On January 10th, the Center on Ethics and the Legal Profession at Georgetown Law and the Thomson Reuters Institute released their 2023 Report on the State of the Legal Market, which seems more relevant than ever as we go into a year of uncertainty. The report confirms this (and I’ll delve into a few specific points), but overall, I’d like to remind readers that we’ve been here before – contractions in the legal industry are nothing new. The good news is that hopefully, firms have learned the lessons of 2008/2009 and haven’t forgotten them. Will there be some casualties? Yes, but that’s the nature of business. And make no mistake – the law is still a business.
Georgetown addresses some key takeaways from the report in this release. While some of them sound truly dire, not all of them are cause for concern (and indeed, I’ve spoken with many of my lawyers who foresaw this market contraction and aren’t worried). Let’s look at some of them:
Falling Demand, Client Spend Optimism
This sounds worrisome at first, especially when coupled with these statistics:
Law firms saw a substantial slowing in demand for their services throughout 2022. Demand fell by an average of 0.1% in 2022 through the end of November, and will likely finish the year in negative territory, compared with the robust 3.7% rebound in growth for all of 2021.
But in context, we learn that this is attributed “primarily to a sharp contraction in transactional work, such as M&A, brought about by growing economic uncertainty.”
Why is that good? Most firms aren’t one-trick ponies. And while transactional lawyers won’t be happy about this news, their insolvency and restructuring partners will be. There is always work for lawyers. And many of the businesses that were propped up during the pandemic will need to be restructured or made insolvent, which will keep those lawyers busy. As we saw in 2008/2009, some lawyers will be shuffled to other practices, while lawyers in mid-sized firms who already have multi-practice skills will have plenty of work to manage.
Speaking of mid-sized firms…
Market Shifts Towards Midsize
Georgetown noted that:
Midsize firms stood alone among the market segments in seeing demand growth in 2022. The report describes this apparent willingness by clients to move work in search of high-quality but more cost effective counsel as “striking.” While larger firms saw stark deterioration in all practices, midsize firms were increasingly competitive, especially in litigation, labor & employment, and intellectual property.
You know that made this midsize network lady VERY happy – it reinforces what I’ve been hearing and seeing within our own organization. First, trying to get the folks in those practice areas on the phone/email is almost impossible these days because they’re swamped, but two, they really are high-quality and cost-effective.
These figures ARE concerning and there’s no sugarcoating it:
While average hours worked per lawyer has been steadily declining for more than 20 years, it fell sharply in 2022, reaching the lowest level ever recorded by Thomson Reuters Financial Insights, an average of 119 billable hours per month.
The report calculates this means the average lawyer billed $98,000 less in total fees than a comparable lawyer in 2007, based on average rates for 2022.
So what does that mean? I’m not going to be a Pollyanna here, but I am going to say that it means you, as lawyers, have AMPLE time to up your business development game. This is the time to work on those BD plans, implement the strategies that you’ve been putting off, and get things in the pipeline for the future. When things are quiet, that is when you work on selling.
This one is truly interesting to me – the two pieces that make up expenses here are the war for talent, which firms can’t do much about at the moment, and direct and overhead expenses. So says Georgetown:
Both direct and overhead expenses are rising at double-digit rates, the highest since 2009, as a result of factors including higher talent compensation, return-to-office expenses, business development costs, and inflation. The report cautions that “in an environment where revenue generation is slowing, such an expansion in expenses is alarming should it continue.”
Pieces of that are challenging, but “return-to-office expenses” – remind me again why firms are pushing so hard for this? 2020 and 2021 were two of the most successful years for law firms in terms of profitability and efficiency, and yet many firms are *insisting* that their lawyers and other professionals must be in the office to work. Apparently at their own detriment.
Please give some careful thought to whether those return-to-office plans really make sense, both from a fiscal and morale standpoint before you enforce them. I know that there are real concerns about young lawyers – how they are trained and assimilated into the firms – as well as a push from more senior lawyers who simply prefer to work in the office and are lonely without their colleagues. But run the math and make actual business decisions as to what makes the most sense for your firms.
Rates Hindered By Inflation, Falling Realization
We’re all suffering from the effects of inflation – while this report looks at US firms, our foreign neighbors are truly bearing the brunt of some shocking inflation numbers.
Please remember the need to be sensitive when raising your rates and notifying your clients – this shouldn’t be done via a bill.
But the other thing that’s happening for firms is falling realization rates, and this is more controllable.
after rising steadily for the previous two years, collection realization has begun to level out or decline across all segments of the market. The report suggests this could be due to firms losing their focus on billing discipline or clients pushing back on invoices and payment cycles, or both.
These are things to examine at your firm and track, if you aren’t already and identify where improvements can be made. Given that market pressures may impact these rates, you may not see a dramatic increase, but if it is due to billing discipline, this is easily rectified for the firm, as is a reassessment of client management.
Finally, Thomson Reuters suggests the type of due diligence I always like to recommend – look at everything:
“Law firms need to closely examine all aspects of their business – including talent management, practice management, workflows, operations, and finances – and employ the necessary solutions and technology in order to successfully navigate the year ahead.”
Paul Fischer, president, Legal Professionals, Thomson Reuters
When things seem uncertain, we get back to basics – take a deep breath: what do we know, where can we improve efficiencies, how can we best serve our clients and our staff, what worked well the last time, and what didn’t work well and how would we change that? We’ve been here before and we know more now.