutions are making inroads into standard, low-value documentation and bulk review. In 5 years’ time they will certainly be able to handle much more complex work and law firms, especially those in the mid-market, will need to embrace and leverage these tools in order to work smarter, faster, better.
The question now, however, is whether 5 years is enough time for law firms to make the paradigm shift necessary to capitalize upon the changes in the market, perhaps even by moving away from the partnership structure entirely. Teaching lawyers to code is one thing, but will it be enough? What if one day the competition is Amazon Legal Services?