In its tenth year, the purpose of the Altman Weil “Law Firms in Transition Survey” remains the same: to track the shifting attitudes around the changing legal market. In the survey’s early years, it captured how law firms were responding to the effects of the Great Recession. Now, “the commoditization and commercialization of more and more legal services” are challenging firms.
As the economy has improved post-recession, most firms have been able to gain “a reasonable level of ‘comfort.’” This, say the 2018 survey authors, “creates a false sense of security and a misdirection of focus in many law firms.” Firms should be pursuing long-term innovation and change mission because of some fundamental truths, including:
“Change moves in only one direction. There is no going back.”
Firms will face growing competition from legal service alternatives and be affected by the changes that new, smart technology brings.
Altman Weil recommends firms act, and with urgency, in a number of ways, including refocusing strategy externally; incorporating innovation into every strategic plan; paying close attention to the firm’s greatest asset — human capital; and pursuing real differentiation.
One mistake that firms often make is focusing on internal issues, rather than externally on their clients and the markets. Firms need to consider whether what they’re doing will increase service delivery and value for clients.
“Strategic thinking must evolve and become more forward-looking to deliver offerings that resonate with clients and enable law firm sustainability.”
Incorporating innovation into strategic plans, say the survey authors, means practice leaders need to consider experimenting with new approaches to staffing, pricing and efficiency. Technology will always be a part of innovation, but new labor models and new pricing methodologies must also be considered.
Legal Market Trends
Among the questions that the survey asked of firms, 398 of which responded, was which legal market trends they thought are temporary and which are permanent.
The respondents listed lower firm-wide billable hour targets as the leading temporary trend, but the least likely permanent trend. This was followed by a slowdown in growth of profits per partner, smaller annual rate increases and outsourcing of legal work.
The respondents overwhelmingly listed more price competition and a focus on improved practice efficiency as permanent trends, followed by less support staff and technology replacing human resources.
The survey asked firms about the pace of change in their profession. Sixty-nine percent saw it increasing while 27 percent believe it will stay the same.
When it comes to how the demand for their firm’s services has changed annually over the last few years, 40 percent reported growth, and 32 percent said growth was mixed.
The survey also covered competitive differentiation, asking for the first time this year whether respondents believed their firm is “clearly and specifically differentiated from competitor law firms.” The response was right down the middle: 50.3 percent said yes, and 49.7 percent said no. It’s interesting to note that the response was an overwhelming 79 percent yes when the question was asked of firms with 1,000+ lawyers.
Leading (or Lagging) Change
Regarding market forces and what clients want, the survey asked about the types of activities that firms were proactively initiating to better understand what clients wanted. Conversations about pricing/budgets led the pack, followed by participation in client industry groups and events, conversations about project staffing and management visits to key clients.
Sixty-five percent of firms see the trend of corporate clients doing more work in-house as permanent.
Beyond simply reducing rates, how serious are law firms about changing their legal service delivery model to provide greater value to clients? Less than 2 percent and 1 percent considered their firms’ efforts a 9 or a 10 out of 10. Eighteen percent saw their firms’ efforts around a 6 out of 10. The highest percentage, nearly 23, considered their firms’ efforts a 5 out of a 10. Clearly, there is room for growth regarding how serious firms are about changing their legal service delivery model.
For the client perspective on that important question, Altman Weil also asked chief legal officers. Nearly zero percent considered firms’ efforts in the 9 or 10 range, and almost 10 percent thought they ranged from 6 to 8. But here’s the truly sobering stat:
Nearly 91 percent of CLOs consider firms’ level of seriousness around changing their legal service delivery model to range from 0 to 5. A 10 represents doing everything they can.
So why aren’t firms doing more to change?
Nearly 69 percent of firms listed partners as being resistant to most change efforts.
Other factors preventing change include most partners being unaware of what they might do differently and the firm not feeling enough economic pain to be motivated to create significant change.
Altman Weil also asked firms to select what they have done to make innovation an integral part of the firms’ strategy. Nearly 62 percent included innovation initiatives in firm strategic plans and another 62 percent budgeted time and/or fund for innovative projects/experiments.
However, only 18 percent of firms engaged in partnership/joint venture with a technology company to better serve clients.
So how confident are firms that they’re fully prepared to keep pace with the challenges of the new legal marketplace? Nearly 26 percent felt they were a 7 out of 10, with 10 being completely confident; and 18 percent felt a 6 out of 10.
Moving on to awareness: Altman Weil asked respondents to rate partners’ awareness of the challenges of the new legal market. Nearly 22 percent felt partners earned a 7 out of 10, with 10 being completely aware. Nearly 18 percent hovered both at a 6 and a 5. Ten percent felt partners earned an 8. Overall, respondents felt mediocre at best about the partners’ awareness of legal challenges.
Similarly, the survey covered partners’ level of adaptability to change. The highest figure, nearly 24 percent of firms, gave partners only a 5 out of 10, with 10 being the most open and adaptable to doing things differently. Nearly 19 percent listed 6; 15 percent listed 7; and only 6.5 percent listed 8 out of 10 for adaptability. Again, not a lot of confidence in the partners’ adaptability from the respondents.
Steadily over the last several years, confidence in firm leaders has decreased. In 2011, nearly 24 percent listed confidence as high. In 2014, that high confidence was down to 13 percent. And this year, it’s only close to 6 percent. Meanwhile, over the years, low confidence in firm leaders has increased.
So, why aren’t law firms doing more to change the way they deliver services? Again, mainly because partners resist change: 69 percent of firms cited this reason, up sharply from 44 percent three years ago.
Efficiency of Legal Service Delivery
What are firms doing to increase efficiency of legal service delivery? Nearly 53 percent are rewarding efficiency and profitability in compensation decisions. Fifty-one percent are using technology to replace human resources. That number increases among firms with 250 lawyers or more: 57 percent.
When it comes to changing legal service delivery, are the drivers internal or external factors? Survey says: 63 percent considered the drivers to be external, like client or market pressure.
Altman Weil also covered matter management efficiency. It asked whether firms were proactively initiating conversations about matter management efficiency to better understand what individual clients want. Just over half — 56 percent — confirmed this is occurring.
As was touched on earlier, technology plays an important role in increasing practice efficiency. Nearly 86 percent of firms see using technology to replace human resources as a permanent trend going forward.
A consistent theme that Altman Weil has observed over the past 10 years has been “law firms’ general unwillingness to lead clients rather than merely responding to client requests.”
Add the authors: “Corporate clients continue to give law firms low marks in terms of firms’ seriousness about changing their legal service delivery models to provide greater value to clients.” As mentioned earlier, nearly 23 percent rate their firms a 5 out of 10 for doing everything they can.
On a related note, what are firms doing to support its pricing strategy? Nearly 67 percent are collaborating with clients on creative alternative fee options. This was also identified as the most successful tactic. Fifty-nine percent are developing data on cost of services sold. Thirty-nine percent are training their lawyers to talk with clients about pricing. This was up from 29 percent in 2017.
So, what’s driving the change to pricing strategies? While nearly 28 percent identified internal factors as being the driver, 64.5 percent pointed to external factors, like client or market pressure.
A new question that Altman Weil posed this year was on alternative fees, asking respondents to estimate approximately what percentage of their firms’ legal fees come from non-hourly-based pricing. Nearly 51 percent stated between 1 to 10 percent; nearly 30 percent said between 11 and 20 percent, and nearly 11 percent listed between 21 and 30 percent.
As always, the Altman Weil flash survey is exceedingly thorough and illuminating. The survey’s authors expertly guide readers annually through the results and their recommendations. Once again this year, they’re imploring firms to embrace change and be proactive or risk being left behind.