Transactional practices are becoming increasingly important sources of growth for large law firms, helping to offset persistent weakness in litigation, according to a new report from Thomson Reuters Peer Monitor.
The new report, Rise of the Transactionals, discusses how transactional practices—corporate, M&A, tax and real estate work—have consistently outperformed litigation practices over the past two years. For example, while billable hours for transactional practices have grown in seven of the eight most recent quarters, litigation practices have declined for 11 consecutive quarters and have not been positive since the first quarter of 2012.
In addition, transactional practices have grown in its share of total law firm billings and now make up 32% of billings, compared with 36% for litigation. Transactional practices are also showing stronger collected rate growth than other practices.
“Litigation is said to be a counter-cyclical practice with respect to the greater economy—so during the Great Recession, with a dip in the economy we would have seen a rise in litigation, however, this was not the case,” said Jennifer Roberts, a Senior Analyst with Thomson Reuters Thought Leadership.
“Litigation got hit pretty hard, relatively not as hard as transactional practices, however,” Roberts said. “The fact that litigation did not show signs of its counter-cyclical nature indicates that there are greater factors at play. Any correlation between the rise of transactional and downturn of litigation work really speaks more to what is going on in the market place, legal and otherwise.”
Interestingly, the report also showed that the trend of growing transactional work is currently favoring Am Law Second 100 firms. Last year, the Am Law Second 100 saw transactional practices grow a robust 5%, compared with only 3.4% for the Am Law 100, which accounted for much of the overall outperformance by the Am Law Second 100 market segment last year. So far this year, the trend is continuing, though the gap has narrowed, with transactional practices up 3.7% for both the Am Law Second 100 and the Am Law 100.
Roberts suggested there were reasons Am Law Second 100 firms were outperforming the larger firms in transactional business areas. “A select group of Am Law Second 100 firms did extraordinarily well in 2014 which can be attributed to the fact that these firms have the bench strength that clients are looking for as well as the ability to offer quality legal services at a lower cost,” she said. “And they may also be more willing to work with alternative arrangements for fees and incorporating process improvement and management to drive efficiencies.”
Indeed, the report suggested (in a section titled, Large Firms vs. “Large Enough” Firms) that Am Law Second 100 firms may be performing better here because “[i]t may be relatively easy for clients to move transactional work slightly down-market without significantly altering their risk profile”, adding that for some clients it may be a more strategically wise move to hire a firm that is simply “big enough” to do the work needed.
“The rise of the Second 100 also speaks to the increase in competition within the market now that the ‘large enough’ firms are seen as actual competitors to the top tier,” said Roberts. “However, recent reports have suggested the continued importance of the relationship between the client and the firm. So if the top tier is doing a good job at managing relationships I don’t know if they will feel much of an impact.”