Law Firms in a Harsh Legal Marketplace

By: M. Jerry McHale, QC

At the low and middle positions on the income scale the high cost of legal services results in people either abandoning claims or pursuing them unrepresented. Many in the wealthier sector of society who could afford representation are adopting strategies to avoid engagement with the formal legal system, and when they must engage they are insisting on greater efficiency and accountability in the delivery of legal services.  This overall dynamic is a serious threat to the traditional law firm model.

Law firms are struggling on a number of fronts. In addition to clients demanding more for less, new and effective forms of competition are arising and the underlying economy is generally weak.  How are law firms actually responding and what impact are these pressures actually having?  The reports discussed below are American, but they provide some interesting insights into these questions and they disclose trends that certainly have relevance for Canadian law firms.

The 2016 Report on the State of the Legal Market[1] (the “Georgetown report”) describes firms dealing with flat growth by nosing rates up and reining in forcefully on expenses, while being pushed hard by clients who “…have increasingly demanded more efficiency, predictability, and cost effectiveness in the delivery of the legal services they purchase.”  Firms have generally maintained profitability but, significantly, law firm share of the total legal market spend is in decline. Market share has been lost to online services and technology, to corporate clients keeping legal work in-house, and to a growing assortment of non-traditional service providers. These non-traditional providers reduce overhead and fees through virtual firm models, by utilizing lawyers working from home, and by offering the capacity to quickly engage and disengage temporary or part time legal help as required. Others are carving out a niche by satisfying a growing client demand for legal help that is integrated with business or management advice.[2] These services have made significant inroads into territory once held entirely by traditional firms.  

The Georgetown report’s specific findings with respect to demand for services and firm strategies are interesting:

  • The demand for services through 2015 was essentially flat, continuing a general pattern of the last 6 years,
  • This contrasts with the market prior to 2008 where annual growth of 4 - 6% was the norm,
  • By practice area, there was some growth in real estate and corporate law, with declines in litigation, labour, employment and bankruptcy,
  • Law firms raised their rates in 2015 by a “fairly modest” 2.7%.  This contrasts to annual rate increases up to 6% before 2008,
  • Firms are charging out at higher rates but collecting less. Client resistance to cost translates to a significant decline in collected billings. Billed and collected realization rates[3] hit an all-time low in October 2015,
  • Small rate increases combined with much tighter control over costs have resulted in “dramatically lower” expenses since 2008 and have generally allowed firms to maintain profitability,
  • A number of firms have lowered costs by “de-equitizing” - reducing the number of equity partners,
  • The future of this overall strategy is in question. There is little or no room left to cut expenses, demand is barely holding and client pressure for more savings is relentless. 

Another noteworthy observation emerging from the Georgetown report is that the U.S. is experiencing “growing segmentation within law firm market share.” Translation: some firms are managing a whole lot better than others in the competitive post-2008 environment and the gap between the most and the least productive is steadily widening. The evidence seems to be that firms that are developing comprehensive strategies to respond to client demands are outpacing firms that are less deliberate and merely reactive.

The tone of a 2015 survey of American law firms conducted by Altman Weil Inc.[4] (the “Altman Weil report”) is a little more encouraging. It reports signs of optimism in the firms, with some firms reporting increased revenue and some reporting - and others anticipating - increased demand. But, at the same time, it observes that the situation, especially in larger firms, is commonly one of too many partners and too little work. It also notes that non-traditional service providers are scooping an increasing volume of traditional firm business.

Like the Georgetown report it emphasises the need to adapt. It confirms a link between profitability and willingness to implement strategic changes - to lawyer staffing, efficiency of legal service delivery, and pricing approaches.  One might expect such findings to be powerful motivation for firms to reinvent themselves, but both reports describe problems here. The Altman Weil report says 44% of firms feel partner resistance is holding back change. This brings to mind Darwin’s finding that it is the most adaptable, not the biggest or strongest who survive. 

We do not have the benefit of reports like this in Canada, so it’s hard to know how accurately the American analysis reflects the Canadian situation.  That said, Canadian firms are being driven by nearly identical market forces and there are plenty of anecdotal reports suggesting lacklustre growth, an oversupply of lawyers and unhappy clients looking for lower cost alternatives.

It would be a mistake to hold out for external relief from these trends. Even if the economy improves, technological options will continue to proliferate, non-traditional service formats will continue to grow, clients are going to keep pushing and the legal market will continue to evolve at an accelerating rate - the Altman Weil report found that 72% of firm leaders believe the pace of change in the profession is still increasing. If relief is to be found, it will be generated internally through fundamental modifications to the way legal services are delivered.

If there is a silver lining to this cloud it is that this threat to law firm self-interest could provide the real impetus for change that the access to justice file has been lacking.   A principled argument for greater access to justice - based on serving the public good, fulfilling our professional duty and preserving the rule of law - has been on the table for years. But, firms won’t change as long as billing targets are being met. As Richard Susskind says, “It's hard to convince a room full of millionaires that they've got their business model wrong.”[5] Now, as revenue streams weaken, clients lose confidence and talk of deregulating the monopoly grows, pragmatic arguments about the survival of the profession are much more likely to be heard.  In fact, they are being heard - the spike in interest in the access issue over the last five years corresponds to the dawning, ground-level recognition that the profession is rapidly losing its customer base. For years there has been more talk than action about access. If the current array of pressures doesn’t change that, then nothing will.

 

[1] Georgetown Law, Center for the Study of the Legal Profession and Thomson Reuters Peer Monitor, online at https://peermonitor.thomsonreuters.com/wp-content/uploads/2016/01/2016_PM_GT_Final-Report.pdf

[2] For a full discussion of non-traditional service providers see: Joan C. Williams, Aaron Platt, and Jessica Lee, Disruptive Innovation: New Models of Legal Practice, Center for WorkLife Law, University of California, Hastings College of Law, 2015.

[3] Realization rates are the percentage of recorded time actually paid for by a client. 

[4] Thomas S. Clay and Eric A. Seeger, 2015 Law Firms In Transition, for Altman Weil, Inc. online at http://www.altmanweil.com/dir_docs/resource/1c789ef2-5cff-463a-863a-2248d23882a7_document.pdf

[5] Legal Rebels, January 28, 2016, online at http://www.abajournal.com/legalrebels/article/richard_susskind_qa