Legal Business Blogs

Guest post: Law land annual reports -has the partnership model been outgrown?

With the release last week of the Annual Report from Georgetown Law’s Center for the Study of the Legal Profession, the ‘Big Three’ annual reports – Altman-Weil’s Law Firms in Transition, Citi/Hildebrandt’s Client Advisory, and Georgetown’s – are now all out and we can see what trends and developments they seem to discuss in common.

Even armchair students of the profession will have glancing familiarity with these reports, and their different approaches.

Altman-Weil’s largely incorporates and reports upon the results of its annual survey of managing partners, and thanks to asking many of the same questions over the years, provides an extremely useful and distinctive time series tracking how responses have changed. (It’s not a strict longitudinal study since the composition of the individual respondents evolves over time, but we’re not expecting single-decimal point accuracy here.) In tonality, Altman-Weil’s approach is to emphasise ‘just the facts,’ but reserving permission for editorial commentary (‘the majority of change efforts can be characterised as limited, tactical, and reactive,’ for example).

Citi’s is reliably the industry cheerleader of the group, coming down on the side of glass-half-full and partly-sunny, but its data is invaluable and its overall analysis and discussion even-handed and fair. Do not expect Citi to sound the alarm, however (‘although low single-digit growth seems mild compared to the highs and lows of 2001-09, it’s actually similar to typical growth rates seen before that period’).

Georgetown’s, not surprisingly, tends to deliver the broadest reflections on the industry and, true to form, this year’s report is structured around the metaphor of Kodak’s legendary decline and fall at the hands of the digital photography revolution when it was a Kodak labs engineer who actually invented digital photography itself in 1975. Georgetown also features the real-world and rigorously reported data of Thomson Reuters ‘PeerMonitor’ service. Still, ‘the story of the demise of Kodak is an important cautionary tale for law firms in the current market environment.’

Having studied and digested all the reports, what may we reasonably conclude?

For all their variations in sourcing, authorship, history, and approach, I take away two utterly consistent and indelible messages:

(1) Big Law’s market landscape has changed irrevocably: (a) clients are now in the driver’s seat and it is a buyer’s and not a seller’s market; (b) demand for Big Law in nominal dollars is barely growing and in real dollars perhaps shrinking; and (c) the proportion of ‘legal services’ supplied by non-law-firms (including in-house departments) is growing, and at an accelerating rate. And:

(2) The dispersion of performance among Big Law firms – segmentation, equivalently – is growing, and at an accelerating rate.

But don’t take my word for it:

Altman-Weil: ‘83% of law firm leaders say they believe competition from non-traditional service providers is a permanent change in the legal market…the biggest bite is being taken by clients themselves.’

Citi: ‘As we wrote in our last Client Advisory, we are operating in a buyer’s market…In addition, dispersion in performance among law firms and year-over-year volatility in performance for individual firms has increased. These market dynamics are likely to continue. While the demand for traditional law firm services has remained relatively soft, the supply of legal service providers has increased, creating a hyper-competitive market.’

Georgetown: ‘Clients who previously deferred to their outside firms on virtually all key decisions regarding the organisation, staffing, scheduling, and pricing of legal matters are now, in most cases, in active control of all of those decisions…What was once a seller’s market has now clearly become a buyer’s market, and the ramifications of that change are significant. […] The increased market share of outside vendors reflects a proliferation of non-traditional providers of legal and legal-related services. Once regarded as an insignificant sliver of the overall legal market, such non-traditional providers have now established a firm foothold in several service areas once dominated exclusively by law firms.’

Those of you, like yours truly, who are fond of data can simply look at this chart from Citi, comparing ‘demand volatility’ (revenue growth) in the last two immediate pre-Global Financial Crisis years with the two most recent years:mckinseyAI

I think the chart is visually striking by itself, but here’s how I’d summarise it:

In 2005-07, two-thirds of firms in the Citi dataset enjoyed two up years in a row, only in in four had an up year and a down year, and only one in 7 had two down years.

But in 2012-14, the industry was basically divided into equal thirds: One-third up and up, one-third up and down, and one-third down and down.

Citi performs the same analysis on PPP and, if anything, the dispersion is even more striking: Pre-GFC, nearly three-quarters of firms had two up years in a row and only one in 30 had two down years, but in 2012-14, fewer than half of all firms had two up years and one in eight had two down years.

For purposes of present discussion, may we stipulate this is the diagnosis?

Let us then proceed pragmatically to ask, ‘What’s to be done?’

At the highest level, one again finds a consensus among the Big Three reports: Clearly defined and differentiating, and crisply executed, strategy matters more than ever.

As I’ve written at length in this annals, ‘strategy’ is many things but it is emphatically not a statement of platitudinous values, real or aspirational. A few other things it is not:

Not a little bit of this and a little bit of that;

Not offering a sop to every conceivable constituency;

Not saying ‘yes’ or ‘maybe’ or ‘someday’ to virtually everything; strategy worthy of the name means saying “no;” and finally

If you’d like an acid test – I admit, I’m particularly fond of this technique – not a statement whose polar opposite is nonsensical.

The last point deserves a moment’s explication. Pretend your firm’s strategy is ‘to deliver impeccable client service on matters of the greatest consequence in an environment of thorough professionalism.’ With me? (You may have heard statements topologically indistinguishable from this in your immediate neighbourhood.) What, then, is the ‘polar opposite’ of that statement, and is it nonsensical?

‘To deliver deplorable client service on matters of trivial import in an environment of sketchy ethics.’ Nonsensical? Yes.

Conversely, pretend your firm’s strategy is ‘to become the leading land-use firm in [major metropolitan area] within three years.’ The reverse? ‘Not to become…[etc.].’ Nonsensical? Hardly; perfectly sane and understandable.

But let’s move along here.

How do the Big Three think we as an industry are doing on responding to the challenges of (a) a buyer’s market; and (b) accelerating dispersion of results?

Altman-Weil: ‘The majority of change efforts can be characterised as limited, tactical and reactive.’

Georgetown: ‘Law firms have responded to these changed market conditions in largely passive and reactive ways.’

Citi: ‘Client demands for more efficient delivery of legal services, and pressure on margins, have already caused firms to think differently about how they deliver legal services, and we anticipate more of this. Firms have begun to focus more on understanding the cost of running matters.’ (Can you say, damning with faint praise?)

If you view these changes as systemic and not cyclical, and as profoundly focus at the heart of the supply/demand intersection for Big Law, why no greater sense of urgency?

For the first time, at least in my reading of these three reports, serious attention is devoted to the psychology and dynamics of change within law firms. Again:

Altman-Weil: ‘Leaders must become more forward-looking and get every lawyer in the firm to look into the future with them and understand the impact of trends already in motion. Ask your partners what they think their practices will look like in eight to ten years if the forces of commoditisation and technological change progress at the same or increasing pace. Without a substantial number of partners seeing a different future, little is likely to happen. Start with the ‘why’ and educate your partners more widely and deeply on how market trends will affect their practices. Every time you change one mind you will gain an apostle to communicate the change message to others. Leaders get people to do things they might never do otherwise.’

Georgetown: ‘Making significant operational changes…is hard and inevitably runs into stout resistance from partners who see no reason to change methods that have ‘always worked before.’ … Most law firms remain locked in a ‘billable hour mentality’ that makes it difficult for their partners to think creatively about alternative approaches to legal service delivery… Most still retain the billable hour as their key metric for other purposes [including] lawyer evaluation and compensation, matter or project budgets, and the profitability of matters.’

Citi: ‘Leaders of successful law firms recognise the need and challenge of adapting their firm cultures to the changes in the market. For most firms, this begins with getting partners to leave the status quo behind and focus on the need to adapt to changes in the industry. This includes acceptance of a flat demand environment and the need to become more of a business developer. It means making greater use of technology and possibly a new leverage model. It also means understanding and accepting the likelihood of PPEP volatility.’ (Predictably, Citi is the most measured in the rhetoric they deploy.)

If you’re like me, you have to ask yourself at this point whether firms don’t see the need for change or see it but prefer not to?

Now, in my travels I have met an enormous number of managing partners, executive committee members, and rank and file partners, in Big Law, small law, and everything in-between. My own view is that they’re overwhelmingly smart (or super-smart), analytic, and risk-diagnosing bloodhounds. How could it possibly be that this large cohort of people don’t see what’s going on in the market?

Actually, I believe they do. Even the supposed troglodytes at Kodak weren’t actually naive at all; they knew digital photography would eat their film lunch, but they couldn’t stop doing what was so profitable. So I subscribe to the ‘they prefer not to’ hypothesis. After all, it has a lot going for it:

Those in charge of law firms (and certainly Big Law, with a small minority of exceptions) are old enough that they may have left the building before change becomes imperative.

By and large, most firms are not in much pain, certainly not enough to motivate a serious and sustained change to the status quo. (Readers with a familiarity with the psychology of addiction and how to break it may want to chime in with thoughts on ‘hitting bottom.’)

Speaking of the status quo, lawyers – more than any other category of professionals on the planet – elevate the presumptive superiority of the status quo over and above any and all other possible statuses. While I have never comprehended this, much less endorsed it, I’m not in the business of denying reality.

Never underestimate the short-termism of lawyers – for starters, their compensation is 100% in current earned income paid from their firm’s results this fiscal year and this fiscal year alone (with exceptions too immaterial to compromise this as an observation about the industry).

Compounding the short-term orientation, many lawyers – in our era of hyper-liquid lateral markets- have no allegiance to their firm beyond the last day of the current fiscal year. Why suffer financial or psychological dislocation for even a few calendar quarters if the payoff will only accrue to some uncertain future time?

And this brings us back to our Big Three. Even the stiff-upper-lip Citi addresses it obliquely, in the opening quote to its report:

‘It is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is best able to adapt and adjust to the changing environment in which it finds itself.’

– Leon C. Megginson, Professor of Management and Marketing at Louisiana State University at Baton Rouge (in a 1963 speech on Charles Darwin’s ‘The Origin of Species’)

Both Altman-Weil and Georgetown take it on far more directly. Altman-Weil presents data showing centralised leadership correlates with superior financial performance. I assume I don’t have to connect the dots for you. Georgetown more bluntly challenges the partnership model of organisation itself as potentially not ‘fit for purpose’ any more:

Law firm partners must understand that the exercise of their ‘ownership’ rights can no longer entitle them to exercise a veto over every key management decision or to approve in advance changes in firm operating systems or models. Other professional service firms (including accounting and consulting) have made adjustments to their governance structures to make them more responsive to the demands of their market environments. Law firms need to do the same. This is important not only to enhance such responsiveness, but also to enhance the likelihood that decisions will be made with an eye on the long-term viability of the firm rather than the short-term interests of individual partners.

Could it be, in other words, that we have outgrown our historic roots as partnerships? Is the perennial debate between whether we’re a ‘profession’ or a ‘business’ (we are incontrovertibly both) actually pointing at something profound and could it be more than a tiresome and tendentious, perennial rhetorical tic to pose this question?

We are not remotely done with this topic.

Bruce MacEwen is the president of Adam Smith, Esq. You can read his blog here.