The financial results reporting season has begun in earnest. Last week, Citi Private Bank and Hildebrandt Consulting released their “2016 Citi/Hildebrandt Client Advisory.”
Last year’s report suggested, at least to me, that the pace of change, especially efficiency advances, at large law firms would accelerate in 2015. That appears not to be the case; indeed, this year’s Advisory sees operating expenses on the rise.
What does appear to have accelerated, however, is the client pattern of moving legal work away from the largest law firms in pursuit of cost efficiency from other providers. This trend, together with others, increase the imperative for systemic change.
As always, the 2016 Client Advisory is full of interesting graphs and data about the financial performance of BigLaw, drawn from a sample of 201 of the largest US-headquartered law firms. The Advisory reports that the average performance of the sample was essentially flat, with some exceptions; and importantly, it showed increasing variation and volatility of performance among individual firms.
Here are several quantitative findings I found important in assessing the overall direction of the market:
- Declining Levels of Work — About half the surveyed firms are experiencing a decline in work year-on-year. While the total market demand for legal service is increasing and the total amount of work in the full sample is flat, for 100 of the 201 firms, their share of the market was declining in 2015.
- Increasing Levels of Expense — Meanwhile, the Advisory reports that expenses are rising across the sample. The leading cause is an increase in lawyer compensation, driven by increased headcount and higher compensation per lawyer.
- Overstaffing — Since the amount of work for the lawyers has been flat across the sample, the increased headcount means that chronic overstaffing continues, with overall “productivity” (billable hours per lawyer) declining even further.
- Declining Levels of Partner Income — The foregoing developments produce an expectation that for more than 40% of the largest US-based law firms, income per partner will decline in 2015.
Also as always, the 2016 Advisory distills a number of sound conclusions and recommendations from its data.
Here are some additional conclusions I think also can be drawn from the data:
- Clients’ Buying Behaviors Are Changing — I think the leading cause for the decline in work at so many large law firms is a change in clients’ buying behaviors. Clients are actively rethinking how they access the legal service they need, choosing the solution with the best combination of value delivered and cost incurred. This means work is moving away from incumbent providers, to legal processes outsourcing firms (LPOs), other firms, or in-house.
- “The Elite Gap” Will Accelerate the Movement of Work — The Advisory graphically portrays the dramatic increase in the earnings gap between what it dubs “the elite firms” and “everyone else.” It is stunning. This gap is likely to cause an increasing concentration of market share for the highest value engagements in the most profitable firms. In turn, that will mean that the rest of the large firms will be competing for what is left, which, by definition, will be more subject to cost considerations. This likely will increase the rate at which clients move work to providers that are more cost effective.
- Financial Pressure Is Becoming More Real and Present — One of the impediments to change has been the continuing high level of income large law firm partners have enjoyed. The Advisory’s data shows that those levels of income are now under real and present pressure. Forty percent of the firms surveyed are projected to see decreases in income this year. More significant, for half the firms, the Advisory indicates that declining levels of work and increasing levels of expense will drive income down further going forward. As these partners’ comfort zone is diminished, their openness to change likely will increase.
Imperative for Change Intensifies
I think the main take away from the Advisory is that the imperative for fundamental change in the way law firms deliver service is intensifying. All firms face pricing pressure. Operating expenses are increasing. Clients are moving work away from the leading firms. It is time to look inward and find a better way to serve clients.
The Advisory recommends that firms increase their focus on traditional tactics such as branding, client relationship management, and business development. This is good advice. But it won’t save the day unless firms do the much harder work of changing their service model.
Appropriately, the Advisory closes with a discussion of “Improving Efficiency.” This is where the most intense focus should be.
For more coverage of the 2016 Citi/Hildebrandt Client Advisory, see David Curle’s recent post.