The 2021 Report on the State of the Midsize Legal Market highlighted the jarring changes that occurred in the legal industry in 2020. Changes that impacted how and where work is done, newly emerging client needs, expectations of work-life balance, and the rapid adoption of new technologies.
Managing through all this change created both new challenges and opportunities for midsize law firm leaders during the pandemic. Three of the biggest identified by firm leaders included i) a renewed focus on profitability; ii) a shift in the operational support model; and iii) increased expectations — from lawyers, staff, and clients — around technology.
With demand for law firm services down 2% last year compared to the year prior, it was surprising to see that profits-per-equity partner are up 5.8%, setting a record for growth. Firms were able to achieve this record profit growth by cutting expenses early in 2020 and by focusing intently on adherence to client budgets and collections.
While firms held direct expenses in check through slight reductions in the number of associates, of counsel, and non-lawyer timekeepers, even greater reductions were seen in overhead expenses. In particular, the rapid move to remote working for many law firms contributed immediate and major cost savings. Office expenses, which make up about 8% of overhead, fell by one-fourth. Major expenses like business development & marketing and recruiting were slashed by more than 40%. These reductions, as well as other cost savings, in areas such as travel, contributed to law firms’ strong profitability growth even in the face of declining demand. Firms also achieved high profitability through effectively setting and then strictly monitoring client matter budgets and making timely payments collections.
Reduce, save, repeat
Interestingly, this situation as created a conundrum of sorts for the industry. Now, law firm administrative leaders are under pressure to deliver similar profits in 2021 while facing many of the same challenges they did in 2020. Yet, many of the expense cuts made in 2020 are not sustainable in the long term.
As law firms continue the trend towards professional management, it makes sense for them to focus on profitability. A firm’s profitability has a direct effect on partner retention and recruitment and creates the room necessary to provide associate bonuses. Further, maintaining healthy operating margins also helps make the case for capital investment in the new technologies that are necessary to adapt to the changing world. As law firms become more operationally efficient and successful partners more discerning, they may be scrutinized for profitability in the same way publicly held companies are.
Indeed, midsize law firms’ attention on profitability is also shifting focus and investment towards bolstering support within the “business of law” function. Forty percent of responding law firms with more than 50 attorneys stated they had furloughed support staff when the pandemic began. Many of those support roles were permanently shuttered and replaced by technology-enabled solutions that assisted fee earners in performing tasks once completed by assistants. However, many furloughed workers were also hired back in different capacities, with legal secretaries shifting focus to become budgeting or collections experts, for example.
Technology as the driver
Throughout all the change in 2020 and early 2021, technology was well-positioned to become the key to maintaining law firm operations. In fact, even with expense reductions as high as 45%, technology expense grew 4.8% year-over-year. Off-the-shelf technologies — laptops, web conferencing, VPNs — enabled lawyers to work remotely with one another, the firm’s support staff, the courts, and other parties. So far in 2021, midsize law firms are addressing the gaps in those technologies with industry-specific solutions that offer greater security and more functionality and customization, especially in areas that can boost fee-earner productivity and law firm financial performance.
Thomson Reuters’ recent 2020 Law Firm Business Leaders Report found that technologies such as legal project management, financial management information systems, platform and collaboration tools, document automation, and matter management analytics are among the biggest targets for adoption and upgrades.
With the economy recovering, successful midsize law firms are positioning themselves to take advantage of a potential resurgence in demand. Following the 2008-‘09 financial crisis, nearly every type of litigation matter tracked by Thomson Reuters Monitor Suite saw growth in matter volume for two and sometimes even three years after the economy began to recover.
By focusing on market development, efficient operations, and solutions that deliver value to their clients, midsize law firms will be able to sustain profitability through 2022 and beyond.