We start the week with a post on the recently released and anticipated 2017 Report on the State of the Legal Market from the Center for the Study of the Legal Profession at the Georgetown University Law Center and Thomson Reuters Legal Executive Institute.
The in-depth analysis begins by thoughtfully reflecting on the “decade of fundamental change,” in particular how the Great Recession affected the legal market. As we know, this seismic change resulted in greater pressure on legal departments to do more with less and, in turn, asking their firms to give them greater value for their spend. In order to survive, many client attitudes changes, most firm attitudes changed, and they haven’t changed back.
Specifically, with regard to law firm survival, the report refers to the naturalist Charles Darwin’s conclusions that the species that adapted to changes in their environment had the best chances for survival. We, too, drew on this reference in our 2016 white paper “The Agent of Change: How Corporate Legal and Firms Can Mutually Thrive in the Changing Legal Market.”
In reflecting on the last decade, the report reviews law firm financial performance, as well as fundamental market changes. One example of the latter is the “death of traditional billable hour pricing,” which the report calls “rarely acknowledged” due to a “definitional problem” and the overlooking of the “widespread client insistence on budgets (with caps) for both transactional and litigation matters.” Much of the talk in the industry has been on alternative fee arrangements (AFAs), however, the report cites these accounting for only 15 to 20 percent of law firm revenue. And while the budget-driven arrangements are often not considered AFAs, they actually do differ from the traditional model prior to 2008, making them alternative in their own way. The report finds these two methods combined to account for 80 to 90 percent of all law firm revenue, proving times have in fact changed.
The thorough report looks ahead and considers long-term challenges and the need, for example, for a new, more aligned focus on profitability. Currently, there remains a reliance on the billable hour metric over other firm processes. This results in a “serious mismatch between the way financial performance should be judged and the standards used by lawyers to shape their own behaviors.” In short, they’re not focusing on the right areas to accurately measure performance. With an increasingly competitive market, the report encourages firms to bring all systems “into alignment around consistent principles of profitability.”
The report satisfyingly concludes by returning to where it began: Darwin. The firms that are able to adapt to the changes around them — truly adapt by conducting careful review and redesign and not simply applying “band-aids on old models”— are the ones that will survive and thrive.