Altman Weil has released the results of its 2011 survey of US law firms, Law Firms in Transition, by Thomas S. Clay and Eric A. Seeger . Anyone interested in the financial performance of US law firms, including BigLaw, should read this. My focus here, however is elsewhere: alternative fee arrangements (AFA) and practice efficiency / legal process outsourcing (LPO).
AFA. Virtually all of the 805 firms surveyed, including 95 of the largest 250, report using AFA. Don’t jump to the conclusions that firms are embracing AFA. Only 12% report “that non-hourly projects are more profitable than hourly billing.” Two-thirds of firms offer AFA in response to clients; only one-third offer it as a competitive differentiator. The latter, however, reported higher profitability on non-hourly fees at a rate 2x the former. A reasonable inference (not logical necessity) is that firms can make more money embracing AFA rather than merely succumbing to client pressure to offer it.
Legal Process. The trend most cited, by 96% of firm, as a “permanent change in the profession” is the “focus on practice efficiency”. As the authors note, however, “Practice efficiency and process improvement are simple ideas – but are not easy to execute effectively.” One way to execute is with legal process outsourcing (LPO). On LPO, the survey finds that 8% of 250+ lawyer firms outsourced legal work in 2010 and 11% expect to do so this year. Perhaps more telling is that from 2010 to 2011, the number of firms who think LPO will become a “permanent trend” jumped from 28% to 41%.
Thinking about the practice efficiency imperative and LPO data, I have two questions. First, for the firms not planning to use LPO, what are they planning to do to achieve this goal? I am by no means suggesting LPO is the only option, just that other than LPO, I see more talk than action. Please, prove me wrong – with data or anecdotes (beyond one firm’s Six Sigma commitment and several’s legal project management efforts). Second, for the the 59% that don’t see LPO as a permanent trend, what do they mean by “permanent trend”. Let’s just say that in my view, Thomson Reuters’ purchase of LPO Pangea3 speaks clearly to “permanent trend”.
Here’s my overall take: the good news is that firms now at least talk about the need for changing how they work. So we have crossed one hurdle. The bad news is that specific plans to change (lay-offs don’t count) seem sparse. The secret sauce we need to make the twain meet is simple: aggressive clients who demand real change.