Volatile markets and fierce competition are pushing elite US firms to adopt bolder business models to stay fit in a changing landscape, say Dan DiPietro and Gretta Rusanow

Looking at the direction of the legal market for elite firms, it is instructive to consider how the world has changed for them since 2008. In the years since the Great Recession, we've observed that these firms have experienced a more challenging time, both in terms of revenue generation and expense management.

In our discussions with top law firm leadership, as well as our formal research, we see that these firms are no longer immune to the challenges facing the broader industry. They now face stagnant demand for their services, fierce competition, pricing pressure, rising costs and the resulting pressure on margins. A higher expense base doesn't help. And the current volatility in the markets hasn't favoured their heavily transaction-centric practices.

The problem

When we ask elite firms about market dynamics, they talk of the impact of volatile markets, reduced demand for their services and tough competition. Overwhelmingly, they name pricing pressure as the main challenge they face.

With the markets as they are, there is, of course, generally less work to go around. And even within the smaller pool of legal work, clients have become increasingly sophisticated in deciding which firms will get that work. 

Clients have long focused on how to manage the overall level of their corporate legal spending. Uniform industry task codes, e-billing and matter management systems have given them increasingly sophisticated tools to analyse at a granular level, the cost of each task.

The Great Recession gave even greater motivation to apply these tools. The increasing involvement of corporate procurement departments in negotiating legal spending, where the focus is on price v quality, has also changed the landscape for elite law firms.

Clients are no longer just focusing on deconstructing the mass of legal work and using a wider array of law firms and non-traditional legal service providers. They are also focused on deconstructing the components of individual matters. This means that the full scope of even a high-end matter may no longer go exclusively to an elite firm. Clients may now send the lower value of segments of a matter to a broader array of lower-cost providers.

With an oversupply of law firms and non-traditional alternatives, clients are able to command lower prices. The result is that elite firms have seen fierce competition from traditional and non-traditional firms, and an uptick in the proportion of revenue derived through alternative fee arrangements.

The solution

In response to the pressures described above, elite firms have begun focusing on five strategies:

1) More efficient delivery of legal services. We are often asked about training partners and associates in project management skills, and have seen an increasing trend of hiring project managers.

Finding ways to make lawyers more productive through training, knowledge management and better use of technology are top of mind. Lowering the firm's cost base, whether that be through rethinking real estate, outsourcing back office and some legal functions, or introducing lower-cost associates, are also emerging strategies.

2) Global footprint. Achieving growth, even in this challenging market, is a key focus of elite firms. They understand that some form of global footprint is critical to remain relevant to their clients as they continue to expand internationally. 

Of course, that strategy is also key to winning new clients involved in cross-border matters. However, our research shows that the US offices of these firms outperform most other regions in terms of productivity, rates, realisation and profitability. These firms know that they have to expand internationally, but so far, they have struggled to pursue an international growth strategy that has been profitable.

3) Brand. When it comes to growth, we've noticed that elite firms have become focused on how to leverage their already strong brands to attract and retain talent, cross-sell to existing clients and attract new clients.

4) Business model changes. To remain an elite firm in this changed market, we see that changes are likely to occur in their business models. For 'bet the company' work, elite firms may maintain a similar leverage model, but for the increasing amount of practices under pricing pressure, they will likely need to adopt new leverage models for, or scale back, those practices.

We envisage that elite firms will continue to expand in emerging markets as determined by their clients, with these firms being either truly global or better described as international. We are likely to continue to see the increasing use of alternative fee arangements, and with it, a laser focus on operational efficiencies. 

The bar for equity partner performance will likely be higher and there will be a stronger focus on rewarding strong performance. Broader than the partnership, firms will be more focused on attracting, developing and retaining the right talent. 

5) Value. Finally, and most importantly, we will see even greater focus on providing – and demonstrating – value to the client. After all, it is value, rather than price, that distinguishes these elite firms from the pack.

As we reflect on the challenges facing elite US-based firms, we're reminded of Peter Drucker's cautionary note: "The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday's logic." There is no single piece of advice that is more relevant than this.

Dan DiPietro is chairman and Gretta Rusanow is senior client adviser at Citi Private Bank's law firm group.