The large law firm market is generally experiencing flat to minimal growth. In addition, other factors such as a declining profit margin, weakening collections and loss of market share to alternative legal service providers continue to undermine law firms’ profitability. Even in this challenging market, there are still law firms that have been able to outperform their peers.
So, what is their secret? While client base and geographic locations obviously still play an integral role, a Thomson Reuters Legal Executive Institute report recently found that the key difference may be that high-performing law firms are making investments in technology, marketing and business development.
Using Peer Monitor data that was gleaned from 165 U.S.-based large law firms, The 2017 State of the Legal Market Midyear Report looked at firms with market-leading growth in overall profits, revenue per lawyer and profit margins.
According to this report, the highest-performing quartile of firms increased their marketing and business development expenses by an average of 4.6% last year and grew their per-lawyer technology investment by 3.2%. In comparison, the lowest-performing quartile increased their marketing and business development expenses by a mere 1.8% and their technology spending by only 1.2%.
Top performers are not the only ones that are looking to improve their brands. The report also found that 80% of its survey respondents anticipate marketing and business development being a major priority throughout 2017. This would indicate that more law firms are looking to adopt a a strategy similar to that of their high-performing peers.
The report noted that overall market demand growth was only slightly positive for the first six months of 2017, with billable hours rising only 0.1%. While law firms have traditionally driven much of their growth through rate increases, this may be an increasingly risky strategy. Even though there has been some strengthening in rates, realizations continue to be at near-record low levels.
Firms last year collected an average of only 82.5 cents for every dollar of their standard rates. According to Peer Monitor data, average write-downs of worked rates increased from 7.8% in Q2 2016 to 8.4% in Q2 2017, as clients continue to push for discounts and write-downs.
The Pushback Effect
Finally, the report noted that the perceptions around rate pressures may be somewhat of a self-fulfilling prophecy for law firms. Firms are concerned and are anticipating that their clients will continue to push back on billing rates even more — and there is strong evidence indicating that they will. In response, the report adds, “partners are showing a willingness to reduce their fees by an increasing profit margin for the sake of minimizing the chance of the client being upset upon seeing the bill.”
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