Talent wars top list of perceived threats to law firm profitability, new survey finds
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Law firm business leaders are bullish about the future of the legal industry, but they are increasingly concerned about the impact of talent wars on profitability, according to a survey released Tuesday.
Fifty-one percent of the surveyed leaders said lawyer recruitment and retention pose a high risk to future law firm profitability, while 35% considered the issue a medium risk, according to the 2021 Law Firm Business Leaders Report, available here.
The other highest-ranked profitability risks were poaching of staff by competitors, considered a high risk by 31% of respondents and a medium risk by 38%, and associate salary increases, considered a high risk by 29% of the respondents and a medium risk by 46%. Next highest-ranked risks were underperforming lawyers and competition between law firms over fees.
That’s a big change from a year ago, when talent concerns didn’t make the list of top five risks.
The survey is based on responses from 55 business operations leaders at large and midsize law firms. The survey was conducted by Thomson Reuters and the Georgetown University Law Center’s Center on Ethics and the Legal Profession, according to coverage by Reuters and Law.com.
Bill Josten, manager of enterprise content for Thomson Reuters, told Law.com that the higher price tag for associates is likely fueling concerns.
“It’s not inconceivable that a firm that’s keeping up with scale is paying $100,000 to $150,000 more for each associate today than they were two years ago,” Josten told Law.com. “The axiom has always been 50% attrition in the first five years, and our statistics suggest that rate may even be accelerating. Well, if you have the same attrition rate, with a higher price tag, that becomes a bigger threat to profitability.”
Josten told Reuters that pay pressures will likely result in three types of law firms: those that can keep up with the pay scale, those that will “decide to get off the merry-go-round,” and those that will try but fail to keep up with the scale.
Another new reality for business leaders is remote work. Sixty-two percent of the surveyed business leaders said they probably will support remote work to improve firm performance, but none said they definitely will do so.
Asked to pick three factors that present the greatest challenges to managing a split work force, firm culture was the most popular answer, cited by 88% of the respondents.
At the same time, law firms are “doubling down on their use of technology,” although the aim isn’t necessarily to impress associates, the report found. “While many [firms] view tech as a way to create a competitive advantage in the eyes of their clients, far fewer are considering it as a way to set themselves apart in the eyes of potential talent,” the report said.
Despite concerns about talent, financial prospects are still good. The survey found that:
• Fifty-five percent of the surveyed leaders expect moderate growth in profits per equity partner over the next year, and 20% predict high growth. The same percentages apply to expectations about growth in profits per lawyer.
• Fifty-five percent expect moderate growth in revenues per lawyer over the next year, and 11% expect high growth.
• Forty-nine percent expect moderate growth in demand for services over the next year, and 20% expect high growth.
“Having weathered the storms and disruptions of the last 18 months,” the report concluded, “law firms have emerged into an environment where they feel generally optimistic about the road ahead.”