Key observations on the changing legal market

Based on her work with a spectrum of clients, Pamela Woldow Esq. has outlined five major changes to the world of legal practice that cannot be ignored. The following key observations are described in the article directed to managing partners in large firms “5 Key Observations on Law’s Tectonic Shifts”:

  • Too many Income and Equity partners
  • Half of what lawyers do now will soon be accomplished by technology or alternative (i.e., non-lawyer) providers for a fraction of law firm fees
  • The rate increases that traditionally grew firm’s revenues faster than any economic indicator will hit the wall
  • Associates are not loyal
  • Unique Firm Cultures are a Dying Breed

The three first trends are closely connected. It’s no longer possible to increase rates and charge expensive fees for work that can be performed by technology or alternative providers much more efficient and to a significantly lower cost. As Pam Woldow points out, “Legal technology is attracting huge capital infusions that will allow even greater strides. Witness: already, GCs are using Neota Logic and Kiiac to accomplish work that used to go to law firm lawyers,” and “Partners are expensive assets if they can’t bring in the bacon, and lots of them cannot these days.”

A recent New York Times article, “A Lawyer and Partner, and Also Bankrupt”, told the sad story of former Dewey & LeBoeuf partner Mr Owens, who’s already become a victim of the trend spotted by Pam Woldow. As expressed in the article “firms have been reluctant to confront the reality that in many cases they’re not economically viable and that successful service partners are probably going to need to work more hours than rainmakers, not fewer, to justify their mid-to-high-six-figures salaries.”

Ron Friedmann has in a sum up of the most interesting Tweets each week focused on the same trends in “State of the US Legal Market Summed Up in 3 Tweets” and how Big Law faces price and profit pressure. In the American Lawyer article “Profit Pressure Prompting Firm Leaders to Swing Ax”, the first part of 2014 is said to be looking like layoff season. “The widespread falloff in profits, legal industry consultants say, is prompting many firm leaders to zero in on how they can rein in expenses. And despite a general feeling that many had already cut support staff to the bone during the depths of the recession, layoffs are still seen as the quickest way to bolster the balance sheet.” Pam Woldow’s observation on technology is shared by Dan DiPietro, who in the article expresses that “It’s not a good idea to wait too long to get to the right size. And firms are recognizing that they can do things more efficiently. Technology is helping.” That former lawyer work is being replaced by technology or alternative providers also explains the layoffs of young associates. As the firm Brown Rudnick explained in a statement “Demand for legal services has been relatively flat during the last two years, and client demand for first-year associates has declined.”

The Washington Post article “Is this the death of hourly rates at law firms?” reports how the increase in alternative fees now has reached the last vestige of the hourly billing model, litigation. Technology plays a part in this change too as some law firms are creating programs to figure of how to charge non-hourly fees for litigation by predicting how much a litigation matter will cost based on how much similar litigation has cost in the past. Kathy Kirmayer is a litigator at a big law firm who does not charge hourly for most of her works and thinks the shift is inevitable, and could alter the business model that has allowed law firms to flourish for decades. “Law firms have been extraordinarily profitable over the last 50 years based on a model that has them charging by the hour, so clients are rewarding effort, not results. But now with changes in the economy, clients realized they couldn’t continue spending on legal services the way they had been. They shrank the market, so law firms had to shake up the way they did business and figure out how to deliver the same quality of legal services at a more realistic price point. That’s like changing an entire culture.”

But to change pricing philosophy does not come easily, something we discussed in our latest blog post “Optimal pricing to benefit firms and clients” with insights from global legal pricing guru Richard Burcher.

Jason Plant has however recently expressed a more moderate view, believing more in a widespread cost focus than a disruptive “Napster like” wave of change in legal. In the blog post “Big change in legal is a generation away!” he explains how legal is “a mature industry under cost pressure that will look pretty much the same with less firms, cost sensitive with constant eye on keeping these costs under control and with less lawyers being paid a lower amount. What lawyer is going to risk [his slice of] the pie on a disruptive bet? Better to make it fractionally smaller bit by bit right? And so I think that it won’t be until the vast majority of lawyers have come through the system with no experience of the pre-2008 world that enough lawyers will be willing to make the big changes.”

What do you think? Is there a “Napster like” disruptive wave of change waiting around the corner to alter the legal market, or will it be up to our sons and daughters to bring in the real disruptive changes?