The American Lawyer report presents some interesting findings, and makes a constructive suggestion. But what action should a firm take in response?
The Special Report
In the past 10 years, the AmLaw 200 firms have experienced the following four trends, according to a recent special report by the American Lawyer based on its extensive database and U.S. Census economic data:
- Business legal service revenues in the United States have fallen 25.8% in inflation-adjusted dollars, to $118.3 billion. Revenue per lawyer of AmLaw 200 firms hit a record low of $438,000 in 2013 when adjusted for inflation, as compared with a record high of $776,000 in nominal terms. Despite the contracting market, large firms have been able to raise rates by 3-7% in each of the past three years, though. In other words, they are selling more expensive but fewer hours. As a result of rate increases and leverage increases (see the fourth point below), profits per equity partner in constant dollars are also down, but not nearly as much as revenues.
- The AmLaw 200 increased their share of U.S. corporate legal spend to 47% in 2010 and have maintained (but not grown) that very large share since then.
- The top 10% of AmLaw 200 firms, each with profits per equity partner exceeding $2 million, have pulled away from the rest in terms of revenue per lawyer and profits per partner. Of the remaining firms, some are doing fine, if not great, and some are falling behind.
- The non-equity partner tier has increased from 28% to 40% of all AmLaw 200 partners in the past 10 years. The equity partner tier shrank by 3 percentage points. Average leverage (roughly, the ratio of associates and non-equity partners to equity partners) increased somewhat, from 2.59:1 to 3.15:1.
In other words, in the past 10 years the market for business legal services shrank, but the AmLaw 200 firms hung on by increasing their share of that market, by raising rates and by increasing leverage. The top 10% of those firms pulled away from the pack and have thrived.
The report, authored by Aric Press, editor-in-chief of the parent company of the American Lawyer, is based on the first annual "The State of the Big Law Market" survey published by the magazine's intelligence arm, which sells for $1,000.
The report does not seek to predict future trends. Instead, it concludes with a single recommendation: Firms need to survey their clients, either using their own partners and executives or by retaining outside experts, to gain "a direct and clear-eyed view of where they stand with their clients and where they're placed in the larger market." The study asserts that each firm "stands essentially as its own microclimate, with its own market challenges" and therefore needs to assess its position and develop a plan of action.
The study then correctly observes that success will depend on how well the firm follows through in executing its plan.
What it all means
Key steps to develop a strategic plan
The American Lawyer special report is essentially advocating that firms develop a strategic plan. Formulating a plan does not start with pencil and paper, or a meeting of partners. It starts with learning about the firm in an objective manner - its strengths and weaknesses - and about the marketplace for legal services in which the firm operates.
Client interviews. An important early step in this process is to conduct client interviews. This is essentially the American Lawyer recommendation. By using an outside expert to conduct the interviews, the firm will gain the most candid, and therefore most accurate, information about what its major clients believe is good and not so good about the firm, including the quality of its substantive practice areas, its client handling practices and its pricing and billing.
Reality check. Considerable time will also be spent by the equity partners discussing the results of the interviews and adjusting their self-image to the reality of the client feedback.
Know the competition. The final piece of information gathering is to gain competitive intelligence about the marketplace in which the firm operates, including its competitors, the services and other law firm attributes potential clients are seeking and how the firm and its competitors stack up against each other. Some of this will come from the client interviews. The outside expert that conducted those interviews, supplemented by the firm's competitive intelligence personnel, will need to gather the rest.
Prepare the plan. At this point the firm is ready to start formulating its strategic plan. First, comes the vision of where the firm will be in ten years. Then, the specific steps to get there. These steps should focus on three or four very concrete things. For example, bulk up on strong practice groups and get rid of the weak; go after commodity work, which is shunned by many but still has to get done, and find a way to make it profitable; or assemble a golden team for a practice area, bringing in laterals as needed, that can command premium rates. Finally, at every iteration in formulating the vision and steps, get partner buy-in through discussion. Using the outside expert who assisted with client interviews to facilitate these partner discussions may improve both the discussion atmosphere and the degree to which partners feel they are being heard and therefore buy in to the plan.
Executing the plan
The hardest part of strategy planning may be the execution phase. Staying focused and on track, given the many day-to-day challenges facing law firm management, can be difficult. First, management must take the obvious actions inherent in the strategic steps, such as hiring the right laterals or making an orderly shut-down of weak practice areas. Second, the firm must take other important actions to make the changes successful. These may include introducing principles of legal project management; moving to more flat fees; providing business development coaching to lawyers; revamping the compensation system to align better with the strategic objectives; introducing more and better lawyer training; and overhauling the way lawyers collaborate through use of knowledge tools and processes, such as utilizing best practices for practice group meetings, developing checklists, creating experience databases and using third party subject matter expertise systems.
Spending on outside professionals may be a good investment to facilitate these steps, such as a business development coach, a law firm change management adviser, a collaboration improvement consultant (aka knowledge management consultant) and a legal project management consultant. In addition, specific partners should be assigned the responsibility for accomplishing specific steps, and their compensation aligned accordingly. When accomplishing a task is a person's primary job, it is more likely to be successfully completed.
Of course, there's a lot more to creating and executing a strategic plan than has been described above, and every firm's plan will be unique to its market position and culture, but this is the general idea. With single-minded purpose and the right implementation approach, dramatic changes can be made - even in a law firm.
Effective strategic planning requires hard work by firm management and takes time. A willingness to gather and confront hard facts is essential. Patience to achieve consensus and buy-in is also necessary to prepare for the implementation stage. Executing the plan requires determination and focus, both by firm management and a broad group of firm thought leaders and practice group heads.
In a shrinking market for business legal services, successful implementation of an effective strategic plan, though, can mean the difference between thriving and declining.
[Photo credits: © Can Stock Photo Inc. / focalpoint & stuartmiles]