The New Normal
Latest data reveals growing problems for OldLaw
Posted Nov 14, 2013 12:27 PM CDT
By Patrick J. Lamb
Just days apart, Wells Fargo and Citibank released their commentary on the financial performance of the Am Law 200 law firms. The news was not pretty. Characterizations like “underproductivity” and “anemic” and “margins squeezed” littered the two reports. What do we learn from these two reports? We learn that demand from clients is dropping, there is compression on profits, and that excess capacity is worsening, including (perhaps especially) at senior levels.
The Wells Fargo and Citibank commentaries are based on survey responses, so their reliability is limited by the truthfulness of the responses. (Remember how “off” Dewey’s responses were). Even with the expected positive spin law firm leaders will place on their responses to the banks, Wells Fargo’s Jeff Grossman, legal specialty group director of banking, stated “[The data] really supports the argument that there are a few firms in this country doing exceedingly well even in this tough environment, and everyone else is treading water or facing significant challenges.”
“Facing significant challenges” is banker-speak for “in a world of hurt.”
On the heels of this happy holiday news, Aric Press penned an article (PDF) based on the LegalView Legal Market Index. Press explains the index "is based on the purchases of legal services by 70 large corporate clients spread across eight industry groups ranging from financial services to health care to industrials to technology. The LegalView 70 consists of big companies: 21 are in the Fortune 500; another 12 belong to the Fortune 1000. These are clients that hire a lot of firms: In each quarter these companies used 181 to 183 of the Am Law 200 firms and more than 3,000 others. These 70 clients spent $2.46 billion last year on law firm services, with $1.3 billion of that going to the Am Law 200 firms." TyMetrix, the giant electronic billing clearinghouse and data analytics and advisory company, produces the Index. Because it is based solely on data and omits the spin law firm leaders place on their own performance, the Index is arguably a far more reliable indicator of what is happening “out there."
So what is happening? Clients paid for fewer hours and spent less overall during the first 9 months of 2013 than they did in 2012, which was a down year itself. Associate hours were down significantly, while average hourly rates were up, suggesting that some associate work was being outsourced or hoarded, or a combination of both.
What does this foretell? Citibank suggests that 2013 will fall short of 2012, if only slightly. Wells Fargo asked their firms about their expected 2013 performance and reported that “while roughly 55 percent said they would hit their budget targets, one in four said they would fall short of their revenue projections. Less than 20 percent said they expected to exceed their budget. A third of the firms surveyed also said they would be below their budgeted number of hours.” But because firms frequently recast their budgeted forecasts downward during a poor year, the question is what version of the budget the respondents were speaking about when they provided their response. Too, we cannot know if firms were budgeting for good or bad years. Those caveats aside, 25 percent admitting that they would fall short is an eyebrow-raising number.
In reading these reports, it is important to keep in mind that the reported “anemic” numbers are averages, meaning some are higher but also some are lower. We also don’t know the mean or the standard deviation. Some firms, indeed many firms, likely are facing a very painful year end.
What does all of this mean for the New Normal? It means that pressure continues to build on the Old Normal.
How firms choose to respond to this continuing pressure is surely of interest, but there is scant evidence to suggest anything other than change at the periphery, which is hardly going to relieve the pressure. How individual partners choose to respond to the pressure is perhaps of greater interest. Simply turning a blind eye to the pressure is using hope as a strategy, a fool’s errand. Forcing a turnaround is sometimes unrealistic because the power structure of the firm is vested in its past leadership and loath to admit error or need for change. There has been a huge number of people who have decided that the time had come to be in a better space, rather than expend effort to move their firms toward that better space with little assurance of ever arriving in the better space. If this trend continues, it will foreshadow continued hard times for Old Normal firms.
Patrick Lamb is a founding member of Valorem Law Group, a litigation firm representing business interests. Valorem helps clients solve their business disputes and cope with pressures to reduce legal spend using nontraditional approaches, including use of nonhourly fee structures, coordination with LPOs or contract lawyers, joint-venturing with other firms and implementation of project management tools to handle lawsuits or portfolios of litigation.
Pat is the author of the book Alternative Fee Arrangements: Value Fees and the Changing Legal Market. He also blogs at In Search Of Perfect Client Service.