The New Landscape: Challenges and Opportunities Facing Law Firms             

By Frederick J. Esposito, Jr.

Many challenges are facing legal departments and the legal profession as a whole. One of the biggest challenges stems from the aftermath of the “big recession” of 2007-2008. When the economy declined, clients became more sensitized to the need for improved efficiency and value, and most important, reduced cost. According to the 2014 Law Firms in Transition Survey recently released by Altman Weil, a large majority of law firm leaders are reporting that greater pricing competition, practice efficiency, commoditization of legal work, competition from nontraditional legal service providers, and non-hourly billing arrangements are all permanent changes in the legal landscape.  In the same survey, two-thirds of law firm leaders think the pace of change in the profession is still increasing.

Clients today are in the driver’s seat – asking law firms to provide more value at a reduced cost. Technology is one way law firms can improve efficiency and reduce costs, but it does not provide the client-centric focus and attention to value that is now expected by clients when providing legal services.  Clients want to pay less, they want more predictability in legal spend, and “alternatives” to the billable hour. Clients want value, and clearly, alternative fee arrangements have been gaining traction in supporting the value proposition. This trend is further supported by the increased emphasis on legal project management to improve efficiency.  All of these shifts in the profession have prompted firms to take a hard look at how they provide legal services.  So much so, the new “landscape” of efficiency, focus and value has challenged law firms to review and change their business models.

Clients have become more assertive in their fee discussions and law firms are being forced to “do more with less.” Further, firms must now align their economic interests with their clients, and alternative fee arrangements (any non-hourly fee arrangement) seem to be the preferred strategy. Pricing must be part of every firm’s strategy.  Otherwise, too many firms will fall into a discounting mode which will have a direct impact on margin and profitability.  In the new landscape, finding opportunities in the changing market will prove difficult for those firms resistant to change. But these changes also present many opportunities to improve law firms’ competitiveness, both long and short term.  Law firm leaders will need to find ways to better educate their colleagues about changes in the marketplace so they can start transforming from within their firms rather than having change imposed upon the firm from clients and other market pressures. There is no question that law firms are undergoing several change management initiatives and avoiding alternative fee arrangements is no longer a strategy. Law firms that see opportunity rather than hardship will reap the benefits, and those firms that recognize alternative fee arrangements as a means to differentiate themselves will outdistance their competition.

Some law firms have become very responsive to the new legal landscape and have been progressive in their efforts and methodology to review cost structures for clients. They are aligning pricing with client preferences, rethinking growth and aligning staffing with profitability.  These are challenging undertakings, and perhaps it’s a risky proposition to assume that law firms will be able to react and adapt to these changes in the profession.  As a start, firms should start small, take risks, learn some valuable lessons, and grow from the experience – in short, encourage innovation. For example, some firms have invested significant time and money in developing customized sophisticated financial reporting producing performance metrics based on client billing, collection, realization and drilling down to costs associated for producing work, from task to timekeeper, and then using those metrics to determine where the firm can offer more competitive alternative fee, or non-hourly, arrangements. Smart firms continue to embrace the changes in the legal profession and in doing so, have opened the doors for increased business development opportunities.

Technology also continues to have a profound impact on the legal profession, particularly in two areas: increasing efficiency and in social media.

First, technology can offer law firms and their clients more efficiency and if properly structured, reduced spend and value. It enables firms to automate certain processes to reduce costs to produce legal services. For example, some practice areas are very paper-intensive or form-driven, and by automating processes or outsourcing to reduce costs, that value is passed onto clients. We’re beginning to see more firms outsource these types of processes to focus their efforts on the more strategic legal work. This provides a win-win situation for the law firms and their clients.

Social media is another area where we’re seeing many changes, and with great momentum. Attorneys are beginning to see the enormous benefit the web and social media can have in promoting their services. Firms are revamping their websites like never before. Instead of showcasing long resumes and endless lawyer credentials, law firms are streamlining their websites and offering a more concise and progressive “brand” image of their firms. It’s become more about solving the client’s problems than it is about boasting about the law firm itself. Clearly, technology is and will continue to be a very important tool for law firms in planning their strategic business development initiatives.

For those firms looking to get started down the path of exploring strategic opportunities and addressing the new challenges on the new landscape, it is important to have useful, and particularly, responsive analytics and meaningful data to draw from, and that information is usually right in your backyard – your time and billing systems. Within your time and billing system resides all of the performance and historical data information that you will need.  The historical data can be analyzed in many different scenarios, with varying assumptions, and in most cases, with relative ease, for making the most informed financial and strategic decisions for the firm.

Most important, before most firms can take these initial steps, I would add that law firm principals need to understand their firm’s performance.  While internal systems and software can generate information, that information must be reviewed and analyzed with an understanding of how and why the firm performs as it does.  For example, do law firms know how much it costs to produce a billable hour?  By practice?  By timekeeper?  By client or matter?  Are your alternative fee arrangements generating profit?  Improved understanding of these economics will assist firms greatly in their pricing and strategic business development initiatives–all of which are critical to remaining competitive, and profitable, under the new legal landscape.

The one important attribute that technology does not possess and cannot do is to provide that ever-important critical thinking component. We need analytics, but we also need a critical thinking component which assists us in ascertaining if the analytics make sense. Someone needs to interpret the metrics and whether they make sense for the firm.  Statistics are not meaningful unless they can be benchmarked and validated. In short, critical thinking and technology are a powerful combination and a resource that opens the doors for providing efficient, client-focused and low cost legal services.

 

Fred EspositoAbout the Author

Frederick J. Esposito, Jr., CLM, is the chief financial officer for Rivkin Radler, LLP in Uniondale, NY.  He can be contacted on Twitter: @lawmgtguru or on LinkedIn: www.linkedin.com/in/fjesposito/.

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