5 finance and operational trends for law firms

Once again, the Thomson Reuters Annual Law Firm COO & CFO Forum was a success and CCM was proud to be a sponsor.

The 2017 speaker line-up included financial and operational executives from law firms across the country, discussing legal trends, challenges and opportunities. Discussions centered on benchmarking data from the TR Legal Executive Institute’s latest report on the state of the U.S. legal market.

Besides general sessions on the evolving law firm business model, the conference featured finance-specific sessions on profitability through segmentation and specialization, pricing strategies and legal project management.

Following is a summary of key messages from some of the presenters and panelists. We will delve into these trends individually in future posts.

1. LEGAL MARKET SHIFT FROM SELLER’S TO BUYER’S ADVANTAGE

Information was once the stronghold of lawyers; that is no longer the case. Combining this new reality of easier access to digital information with new pressures from start-ups, technology advancements and other forces means that it’s unlikely the equation will shift back again. Clients will continue to exert pricing pressure and use their leverage as they assess their needs for legal services.

2. PRE-NEGOTIATED FEES AND OTHER PRICING STRUCTURES

While firms hang on to the billable hour as the billing standard, several Forum panelists were clear that clients increasingly prefer negotiated fees and alternative pricing structures. Microsoft Corporation was mentioned as an example of a company procuring most its external legal counsel services through alternative fee arrangements, known as AFAs.

In spite of this, the 2017 State of the Legal Market Midyear Report shows that the average Am Law 100 firm managed rate growth of 3.6% in the first half of the year. But the report also states,

“Firms that rely too heavily on rate growth to drive additional year-over-year profit may well find themselves in trouble as clients clamp down on future rate increases.”

3. SUCCESS METRICS BEYOND PROFITS PER PARTNER (PPP)

Top-performing firms are looking at performance and outcomes through a variety of lenses, not only partner profits. One presenter mentioned this as part of a bigger trend in firms operating more like enterprises. We see this with our law firm clients as well as new back-office processes and approaches are put into place.

Thomson Reuters refers to the firms that fall into the top quartile as dynamic firms. These firms are outpacing their peers in a number of areas: law firm value, bottom-line financial health, operational efficiency and other key performance indicators.

4. STRATIFICATION OF THE MARKET FOR LEGAL SERVICES

The market for legal services has been stratified into commodity work at the bottom, strategic and mission-critical legal work at the top, and a large middle of regular but mundane work like contracts, patents and property. Firms that find their niche and position themselves accordingly may find an easier path to sustainability and success. One panelist turned to the expression of “sticking to their knitting” and doing it better than any other firm.

5. NO MORE EASY FIXES

The 2017 state of the legal market shows that law firms have been successful at picking the low-hanging fruit in terms of streamlining processes, cutting costs, improving client service and so on. With the easy fixes gone, continued flat demand, and the likelihood of another economic correction at some point, firms will have to be smarter, more creative and more holistic in how they deliver services, optimize all their resources and operate the enterprise.

No matter what markets or practice areas a firm serves, two over-riding conditions were communicated throughout the event:

• More revenue will come through alternative fee arrangements as client continue to press for pre-negotiated pricing and services.
• In response to pricing constraints, greater operational efficiency will be critical, including enhanced budgeting and project management.

If you have any further questions, please contact us.