Image credit: Shutterstock.com

Demand for law firm services has generally been flat for years, and yet law firms raised their rates last year.

Associate productivity has been on a secular decline, and yet law firms gave those workers raises last year for the second time in three years.

James Jones, a senior fellow at the Center for the Study of the Legal Profession at Georgetown University Law Center, witnessed this behavior he described as “at the very least anomalous” in 2018. In a report issued by Georgetown and Thomson Reuters on Wednesday, Jones gave his answers about why he thinks it happened.

The short answer: Wealthy firms, which can afford to pay higher associate salaries because they can charge higher rates, are setting the market. Mid-tier firms, despite facing more troubling economics in a different market, are following their lead.

“We do not have one market for legal services anymore,” Jones said in an interview with The American Lawyer. “A lot of people have a really hard time being honest about where their services fall because the vast majority of American law firm services are in that big middle. And I've never met a lawyer who didn't like to think that he or she performed brain surgery. But you know, there just aren't that many big brain operations going on that clients are paying for.”

'Warning signs'

The annual report from Georgetown and Thomson Reuters, which warned of a “wake-up call” for stagnant firms in a prior report, this year also heralded some good news. Last year was a rare postrecession bright spot for the law firm market.

James Jones

Demand (up 1.3 percent), negotiated billing rates (up 3.2 percent) and productivity (up 0.5 percent) all made positive gains last year, breaking from more recent years that have seen at least one of those metrics fall. This year marked the second year in a row of growing demand for law firms' time, which marks the first consecutive years of growth since 2010 to 2011.

But gains are increasingly driven by a smaller, wealthier portion of the legal market: The Am Law 50. That sector saw demand grow 3.4 percent; negotiated rates increase 4.8 percent; and productivity edge up 1.4 percent. Meanwhile, it was another year of stagnant growth for the Am Law Second Hundred and midsize firms. Second Hundred firms saw growth in demand up only 0.7 percent while their negotiated billing rates were up 2.9 percent and their productivity up 0.4 percent, lagging their larger competitors.

Those growth rates also look tepid compared with increases enjoyed by alternative legal service providers cited in the report. The ALSP market has grown to $10.7 billion in annual revenues, with a compound annual growth rate of 12.9 percent, the report said. At the same time, there is evidence those entities have moved up market, leading the authors of the report to conclude “it seems inevitable that, given current market pressures, growth of ALSPs will continue” for the foreseeable future.

For Jones, it adds up to a good year for law firms within the context of a changing market that will require different responses from law firms, depending on what type of clients they serve.

“There are clearly some warning signs and I don't think we ought to be popping the champagne corks here,” Jones said. “One of the biggest [warning signs] is if you really dig down into these numbers what you see is that is not a uniform performance across the market.”

'Dynamic' market

The report describes the new legal market as having moved from a “monolithic” market to a “dynamic” one, composed of three major categories of work: Unique legal expertise (20 to 25 percent of the market), comprehensive legal services (60 to 70 percent) and ancillary support services (10 to 15 percent).

Ancillary support services are described as non-legal services that law firms previously handled for clients but are now mostly handled by lower-cost providers.

The report says most law firms are competing with each other and alternative providers in the comprehensive legal services market. Still, they followed the lead of firms in the unique legal expertise market after those wealthier firms raised associate compensation and, in turn, raised rates.

To avoid making similar mistakes in the future, Jones said law firms should take a clear-eyed assessment of the types of clients they service. That assessment will also lead them to take certain strategies based on their competitive advantages, Jones said. For instance, firms competing in the middle of the comprehensive services market may find that legal talent and expertise is not necessarily as valuable to clients as efficiency and reduced costs, he said.

“These partners can't believe their press releases,” he said. “They've got to be honest about this if they're going to make the kind of strategic decisions that will enable them to be successful in this market.”

Read More:

Report Warns of 'Wake-Up Call' for Stagnant Firms

Is UnitedLex the Future? Dan Reed Thinks So

Demand for Big Law Hits Post-Recession High: Report