Most law firms are woefully unprepared for any significant economic downturn — let alone a prolonged, decrease in demand.
This is a startling reality; but here are a few undeniable facts:
- Starting in 2008, during the “great recession,” the demand for legal services fell dramatically approaching 10% by 2011, and consequently so did productivity and profits for most law firms.
- Since 2009, the U.S. economy has experienced the longest stretch of economic expansion in history. Earnings have improved and employment has fallen from 9.8% in January of 2010 to 3.7% last month.
- But…demand for legal services has been relatively flat during the same period. A real increase in profitability has been hard to come by and law firms continue to fail.
- Alternative service providers continue to eat up a growing percentage of the pie. Analysts say that ASPs currently consume more than $10 billion of the legal services market and that figure is growing at an annual rate of more than 10%.
- In-house counsel are aggressively shifting work away from law firms while expressing concern that their outside counsel don’t listen and do not appear to be improving service levels or adapting to the new reality.
How has the profession responded?
With few exceptions, firms have ignored the messages the marketplace has been sending, and continue to operate in much the same way as before 2008. Profitability pressures are addressed by raising rates (an average of more than 50% since 2007), which has resulted in more work shifting in-house and a major decline in collected realization rates.
What is to come?
As Isaac Newton said “What goes up must come down.” Now in the 10thyear of economic expansion, the tide is going to turn. Many economistand other prognosticators see the next recession on the horizon, perhaps starting within the next year. Some experts expect the downturn to begin as early as the first quarter of 2020; and many expect it to last longer than the last recession.
What to do?
There are two things I recommend to all law firms:
- aggressively work to get your total cost structure in line with demand for your services; and,
- proactively engage with your clients to identify specific ways in which to improve your service.
Cost structure –– Most firms continue to be challenged with underperforming professionals. Virtually all law firm cost is directly related to the quantity of professionals employed. Law firms should seek to finally resolve chronic underperformance and eliminate related cost.
Client engagement –– In survey after survey clients say their law firms aren’t listening to them, don’t ask about their service levels and don’t innovate. While firms have chosen to ignore this feedback (we’ve heard lawyers suggest the clients have no way of knowing what is best for them), clients have chosen to move more and more work in-house. Institutional clients once thought to be loyal are seeking other solutions.
If we’re going to get serious about client service, it is long past time for law firm leaders to ensure that they have a real process for listening to and collaborating directly with their clients. Where sincere, these conversations inevitably lead to identified means of improving service. These means will lead to ongoing dialogue and experimentation that results in improved satisfaction levels. (Perhaps, even a new breed of loyalty.)
The results of these efforts will be immediate. Clients who have been frustrated by the lack of law firm interest in their views will be delighted with the opportunity to be heard.
The clock is ticking, I hope your firm is preparing for the inevitable!