I will start the new year with thoughts about the future. I see continued evolution of the Big Law market. That evolution is nicely captured in the  Citi Private Bank – Hildebrandt Consulting LLC 2015 Client Advisory (PDF), which I summarize and comment on here. I especially like its suggestions of what law firms must do to succeed.

Introduction: Disruption is Dead but Change Lives

Back in 2009 and 2010, when Big Law was laying off lawyers, I can understand why some (me?) expected large law firms would be disrupted. Yet most large law firms survived the financial crisis, with many thriving. If that crisis did not disrupt, what will? It makes more sense to focus on change, typically gradual.

That gradual change, however, has taken on some new urgency. Before the crisis, rapidly growing demand and profits covered-up many law firm management sins. No more. With demand growing modestly and partner mobility an ever-present concern, firm management must plan for success, as the Citi report explains…

Citi – Hildebrandt on the 2014 Big Law Market

The 2014 data show a return to modest market-wide growth in demand and profitability. The averages, however, conceal a growing performance divide. Among the top-performing firms measured both by revenue and profit, about 75% experienced demand growth and 25% declines. Among the rest, the split was closer to 50-50. The benefits of growth favor fewer firms now, leaving others performing below historic averages and their (former?) peers.

Another key performance indicator, realization, remained well below its historic average, largely because of continued excess capacity and clients exercising their market power.

One reason the report cites for the modest and mixed performance is that law firms continue to face new competition. Clients increasingly meet their legal needs by exanding in-house law departments and turning to alternative providers. Furthermore, price pressure remains strong. As more growth occurs outside of law firms, the pressure for firms to offer alternative fee arrangements (AFA) and discounts continues. In 2014, these accounted for almost two-thirds of large firm revenue.

Achieving Success in a Diminished Market

The report reviews several growth strategies – mergers, lateral hiring, and organic growth – and then asks “what it takes to be a successful law firm”. It concludes that success is

“most likely to come from a firm’s efforts to build a brand as the leading law firm in key practice areas, improve their service offering to better meet clients’ needs, and implement more innovative ways to deliver quality services.” (Emphasis added.)

Why did the authors conclude this? They cite almost a dozen success factors; I will summarize the ones that go to service delivery and innovation.

Firms increasingly must focus on margin growth, not just revenue growth. I view this a service delivery factor because it ties so closely to most other factors the report discusses. Specifically, firms must manage their leverage. More and more firms deploy lower cost lawyers such as staff attorneys.

“When we ask [elite] firms whether they are concerned that expanding their lawyer base beyond partner-track associates will hurt their brand, their response is simply that this is what their clients, and the market in general demands. To ignore this trend would be at their peril.”

The leverage concept also applies to legal technology.

“Technology has supported the commoditization of many legal services… successful firms constantly examine how emerging technology might impact their businesses, and look for ways that it could enable them to deliver quality legal services much more efficiently.”

Just hiring different types of lawyers and deploying new technology is not enough. Firms must learn to “price and manage the delivery of legal services”. The reports cites the growing number of pricing and legal project management professionals hired by large firms. (Unsaid in the report is the challenge of getting partners to live by these disciplines, following the advice of these professionals!)

“Differentiating the Brand” continues to remain a key success ingredient. Clients have trouble telling firms apart. The report cites innovation as a way to differentiate, for example, creative staffing and use of tech. I would lump with this the separately listed “Client Centricity”, or listening to clients and tailoring services for them.

Conclusion

That even elite firms hire lower cost lawyers and pricing + project management professionals signals the need to evolve. The good news is that differentiating can appeal to lawyers’ competitive sensibilities. The bad news is that not all lawyers and law firms will get an “A”.