Large law firms will almost certainly not return pre-2008-crash economics. BigLaw will remain immensely profitable but firms will need to manage themselves more effectively. And this includes how they staff to support lawyers. 

The most recent evidence of the ‘new normal’ is the Altman Weil Law Firms in Transition study. This ‘Flash Survey’

“found a clear consensus emerging among US law firms regarding changes… Over 75% of firms… believe that more price competition, more non-hourly billing and the use of project management to improve efficiency of service delivery will be permanent changes in the legal landscape. The primary impact… will be a greater focus on efficiency and productivity driven by client demands for cost control.”

Nonetheless, the study found that firms expect to maintain profitability by controlling cost. Of course, lawyer compensation and partner profit are the biggest cost items. Though profit is not usually considered a cost, doing so is a useful construct. First, profit per equity partner is the economic cost required to attract and retain a key factor input (economist-speak for the services a partner provides). And second, by re-classifying partners from equity to non-equity status, firms control the cost of that key factor input. Altman Weil found that firms will make fewer partners and rely more on contract lawyers (presumably in lieu of hiring associates).

The legal press focuses on what happens with lawyers; I focus on staff. On the staff side, the study found that two-thirds of firms cut staff in 2009 and 20% expect to do so this year. Altman Weil also asked about outsourcing: “Did your firm do any of the following in 2009? Will you do so in 2010? Outsource non-lawyer functions. Offshore lawyer functions.”

For outsourcing staff, 15.7% of firms said yes for 2009 and 13.8% for 2010. These results seem low. Already in 2007, the International Legal Technology Association (ILTA) staff survey found “37% of Large firms and 19% of Very Large firms obtain [various IT] services outside of the firm”. Further, in my day job at Integreon, I see growing interest in staff outsourcing in 2010 among large US law firms. For offshoring staff functions, the survey found virtually no interest in 2009 or 2010.

Outsourcing is not just about lower cost labor. It’s also about improving process and more favorable economics. I explain this rationale in some detail in my paper Outsourcing as a Strategy to Manage Support Cost and Variable Demand. It was first published in fall 2009 as a chapter in Implementing a Successful Legal Outsourcing Engagement, an Ark Group study by Michael D. Bell of Fronterion, an LPO analyst firm.

For a specific example of how outsourcing can control cost and improve law firm profit, see my Integreon blog post today, Middle Office Outsourcing Improves Law Firm Profit, which discusses an article in The Lawyer last Friday. That article explains that staff outsourcing helped UK firm Osborne Clarke improve profit in the face of flat revenue.