State of the Legal Industry Market: A New Legal Model is Emerging
Joy A. Long
After several decades of operating on an essentially law firm-centric model, a new model appears to be emerging in the legal services industry. While noting incremental improvements in 2019 financial performance, the 2020 Report on the State of the Legal Market from the Legal Executive Institute (LEI) serves as a warning that law firms will need to adjust for a new model in order to survive. This blog reviews the report’s findings.
According to the report, most firms in the U.S. legal market saw “fairly steady overall financial performance” in 2019. Demand, worked rates, fees worked and headcount all grew in 2019. However, productivity slipped into negative growth.
Direct and indirect expenses continued to rise in 2019, especially for recruiting and professional services. The collected rate realization (compared with worked rates) held steady around 89%, while average revenue growth increased 5.4%.
Three Major Changes
Despite the relative stability in financial indicators, the report claims that mounting changes in the current law firm model are likely to undermine the future performance of firms that are not prepared for them.
The report identifies three major changes:
- The Strengthening Hand of Clients
Since the Great Recession, clients have taken control of the legal market, no longer deferring to law firms. They are exercising their power in a number of ways, such as relying on competitive procurement processes when hiring outside counsel, requiring strict budgeting and billing processes, and imposing outside counsel guidelines for billing, expenses, staffing and other matters.
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- The Continued Growth of Non-Law Firm Competition
An LEI survey from January 2019 found that corporate use of alternative legal service providers (ALSPs) has expanded significantly. Moreover, the Big Four accounting firms also are expanding within the legal market. They are delivering services in a wide range of areas, including finance, mergers and acquisitions, compliance and employment law.
Related Read: New Study Highlights the Threat of Alternative Legal Service Providers to the Traditional Law Firm Model
- Law Firm Innovation
Some law firms are responding to these industry changes with their own innovations. They are increasing their reliance on their own professionals and specialists (for example, HR, IT finance and business development) and including them in their client-facing teams. They are also improving their internal systems to boost efficiency and make better use of analytics and profitability data. Some law firms are outsourcing more, including to ALSPs, while others are creating their own subsidiaries for legal-related services.
The LEI report acknowledges that the new model is not the norm, but concludes that the market is clearly moving in that direction. The report says that law firms should expect clients to continue to drive service providers toward multidisciplinary practice-type services. These changes, along with the upheaval in the wake of the COVID-19 pandemic, will undoubtedly result in even more changes to the legal services industry.
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