Legal Recovery Watch: the Real Unknown
January 22, 2010 | Filed Under Legal Deflation, Law Firm Trends
There are glimmers of hope in the legal industry. And perhaps just a scintilla of wishful thinking.
The WSJ Law Blog story cites a new report from the Citi Private Bank Firm Group. It is their 4Q09 “Managing Partner Confidence Index,” and it shows an uptick in that metric, the strongest move in over 2 years.
The WSJ rightly expresses some skepticism as to whether things are really turning around, noting macroecomic factors, and concludes thusly:
One big looming unknown for managing partners, according to the report, is whether a step-up in demand will lead to a corresponding step-up in revenue. The reason why one might not perfectly track the other, reads the report: “The difference is probably due to continued discounting pressure from clients. For many law firms, the road to recovery looks to be a long one.”
Understanding this point requires a closer look at the report, specifically the Demand indicator (bottom of page 1) of the overall index. It is up, with the explanation that:
“Nearly two in three respondents (64%) expect demand to grow over the next 12 months; 23% think it will stay flat.”
While the managing partners, profit hawks that they are, understandably focus on (hope for?) an end to discounting, I think this view of demand is the key. Two-thirds of managing partners surveyed buy into the assumption that a rebound in the economy will result in a commensurate rebound in a demand for legal services.
I think that this assumption is partially true, but misses the work going on in aggressive legal departments to attack demand (i.e. the ongoing need for legal services), who satisfies that reduced demand, as well as the pricing thereof. This requires a deep dive, a real microeconomic view of corporate legal services.
Over the last 12-18 month the focus has been doing the same things cheaper. That’s called a good start.
The next frontier for legal pioneers involves long-term savings. It may be called doing some things less, others not at all.
I don’t know how you factor this into a “Managing Partner Confidence Index,” but something tells me it’s not an easy fit.
(Update: The Legal Intelligencer has a look at this report as well).
Law Firms Look at New Year with New Reality
January 4, 2010 | Filed Under Law Firm Trends
A new year should start with optimism, tempered with clarity.
UK’s The Lawyer has a good summary of the pulse of some major law firms at the start 2010.
My favorite nugget is from Charles Martin of Macfarlanes:
“Financially it would be brave to think that 2010 is going to be a vast improvement on 2009. Against that background, prudent law firms will continue to sharpen efficiency levels, look at better client service and improve ways of organising themselves internally.”
He hits at least three of what should be in the top five on the legal agenda.
The good news is that all three are related, the challenge is in the execution. I think what law firms will realize in 2010 is something that Corporate America has known for some time:
As painful as reducing headcount is, it actually is the easiest step to take. It is much harder to figure out how to do the right things with fewer people. Too many firms (or their clients) think that some talk about “doing more with less” will suffice. It doesn’t.
For a law firm to change how it is organized internally and deployed to clients externally requires a sea change in management substance and style. Most firms will find it exceptionally hard to do well. But it’s necessary and worth it.
So 2010 starts on a positive note, we will see if the managing partners can keep everyone on the same page.
(Update: Comcast’s GC Art Block gives a clear message from the client; it’s linked from our newstream site, Law River).
Orrick Fits Levi’s with Made-to-Measure Billing
November 23, 2009 | Filed Under Alt Billing, Law Firm Trends
The ABA Journal reported this morning that Levi Strauss is handing all legal work worldwide (save IP) to Orrick, Herrington & Sutcliffe. For a flat fee. Where Orrick doesn’t have a presence, it will refer the work to other firms, which can be the hardest part of a deal like this to make work in practice.
This arrangement sounds similar to that struck by Tyco and Eversheds a few years ago for international work, which I covered here. Last week, Corporate Counsel magazine described how Tyco’s domestic US product liability work is handled by Shook, Hardy and Bacon.
This shows how a global firm really can differentiate itself with a global client. For all the talk about value pricing, it comes down to a firm taking risk and a client taking a stand.
There’s no information thusfar about how many firms Levi’s is supplanting by converging on Orrick.
(Hat tip to Ron Friedmann via Twitter).
Hogan/Lovells: Welcome Sign or Smoke Signal?
November 6, 2009 | Filed Under Law Firm Trends
When the story about the potential cross-border merger of Hogan & Hartson and Lovells reached the business press a week ago, it surprised me as to the size and timing of such a combination. Bruce MacEwen had already explained why it could make sense.
This week, The Lawyer reported that the merger has been approved by management. It’s certainly not on a rocket docket: partnership approvals would come in December and the merger would be completed in May, 2010.
If Hogan-Lovells happens, it’s a sign that two strong firms want to move forward aggressively when other firms are retrenching. In the meantime, I can think of a least 3 reasons why I don’t think this is a signal of a bottoming of the legal market or the start of law firm merger-mania:
1. Clients are still trying to cut back, on the number of firms used, and the costs paid to each. There is a lag between law firm work in progress and client demand. Most firms will continue to experience downward pressure.
2. The cross-border work is appealing and often high-margin. But there’s a finite amount and much of it is linked to the global economy. There’s already probably excess capacity for this work for the next 12-18 months, unless two firms match up really well in terms of clients, offices, and areas of strong expertise.
3. Some firms looking for merger partners are doing it out of weakness: to shore up practice areas, fill in for key partner departures, or reverse falling realization rates. Why would a stronger firm want to take on a weak sister when you could cherry pick their best people?
So good luck to Hogan and Lovells. Six months is a long time; the rest of the industry will likely be watching.
There Must Be a Pony in Here Somewhere
August 21, 2009 | Filed Under The Future Client, Law Firm Trends
In the spirit of optimistic discovery, I noticed a few reports about law firms and the economy cross the wires. The starting point is a notice from Thomson’s Hildebrandt unit that details their latest reading of law firm performance, something they call the “Peer Monitor Economic Index.” The headline: “Cost Controls Helping Law Firms Counteract Weak Demand, Pricing.” Sounds promising.
WSJ’s Law Blog has a bit more tempered view of this report here, with the banner: “Has BigLaw Turned the Recession Corner? Yeah, But . . .” Finally, the NLJ completes the picture with an article entitled: “Survey Suggests Law Firm Economics May Be Stabilizing.”
This sort of stuff put a little wind beneath your sails as you make that final trip to the beach ahead of back-to-school time and a later-than-usual Labor Day.
When you look closely at the Hildebrandt press release, a few things readily become apparent. First, cost controls may do something in the short term about firm profitability, but they certainly have nothing to do with client demand and its related pricing. Many law firms deal with costs as a short-term tactic, not part of a longer term strategy.
Then you see these nuggets on demand, pricing and outlook:
Demand, as measured by billable hours, was down 7.3 percent in the second quarter compared with a year earlier. However, there are some signs that demand may be beginning to stabilize. Bankruptcy work continued to be strong. Litigation work was down from a year ago, but may be stabilizing. Transactional practice areas, including corporate, mergers and acquisitions, capital markets, and real estate were substantially lower but should show signs of recovery in the second half of the year if the general economy continues to improve.
Rate growth continued to be weak, up only 3.2 percent from a year earlier. Among practice areas, bankruptcy showed the strongest rate growth, up 6 percent. Litigation rates managed to increase 5 percent. IP litigation rates were basically flat. Antitrust and M&A were among the weakest practice areas, declining 1 percent and reflecting a lack of activity in many corporate sectors.
“Demand and pricing volatility will continue to pose challenges for firms in the coming months,” said Lisa Smith, vice president, Hildebrandt. “However, the legal industry’s success in systematically reducing expenses will give firms greater confidence and leeway in exploring new approaches to the law firm business model, such as alternative compensation and pricing models, to position themselves for continued success in a low-growth environment.”
The demand and pricing excerpts can be explained in one sentence, outside of a few practice areas, both are bad, and may still be getting worse. I believe that many firms still haven’t seen the low point of this downturn, since their current workload is a lagging indicator, one that tracks client decisions made years ago or relationships forged decades ago.
So let’s look briefly at the last excerpt, which to me is the most interesting. The premise is this: cutting expenses will give law firms more leeway in exploring new business models, particularly in a low-growth environment.
Here’s hoping, but I don’t expect anything across-the-board change amongst the so-called BigLaw firms. Changing a model in real time takes a lot of courage, and large amounts of leadership and consensus. Not easy tasks to initiate or manage.
What I really think is going on is that many firms hope that things will get better just in the nick of time to avoid the pain and uncertainty of making major changes.
If I’m correct, this leaves an opening for a few intrepid firms to develop a coherent strategy, and wrap it around a more flexible business model.
That would be interesting, even newsworthy.
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