Trends Impacting the Legal Profession

Slides Used with Permission

of James W. Jones
Selected Slides for Building a
Better Legal Profession
National Conference of Student
Leaders, April 3, 2009
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Maturing of the Legal Market
Causes of this change were many:
Bates v. State Bar of Arizona
433 U.S. 350 (1977)
Zauderer v. Office of the Disciplinary Counsel
471 U.S. 626 (1985)
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Growing Client Sophistication
As a result of this maturing of the market:
Clients are more sophisticated seeking out real value
for their money.
Clients are more discriminating in the level of legal work
they want and in the price to be paid for value received.
Clients are more demanding regarding response time and
specific experience.
Clients use a variety of firms for particular specialties and
rarely rely on one (or even a few) firms for their legal needs.
Results: a growing segmentation of services by clients.
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Growth of Law Firms
At the same time that the legal market has been
segmenting in terms of both client expectations and
service offerings by firms law firms in the US have
grown significantly larger.
To some extent, this growth may be attributed to the
strong growth incentive that is hard wired into the
economic structure of most law firms.
Part of the economic logic of law firms is the pyramid
structure.
In the typical case, this logic drives exponential
growth.
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Growth of Law Firms
Example: A law firm formed in 1945 with two
lawyers and a sustained annual growth rate of
10% results in 35 lawyers in 1975, 235 in 1995,
and 609 in 2005.
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Growth of Law Firms
0
100
200
300
400
500
600
700
1
9
4
4
1
9
4
7
1
9
5
0
1
9
5
3
1
9
5
6
1
9
5
9
1
9
6
2
1
9
6
5
1
9
6
8
1
9
7
1
1
9
7
4
1
9
7
7
1
9
8
0
1
9
8
3
1
9
8
6
1
9
8
9
1
9
9
2
1
9
9
5
1
9
9
8
2
0
0
1
2
0
0
4
N
u
m
b
e
r

o
f

L
a
w
y
e
r
s
1965: 13
1985: 91
1995: 235
2005: 609
The growth of many large US firms
mirrors this curve almost exactly.
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US Law Firm Growth
535
194
232
273
268
302
325
386
438
513
81,243
53,892
58,533
68,139
66,890
75,498
96,490
109,495
128,217
133,723
0
25,000
50,000
75,000
100,000
125,000
1987 1988 1991 1994 1997 1998 2000 2003 2007 2008
(
T
o
t
a
l
)
50
150
250
350
450
550
(
A
v
e
r
a
g
e
)
Average and Total Lawyers in NLJ 250 Firms
Source: NLJ 250
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Industry Concentrations: Top 10 Firms Market %
0%
20%
40%
60%
80%
100%
HR Consulting I-Banking Advertising Accounting IT Consulting Management
Consulting
Executive
Search
Law
Source: Lorsch and Tierney, Aligning the Stars
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Segmentation
Over the last several years, legal market has been
segmenting noticeably at all levels.
Trend continued in 2007 in essentially all indicators
For example, in size, the average NLJ 250 firm grew
70% in the period 1997-2007, while the 20 largest US
firms grew by 113%,
But, consistently across the market, firms at all levels
are pulling out from the pack in terms of total
revenues, RPL, PPEP, and partner compensation.
True among each tier of firms (high-, medium-, and
low-profit) and among each geographic grouping.
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Segmentation (cont.)
Today, 25% of all law firm revenues of US firms are
accounted for by the AmLaw 50.
Similar segmentation trends are occurring among
global firms.
The top ten Global 100 firms account for a third of the
total revenues of the Global 100 group.
And the lower half of the Global 100 account for only
27% of total group revenues (down from 30% in 2003).
The top seven Global 100 firms are extremely big
each with revenues over $2 billion per year and the
revenues of the #10 firm (Sidley Austin) are only half
those of the #1 firm (Clifford Chance).*
Source: The Legal Business Global 100 (July/August 2008)
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Segmentation (cont.)
As gaps widen, the tiers are hardening and
movement between tiers will be increasingly difficult.
Is one of the driving factors for mergers.
Examples over the past few years DLA Piper, Reed
Smith, K&L Gates, Wilmer Hale, Orrick, etc.
Such combinations are currently probably the only
effective way to move a firm successfully from one
tier to another at least in a reasonable period of
time.
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Changing Client Attitudes
Corporate clients today are more focused on
value, less tolerant of inefficiencies, and more
willing to change law firms than ever before.
As a consequence, clients think of the market in a
much more segmented way than ever before.
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Clients View of Services
High
Low
Low
High
Price
Sensitivity
Trusted
Advisor
Experienced
Professional
Reliable Practitioner
Efficient Supplier
Value
Focus
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Changing Client Attitudes*
Corporate clients today are more focused on value,
less tolerant of inefficiencies, and more willing to
change law firms than ever before.
Key findings from 2007 HILDS:
Over half of US HILDS respondents (54%) reported
they were engaged in convergence activities;
Over 61% of Fortune 1000 companies replaced one of
their primary outside law firms in the preceding 18
months;
HILDS respondents reported more use of off-shore
providers for various kinds of legal processes,
including discovery management;
Based on results of 2007 Hildebrandt Law Department Survey of 202 US companies and Canadian Corporate
Counsel Associations In House Corporate Counsel Barometer 2007 that surveyed 722 Canadian in-house
counsel.
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Changing Client Attitudes (cont.)
HILDS respondents reported a serious move toward e-
billing and a renewed willingness to experiment with
alternative pricing and fee arrangements.
The ACC has launched a major value challenge
initiative to encourage dialogue between clients and
counsel on better ways to measure and deliver value in
legal services.
Have seen a recent trend in Asia and Europe toward
project pricing even for complex transactions.
Most surveys report that corporate GCs predict no
increase in outside counsel spending in 2009 (over
2008), and some see a decline.
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War for Talent
Firms today face a competitive war for talent as
intense and important as the war for clients.
Results from a perfect storm reflecting:
Shifting realities of supply and demand -- a sellers
market for talent;
Narrowed opportunities for advancement in firms;
Generational differences -- dramatically changed
expectations of younger lawyers; and
Changing demographic realities -- raising the stakes
for everyone.
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Supply and Demand
Shifting realities of supply and demand
Over the past 20 years, the size of law firms has increased
dramatically; BUT
During that same period, number of law school enrollments
and graduations have grown much more modestly;
The result is a market in which demand increasingly
exceeds supply hence the sellers market.
[NOTE: While the current economic downturn has
brought some relief to the salary wars associated with
the sellers market, the relief is temporary.]
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US Law Firm Growth
535
194
232
273
268
302
325
386
438
513
81,243
53,892
58,533
68,139
66,890
75,498
96,490
109,495
128,217
133,723
0
25,000
50,000
75,000
100,000
125,000
1987 1988 1991 1994 1997 1998 2000 2003 2007 2008
(
T
o
t
a
l
)
50
150
250
350
450
550
(
A
v
e
r
a
g
e
)
Average and Total Lawyers in NLJ 250 Firms
Source: NLJ 250
148% Increase
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Supply and Demand (cont.)
0
10,000
20,000
30,000
40,000
50,000
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
Total Graduations from US Accredited Law Schools
Source: American Bar Association
24% Increase
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Narrowed Opportunities for Advancement
At the same time, opportunities for young lawyers to
advance have been narrowing.
Driven by market pressures to improve profitability, firms
have slowed growth in the equity partner ranks through
Two-tiered partnerships,
De-equitization of partners,
Raising the bar for equity partner admissions, and
Creating permanent non-partner positions.
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Narrowed Opportunities for Advancement (cont.)
In most large firms, growth in equity ranks now less
than half that in non-equity ranks.
Among NLJ 250 firms, about 25% of all partners are
now non-equity and percentage is growing.
And half of all new equity partners are now laterals.
All of this factored into the high level of associate
attrition in law firms prior to the current economic
downturn estimated by NALP at 18-19% per year
prior to 2008.
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The Current Crisis
In legal market, the current economic crisis has
exacerbated a slowdown in business evident for
several months.
In most firms, productivity dropped in second half of
2007.
Driven by slumps in real estate, structured finance, and
transactional practices.
Resulted in an abrupt end to a six-year period of
unprecedented revenue and profit growth.
In 2008, PPEP was flat to a minus 10% (minus 5-
15% for firms with significant capital markets
practices).
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The Current Crisis Demand Driven
-8
-6
-4
-2
0
2
4
6
8
10
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P
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7-Year CAGR
2008 YTD Q3
Key Economic Indicators through 2008 Q3
Source: Citi Private Bank Law Watch
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The Current Crisis Aggravated by Headcount
0
1
2
3
4
5
6
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7-Year CAGR
2008 YTD Q3
Key Personnel Indicators through 2008 Q3
Source: Citi Private Bank Law Watch
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The Current Crisis Projections for 2009
Flat to declining overall demand;
Few rate increases and heavier discounting;
Overall revenues flat to modest (3-5%) growth;
Additional layoffs and cost cutting (including salary
freezes and reductions);
Expenses that (despite these efforts) will rise at a
faster rate than revenues;
Resulting in net income that is flat to down 15%
compared to 2008.
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The Current Crisis Broader Impact
Over longer term, current crisis may hasten a re-
thinking of basic law firm structures and the way firms
do their business.
Law firm profitability is determined by five basic factors
leverage, productivity, rates, realization, and
expenses.
During past six years of unprecedented growth, only
one of these factor rates has really worked
consistently.
If across-the-board rate increases are no longer
possible, the hit on profitability will be severe.
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The Current Crisis Wont Last Forever
Present downturn in the legal market caused
primarily by reduced demand, and demand will return
in time.
When the economic recovery finally begins, the legal
market will be a leading indicator.
While some restructuring will occur, the long-term
prospects for the legal industry remain very good.
Firms that take a long-term view and act in focused
and strategic ways should be fine in the long run.
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Growth and Consolidation
Perhaps the most noticeable mega trend over the
past decade or so has been the sheer growth of law
firms both internally and through consolidations.
Has been driven in part by the inherent growth
imperative hard wired into law firm economic model.
But also by client demands and concerns about market
positioning.
Trend moderated in 2008 (because of economic
slowdown), with NLJ 250 firms growing at 4.3% --
well below the 5.6% rate in 2007, but comparable to
the 4.1% rate in 2006 and 4.4% rate in 2005.
While the current downturn may continue to slow
growth in 2009, long term the upward trend will
continue.