Youngstown Daily Legal News

Report reveals slow growth for legal industry and how firms must adapt

ANNIE YAMSON
Special to the Legal News
Published: August 30, 2016

Citi Private Bank’s Law Firm Group recently released its study on the state of the legal industry, and while the news is not awful, the lesson is that law firms must adapt quickly to a changing and tepid market.

The executive summary of the group’s 2016 Client Advisory indicates that the legal industry has been largely characterized by modest revenue growth rates in the past few years.

“In addition, dispersion in performance among law firms and year-over-year volatility in performance for individual firms has increased,” the report states. “These market dynamics are likely to continue.”

At the same time, demand for traditional law firm services has remained “soft,” even though the supply of legal service providers has increased. The report states that these circumstances have created a hyper competitive market, forcing law firms to rethink how they deliver services.

“The firms that outperform the rest of the industry will likely be those that successfully pursue dual strategies of growth and operational efficiency, while at all times staying attuned to the changing needs of their clients and broader target market,” according to the client advisory.

Citi reports that the buyers market has resulted in a shifting supply-and-demand equation: Modest revenue growth, increased competition and the emergence of low-cost service providers have combined to drive pressure on law firm pricing.

The report states that, in a hypercompetitive market, the focus must be on revenue growth achieved by brand differentiation, investing more in business development efforts and getting closer to clients.

“Indeed, when we look at the most profitable firms in the Citi Annual Survey, we note that they all have built strong brands,” the report states. “We’ve observed that in differentiating themselves, these firms have built a brand in one or more practice areas or industries, while maintaining practice areas that make strategic sense for supporting brand name practices.”

As billable hours become harder to come by, successful law firms must also focus on developing their client teams, the report states.

“An increased focus on understanding the client will enable firms to tailor their services to truly meet the needs of clients,” Citi reports. “With talk of innovation in the industry, in this hypercompetitive market, it’s surely what clients would regard as innovation that counts.”

Among the other recommendations made by Citi are achieving revenue growth through lateral hiring, mergers and acquisitions, making use of project managers in order to maintain a firm’s margins, and rethinking the leverage and staffing model.

As associate attorneys become more senior, the report states that the leverage model has become more expensive. For example, at many firms, income partners do not contribute as much as associate attorneys, and in some cases, don’t generate enough revenue to cover their compensation and share of overhead.

Over the next few years, the report states, law firms are anticipating a shift with the majority planning on increasing the use of less expensive, nonpartner-track lawyers.

“One interpretation of these projected changes is that, going forward, some of the work that has been historically done by income partners will be done by counsel and senior associates, while some of the work that has been traditionally done by junior associates will be done by nonpartner-track and contract lawyers,” the report states. “Such changes would have the benefit of reducing the overall cost of leverage.”

Citi also reports that leaders of successful law firms will simply have to adapt to a changing culture.

“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,” the report states. “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 embracing a new generation — law firm demographics now reflect a growing proportion of millennials who will affect how firms approach recruitment, training and communication.

“It will also impact the infrastructure that firms build,” the group states, “including how they set up offices and make use of technology and social media.”

Do not undervalue the millennial attorney, Citi warns. It advises firms to make use of the generation’s social media knowledge and fresh perspectives.

But the major takeaway, according to the report, is to not lose sight of the pressing issues of the day.

Those who adapt and stay close to their clients will succeed, but Citi also states that the outlook isn’t completely bleak: “While the return of double-digit growth rates for the legal industry is unlikely, there’s a lot to be said for steady, if unspectacular, low single-digit growth rates, especially if softness in demand continues.”

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