This is a live blog post from the Law Firm COO & CFO Forum by Thomson Reuters. The opening session is The Market Setting – Trends Driving New Approaches to Legal Practice, which covers large law firm trends and the legal market.. The presenters are James Jones, Senior Fellow at Georgetown Law, and Dan DiPietro, Managing Director and Chairman, Citi Private Bank Law Firm Group. (Live post – please forgive typos or errors.)

The theme of the conference is innovation. Jim speaks to the need to understand the overall market to understand how we should think about innovation.  Dan and Jim will focus on five key market trends.

Dan observes that we are no longer in a free fall crisis mode of 2008-2010. He sees increasing divergence / stratification of law firms, not just at the top but also in other segments. “We’ve run of money, it’s time to start thinking” – Rutherford quote applicable to market today.

An open question is what metrics law firms must consider. Dan counsels that clear and simple answers to complex problems can be wrong. He sees some glib responses among law firms considering new metrics.

For H1 2014, revenue is up: 5.9% in Am Law 50; 2.1% in Am Law 51-100; and 2.7% in Am Law 2nd 100.  The higher growth in top 50 results from a shift to transactional work. Lagging firms tend to be heavier on litigation. Demand is up, respectively, by 1.9%, 0.2%, and -0.5%. Hours per lawyer: 2.0%, 0.3%, and -1.0%.  [RF: Taken together, this means rate increases are sticking.]

Jim says these data suggest that the market is segmenting in new ways. In the past, the market was more uniform and averages represented the individual. But today, even within smaller segments (e.g., just Am Law 50), there is much variation in performance. Dan says two groups of firms are being rewarded today. First group is the go-to firm with strong brand and reputations; these tend to be in Am Law 50 and based in NYC. Second group are those firms that have demonstrably shown that they are efficient. These firms have more efficient staffing, lower rates, and maintain quality.  Work that is not brain surgery or very high stakes will increasingly go to the second group.

On the expense side, the big opportunity is to work on the “sacred cows” – high rate lawyers. Firms must move to lower cost staffing models.

Now go to five trends to watch..

1. Surge in performance in a sub-group of Am Law 50. Scattergrams of profit level versus profit growth shows more dispersion post 2007 than pre 2007.  Furthermore, post 2007, many more firms have shrinking profits, which drives lateral partner movement. In the current era, there is also bigger dispersion in absolute level of profits.  Am Law 50 see 75% of firms with profits increasing but in other segments, it’s closer to 50%.  These trends support notion of segmentation in market between go-to firms and value firms.

2. Softness in the litigation market. Even before 2008 recession, demand for litigation was softening. That has continued since the economic crisis. In recent years, quarterly demand for litigation has been flat or shrinking. This reverses a long-standing trend that litigation goes up in economically troubled times. We did not see a spike during the 2008 crisis or since then. This continuing trend is shifting dynamics among practices.

Anecdotally, Dan hears that CEOs are less willing to fight to the death in litigation. One reason is that the stock market does not like the overhang of litigation risk. A second reason is that CEOs now see the high cost of litigation and want to avoid it. (The high cost is driven in part by eDiscovery.)

Among the AmLaw 100, litigation has dropped from about 35% of firm business to under 30%.  Some of this is a result of transaction growth but some is a move to value firms and a move to non-traditional service providers. Profitability gap between transaction and litigation practices is growing.  Realization for litigation is below 80% but about 86% for transaction practices.

3. Emergence of non-traditional service providers.  These include traditional LPOs such as Integreon, Pangea3 (P3), and CPA Global. These firms are growing aggressively, moving out of their original niche (not just doing document discovery, for eample, doing research).  Shows data from LPO Program that LPO market size in 2012 was $1.1 billion and has grown 30% per year for three years. Each dollar to an LPO is more than a dollar loss to firms.

Another category are “re-invented” law firms such as Riverview Law in the UK, which operates on a fixed price model. Redgrave is a DC law firm that focuses almost entirely on discovery and information management. These alternates are taking share.  Additional players include Axiom, “a faux law firm” that is a staffing agency; BT, the UK giant corporation, is now in the law business via an ABS.

Tech players such as KM Standards and Koncision help produce documents. And finally the accounting firms are back practicing law in many parts of the world. Tech players also include Raptor Risk Analysis, Resolution Tree, and Neota Logic. These will help control litigation cost.

There is growing evidence that law firms are losing share to the non-traditional providers. Altman Weil survey found that law firm share of GC budget fell, in one year, from 52% to 49%.

Also notes that clients are keeping more work inhouse and that clients are disaggregating work, giving some to law firms and some to non-traditional providers.

4. Firm efforts to rethink service delivery and pricing strategies.  Dan reports a subset of findings from a survey of 66 managing partners, mainly in AmLaw 100. Citi asks about greatest challenges and opportunities and heard the word “client’ many times. The change is a bigger institutional focus on client service. A representative quote:  “create a dramatically more client-driven, client-centric organization, where the needs and expectations for clients shape who we are what we do, and how we do it.”.  This is a new attitude; Jim reports never hearing about efficiency pre 2008.

Many law firm leaders are focused on differentiation of their brand. Brand here means what the firm is known for. In a relatively flat market, this is not surprising because gains from share shift. Some firms are really doing it; others are drinking Kool-Aid.

Alternative Fee Arrangements (AFA).   However we slice the data, AFA are growing. Among large law firms, more than 20% of business is AFA.  Many firms are actively using AFA as a differentiator. Some manage partners believe raising it allows winning share and having more control of how fees are structured.

AFA must drive different behaviors in firms.  Management must focus on costs, increasing profitability by changing leverage and overhead. Jim thinks what is going on in the market is more dramatic than the AFA data show. He thinks about one-half of work is now done under a budget, often with a hard or soft cap. These are still hourly billing matters (not AFA) but once you hit the cap, “It’s all over.”.  So both budgets and AFA should drive new behaviors in law firms.

These trends are driving changes in how firms look at important clients. Revenue no longer drives which clients are most important; increasingly it’s based on profits.  [RF comment: I’d love to see data on just how many firms really look more at profit than revenue.]

Survey on AFA also asked about legal project management (LPM). 50% of firms train lawyers on LPM and 50% plan to. About one-third of firms have hired and embedded project managers in the practices but about another third plan to hire them.

An emerging related trend is the emergence of a new C-level pricing position. Many firms hire pricing folks embedded in finance. But others have Chief Pricing officers; they are now quite sophisticated in their approach, with the Chief being client-facing. So far, a handful of firms but sees evidence of growing interest.

5. The Dilemma of Excess Capacity.  However one slices the data, hours billed per lawyer is down versus the past.  Associates are closest to returning to historic level of billability but the “sacred cows” of partners and counsel are dragging down billable hour targets. The replenishment ratio (hiring versus departures) has remained >1 since 2011. Jim says this raises question of why firms are increasing headcount in the face of flat demand. The biggest area of hiring is in senior and staff attorneys. Jim suggests there is a mis-match in firms’ hiring practices. Firm keep waiting for a surge in demand, which has yet to occur. Because hiring cycle is so long, firms err on the side of hiring more heads. Says this rational but potentially costly.

[Q&A not blogged.]



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