Ten Years in Turmoil: The State of the US Legal Market ( )

Transcription

1 Ten Years in Turmoil: The State of the US Legal Market ( ) James Jones Senior Fellow, Center for the Study of the Legal Profession, Georgetown University Law Center Gretta Rusanow Head of Advisory Services, Law Firm Group, Citi Private #TRC217

2 REUTERS / Firstname Lastname The 16 th Annual Law Firm COO & CFO Forum The Parallax View: A 10-Year Industry Retrospective Ten Years in Turmoil: The State of the US Legal Market ( ) James W. Jones Georgetown Law Center Gretta Rusanow Citi Private Bank

3 Outline of Presentation -- A decade of fundamental change ( ) Law firm financial performance Fundamental market changes -- Impact on the traditional law firm model Changes to traditional leverage Depletion of equity partner ranks Challenges for law firm staffing model -- Some successful models for addressing changing market -- Long-term challenges for law firms

4 A Decade of Fundamental Change ( )

5 Tenth Anniversary of the Great Recession -- End of a decade plus period of unprecedented prosperity for law firms. -- Shift from a seller s to a buyer s market for law firm services. New client insistence on greater value for legal spend. Value defined as greater efficiency, predictability, and cost effectiveness in the delivery of legal services. -- Challenge for law firms: how to adjust to new client demands and expectations.

6 Review of the Past Decade: Law Firm Financial Performance

7 Summary -- Overall, a period of: Stagnation in demand growth for law firm services; Decline in productivity for most categories of lawyers; Growing pressure on rates, as reflected in declining realization; and Declining profit margins. -- Some good news in management of expenses, at least in second half of decade.

8 Demand Growth Growth in Demand for Law Firm Services* Source: Thomson Reuters Peer Monitor All timekeepers. Billable time type, non-contingent matters.

9 Productivity Billable Hours Worked Per Lawyer* Source: Thomson Reuters Peer Monitor Lawyers only. Billable time type, non-contingent matters.

10 Productivity (cont.) Billable Hours Worked per Lawyer by Category of Lawyers* Source: Thomson Reuters Peer Monitor *Lawyers only. Billable time type, non-contingent matters.

11 Rates and Realization Rate Progression* Source: Thomson Reuters Peer Monitor *Lawyers only. Billable time type, non-contingent matters..

12 Rates and Realization (cont.) Collection Realization against Standard Rates* Source: Thomson Reuters Peer Monitor *Lawyers only. Billable time type, non-contingent matters..

13 Rates and Realization (cont.) Collection Realization against Worked (Negotiated) Rates* Source: Thomson Reuters Peer Monitor *Lawyers only Billable time type, non-contingent matters

14 Expense Growth Growth of Direct and Overhead (Indirect) Expenses Source: Thomson Reuters Peer Monitor

15 Leverage Leverage (Lawyer to Equity Partner)* Source: Thomson Reuters Peer Monitor *Employed lawyers only *2017 through June only

16 Billing and Collection Cycles Billing and Collection Cycles* Source: Thomson Reuters Peer Monitor *Billable time, non-contingent matters *2017 through June only

17 Change in Profit Margins Profit Margin Stagnation* Source: Thomson Reuters Peer Monitor *Rolling 12 months through Q (i.e., Q Q2 2017)

18 Driver of Financial Performance Foregoing analysis shows that law firm financial performance over past 10 years has essentially been driven by only one factor: rate increases. Demand growth has been flat; Productivity has been declining; Expenses have been growing (albeit modestly); Leverage has remained unchanged; and Billing/collection cycles have remained constant. Only rates have grown, though with increasing client pushback (as shown in realization rates).

19 A View from Citi Private Bank

20 Long-Term Challenges for Law Firms

21 No More Easy Fixes For the past 5 or 6 years, most firms have maintained their financial performance at acceptable levels by several easy fixes: In 2009, most firms instituted massive layoffs of legal and non-legal staffs; Many firms also dramatically slowed expansion of equity partner ranks; Almost all firms launched aggressive expense management;

22 No More Easy Fixes (cont.) Most firms reduced associate hiring goals and expanded use of contract lawyers; Some firms adopted other cost-reduction strategies like opening firm-wide service centers; and All firms continued regular rate increases.

23 No More Easy Fixes (cont.) These fixes are not likely to be as effective in the future: Further reductions in equity partner ranks will be difficult (growth rate is already near zero) and counterproductive; Expense growth (currently at 2-3%) will be hard to sustain, as recent compensation increases show; Productivity will continue to be challenging; and Rate increases will have diminishing effects as client pushback continues.

24 No More Easy Fixes (cont.) What is needed is a longer-term strategic focus in the way law firms think about their markets, their clients, their services, and their futures. And the time for firms to embrace these changes may be shorter than we think.

25 When Will the Next Downturn Occur? We are currently in the eighth year of an economic expansion in the general economy. Since 1945, the average economic expansion has lasted 4.9 years. For all of the reasons we have discussed, when the next downturn hits assuming no major changes by law firms or their clients it is likely to be more severe than the one experienced in For many firms, this issue is the most serious challenge they are likely to face in the next few years.

26 Questions and Discussion