The annual Law Firms In Transition report from Altman Weil is always a good barometer for what’s eating, ailing or tormenting the law firms of today. The 2015 version contains 84 pages of data about drivers of change, staffing, efficiency and pricing. It’s a must-read for law firm leaders.
Overall, it reports on a generally better economic climate for law firms. It also documents the challenges that firms face, including pricing pressures from clients, new forms of competition, and structural and generational difficulties that are a drag on profitability and limit future succession plans and alternatives.
It’s the report’s conclusions about law firm responses to those changes, however, that are the most interesting part of this year’s report. Most firms aren’t meeting the challenges with major strategic shifts, but instead with incremental, tactical responses:
“The survey clearly shows that many firms are engaging in a variety of changes in response to post-recession market forces. But the majority of change efforts can be characterized as limited, tactical and reactive. Law firms appear to be gambling that a measured approach to change will hold them in good stead among peer firms taking the same incremental approach.”
Specifically, firm leaders are not making the hard, long-term moves on staffing, pricing, and efficiency that would really turn the ship. And this report even goes so far as to establish a link between those strategic moves and law firm performance in a way that has been missing in earlier industry research.
The report does this by comparing firms’ specific strategic leadership measures with the performance of those same firms.
Take a look at how this plays out for three key measures of firm leadership:
- The extent that firm leaders have decision-making authority to undertake change efforts.
The firms where leaders have a high level of decision-making authority have generally performed better on revenue, revenue per lawyer, and profits. For example:
- 8% firms in which firm leaders have a high level of decision-making authority experienced an increase in gross revenue in 2014 compared to 2013, while just 64.6% of firms whose leaders have low levels of decision-making authority did.
- The extent that firm leaders tackled strategic change in their staffing model
The firms whose leaders have pursued change in staffing strategies have done better in profit measures. Those strategies include the use of part-time lawyers, contract lawyer agencies, outsourcing non-lawyer functions, and low-cost centers for back-office functions. For example:
- 9% of firms that had pursued such strategies experienced growth in profits per equity partner in 2014; just 60% of firms who did not implement those changes experienced that kind of growth.
- Conversely, 31.1% of firms that didn’t make this kind of staffing change experienced a decline in profits per equity partner, vs. 15.4% of those that did make such changes.
- Pricing Strategy
Firms that have changed their strategic approach to pricing have also performed better. Here firms were asked to note the extent to which they had taken measures to sharpen their pricing strategy, including developing data on the cost of services sold; training for lawyers on new ways to discuss pricing with clients; setting margin goals for the firm or practice groups; identifying each client’s pricing preferences, or adding a pricing director or giving pricing responsibilities to a current staff member.
Here again, taking these strategic steps correlated to better firm performance:
- 7% of firms that changed their strategic approach to pricing increased revenues in 2014; while 69.5% of those who did not do so increased revenues.
- 7% of firms that took measures to address pricing increased profits per equity partner in 2014; while 66.2% of those who did not do so increased revenues.
One can’t read too much into this data; clearly a rising tide lifts all boats, and a number of firms that did not make any bold strategic moves nevertheless managed to grow revenue and/or profits. Still, this report provides good fodder for those that would argue that longer-term, strategic shifts in staffing and business practices will ultimately pay off in the form of better performance.
According to the data in this year’s report, it will.