The Good Years Made Law Firms Complacent Ahead of the Pandemic, Report Finds
By the time the pandemic struck, most firms had not addressed issues that dogged them in the recession a decade ago, according to results from an Altman Weil survey.
June 24, 2020 at 03:16 PM
5 minute read
Altman Weil principal Eric Seeger sees a lot of parallels between 2009 and today. Not only in the similar economic conditions—a stalled economy, which has led to client demands for discounts and austerity measures across the industry—but also in law firms themselves.
This year's annual Altman Weil Law Firms in Transition survey is most striking, Seeger said, in how little the answers and data have changed over the years. By the time the pandemic struck, most firms had not addressed the issues that dogged them in the recession a decade ago, including overcapacity and underproductivity in the partnership ranks, according to survey results released Wednesday.
"What was most interesting about this year's data was how much things didn't change. Firms do not appear to have gotten more serious about changing the way they deliver legal services," Seeger said. "And firms, for the most part, were highly confident and maybe complacent about what they expected in 2020."
Conducted in March and April, the annual study received answers from more than 182 law firms that had head counts over 50 lawyers. Around a quarter of respondents were Am Law 200 firms. Altman Weil principals Tom Clay and Seeger authored the study.
Although nobody could have accounted for a coronavirus pandemic that has since rattled markets and led to countless deaths across the world, many economists in 2019 did foretell an end to the unprecedented period of growth that characterized the decade before the pandemic.
The majority of surveyed law firm leaders said they were leaning on higher rates and realization as a driver for growth and profits in 2020, possibilities that have been dashed by the pandemic, the authors said.
And yet, Seeger said, many of the same practices that hurt firms then are still present now. Last year's survey found that firms had actually stalled in their innovation efforts, lulled into security by the red-hot economy.
"People are happy because times are good right now," Seeger said in an interview for last year's survey. "But clients still want it better, faster and cheaper. So when the economy turns, as it always will, firms need to be in a position to demonstrate that they are focused on that and can deliver to clients' expectations."
And this year, the data has found things are no different.
Many firms were still overstaffed with underperforming partners or staff with not enough work. Half of all firms and 60% of large firms with head counts over 250 lawyers said their nonequity partners were not "sufficiently busy." In nearly a quarter of firms, more than 10% of attorneys were viewed as underperformers.
Strides in efficiency have likewise been stunted, the survey found. Only 22% of firm leaders said their firms were overhauling their work processes. And just 31% provide ongoing project management support and training to their attorneys.
And while the vast majority of surveyed law firm leaders believed that these changes must be undertaken to account for a wobbly economy, increased competition and the ongoing commodification of legal services, Seeger and Clay admit that firms may have had little incentive to change.
More than half the firms surveyed saw revenue increases of more than 4% in 2019, the highest proportion of growth since the survey began in 2009. An even greater proportion of firms, 73%, reported increases of more than 1% in revenue per lawyer.
"So firms did really well in 2018 and 2019. And that may have caused some complacency to settle in," Seeger said. "Those increases were driven by moderate increases in demand combined with generous rate increases, stable realization and slow hiring that translated into a higher revenue per lawyer."
When asked why their firm hasn't made strides to adapt to a changing environment, 70% of the surveyed firms said their partners were leading the resistance to change and 65% of firms said clients weren't asking for change.
From ongoing conversations he's had with law firm leaders grappling with the pandemic, Seeger anticipates next year's survey to closely resemble the flagship study the consultancy put out in 2009, where 44% of surveyed law firms reported a decrease in revenue.
But, he added, the good years leading up to this year's recession have given firms a buffer. Even as clients clamor for discounts on top of historically discounted rates and demand continues to be sluggish, there will still be legal work, Seeger said, and he doubts that there will be a spate of law firm failures driven by the pandemic.
"Most firms were in a healthy position heading into this year so they'll be able to absorb a bad year," he said. "How fast and to what extent demand returns nobody can say."
|Read More:
If Cash Is King, Do Law Firms Need to Change Their Business Model to Keep Up?
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