Big Law: How to Survive the Next Downturn

For much of the last few years, the stock market has been moving relentlessly up – so much so that the recent volatility (and downturn) comes as a surprise to many.  It should not.  No business cycle lasts forever.  We are in the midst of one of the longest running periods of growth in the U.S. economy.  In fact, we are currently in the midst of one of the longest business expansion cycles ever.

When placed in the context of this long period of business expansion, the growth in the Big Law sector seems particularly unimpressive.  The growth of alternative providers, the expansion of in-house legal teams and the general tightening of legal budgets since the Great Recession means that demand for services of Big Law firms remains flat (or perhaps with some small growth).  In their 2018 Report on the State of the Legal Market, Georgetown Law and Thomson Reuters argue that these pressures are driving a fundamental change in the market:

The market for law firm services is being transformed – by clients, by law firms that ‘get it’ and by alternative service providers – and that pace of change in the transformational process is accelerating. 

No question that the market has shifted.  We have seen these forces at work for a number of years, but it is now coming into clearer focus.

With due respect, however, their conclusion wildly overstates the pace of actual change in law firms.

The Real Pace of Change, Economic Realities for Law Firms

First, if you look at data like the Altman Weil 2017 Survey of Chief Legal Officers, you will see something interesting.  For the past five years, the budget allocations between in-house counsel, law firms and alternative service providers has remained relatively stable.  If anything, the amount of budget allocated to alternative service providers has dropped a bit in the past couple of years.  Change – most certainly.  An accelerating pace of change?  Reasonable minds can differ.

Second, if you look at most of the reports on law firm economic performance, the story they tell for this year is much the same as it has been for many years.  Yes, there is increased stratification in the industry – the super rich law firms are growing profits faster than the rest of the market.  This certainly reflects the continued distinction buyers are drawing between routine legal work and bespoke, complex work.   It is also true that alternative providers  continue to pull off portions of the market (an estimated $8.4 billion).  But, at the same time, a large driver for increased profitability for law firms continues to be the old staple – increased billing rates.  According to Peer Monitor, demand was relatively flat in 2017 while rates grew 3.1% – the best performance since 2014.

So, in an expanding business climate, we see  a relatively flat market.  One in which many firms – despite all the discussion about different models or change in the practice – continue to achieve growth largely through rate growth.   If this is happening in the middle of one of the longest periods of business expansion in the country’s history, what happens when the U.S. business cycle turns from one of expansion to one of retraction?

In the last recession, we saw a dramatic change in buying habits of corporations.  What leads us to believe that the next recession will not accelerate that change?  Putting aside those top 20 firms, what will this mean for the rest of the legal industry?  The industry coped with the last recession largely by cutting costs.  Certainly, there has been some creep in spending and therefore there will be some opportunity to cut costs – but nowhere near the levels of 2008.

Firms that  base their business model largely on increasing rates, however modestly, and thus growing profits, will be challenged to survive.

Navigating Next Bear Market Will Require More Than Talk

What about those firms that ‘get it’ – to use Georgetown’s terms?  There has certainly been much talk about innovation over the past few years in the industry.  One cannot turn around without bumping into a conference about disruption or change or the impact of technology on the legal industry.  Hopping on the marketing bandwagon for innovation has been a big part of the industry over the past few years.

What I assume Georgetown means by ‘get it’ – certainly what I understand by the term – is not those firms that simply talk about change or chatter about finding a different way to compete.  It is those firms that have learned to apply innovation to deliver superior client experiences.  Buyers of legal services are too smart and have learned too much by working – even slightly – with alternative service providers or more nimble firms or technology companies.  When the next downturn occurs, this change process will accelerate at a pace unlike any we have seen to date.  Those firms that have learned to apply innovation will be better positioned to meet the buyers’ needs.

Applied innovation means doing the hard work to mesh people, process and technology –  with a consistent eye on solutions for client problems.  It is not difficult to buy or even build technology applications.  It is far more difficult to maximize the value of that technology.  To do so requires a deep understanding of the abilities of the people involved and the process that knits it together.  “It’s easier and sexier to build a bad product than it is to advocate for systemic change,” wrote Nicole Bradick in “Technology Can’t Solve all of Our Problems,” (Medium, Feb. 15, 2018).

Applying innovation to drive different levels of client service is not easy and not for the faint of heart.  Yet there is a window – certainly one can hope for a long one – for firms to use this period of business expansion to lay the grounds for success in meeting the challenges of the next downturn.   Or perhaps we just hope that we never encounter another recession.