EAGAN, Minn. & WASHINGTON, D.C. — Law firms must find ways to effectively adapt to evolving competitive conditions — including the effective demise of the billable hour — or risk further erosion of their market positions. At the same time, the changing market dynamics present opportunities for firms that are willing to challenge conventional thinking, take risks and innovate new approaches to the delivery of legal services.
These are among the findings of the “2017 Report on the State of the Legal Market” issued today by The Center for the Study of the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute.
You can download a free copy of the “2017 Report on the State of the Legal Market” here
The report discusses how, 10 years after the financial crisis and Great Recession began, its aftershocks still reverberate throughout the law firm market, which has shifted dramatically into a buyer’s market, resulting in a steady erosion of demand, rates, productivity, realization and profitability. And while the overall market for legal services continues to grow, law firms are dealing with new competitors and changing client needs. Indeed, clients are upending traditional law firm business models not only by demanding lower costs, but also disaggregating services to non-law firm service providers, imposing new pricing models, and reducing use of first- and second-year associates.
As to the billable hour, the report notes that its death has been “one of the most potentially significant, though rarely acknowledged, changes of the past decade.” Although firms still technically bill a majority of their work on a billable hour basis, budget caps imposed by clients mean that as much as 80% to 90% of law firm work is now done effectively outside of the traditional billable hour model.
Further, the report cautions that firms that merely place “band-aids on the old models” will face an increasingly uncertain future. Conversely, firms “that are able to adjust to the new market realities… and redesign their approaches to client service, pricing, legal work processes, talent management and overall structure will enjoy an enormous competitive advantage.”
Mike Abbott, vice president, Client Management & Global Thought Leadership at Thomson Reuters, agreed. “The law firm market is increasingly segmenting between firms willing to adopt new business models, processes for delivering legal services, and pricing, staffing and compensation models that reflect the new market dynamics, and firms that retain more traditional approaches,” Abbott said. “For example, this year’s report discusses how firms that take a more pro-active approach to initiating discussions on using alternate fee arrangements are seeing greater profitability, even for work that is done under such arrangements. And they are better positioned to compete in an increasingly crowded marketplace for legal services.”
The report is jointly issued annually and relies on data from Thomson Reuters Peer Monitor. It reviews the performance of U.S. law firms and breaks down the new market realities that drive the need for firms to take a longer-range, more strategic view of their market positions.