Law firms in transition survey 2015 – profitability clearly linked to strategic changes

The annual Altman Weil Law Firms in Transition Survey captures how the business of law is changing and how law firms progress on dealing with the rapidly-evolving legal industry. According to the 2015 report gross revenues increased for law firms in 2014, but the pace of change in the legal industry is still increasing. Despite the signs of optimism, the ‘good old days’ are not making a comeback. Key findings from the report include;

  • Increases in law firm profitability are clearly linked to strategic changes in lawyer staffing, efficiency of legal service delivery and pricing approaches.
  • Overcapacity of equity and non-equity partners, especially in larger firms, is endemic and a drag on profitability.
  • Non-traditional competitors are actively taking business from law firms and the threat is growing.

The report stresses that law firms which change their approaches to lawyer staffing, efficiencies and use of smart technology appear to be profiting from these changes, as there is a clear divergence of performance in the 2015 legal market. Some law firms are doing a lot better than others, which to some extent might be due to the practice mix or the geographic variables of local markets, but the survey also reveals strategic choices that are affecting law firm performance. Law firms that have done more in the areas of staffing, efficiency and pricing are consistently more likely to see increases in gross revenue, revenue per lawyer and profits per equity partner than those firms that have not embraced strategic change. They are also more resistant to new kinds of competition.

83% of law firm leaders say they believe competition from non-traditional service providers are already taking business from law firms and that this is a permanent change in the legal market. The biggest bite being taken is by clients themselves – 67% of law firms are currently losing business to corporate law departments which are insourcing legal work. As noted in the report, “clients may not be asking for change, but they are showing law firms that they can and will take alternative measures themselves to achieve greater efficiency and economy.”

The second largest ‘non-traditional’ threat to law firm business is clients’ use of technology tools that reduce the need for lawyers and paralegals. According to the report, there is a drawing recognition of the power of ‘smart” technology to do work that paraprofessionals and lawyers have traditionally performed. This will present a mortal threat to some practices and the impact of new technology should be closely watched. 24% of law firms are currently losing work to client technology solutions and another 42% see this as a potential threat to their firms’ business. Law firms also see a need to adopt technology tools to manage and standardize the internal work. The report shows that law firm managers’ view on tools like for example IBM Watson’s potential are quite positive and 47% expect such tools to replace paralegals, and 35% first year associates, in their firm within the next five to ten years.

As a summary, firms that have begun change efforts are outperforming those that have done less. But also these firms will need to stay the course and avoid complacency. For the rest, it’s not too late to begin, but in the absence of serious strategic change, the gap between the higher and lower performers can be expected to widen.

The complete report is available here: 2015 Law Firms in Transition – An Altman Weil Flash Survey »