Recent reports on the legal profession reinforce what most realists already knew; market forces continue to apply significant pressure on law firms.
Two forces at work in the marketplace show no signs of easing any time soon: the demand for legal services on one hand, and on the other, the (over) supply of lawyers to do the work. And while firms have attempted to adjust to these forces in a number of ways, the use of technology and a fresh look at strategic issues are two specific responses worth a quick look.
The results of Altman Weils’ recent Survey of Chief Legal Officers is loaded with relevant information. Here are a few highlights:
- 48% of respondents decreased their budgets for outside counsel with only 26% reporting an increase;
- 26% intend to further reduce the use of outside counsel in 2015 while only 14% are projecting an increase; and finally,
- 43% plan to increase their in-house staff in the next year.
These statistics in conjunction with a continuing shift of (for now) certain types of work to alternative service providers, and outsourcing of services constitute relentless pressure on the demand side of the equation.
Beginning in 2007/2008 through 2012 we saw an aggressive correction in the quantity of lawyers employed by US law firms (layoffs). But we should note that this trend has begun to shift.
According to a recent Thompson Reuters report —
“In 2012, firms did a commendable job of pulling back headcount growth, bringing supply into better balance with demand. But since Q3 2013, headcount growth has been steadily rising, reaching its highest level since Q4 2012. Firms continue to add headcount ahead of demand. In fact, in recent quarters, headcount growth has more than cancelled out growth in demand, dampening productivity and profitability.”
The bottom line is that supply is growing again in a marketplace that never did return to a healthy supply/demand balance.
In other words, short of an unforeseen growth in demand, firms are going to be facing all of the tough questions that come with too much capacity — more lawyers than there is work.
In response to the continuing economic pressures some firms have turned to technology as a means of becoming more competitive.
A recent report (The Emergence of Tigers and Bears and Other Law Firm Trends) by Aderant provides some intriguing insights into this response. The report is based on responses from 227 firms with a good mix of small and large firms.
Two points stood out to me, and both draw a clear distinction between larger vs small to mid-sized firms.
Point 1. When asked what the number one business objective was, the majority (51%) of the small to mid-size firms said acquiring new clients. By contrast, only 21% of the larger firms cited this as their primary objective.
Point 2. When asked where they were investing their IT dollars, the large firms indicated that 55% of their IT budget goes to automate processes and making service providers more efficient. Whereas only 12% of the small to mid-sized firm budget is invested in this area. Instead smaller firms are investing in better analysis of their operations and technology in order to capture more billable time.
As larger and more established “brand names” have wrestled with the demand problem one strategy has been to aggressively pursue the work being done by firms whose brand is not as strong. When combined with their investment in more efficient service delivery, the (typically) larger firms are creating increased pressure on the weaker firms.
The strategy implications for small to mid-sized firms seems clear. With growing pressure from shrinking demand and larger firms pursuing their market, higher efficiencies and focus will win.
In other words, developing a brand around a capability or a small group of capabilities is the ticket to survival. With limited budgets, strategic investments to become known for something is simply more realistic than hoping to become known as a premier provider in an array of practice areas.
This is my observation as to how any firm, weaker firms in particular, have to respond.
How much focus does your firm have?