The 2020 Report on the State of the Legal Market, from Thomson Reuters Legal Executive Institute and the Center on Ethics and the Legal Profession at Georgetown University Law Center, detailed the evidence of a fundamental shift in the legal industry.
While law firms enjoyed a second consecutive year of demand growth and near historic highs in average worked rate growth, clients continued to gain increasing levels of influence on how and by whom their work is completed. This has been demonstrated by the continued rise of alternative legal service providers (ALSPs), including the Big Four accounting firms as well as other non-law firm service providers, often called law companies.
However, despite the decrease in market share owing to the rise of these new law companies and ALSPs, lawyer headcount has continued to grow at an increasing pace at law firms. This was most clearly shown in the fourth quarter of 2019 when lawyer growth in the market reached the highest point since 2011, resulting in a decline in productivity. However, declining productivity is not a new trend, as lawyer growth has continually outpaced demand for the vast majority of the past decade and has had a costly effect on law firm bottom lines.
Indeed, outside of one quarter in 2013 as well as a brief period of growth in 2018, productivity has continually been on the decline. In 2011, lawyers at firms in the Peer Monitor program worked an average of 126 billable hours per month; by 2019, that number had decreased to 122. When coupling this decline of four hours per month per lawyer, or 48 hours per year, with the average worked rate for lawyers in 2019 of $518, the loss in productivity cost law firms on average $24,864 dollars per lawyer this past year alone. Based on the average firm size in the Peer Monitor program of 425 lawyers, the average cost for this comes out to more than $10.5 million per firm in 2019.
The size of the average cost lends credence to the assertion that declining productivity is currently a major threat to profitability growth in the present and in the immediate future.
Perhaps the extreme levels of rate growth throughout the legal market in 2019 were an attempt by firms to recapture some of this lost revenue due to declining lawyer productivity. If that’s the thinking among firms, however, it is curious that hiring rates continued to increase. One explanation could be law firms may be anticipating sustained demand growth in the future, or possibly preparing for the imminent retirement of many Baby Boomer-aged lawyers.
Whatever the case may be, it is clear that the overall cost of declining lawyer productivity is much higher than it may seem at first glance.
For a complete discussion of the current state of the legal market, as well as exploration of how some firms are choosing to adapt, you can download a copy of the 2020 Report on the State of the Legal Market here.