There continue to be reports addressing the challenges facing the legal profession related to a falling demand for legal services and the increasing number of alternatives to traditional law firms.

At a macro level the demand for legal services has been flat to negative for the last decade. While larger firms have faired slightly better over this period, most observers believe any increase in revenue has come at the expense of mid-size to smaller firms.

At a micro level the future is concerning for all but the most highly regarded (and often specialized) law firms.

In-House Is Becoming More Robust 

A distinct trend of legal work shifting in house has been accelerating for years. 2012-2014 saw billions of dollars in legal work previously handled by outside firms move in-house. During 2015 and 2016 the trend has shown no signs of slowing. In fact, the growth of in-house capabilities and in the work these groups are prepared to handle has continued at an aggressive pace.

Altman Weil’s annual survey of the legal marketplace, reflects a consistent trend of law departments increasing their budgets for in-house legal expenses while shrinking the budget for outside counsel. The same survey indicated that general counsel expect this trend to continue at least through the next year.

Not surprisingly, a key driver cited as central to the decision to move work inside is the high and increasing billing rates quoted by law firms. This post by Verizon’s General Counsel offers a compelling perspective on why the trend of work moving in-house will likely continue.

Competition Is Growing

 As if the in-house shift weren’t enough, market share is continuing to shift at an increasing rate to non-traditional service providers. This category of competitor is evolving quickly, and on a global level includes outsourcing, legal staffing, consulting firms, accounting firms and pure technology firms and more.

In an environment where the total growth of revenues available to traditional law firms is flat or falling, these new competitors are reportedly growing at 25-35% annually. Although impacting a small percentage of today’s total legal spend, their collective slice of the pie is growing rapidly.

Especially at risk is legal work product that is routine and subject to mechanization. Growth in the artificial intelligence arena, and the leverage that AI affords in the right situation, puts increasing pressure on the traditional law firm model.

So What To Do?

The million-dollar question for lawyers and leaders of law firms is “What do we do?”.  What is the appropriate response to a market in transition? Consider these steps as an initial way to address the question.

  1. Get out of low margin areas. Develop an immediate awareness and understanding of the areas of work that generate reasonable margins for your firm. Carefully examine the areas being pressured by market realities. In areas that are providing low margins, consider your options. These could well include partnering with an alternative provider with specialization in the area, or getting out of the business line completely.
  1. Focus on efficiency. Become experts in work processes that create new levels of efficiency. See this description of Seyfarth’s work in this area.
  1. Manage capacity very carefully. Much has been said about this; but, survey data continues to reflect an overall industry trend of hiring and retaining too much capacity. It is much easier to figure out a productivity solution when you’re too lean.
  1. Invest in client ccommunication. There is no better way to know how you can improve, retain existing work, and deepen relationships than to have routine communication with the people you are paid to serve. Get and stay focused on making your clients business partners.

For reasons that I don’t really understand law firms have historically been slow adapters to change. Perhaps it is rooted in a belief that the pendulum will swing, and things will return to the way they were. It may be a lack of understanding about the realities of the marketplace. If you listen, you’ll hear some law firm leaders scoff at things like AI and alternative legal providers.

Whatever the reason, a continued reluctance to acknowledge a changing market will put an increasing number of firms at risk. Don’t be one of them.