Image by matt.hintsa via Flickr
Jerome Kowalski
Kowalski & Associates
January, 2012
Thirty items affecting the legal profession that are guaranteed to dominate the headlines in 2012
It is that time of year when you are entitled to know what to expect for this new year. Accordingly, here is what the hot trends for 2012 will be:
- Continuing decline in legal spend on outside counsel.
- Careful consideration by general counsel whether to build or buy. Corporate legal departments will be major competitors of law firms.
- Increased globalization, with US firms continuing to open new markets, particularly in Asia and South America and foreign firms opening US branch offices.
- Consistent with last year’s trend, expenses will rise at a faster rate than the rate of revenue growth.
- As law firms continue to more efficiently and timely bill for matters and, the trend of law firms whittling away at their inventories (WIP), while not being able to replace that inventory because of the lethal combination of reduced headcounts and reduction in the legal spend, lenders to law firms will require more stringent reporting and will in some instances, reduce available credit lines.
- High end litigation funding will become increasingly popular.
- De-equitization of partners and reductions in head count will continue.
- Deleveraging of work with partners and other senior lawyers billing increased hours and the trend towards the inverted pyramid model continuing.
- Law firms establishing subsidiaries to engage in services complementary to their services, including e-discovery, document review, legal staffing services, investment advisory services for high net worth clients and the like.
- Congress, the courts and the judicial conference will make serious progress about modifying e-discovery rules, bringing down their current gravity defying costs as well as dampening down the torrent of spoliation claims and the attendant Herculean tasks companies need to take to avoid these claims.
- The urge to merge will continue. Last year, there were more than 43 law firm mergers. In 2012, there will be more. Regional firms will combine to become super regional firms and consolidate some back office operations,
- The Euro Zone will continue to roil, unemployment will decline only marginally, Congress will continue to dither about the national debt, housing prices will, at best remain flat or, more likely, decline slightly, due to the huge REO inventory, municipalities will continue to be in a financial vise, as tax bases decline, real growth in GDP will be marginal and there will certainly be additional bankruptcy filings by cities and counties. I know looking at all of this may provoke nausea. But, the wise lawyer and law firm will follow Rahm Emanuel’s counsel that no crisis should go to waste and the wise man looks for opportunity in every crisis. There will be abundant opportunities for lawyers to provide counsel to various institutions affected by each of these economic frailties.
- Given weakening retail sales and decreased demand for most commercial real estate, buyers will emerge to take advantage of attractive pricing on some properties, perceiving real value opportunities. Private equity funds will move in to this arena in a big way.
- Increased focus on collaboration, within the law firm, vertically with clients and horizontally with vendors of support services and co-counsel. Extranets will be enhanced and new technologies will emerge to provide greater transparency and real time feedback and collaboration.
- There will be strong tension at law firms between the competing needs to reduce support staff and the need to enhance marketing, IT, client relations, project management and other support functions.
- More paperless offices. With the bulk of communications now being electronic and the expected decline in timely services from the United States Postal Service likely to increase the trend of communicating electronically, law firms will be incentivized to go completely paperless. Incoming snail mail will be scanned and digitized. The huge cost of storing paper documents will evaporate.
- Increased use of outside facilities management companies for mail, fax, reproduction, IT, bookkeeping and legal records departments.
- More intelligent use of office space. This will include moving support functions to less expensive offices (for example, West Virginia (Orrick), Ohio (WilmerHale), Belfast (Alan & Overy and Herbert Smith), Texas (Pangea3), North Dakota (Integreon) and Kansas (UnitedLex)). We will also see firms follow the lead of Pillsbury which announced that it will move its entire back office operations to Nashville, Tennessee. In addition, law firms will seriously be looking at “hotel” office arrangements, such has been the case for decades at accounting firms. An office, like your home, is just a place to keep your stuff. Today, most of your stuff is stored in the cloud or on your server.
- Continued rise in use of alternative fee arrangements.
- Continued rise in clients using social media, particularly blogging, to identify competent counsel, with a concomitant rise in law firms regularly posting substantive blogs and circulating client alerts and bulletins.
- Law firms will make more investments in technology than in people. The IT hotspots are knowledge management, software to farm information for the purpose of responding to RFP’s, making an AFA proposal, based on prior similar work handled by the firm and for project management purposes.
- Every lawyer will tuck an IPad under his or her arm and no lawyer will attend a meeting without opening one. Continued development of apps for lawyers will simply make this tool not only essential, but a lawyer not having an IPad at the ready, risks a serious loss of credibility.
- Tough times often brings out the worst in some folks. Last year’s small spike in BigLaw partners and even other law firm personnel who engaged in defalcations of client funds will sadly probably continue. Look for more headlines of such tales. Law firms will be well served to now tighten controls and checks and balances regarding client finds.
- There will be periodic announcements by a partner at a BigLaw firm stating “after 25 rewarding and wonderful years with my former firm, I have decided to open a solo practice so that I can work more closely with my clients.” Sometimes these announcements will be sincere and genuine. Sometimes these announcements really mean “I’ve been on the job market for almost a year since I was asked to leave my former firm. I haven’t been able to find a new slot and my firm wants me out right now, so I may as well give this a try.”
- Virtual law firms, such as Clearspire and Rimon will continue to grow and gain real traction and increased market credibility.
- Sadly, we will also see additional law firm failures.
I am quite sure that we have been fairly thorough and inclusive. If you think we left anything off the list, please let us know by commenting below. Similarly, if you think we are wrong about any of the above, post a comment.
It’s going to be a challenging year. Please fasten your seatbelts, hold on to the handrail and make sure that your arms and legs do not extend outside your car. We are in for an interesting year.
© Jerome Kowalski, January, 2012. All Rights Reserved.
Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com .
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Filed under: Alternaive Business Structures, Alternative Business Structires for Law Firms, Alternative fee Arrangements, Crisis management, Downsourcing legal services, Electronic Document Discovery, Global law firms, Hiring and training lawyers, Internet based marketing, Lateral law firm partner, Lateral law firm partner movement, Lateral Partner, Law firm blogging, Law Firm Crisis Management, Law Firm Dissolution, Law Firm Dissolutions, Law firm financial reporting, Law Firm Implosions, Law Firm Internet Based Marketing, Law firm management, Law firm management strategies, Law firm marketing, Law firm partner layoffs, law firm project management, Law Firm Risk Management, Legal Project management, Legal Project Outsourcing, Legaltech, Marketing the Law Firm on the Internet, Navigating the Perfect Storm: Recruiting, Outsourcing legal services, Project management for law firms, Retaining and Training Lawyers in the Coming Decade, Strategic law firm planning, The Law Firm of the Twenty-first Century, Value Billing Tagged: | corporate legal departments, equitization, Law firm, legal profession, litigation funding
Much here to agree with, but also some trends that firms can avoid by re-engineering their business models. Most notably, decline of “Inventory” is a problem of law firms’ (an their consultants) own creation. By selling only those hours that have been recorded, they limit themselves in terms of revenue, gross profit and net profit. This is, as you state, further aggravated by “reverse leverage”. In fact, I would argue it has the hallmarks of a death spiral: less WIP => Less borrowing capacity => more layoffs => more deleveraging => less available timekeepers to generate WIP…lather, rinse, repeat…….. It’s the ugly flip side of the process that led to the highly leveraged standard model big firms in the first place. Not so hard to predict really, just like any bubble.
But how different it might be (have been) if not for the false assumption that lawyers sell only time?
Recorded hours are like paper money, but different. At least with paper money, the Fed can print more (at the risk of inflation). With recorded hours, the firm declares that these hours have value and then, because rational humans will only work so many hours per year before all sorts of ill effects start to creep into the equation, they limit the mount of value they can create. No surprise that this hits a self-imposed limit – but one that is hard to back away from despite the fact it was self-imposed.
It’s as if the Beatles decided that they would only perform live – they’d all be paupers by now. Or if they had insisted that each album be individually recorded – in keeping with the tradition of the travelling minstrel.
I know, I know, it’s all totally different for law firms, because there is this Judge in New York, and he says……
Happy New Year!
Yes, Tom, there is much truth in your comments. I think it always helpful to remind ourselves that when Smith invented time sheets, he did so for the Legal Aid Society and solely for the purposes of tracking lawyers’ efficiency and what we might today call project management.
Yes, of course, a new business model must be created from the ground up, which must be able to deliver quality legal services cheaper, faster and better, which I previously described.
Your reference to the Beatles is interesting. Apple successfully turned the entire business model for music on its ear through ITunes. Today, musical artists actually make th bulk of their money through live performances.
Jerry
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Likewise, I find your reference to Apple interesting. If, as you say, recording artists now make most of their money by performing live, it’s because Apple changed the rules and took a lot of the profit out of the recorded music market. Apple was only able to do this because they realized that the labels were not serving artists or consumers well, as they persisted in their business model, and totally abused some of their best assets in the process (e.g. Dixie Chicks v. Sony). In the same way, if the legal profession does not find a business model that serves the client the way they want to be served, and honors their needs (as opposed to hiding behind excuses like “every case is different – we have no idea what this will cost you”), then someone else will do it for us. However, they may not be so polite as to include us in the solution. The Bar, be it the ABA or any state bar, will be as powerless to stop it as Sam Goody’s and Tower Records were helpless against the iTunes/Napster invasion.
Heightened due diligence by lateral partner candidates in assessing law firms.
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Very comprehensive and thoughtful summary of challenges facing law firms in 2012. I would add Information Governance to the list. In this age of hackers, breaches, eDiscovery and privacy concerns, clients are increasingly asking law firms about their information management and governance practices. Clients want to know their confidential data is safe with their law firms.
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