James W. Jones, a Senior Fellow at the Center for the Study of the Legal Profession at Georgetown Law, recently sat down with Legal Executive Institute and discussed some of the longer term trends that can be discerned from the recent Report on the State of the Legal Market, a collaboration between the Center and Thomson Reuters’ Peer Monitor.
LEI: We’ve seen in the report that although 2014 was a slightly better year than 2013, growth remains sluggish and productivity continues to be a challenge for many law firms. What else strikes you about the report?
Jones: Realization is a tremendous problem—firms continue to raise their rates, but now we have seen realization hit 83%, the lowest that’s ever been recorded. And it’s worse among the AmLaw 100.
We’ve been watching this for past few years, hoping realization rates would flatten out, but they haven’t. They continue to go down.
So that means that law firms across the market as a whole are collecting 83-cents on every $1 they’re recording as standard time. That’s huge! That translates into hundreds of millions of dollars, as you can imagine.
LEI: Even so, the overall picture doesn’t reflect too dire of a situation, does it?
Jones: Firms are doing well keeping expenses down, and profits-per-partner are up again this year, although modestly. The overall picture is that it could be worse—and it’s better than it was in 2013—but we’re not setting the world on fire here.
The right way to talk about it, I think, is that while things are looking up somewhat the market as a whole is still in the doldrums, and I don’t see much likelihood that is going to change imminently.
LEI: What’s behind this?
Jones: There are all kinds of theories, but some people suggest that maybe what we are seeing now is a return to normal growth in the legal market and what we saw during the last eight years before 2008 was the aberration—the exception to the normal patterns of growth. And that may be.
I think we’re also seeing the results of clients making decisions to keep more work in house, and build their own internal capacity and use more non-traditional service providers. So, they’re going out to big accounting firms, legal process outsourcing firms and others rather than just traditional law firms.
While the numbers in terms of revenue that is actually being syphoned off by these non-traditional service providers still seems modest compared to the overall size of the legal market, they’re growing—and they’re growing every single year. And I think it’s beginning to make an impact.
LEI: Another facet of the report people have mentioned is the industry trend toward an increase in the segmentation of the market. Is that going to be a problem?
Jones: It’s an issue that suggests increasingly that the market is dividing into winners and losers. If you look at the AmLaw 100, you see that almost all of the positive performance was driven by just 20 firms. And the same thing is true in the AmLaw Second 100.
In each case you have about 20 firms that are blowing the top off the numbers and everyone else is just putzing along or in some cases not doing very well at all.
The problem is that the longer that kind of dramatic segmentation persists, the greater the tendency for those segments to harden, because the firms with the money have the money to spend.
If these segments become hardened it becomes more difficult for a law firm to rise through the ranks—and that’s something we’d want to watch very closely over the next few years. Because if that continues to happen you will get a dramatically different legal market.
LEI: Are firms reacting to this yet?
Jones: Some firms have understood this, and are starting to do some interesting things, but most firms aren’t. They’re still playing a reactive game, but they aren’t getting out there in front of this and realizing the market has changed in fundamental ways. If they want to grow their market position, they need to get in front of this.
LEI: What’s behind this tepid reaction?
Jones: I think that the kind of changes necessary now are really hard. It’s not just tinkering around the edges but rather rethinking how we do our legal work, how we partner with other service providers, how we work with in-house lawyers.
I think it’s hard for firms to get their heads around the kinds of changes needed to respond to the market.
LEI: What would it take to make firms realize these changes are needed?
Jones: Frankly, I think it would take a real hit in growth of profits-per-partner, which has continued to grow, even during the downturn at about 1% to 3% per year. Of course, firms have done extraordinary things to accomplish that—they’ve reduced the number of partners substantially, they’ve pulled back on creating new partners. But they’re going to run out of the ability to do that, because once you’ve done that, what other trick do you have in your bag?
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