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Hildebrandt / Citi Report: Tough Times Persist for Big Law

The 2010 Hildebrandt Client Advisory paints a grim picture for Big Law. 

The report, prepared jointly by Hildebrandt and Citi Private Bank, notes that “While the year ended with some hopeful signs, we enter 2010 with little prospect of a robust recovery and with mounting evidence that the profession is entering an era in which the fundamental economics of legal practice are likely to be significantly different.” Some key findings:

  • Among almost 200 firms Citi surveyed, 2009 demand fell 4.1% from 2008 (for prior 6 years, it increased 4% per year).
  • The NLJ 250 laid off more than 5,000 lawyers in 2009, over 4%.
  • 2009 expenses dropped over 5% in 2009 in contrast to almost 10% annual increases for the prior 8 years
  • The 21st century legal market boom rested on price (rate) increases. Other factors – productivity, leverage, realization, and expense control – did not contribute to profit growth
  • “It is highly doubtful that [resistance to rate increases] will abate as the economy begins to improve.”

What’s a law firm to do? Firms “that choose to ignore this fundamental shift in the market and go back to ‘business as usual’ as the economy begins to recover are likely to find themselves increasingly out of step with their clients’ expectations and at a growing competitive disadvantage.” A sizable portion of the report addresses the challenge with a discussion of new metrics that firms should track.

Only hinted at, however, are some ways firms might move the new metrics. Clients want to unbundle services and use lower cost providers. So “firms will need to recalibrate their leverage models, perhaps incorporating greater numbers of non-partner track associates or other categories of staff attorneys, contract lawyers, or even outsourced resources.”

I can’t tell from the report if firms as they operate today can do well on the new metrics. Even before I read this report, it’s not been clear how much further firms can go with minor adjustments. I don’t mean to downplay the very painful steps firms have taken. As I’ve said previously though, cuts in 2008 and 2009 were emergency measures, not considered changes to the business model. How much more juice can firms get from, for example, cutting more equity partners or substituting more contract lawyers for associates.

At some point, the existing business model may snap. Firms may fail to attract and retain new talent. Or the weight of $200k overhead per lawyer may pull a firm down. But Big Law can’t easily transform to some other model such as a virtual law firm, a boutique, a firm based on alternative fees (e.g., Bartlitt Beck or Valorem Law), or a staffing agency type operation such as Axiom.

For BigLaw to prosper, it will need to adopt ideas that have been out in the market for quite some time. These include client-facing technology to increase value for clients, internal systems to improve efficiency, serious knowledge management to support alternative fee arrangements, project and process management to improve practice efficiency and effectiveness, working virtually to reduce occupancy costs and free lawyers to bill more time, business intelligence to analyze profits and make smart resource allocations, outsourcing support functions to reduce overhead, and outsourcing high-volume, low-end legal work to improve client value. In a few years, we will know if this is enough.

  1. Suhasini Sakhare

    All the ideas you outlined also need to be supported by changes to legal training. As lawyers are currently being trained, they pretty much carry in the baggage that creates biglaw costs and biglaw (unsustainable?)services.

  2. Wednesday in NYC, there is an all-day seminar on alternative fee arrangements. http://usa.ark-group.com/mp_eventpage.asp?ac=834&tab=Forum%20Agenda&hide=0&&menu=1. It’s a great chance to do some research into other ways that firms can be profitable in today’s environment.

    Folks from Valorem and Bartlitt Beck will be speaking, as it happens. (So will I, on Legal Project Management as a way to control costs to make AFAs effective for the firm.)