Five Business of Law Studies in Summary

Business of Law

Five Business of Law Studies in Summary

The beginning of a new year is an appropriate time for both reflection and forward thinking.  I read through a number of newly published studies, in part, to reflect on the state of the business of law – and what it means for the coming year.  In considering the sum, it is apparent to me the trends in people, process and pricing all share technology as a common denominator.

For example, the issues around people aren’t simply about talent management or lateral hiring, it’s also about communication.  Communication includes using enabling technology tools – like case management – to add value and transparency for clients.

Process is also a good case in point.  Process is not just about documenting the next step in a workflow, it’s about using technology to automate routine tasks – and keep the team focused on delivering value. More importantly, this means putting these tools in the hands of a non-technical audience who can automate tasks without submitting a helpdesk ticket every time.

“…the issues around people aren’t simply about talent management or lateral hiring, it’s also about communication. Communication includes using enabling technology tools – like case management – to add value and transparency for clients.”

Technology is also increasingly a factor in pricing as well.  Corporate counsel continues to invest in spend analytics to examine historical legal budgets and uses this as leverage when negotiating with firms. Likewise, law firms should use technology and business intelligence to sort through their own data in unprecedented detail to understand the effort and cost to deliver competitive pricing.

Now that we have turned the corner into 2017, that’s my take on the current state of affairs based on these reports.  Below are my notes to five business of law studies in summary.

1) Clients Value the Legal Expertise They Lack

Inside and outside counsel have divergent views on the business of law – and the International Association of Defense Counsel (IADC) has quantified it in hopes of fostering greater understanding.  The organization recently released its 2nd annual 2016 Inside/Outside Counsel Relationship Survey which garnered responses from 679 respondents.  About half of the respondents work in a law department and the other half work for law firms.

The report suggests clients see firms at their finest when they provide expertise that the law department does not possess.  Clients also say firms stumble over billing topics too, including timely or realistic budgets and lacking options for alternative fee arrangements (AFAs).

Similarly, firms see their clients at their finest, when corporate counsel is responsive to “to questions, feedback, or requests for authorization.”  Billing also surfaced as a key point of contention – in timely payment within 30 days.

Additional key statistics from the survey include:

  • Both inside and outside counsel say the trend in outsourcing legal work continued to grow but differ on just how much.
  • 61% of inside counsel say outsourcing grew compared with just 39% of outside counsel.
  • 56% of inside counsel expect outsourcing to grow in the next year.

“The significant variance in opinion between the two groups on how much work is going to law firms tells us that companies are consolidating more work with a smaller number of law firms, and that’s a trend that is having a significant impact on our industry,” according to the IADC President-Elect in a piece for General Counsel News.

2) Consulting Firm Urges Law Firms to Invest in Tech

Fees have risen and headcount is up but fewer firms are reporting growth according to the 25th edition of the 2016 Annual Law Firms’ Survey by PwC.  The survey is focused on the top 100 firms in the UK and presents several useful benchmarks including these statistics:

  • 7% is the average net profit margin; staffing accounts for 65.9% of costs on average.
  • North America remains a tough market for UK firms, “with average margins in 2016 being as low as 10%.”
  • Most law firms “(83% of Top 10 and 69% of Top 11-50 firms) have increased global fee income, although increases have been modest and, for international firms, favourably impacted by exchange rate movements.”
  • Headcounts have grown in the UK and abroad, “with average numbers rising by 7.6% in Top 10 firms and 7.1% in Top 11-50. This investment has yet to pay dividends however, as headcount increases have yet to yield significant revenue growth.”

Based on the data, the consulting firm concludes several strategic priorities are emerging for law firms. At the top of the list is heavy investment in new technology and process, followed by the workforce and structural re-engineering.

“There are a number of priority areas where more effective use of IT can assist the business,” according to the report. “Pricing and resource management are identified as two increasingly important areas of focus which directly impact profitability.”

3) The Law Firm Client: Talent, Tech, and Pricing

Corporate counsel continues to place “heightened attention on resource optimization – the right resources, doing the right work, in the most cost-effective and efficient manner,” according to an announcement for the 2016 HBR Law Department Survey.  While corporate legal anticipates demand for services to increase in the next 12 months, most are focused on internal efficiencies in talent, legal pricing and technology.

The survey, which is the 13th annual, garnered responses from 276 law departments in 22 industries and found that most respondents say their legal departments are using AFAs.  The study found “fixed-fee per matter and flat fee for all matters in an area of work were the most common.”

Other key findings from the survey include:

  • Overall legal spend is up 1%, however outside counsel investment decreased by 2%.
  • Corporate legal median spend on technology is $204,000; up 2% from last year.
  • 85% of survey respondents says they are using AFAs.
  • 80% are looking to increase the use of AFAs over the course of the next year.
  • 79% expect their legal needs to increase in 2017.

The focus on legal pricing spilled over into technology as well, as legal spend analytics was among the top three areas of tech investment, alongside document management and contract management.

“Law departments are now looking to leverage their historical data in more sophisticated ways, as we see a growing emphasis on data-driven matter planning and budgeting. In addition to rationalizing outside counsel spending, many departments are focusing on internal operations and performance measurement as more and more work is being performed in-house,” an HBR spokesperson said in the public statement.

4) Client Loyalty, Technology and Responsiveness

Many law firms define a loyal client as one they’ve worked with for five or more years. Another 22% deem a client loyal after two years and another 22% after three years.

That’s according to a small survey conducted by the legal staffing agency LibSource at the 15th Annual COO-CFO Forum event. The company polled “a small group of law firm executives” with just two other questions and found:

  • 64% of respondents think all or most clients expect law firms to adopt new technology in order to provide greater value at lower cost.
  • Most ranked “responsiveness” as the top benefit a firm can provide to clients; among the other top benefits: cost-effectiveness ranked #2 and efficiency #3.

“The Forum confirmed law firms should remain on the lookout for technology and services that allow them to respond more quickly to changing needs and requests,” LibSource said in a blog post on the survey.  “Clients are demanding change and progressive firms are responding with greater urgency and innovation.”

5) Law Firm Economics by the Numbers

Revenue per partner slipped in the 44th annual Survey of Law Firm Economics by ALM, however, the drop could be due to the fact that “this year’s report included sole practitioners for the first time,” according to reporting by The American Lawyer.

The publication said this year’s survey counted 574 firms and suggested larger firms may be faring better than smaller firms.  The publication cites Peter Zeughauser who “noted that Am Law 100 firms, which struggled during the recession, have bounced back. Smaller firms that could offer lower rates attracted clients more successfully during that time, and now it’s the smaller firms that aren’t doing as well.”

Citing the study, the article points to the following benchmarks:

  • $468,511 is the average revenue per partner across all firms.
  • Firms cut expenses per lawyer an average of $8,681.
  • Overwhelmingly, respondents seemed “ambivalent” about the next year.

“Demand is soft,” according to a consultant with Altman Weil who was cited in The American Lawyer article. “Quite a few firms still have more lawyers than work for them.”

This all leaves little doubt in my mind, that we’ll see a lot more on people, process and pricing in the business of law conversations in 2017.  Technology has an enabling role to play in all three.

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