The Future of the the Law Firm - 1998

This article was adapted from a presentation made by Ward Bower in February 1998.  Today – in October 2016 – we are struck by how prescient it was.

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My first reaction to this topic was that I generally do not like to make predictions, especially publicly.  Therefore I must inform you that if any of the things mentioned here ever happen, anywhere, in any law firm, I will claim vindication.

My second thought regarding The Future of the Law Firm was, "which one?"  The future is likely to be dramatically different for different firms.  In effect, we will see new sets of winners and losers in the future.

For example, many successful US law firms of the 1990s were ‘also rans’ in the prior decade.  Some high flyers of the 1980s (notably major firms like Shea & Gould, Lord Day & Lord, Mudge Rose, Gaston & Snow, Johnson & Gibbs, to name a few) are gone, victims of the shakeout of firms unable to compete in the new, mature legal services marketplace.  The shakeout will continue into the foreseeable future.

There are at least 10 ways in which the future law firm will be different from that of the present or the past.

1. Size
Your law firm is likely to be either larger or smaller in the future; in some cases, much larger or smaller than today.  This results from the simultaneous trend toward consolidation and divestiture.  Consolidation is occurring by merger, acquisition, emigration of lawyers from less successful firms to more successful ones, and the shakeout, in which groups of lawyers from distressed or dissolved firms merge defensively or assimilate into larger ones.  At the same time, divestiture of unprofitable practice areas and practice areas with less growth prospects are occurring, as well as the spin-off of niche practices from large firms, creating new, smaller firms.

Most at risk in this type of market are firms in the middle, which will need to grow, shrink or be acquired, in the future.  Growth requires investment in infrastructure, which many mid-sized firms are unwilling or unable to make.  Niche players focused on one or a collection of complementary specialties are likely to be successful for the foreseeable future, and therefore restructuring of mid-size firms into a boutique or collection of boutiques is appropriate.  The good news is that strategies for mid-sized firms seeking to grow, shrink or be acquired are basically the same — to be well managed, focused on core competencies and complementary practice areas, and lean, in the sense that costs are controlled effectively.

2. Technology, Other Costs
In the future, your firm is likely to have higher technology costs, on a per lawyer basis, but lower support staffing ratios and occupancy requirements than today.  The Altman Weil Survey of Law Firm Economics [published by Altman Weil annually from 1973 to 2007, and now published by ALM Legal Intelligence] shows that per lawyer technology expenditures have approximately doubled every three years, since 1980.  That trend almost certainly will continue.  Coincidentally, support staff ratios are beginning to decline.  The evolution/development of commercially feasible voice recognition technology is likely to sharply reduce staffing ratios and costs.  Lower support staff ratios, combined with virtuality, telecommuting, and lesser requirements for library space as books are replaced by computers and CD ROM will reduce those important expense areas, or at least slow their rate of increase.  Some firms may even experiment with the ‘hoteling’ concept, whereby lawyers are not assigned individual offices or workspaces but use generic offices on an as-needed basis, when they absolutely must be on-site.  Otherwise, they will be expected to work either at client locations, or at home.

Law firm investment in technology might be leveraged by contracting with publishers to supply information for direct access by clients to research work products, case law, statutes and legal analysis, organized in a self-help format with menus to guide customer/client inquiry.  In such a manner, the role of lawyers as custom suppliers of legal information is likely to be automated and leveraged by first movers able to make the appropriate arrangements with publishers.

3. Fee Earner : Lawyer Ratios
The Survey of Law Firm Economics shows that paralegal-to-lawyer ratios have increased from .20 to .25 over the past decade.  Part of this is due to client insistence that work be done at its lowest competent level.  Technology and systems also allow non-lawyers to do routine legal work previously done by lawyers.  In the future, law firms are likely to have more non-lawyer fee earners, in the form of consultants, economists, engineers, accountants, financial planners, and the like to compete with multidisciplinary partnerships and other non-traditional legal service providers.

4. Fewer Partners, More Classes of Lawyers
Rational law firms in the future will not make true partners or profit sharers of lawyers who are not net exporters of business within the firm.  Service partners reliant upon others for their work will be relegated to a second tier, limited dramatically in compensation.  Career paths for ‘legal technicians’ will allow permanent employment of competent lawyers in non-partner status, in a second tier of partnership, or relationships such as of counsel, senior lawyer, staff lawyer, special counsel, and the like.  However, unlike in the past, these will be meaningful legal careers, respected in law firms and an ongoing source of leverage for the net exporters who drive the economic dynamics of the organization.
 
5. New Competition
In the future, law firms will have new, more formidable competition.  At the low end, low-cost producers and discounters will provide a challenge.  At the upper end, larger firms (consolidators or amalgamators) with greater breadth, depth and resources will be a significant competitive factor, as will aggressive out-of-town and foreign law firms expanding geographically, and multidisciplinary service providers, be they Big 6/5 accounting firms, consulting firms, banks, insurance companies or estate agents.

6. Greater Marketing Expenditures
In the future, law firms will spend more on marketing, advertising, promotion and business development.  Currently Altman Weil survey data shows law firms spend 1.6% of revenues, up from one percent in 1990.  However, in other precursor markets (professions and service industries which have undergone maturation before the legal profession, such as the accountants, stock brokerages, investment banks, etc.) it is estimated that three to seven percent of revenues are spent on such activities.  Institutional advertising critical for branding, positioning, and image-based differentiation will drive that expenditure.  In the future, we predict that law firms will spend over three percent of their revenues on marketing, just to remain competitive.  Economics dictate that such expenditures translate to top-line improvement, or profits will be squeezed substantially.

7. Client Focus, Rather Than Firm Focus
Future marketing will be truly client focused, rather than firm focused.  Traditional cross-selling (what else can we sell to this client?), which is firm focused, will be replaced by integration with clients through the partnering concept of the quality management movement, to increase value and to raise switching costs.

8. Recruiting Challenges
Despite increasing numbers of lawyers, US law firms will find it harder to recruit top quality law graduates.  The market for top law graduates has become a seller's market, driven by large firms and "the consolidators" need to staff at entry levels, client refusal to pay partner rates for work they know can be done by associates, the predictable failure of a number of US law schools based upon supply/demand dynamics, and the shrinkage of classes at many surviving law schools, to maintain quality standards.  Whether a firm is recruiting from the top one-half or top one-third of law school classes, the aggregate number of graduates so qualified will be smaller, and the demand greater.

9. More Foreign Clients
Your law firm is likely to have more foreign clients in the future, even if it does not establish foreign offices.  This phenomenon will be driven by the economic globalization movement, as more investors and businesses engage in cross-border activities.  This is an opportunity even for smaller firms in "non-gateway" markets to gain access to such clients by becoming the firm of choice for inbound, domestic legal work for foreign clients.

10. Efficiency/Alternative Pricing
Your law firm will have to be much more efficient in the future, reducing costs of production even to survive, let alone remain successful.  There will be intensified price competition at all levels.  This will require effective use of technology, reorganization, restructuring of staff, effective training, delegation, supervision of lawyers, paralegals and staff, unbundling of some services for pricing, reduction of overhead and implementation of alternative pricing, to create clear win/win situations.  Otherwise, hourly billers will simply see margins shrink as clients commoditize more and more of the legal market.

So there it is — one view of the future of the law firm.  The good news is that almost any established law firm can plan and implement strategies to be successful in such a market.  The bad news is that most lawyers do not understand the nature and magnitude of the changes they face or, even if they do understand them, are in denial and intend to pursue ‘business as usual’ until they have to change.  By then it may be too late to keep both good lawyers and good clients that are increasingly pursued by the competition.

Our advice to law firms, based upon this prognosis for the future, is to start planning immediately, or to start re-planning, in the event your current plan does not recognize these scenarios.

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Ward Bower was a principal of Altman Weil, Inc. from 1975 until his death in September 2016. He joined Altman Weil when legal management consulting was in its infancy and built an unparalleled career over four decades as an advisor to hundreds of law firms, including some of the largest firms in the world.

For more about Ward Bower's life and career go to www.altmanweil.com/WB.

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