The Legal Industry Is Still On Life Support 

legal

Perhaps it’s a bit much to say a multi-billion-dollar industry handing out fat bonuses is on life support, but it’s equally important not to let appearances deceive you. The legal industry (and we’re talking specifically about law firms… not the universe of vendors) is still kicking and making gains, but growth remains sluggish, demand remains negligible, and most of the growth is coming from increasing rates. That should remain cause for concern.

The Citi Private Bank Law Firm Group and Hildebrandt Consulting annual report is out, and the outlook for 2017 looks positively tepid. Per Am Law Daily:

The report, which is released annually, noted that demand for law firm services grew by 0.3 percent in the first three quarters of this year, while expenses grew by 3.4 percent during the same time period, thanks in part to the rise in associate pay. Still, firms were able to raise revenue by 3.7 percent, largely because lawyer rates grew by 3.2 percent.

This stingy demand figure, which has stuck with us for awhile now because growth is dead (affiliate link), suggests a saturated, hyper-competitive market. Indeed, the firm leaders that spoke with the authors of the report cited intense pricing pressure and a sharp decline in client loyalty. It’s the sort of dog-eat-dog world that could produce some big losers if the winds changed a little bit. Thankfully there’s no risk of any external factors screwing with the legal market, right?

External factors, such as the ongoing impact of Brexit, the US election result, China’s slowdown, and the drop in oil prices, will likely cause law firms to continue to experience a more pronounced level of volatility from one year to the next than they are used to.

Beyond macroeconomic events, law firms will also continue to experience a shift in the competitive landscape. The growth of alternative legal service providers has had some impact, although many firms tell us that it is still relatively small. The Big 4 accounting firms will likely affect firms in their markets outside of the US. Perhaps the biggest shift will continue to come from the size and scope of corporate law departments.

Oh. Well then.

The good news, at least for now, is that firms are continuing to keep ahead of demand through rate increases. Over the summer, when firms were raising associate salaries like mad, some clients insisted that they’d never pay higher rates. This was always a stupid ploy — the rate increase required to cover the associate salary bump (which, again, contributed to the mere 3.4 percent growth in expenses) was minimal — but it also turns out it wasn’t true, and clients seem more than happy to pay higher rates if law firms pulled this one simple trick:

Realization declined across the industry as firms were putting through rate increases, signaling strong discounting pressure. However, we observed that this dip in realization did not deter the most successful firms from putting through higher rate increases, as shown in Chart 6. Indeed, some firms may have deliberately put through higher rate increases knowing full well that realization would take a hit. In the end, while those firms may not have realized the full benefit of their rate increases, they were still able to retain some of those increases, as shown in Chart 7, contributing to their comparatively stronger revenue growth.

There’s a sucker born every minute, and apparently all of those suckers become institutional clients. Jack up their rates and then offer a huge “because I like you” discount that still results in an increase? Brilliant. That’s probably why it’s been a staple of commerce since Professor Langundum’s Miracle Hair Tonic.

But how long can that last?

Frankly, it’s surprising it’s lasted this long. One would have figured these tactics would lose their potency in the face of alternative fee arrangements, but as the report notes, clients have stymied AFAs:

The growth of AFAs has been much slower than many predicted, remaining at roughly 16% of revenue in 2015 and in projections for 2016, according to the 2016 Citi Law Firm Leaders Survey. Some industry commentators have suggested that the problem has been law firm unwillingness to change. However, the reality is that most of the resistance has come from clients who are not comfortable with what law firms have proposed as AFAs, and would rather stay with hourly rates and discounting.

So we enter 2017, much like we’ve entered the last several years, with an industry slugging forward despite trying market conditions. It’s true that the world will always need lawyers… but how long until they realize they don’t need to spend this much on lawyers?

Source: AVOVE THE LAW

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