Changes to the legal market over the past year carry significant risks for law firms that fail to adapt, according to a new study on the state of the industry as firms head into 2020.

The report, issued by the Center on Ethics and the Legal Profession at Georgetown University Law Center, Thomson Reuters' Legal Executive Institute and Peer Monitor, said key trends include the changing role of clients, the emergence of non-law firm legal competition and law firm innovation in response to those shifts.

In the dozen years since the Great Recession, the report said, clients have taken "decisive" control of the legal market: Instead of deferring to outside law firms, they're now recruiting more competitively for outside counsel and requiring law firms to operate more cost effectively and accountably, with stricter budgeting and billing.

The researchers note that clients are handling more work in-house, and they're demonstrating "increased reliance on legal operations professionals to manage outside counsel relations," while creating "virtual teams" of attorneys from multiple firms to handle particular projects.

Also during the past few years, alternative legal service providers have increased their share of the legal market. ALSPs took in $10.7 billion in global revenue in 2017, according to a global survey by Thomson Reuters, Saïd Business School at Oxford, Georgetown Law and Acritas. That's up significantly from the $8.4 billion estimate in the groups' first survey, using 2015 data. Large alternative legal service providers are expected to grow by 24% in 2020.

Corporate reliance on non-law firm competitors has been increasing, the report found, and alternative legal service providers are increasingly being used by law firms themselves—65% of Big Law firms used them for e-discovery services, 52% used them for litigation and investigations support, and 50% used them for legal research services.

The Big Four accounting and auditing firms also have been key players in expanding alternative legal services. Deloitte launched a legal management consulting program, a strategic alliance with Berry Appleman & Leiden and an alliance with Epstein Becker Green, the report noted. PwC launched a law firm in 2017 to help clients with international matters and started a flexible staffing service. KPMG launched a new unit to support in-house attorneys, and EY acquired DLA Piper-funded legal service provider Riverview Law and legal process outsourcing firm Pangea3 from Thomson Reuters.

These "revolutionary changes," the report warned, "will likely erode future performance if firms fail to take account of a new model for law firm services that appears to be rapidly emerging." However, researchers also found ways in which some law firms have innovated to adapt to a changing industry.

Some firms have increased the number of business professionals in the C-suite, and many now have a chief operating officer, chief financial officer, HR director, chief technology officer and others who interact more frequently with client-facing teams or clients themselves. In addition, large law firms especially have become more tech-savvy in areas such as human resources, compensation decisions and project management training and support. Firms have also accommodated more effective pricing strategic and have begun using data more aggressively to assess partner performance and client profitability.

Law firms have also begun outsourcing more work—particularly e-discovery, nonlegal research, litigation and investigation support, document review and coding and legal research. Other law firms have begun taking a "blended" approach, combining traditional legal services with professional expertise in new subsidiaries such as Allen & Overy's Advanced delivery Solutions.

In terms of traditional law firms' financial performance, the study found that most key metrics improved from 2017 to 2018, including demand, worked rates, fees worked and head count growth. However, productivity decreased from the previous year. The demand for law firm services in 2019 decreased slightly from the previous year, following two years of growth. Certain practice areas, such as litigation, real estate, labor/employment, bankruptcy and corporate, have seen increased demand in the previous year, while patent litigation, patent prosecution and tax have seen decreased demand, the report found.

Also in the previous year, firms are increasing their head counts—largely in the technology transactions and licensing, general corporate and M&A practice areas—while patent litigation, bankruptcy and regulatory practices are shrinking in size. On average, lawyers have worked a stable number of weekly hours, according to the report, about 123, with associates working the most hours and of counsel working the fewest.

|

Read More

Richest Law Firms' Edge Fades as Industry Insiders Predict Strong 2020