Midsize Firms: Key Trends Affecting Competitiveness And Profitability

In conducting strategic planning studies and facilitating numerous strategic planning retreats, I regularly discuss long-term trends affecting law firms with dozens of members of executive committees and managing partners. These trends of interest differ somewhat, of course, for firms of different sizes. More importantly, sometimes the same trend has very different implications for firms of different sizes.

For midsize firms in particular, the following trends will remain important for at least the next several years. Lawyer management in the more financially and professionally successful midsize law firms will need to deal with most and probably all of these trends.

Eight External Trends

External trends are those over which law firms have little or no control.

1. Need for agility. Midsize law firms are likely to see an upturn in the growth and profitability during 2005 and beyond. However, these firms will find the practice of law to be more competitive, concentrated and demanding, with greater emphasis on delivering high quality legal services faster and less expensively.

2. Buyer's market. Midsize law firms will continue to practice in a “buyer's market.” This means that lawyers, and most of the services they offer, will be plentiful; buyers (clients) will have a wide-range of choices of high quality lawyers and law firms to serve them. Fees and other conditions of employment will continue to be influenced by the buyers (clients). Competition for corporate, business and individual clients will cause traditional hourly billing rates to be replaced by variations of hourly billing arrangements, contingency, and fixed fee, and combinations of these alternatives.

3. Profit squeeze. Midsize law firms will continue to be affected by a “profit squeeze” resulting from:

• Increased overhead due to higher associate and staff salaries and benefits;
• Higher automation costs, professional liability insurance and marketing expenses;
• Partners' unwillingness or inability to increase hourly fee rates for “commodity” type work to offset higher overhead;
• Enhanced client scrutiny of hourly rates, hours to produce work, and lawyer and paralegal staffing of work assignments;
• Pressure by corporate counsel for law firms to absorb more “soft” costs;
• Slower-paying clients ' which affects cash flow and hence the availability of distributable dollars for partners; and
• A great many midsize law firms being burdened with higher debt.

4. Consolidations of clients. Midsize law firms will see the continued consolidations of corporations and businesses, as well as the increasing number of bankruptcies of corporate and business clients.

5. Increased competition from traditional sources. Midsize law firms will continue to encounter increasing competition from national, regional and statewide law firms engaged in inter-jurisdictional client representation. This results from mergers and acquisitions of general practice and specialty firms, as well as from the increasing development of law firm networks and strategic alliances among smaller and other midsize law firms as the latter attempt to compete with larger multi-jurisdictional law firms.

6. Increased competition from outsourcing of legal work. Companies such as Borg-Warner, General Electric and others will outsource more commodity-type and legal research work to India and other countries, to be performed at half the $150 and $200 hourly cost that would be charged by their domestic law firms. These lower hourly rates for commodity-type work will affect the hourly rate structure of midsize law firms competing for similar work. Paralegal firms owned by non-lawyers will continue to provide some commodity-type legal services via the Internet. The number of Labor/Employee Benefits, Health Care and Environmental consulting firms will continue to grow. These consulting firms will hire more lawyers to perform many of the same legal/quasi-legal/administrative and preventive types of specialized services offered by midsize law firms.

7. Competition from in-house attorneys. Corporate and business clients will continue to employ in-house attorneys to perform day-to-day legal work and manage legal work referred to outside law firms. As the sophistication of these in-house counsel continues to increase, they will become more critical in the way corporate and business clients:

• Select and utilize outside law firms;
• Negotiate fees and costs of outside law firms (notably by consolidating corporate client work in a smaller number of outside law firms, which enables corporate and business clients to further influence law firms' fee structures);
• Approve payment of bills for fees and costs for legal services; and
• Utilize auditing firms to scrutinize the number of hours required to perform assigned work, the professional personnel (partners, associates and paralegals) assigned to work on these matters, the hourly rates charged, etc.

8. Multidisciplinary practices. Increasing numbers of multidisciplinary practices and non-lawyer professionals will continue to perform more of the administrative and quasi-legal services now often performed by law firms, but at lower cost. Examples of ancillary services performed by private law firms of all sizes and specialties are human resources training, real estate title services, and wealth management services.

Ten Internal Trends

Internal trends relate to cultural and management issues that affect midsize law firms. Unlike external trends, lawyer management does ' or should ' have a considerable degree of control over these trends.

1. Managerial focus. Executive Committees and Managing Partners in the more enlightened midsize law firms will devote more of their time dealing with:

• Delivering the most appropriate approaches for delivering high quality legal services faster, better and less expensively;
• The basics of managing professionally and financially successful professional business service organizations;
• Attracting and retaining those lawyers who control profitable clients and who possess expertise in current and newer substantive practice areas that are essential to attract and retain clients; and
• Attracting and retaining a sufficient volume of profitable business.

2. Business-oriented culture. Within the firm, traditionally “fraternal” attitudes, interpersonal values, personal relationships and financial relationships will all continue to change into more business-oriented relationships.

3. Every partner a working partner. Midsize law firms will have stronger centralized management, including:

• Increased accountability and less autonomy for partners concerning their actions and inactions;
• Greater emphasis on every partner being a “working” partner;
• More merit-based compensation decisions; and
• Diminishing feelings among partners about entitlements being due to older partners by virtue of seniority.

4. Retention of more profitable attorneys. There will be increased mobility of partners who control significant amounts of client business, including those highly productive and profitable partners and experienced associates who support the former partners. As a result, Executive committees and managing partners will devote more of their attention to developing strategies to attract and retain these more profitable lawyers.

5. Practice management focus on the delivery of legal services. Driven by the need to provide high quality, timely and cost-effective service to clients, midsize firms' executive committees and managing partners will devote more time to the strategic planning function and to managing the substantive and business sides of their law firms.

6. Enhanced role of non-lawyer business managers. Midsize law firms will employ more non-lawyer business managers with expertise in areas of financial management and technology, human relations and administration, to relieve lawyer management of most of their involvement in day-to-day administrative matters. Lawyer management will delegate to these non-lawyer managers greater responsibility for preparing sophisticated financial analyses, addressing technology issues, etc.

7. Applying technology to substantive practices. Technology will continue to enhance the speed with which legal services are performed, thereby enabling attorneys and paralegals to produce documents and communicate with clients at a much faster pace. At minimum, firms will use more voice mail, e-mail, and Internet transfer of documents ' document management is key. Also, more firms will make use of voice recognition software. Firms will continue to move from Word Perfect to Microsoft Word, and will increasingly manage computer file storage, including offsite backup.

8. Enhanced importance of client service and marketing. Partners in most midsize firms will become more sensitized to the enhanced importance of both client service and marketing to attract and retain clients. An ABA study on the declining image of the legal profession has motivated executive committees and managing partners to improve the way their firms organize and manage client service and marketing activities. Firms will increasingly attend to client perceptions of the firm ' not only of results achieved and of fees charged, but also of the services provided and of how they are treated by the firm, with regard to:

• Returning telephone calls, and making it easy for clients to contact their attorneys (by e-mail, home phone numbers on business cards, 24-hour telephone answering, etc.);
• Invoicing ' and allowing clients to design their own invoices;
• Written service plans for major clients;
• Use of client surveys (interviews and mail surveys);
• Client status reports;
• “Guaranteed” service (or reductions in the bill);
• Law firms adding value to their clients and educating corporate and business executives through newsletters, seminars, direct mail, web sites, etc.

9. Alternative dispute resolution. In an effort to contain legal costs, more corporate and business controversies will be resolved by alternative dispute resolution, as opposed to litigation.

10. Enhanced “partnering” between law firms and their clients. Partnering will be fostered between law firms and many of their better clients, to create a working relationship that enriches both the law firm and the client. Partnering entails risk-sharing in multiple aspects of a venture, including outcomes; fees, costs and expenses; and ' subject to ethical standards ' shared investment in the matter.

By attending carefully and creatively to these external and internal trends, midsize firms will enhance their ability to thrive in a business environment that is ever more competitive.

In conducting strategic planning studies and facilitating numerous strategic planning retreats, I regularly discuss long-term trends affecting law firms with dozens of members of executive committees and managing partners. These trends of interest differ somewhat, of course, for firms of different sizes. More importantly, sometimes the same trend has very different implications for firms of different sizes.

For midsize firms in particular, the following trends will remain important for at least the next several years. Lawyer management in the more financially and professionally successful midsize law firms will need to deal with most and probably all of these trends.

Eight External Trends

External trends are those over which law firms have little or no control.

1. Need for agility. Midsize law firms are likely to see an upturn in the growth and profitability during 2005 and beyond. However, these firms will find the practice of law to be more competitive, concentrated and demanding, with greater emphasis on delivering high quality legal services faster and less expensively.

2. Buyer's market. Midsize law firms will continue to practice in a “buyer's market.” This means that lawyers, and most of the services they offer, will be plentiful; buyers (clients) will have a wide-range of choices of high quality lawyers and law firms to serve them. Fees and other conditions of employment will continue to be influenced by the buyers (clients). Competition for corporate, business and individual clients will cause traditional hourly billing rates to be replaced by variations of hourly billing arrangements, contingency, and fixed fee, and combinations of these alternatives.

3. Profit squeeze. Midsize law firms will continue to be affected by a “profit squeeze” resulting from:

• Increased overhead due to higher associate and staff salaries and benefits;
• Higher automation costs, professional liability insurance and marketing expenses;
• Partners' unwillingness or inability to increase hourly fee rates for “commodity” type work to offset higher overhead;
• Enhanced client scrutiny of hourly rates, hours to produce work, and lawyer and paralegal staffing of work assignments;
• Pressure by corporate counsel for law firms to absorb more “soft” costs;
• Slower-paying clients ' which affects cash flow and hence the availability of distributable dollars for partners; and
• A great many midsize law firms being burdened with higher debt.

4. Consolidations of clients. Midsize law firms will see the continued consolidations of corporations and businesses, as well as the increasing number of bankruptcies of corporate and business clients.

5. Increased competition from traditional sources. Midsize law firms will continue to encounter increasing competition from national, regional and statewide law firms engaged in inter-jurisdictional client representation. This results from mergers and acquisitions of general practice and specialty firms, as well as from the increasing development of law firm networks and strategic alliances among smaller and other midsize law firms as the latter attempt to compete with larger multi-jurisdictional law firms.

6. Increased competition from outsourcing of legal work. Companies such as Borg-Warner, General Electric and others will outsource more commodity-type and legal research work to India and other countries, to be performed at half the $150 and $200 hourly cost that would be charged by their domestic law firms. These lower hourly rates for commodity-type work will affect the hourly rate structure of midsize law firms competing for similar work. Paralegal firms owned by non-lawyers will continue to provide some commodity-type legal services via the Internet. The number of Labor/Employee Benefits, Health Care and Environmental consulting firms will continue to grow. These consulting firms will hire more lawyers to perform many of the same legal/quasi-legal/administrative and preventive types of specialized services offered by midsize law firms.

7. Competition from in-house attorneys. Corporate and business clients will continue to employ in-house attorneys to perform day-to-day legal work and manage legal work referred to outside law firms. As the sophistication of these in-house counsel continues to increase, they will become more critical in the way corporate and business clients:

• Select and utilize outside law firms;
• Negotiate fees and costs of outside law firms (notably by consolidating corporate client work in a smaller number of outside law firms, which enables corporate and business clients to further influence law firms' fee structures);
• Approve payment of bills for fees and costs for legal services; and
• Utilize auditing firms to scrutinize the number of hours required to perform assigned work, the professional personnel (partners, associates and paralegals) assigned to work on these matters, the hourly rates charged, etc.

8. Multidisciplinary practices. Increasing numbers of multidisciplinary practices and non-lawyer professionals will continue to perform more of the administrative and quasi-legal services now often performed by law firms, but at lower cost. Examples of ancillary services performed by private law firms of all sizes and specialties are human resources training, real estate title services, and wealth management services.

Ten Internal Trends

Internal trends relate to cultural and management issues that affect midsize law firms. Unlike external trends, lawyer management does ' or should ' have a considerable degree of control over these trends.

1. Managerial focus. Executive Committees and Managing Partners in the more enlightened midsize law firms will devote more of their time dealing with:

• Delivering the most appropriate approaches for delivering high quality legal services faster, better and less expensively;
• The basics of managing professionally and financially successful professional business service organizations;
• Attracting and retaining those lawyers who control profitable clients and who possess expertise in current and newer substantive practice areas that are essential to attract and retain clients; and
• Attracting and retaining a sufficient volume of profitable business.

2. Business-oriented culture. Within the firm, traditionally “fraternal” attitudes, interpersonal values, personal relationships and financial relationships will all continue to change into more business-oriented relationships.

3. Every partner a working partner. Midsize law firms will have stronger centralized management, including:

• Increased accountability and less autonomy for partners concerning their actions and inactions;
• Greater emphasis on every partner being a “working” partner;
• More merit-based compensation decisions; and
• Diminishing feelings among partners about entitlements being due to older partners by virtue of seniority.

4. Retention of more profitable attorneys. There will be increased mobility of partners who control significant amounts of client business, including those highly productive and profitable partners and experienced associates who support the former partners. As a result, Executive committees and managing partners will devote more of their attention to developing strategies to attract and retain these more profitable lawyers.

5. Practice management focus on the delivery of legal services. Driven by the need to provide high quality, timely and cost-effective service to clients, midsize firms' executive committees and managing partners will devote more time to the strategic planning function and to managing the substantive and business sides of their law firms.

6. Enhanced role of non-lawyer business managers. Midsize law firms will employ more non-lawyer business managers with expertise in areas of financial management and technology, human relations and administration, to relieve lawyer management of most of their involvement in day-to-day administrative matters. Lawyer management will delegate to these non-lawyer managers greater responsibility for preparing sophisticated financial analyses, addressing technology issues, etc.

7. Applying technology to substantive practices. Technology will continue to enhance the speed with which legal services are performed, thereby enabling attorneys and paralegals to produce documents and communicate with clients at a much faster pace. At minimum, firms will use more voice mail, e-mail, and Internet transfer of documents ' document management is key. Also, more firms will make use of voice recognition software. Firms will continue to move from Word Perfect to Microsoft Word, and will increasingly manage computer file storage, including offsite backup.

8. Enhanced importance of client service and marketing. Partners in most midsize firms will become more sensitized to the enhanced importance of both client service and marketing to attract and retain clients. An ABA study on the declining image of the legal profession has motivated executive committees and managing partners to improve the way their firms organize and manage client service and marketing activities. Firms will increasingly attend to client perceptions of the firm ' not only of results achieved and of fees charged, but also of the services provided and of how they are treated by the firm, with regard to:

• Returning telephone calls, and making it easy for clients to contact their attorneys (by e-mail, home phone numbers on business cards, 24-hour telephone answering, etc.);
• Invoicing ' and allowing clients to design their own invoices;
• Written service plans for major clients;
• Use of client surveys (interviews and mail surveys);
• Client status reports;
• “Guaranteed” service (or reductions in the bill);
• Law firms adding value to their clients and educating corporate and business executives through newsletters, seminars, direct mail, web sites, etc.

9. Alternative dispute resolution. In an effort to contain legal costs, more corporate and business controversies will be resolved by alternative dispute resolution, as opposed to litigation.

10. Enhanced “partnering” between law firms and their clients. Partnering will be fostered between law firms and many of their better clients, to create a working relationship that enriches both the law firm and the client. Partnering entails risk-sharing in multiple aspects of a venture, including outcomes; fees, costs and expenses; and ' subject to ethical standards ' shared investment in the matter.

By attending carefully and creatively to these external and internal trends, midsize firms will enhance their ability to thrive in a business environment that is ever more competitive.