Last year, we produced a report entitled The Rise of the Transactionals, discussing how transactional practices are increasingly assuming a leading role in law firm growth strategies. At that time transactional practices saw demand growth of 3.3% for the previous calendar year, and greatly outpaced the growth of litigation. Moreover, transactional practices had finally surpassed litigation as a larger proportion of total law firm billings. At the end of 2014, transactional practices accounted for 32% of billings, compared to 31% for litigation.
But it appears that fortunes may be starting to reverse.
Growth in transactional practices reached a peak in Q1 of 2014. While growth remains positive, it has been declining ever since. In contrast, litigation has remained highly volatile in terms of demand growth, but it has started to show some general trends in the right direction.
Demand Growth Converging
For much of the past couple of years, transactional practices had a favorable differential of about 3.8% compared to litigation. But that gap has started to narrowly drastically. Through May of this year, the differential between transactional and litigation practices in only 1.4%, showing that litigation is starting to make up ground as transactional practices flag.
While litigation demand growth remains negative, it is seeing smaller negative demand growth than has been seen in previous quarters. Negative demand growth is never a good thing, but less-negative-than-before can be seen as a step in the right direction. In contrast, transactional practices are still experiencing positive growth, but they are seeing steadily declining growth, indicating that clients’ appetites for transactional attorney hours may be dwindling.
There are numerous explanations for why transactional work is slowing. Some of the most popular theories revolve around general political instability throughout the major markets. With the United States presidential campaign season in full swing, there is a high degree of uncertainty about how the outcome of the election will impact the business climate. Toss is the recently completed “Brexit” vote and the uncertainty leading up to it, and you’ve got a recipe for caution among business leaders.
Does this mean that it’s all bad news for transactional practices? Hardly. We must not neglect the fact they are still experiencing positive growth. There is new business to be had; however, there just may not be as much new business as there once had been.
What this means for law firms is that they need to be much more calculated about how they pursue new business and having a solid strategy will be key. Investing sufficient time designing an effective business model, and understanding who the profitable clients are, what types of services they need, and how to win and keep their business, will help better position firms to capitalize on the more limited opportunity in today’s market.
Additionally, embracing technological innovation could also help some firms further pursue transactional business. In a Thomson Reuters survey of legal industry marketing and business development professionals, 40% said that leveraging technology was very important to their firms, and 28% said it was one of their top three priorities.
Success in Transactional Strategy
Looking at the above graphic, it’s readily apparent that there are firms that are still highly successful in growing transactional practices, despite the market slowdown. Of those law firms in the sample, those that saw positive growth saw a higher average level of positive growth compared to the average level of contraction seen by those firms in negative territory. Moreover, a decent number of firms saw demand growth for transactional practices in excess of 10% year-to-date.
There is certainly room for firms to succeed in transactional practices this year. While the US presidential election will continue to bring uncertainty, the finality of the Brexit vote will almost definitely bring an increased need for reasoned, professional advice from law firms as clients look to navigate these new waters.
There will not be one secret formula of best practices leading to growing transactional practices. Those firms in the chart that have managed to grow their transactional practice so far this year have likely taken very different paths to their success. But any firm undertaking a strategic effort to better understand where their strengths and opportunities lie will better position themselves to succeed in a shifting market.