- With Demand 'Stagnant or Down,' Firms Must Adapt to Remain Profitable
- May 12, 2017
- Law Firm: Buckingham Barrera Law Firm - Midland Office
While the Great Recession feels more and more like a distant memory to most companies, the legal sector hasn't had the luxury of forgetting.
With some seven years passed since the downturn, demand in the legal business simply hasn't recovered to pre-recession levels, forcing law firms to adapt in new ways never required of them before to maintain levels of growth and profitability they've been accustomed to.
Just barely more than a decade ago, before the last downturn struck, lawyers not only enjoyed mountains of work, but a nearly unbridled level of control over the business unmatched by any other industry at the time.
The recession has, in fact, resulted in permanent changes to the legal business, said Gregg Eisenberg, managing partner at Benesch, Friedlander, Coplan & Aronoff.
"Demand is stagnant or down at this point," Eisenberg said. "As companies hunkered down during the last recession, they attacked all expenses, including legal budgets. We're seeing larger clients bring work in-house, beefing up in-house legal teams. That's contributing to flat demand and increasing pressure on how these services are delivered and priced. And I don't think that's ever going to change."
But there's a silver lining to all that.
Despite a more challenging climate for the legal industry, firms are still managing to grow. They just need to be more creative, diligent and proactive about the business today in order to do it.
"The way it was back in the early to mid-2000s, no, I don't think that's ever going to come back," said Bill Josten, manager of legal industry analytics for Thomson Reuters' Legal Executive Institute.
Instead of general growth, what the industry will see is a shifting of market share and firms compete among each other for business like never before.
"What you'll see today are firms saying they're laser-focused on what they can do for clients. They're telling them, what we can't do, we'll find other people for those things, and it'll be cost-efficient to you," Josten said. "The firms that innovate service delivery are the ones that will capture more market share and see more market demand."
Profits still grow
The Legal Executive Institute's 2017 Report on the State of the Legal Market shows demand for legal services has, in fact, stagnated over the last 10 years, coinciding with a general drop in lawyer productivity and growing pressures on rates. There was some softness in the market prior to the recession, but it was the downturn that really revealed the industry's vulnerabilities.
Last year's annual Law Firms in Transition survey by legal industry consultant Altman Weil Inc. shows that 62% of firms said demand had not returned to pre-recession levels, principal and report co-author Eric Seeger noted.
"The material of work flowing through law firms is less for most firms, and in-house counsels are a big reason for that," Seeger said.
That's a direct hangover from the recession, as companies, feeling their own margin pressures, scrutinize legal costs with a fine-tooth comb.
But that doesn't mean firms themselves aren't growing.
Indeed, the same Altman Weil report showed that of firms with 250 lawyers or fewer, nearly 74% reported revenue growth, and 70% reported increases in profits per partner. Nearly 40% of all respondents saw revenues and profits grow by more than 4%.
Firms have maintained revenues by trimming costs and shaving off overhead. Meanwhile, margin pressures have led to an uptick in law firm mergers across the industry, while simultaneously prompting firms to re-evaluate their footprints.
Hahn Loeser & Parks, for example, closed an Akron office with nine attorneys and some support staff in February to encourage collaboration in its IP practice group and consolidate costs.
Some other trends that seem to be more common today, Seeger said, include trimming compensation for underperformers or de-equitizing partners, lengthening partnership tracts or increasing standards to achieve partner, collecting on bills sooner and using alternative staffing or contract lawyers on projects.
Those methods are of increasing significance today because steadily raising rates simply doesn't benefit a firm like it did before.
"Rate increases have covered over some of the problematic fundamentals in the market," like waning demand for services, Seeger said.
"But at the same time, that's exacerbating the tensions that are felt on the client side to manage the legal budget."
Local market's evolution
The Northeast Ohio legal market has shifted in its own way over the years. The region saw a surge of law firms during a boon of companies placing headquarters here, a trend that was prevalent through the 1970s.
But while the density of large companies in the market has dwindled, the area's law firms have generally stuck around.
There are 24 Ohio companies in the Fortune 500 today, with just a handful in the Cleveland-Akron region, like Goodyear Tire & Rubber Co. and FirstEnergy Corp. But an exodus of large companies has also meant less work for local law firms, and more competition for work that is available.
That, said Day Ketterer managing partner Rob Roland, has made the market "over-lawyered."
"In our region, we are busy, but we do not have a lot of new players coming to town," said Roland, whose firm built itself on labor, employment and union work. "So if you're getting a new client, you have to wait for them to get fed up with their current attorney, or wait for old attorneys to die."
That's elevated lateral hires as a strategy for firms to grow their books of business.
Yet, experts point out that only a fraction of them truly work out.
A December report by ALM Intelligence, a consultant to the consulting and legal industries, showed that 96% of law firms said hiring lateral lawyers was important to their growth strategies. Yet the same survey showed that 30% of laterally hired lawyers delivered less than half of their expected book of business in their first year with a firm.
Benesch has been particularly active with them, adding dozens of lawyers in the past three years, bringing its total number of attorneys to about 180 today.
Despite the risks, lateral hiring seems to be a popular option in the Cleveland region.
With the tight market here, it's not surprising more lawyers are moving around as firms fight for them and their clients. Scott Kadish, the newest managing partner at Ulmer & Berne, recently told Crain's about the firm's more aggressive pursuit of growth, which includes some calculated gambles on new laterals.
Meanwhile, as clients keep tighter eyes on their budgets, midsize law firms seem to be winning more business from the big firms in that market share shift. Some clients are scaling back work at large, ultra-sophisticated law firms, Josten said, which also happen to charge the most expensive rates. He emphasized that midsize firms tend to have sophisticated practices as well, but may have lost out to work in the past to a firm with a bigger name.
As clients and general counsels scour their legal budgets, midsize firms are finding opportunities to win work.
"Clients are realizing more and more that you don't always have to Uber in a Mercedes to get where you're going," Josten said.
The new reality
The client relationship is a hallmark of the legal business, and a refocusing on that is at the heart of firms seeing profit growth today. While every law firm will promote its attention to client service, that's never been at a greater premium than it is in today's competitive market. So selling clients on those increased rates may not be worth the pushback.
But client service today is about more than just appealing costs and fielding phone calls on nights and weekends. Clients are demanding transparency and predictability on projects and expecting firms to be increasingly proactive about their needs.
That's why Eisenberg envisions a firm he describes as a "tiny powerhouse," referencing a corporate law firm with deepened expertise in a variety of fields — Benesch's 3D printing practice is an example of one the firm has been actively growing.
But Eisenberg also stressed the importance of being proactive in a business that's been traditionally reactive.
"When I first started in law, that's how it was: reactive. But clients require more today, and they should," he said. "You have to provide more than just traditional legal services, or that client will potentially look elsewhere. And that's been a huge shift. Clients want to know that you know what their industry is, where it's been and where it's going."
And that takes an investment of time, money and energy for lawyers to wrap their heads around a business, predict what their needs are likely to be and address them. Sometimes that might involve educating a client about the laws affecting them without ever taking on a billable project.
That gets into those value-add elements that are becoming key differentiators in the market today.
"When you think about competing in the market, you compete on price, value and name recognition," Josten said. "Do they want to be the discount firm? Maybe they don't want to be the cheapest, but they'll get a resolution faster, or maybe their rates are higher but they bill fewer hours. Do they want to be differentiated in terms of quality or output? Firms have to determine what speaks to their target client. But of all the differentiators firms may look into, rates is about the weakest one they can have."
That forethought could connect to a budget number the client wants to hit, or a decision on risk tolerance. The law firms are increasingly positioning themselves to be part of a business' total strategy, said John Slagter, managing partner at Buckingham, Doolittle & Burroughs.
"It's something that's not about us, but about how we want to help them out and help them succeed," he said. "It's a culture change as much as it's a change in focus, which is something we discuss here. You've got to be sensitive to what clients are concerned about."
"This is the new reality," Josten said.