One figure jumps out of a new Georgetown law school report on the legal industry: $74,100. That’s the amount per lawyer that a law firm loses annually, according to the research that found an average attorney bills 156 fewer hours than was charged just a decade ago.
Flat client demand, declining profit margins, weaker bill collection and lower market share due to alternative legal service providers are undermining firm profitability, the “2018 Report on the State of the Legal Market” concludes. Despite this underwhelming climate, rates edged up.
Firms also overestimate the strength of the demand for their services, and have not taken steps to increase efficiency that clients demand, said the report by Georgetown University Law Center’s Center for the Study of the Legal Profession and the Thomson Reuters Legal Executive Institute.
“Law firms have not been stepping up and introducing bold strategies so they are unprepared for the rapid transformations sweeping the legal industry,” James W. Jones, senior fellow at the Georgetown center and the report’s lead author, told Big Law Business.
Clients are demanding more e-discovery, document review and investigative support, according to a separate study last year, also by Georgetown Law and Thomson Reuters.
Many firms “are making only cursory investments” to offset some of the market forces, said Eric Seeger, a report co-author.
The findings mirror other studies, including the annual legal industry assessment from Altman Weil, Inc. issued in May 2017.
“There’s a culture that needs a wake-up call,” said Jones. “The levels of productivity are shocking, but these are not new issues. Many of them predated the great recession in 2007.”
The Georgetown study was based on data collected monthly from 168 firms participating in the Thomson Reuters Peer Monitor tracking system for law firm metrics. It researched specifics on a variety of metrics, including hours billed, time spent on business development, and overhead expenses.
Figures cited are for an average lawyer in one of the firms, which include 56 in the American Lawyer top 100, and outside of that list, 47 in the second-tier of firms and 65 mid-size firms.
The report found a 1.3 percent increase in the number of lawyers employed by law firms last year, but overall legal business was flat. AND A slight growth of around 1 percent in demand among the largest 100 firms was offset by a drop of more than 1 percent in demand among firms ranking between 101 and 200 in size, according to the research that tapped a Thomson Reuters database of client metrics.
Most firms continue to rely on a traditional model of employment: hiring associates from the pool of top law school graduates, and then eventually promoting them to the well-paid lifetime job of partner.
While associates and equity partners rank “reasonably well” in their level of productivity, “it really falters below that,” Jones said.
The lower performers would include non-equity partners and of counsel attorney, the report found. As a result, Jones said that when comparing hours billed in January 2007 to those billed in November 2017 (the latest figures available when the study was being written), he calculated that a typical firm attorney billed 156 fewer hours by the end of that ten-year period.
The calculation was based on a rate of $475 per hour, a figure that comes from averaging the rates of lawyers ranging from associates to equity partners, Jones said.
Overall, Jones concluded that based on those figures, a 300-lawyer firm “would be experiencing an annual loss currently of $22.2 million.”
The variation could be wider, he noted, because the top layer of two dozen Big Law firms have greater revenues than those in the rest of the top 200 largest U.S. firms. The top two dozen firms have been carving away the most high-end business as corporations seek out top level expertise for complex corporate matters.
Stagnant business growth, however, occurred even as the top 100 firms hiked rates by 3.7 percent last year. The second set of 100 firms increased rates by slightly less, 2.8 percent.
Yet, even in pricing and billing for clients, law firms largely cling to tried-and-true ways of interacting with clients, according to the report. Most firms still rely on the billable hour for their client dealings. And only about 14 percent of firms use alternative fee arrangements, according to a separate study issued last August by legal technology firm Aderant North America, Inc.
Few law firms have effective models for one of their most basic services, document management, the Georgetown report found. That absence has opened the way for rapid growth of alternative legal service providers, such as UnitedLex Corp. and Axion Global, Inc.
According to the Thomson Reuters outsourcing report last year, the market for alternative legal services providers stood at $8.4 billion and was forecast to keep growing as much as 25 percent or more annually.
The reluctance to adopt new ways of billing, document management and other technologies, Jones concluded, stems in large part from “the fragility of partnerships.”
Law partnerships, he said, “are not like other businesses. They cannot protect their assets, which are their people, and they can’t impose non-compete agreements, unlike other businesses.”
A firm’s “only other asset is the client, who can leave the firm at any time” because clients have the right to have the lawyer of their choice,” Jones said.
To help solve their dilemma, he recommends that firms need to “reengineer” their models. This might include flexible staffing, redesigned work processes, partnerships with other organizations and alternative pricing.
“They say they do some of these things, but most don’t,” he said. “And their market is oozing away.”
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