State of the Legal Industry: Facing Challenges, but Opportunities Ahead

2023 Report on the State of the Legal Market: Analysis and Insights

The 2023 Report on the State of the Legal Market, released by the Center on Ethics and the Legal Profession at Georgetown Law and the Thomson Reuters Institute on January 10th, is more relevant than ever as we enter a year of uncertainty. The report confirms this and will delve into specific points, but it's important to remember that contractions in the legal industry are not new. The silver lining is that firms have hopefully learned from the lessons of 2008/2009 and will be better prepared. There may be some casualties, but this is a natural part of business and it's important to remember that the law is still a business.

Georgetown Law highlights some key findings from the report in its press release. While some of the findings may seem alarming, not all of them are cause for concern. Some lawyers anticipated this market contraction and are not worried. Let's examine some of these findings:

Decreasing Demand and Optimism for Client Spending: Why it's not all bad news

This may appear concerning at first, especially when considering the following statistics:

Law firms saw a substantial slowing in demand for their services throughout 2022. Demand fell by an average of 0.1% in 2022 through the end of November, and will likely finish the year in negative territory, compared with the robust 3.7% rebound in growth for all of 2021.

However, when looking at the context, we see that this decrease is primarily due to a significant decline in transactional work, such as mergers and acquisitions, caused by increasing economic uncertainty.

Why is this positive? Most firms have multiple areas of expertise. While transactional lawyers may not be pleased with this news, their insolvency and restructuring colleagues will be. There will always be work for lawyers, and many of the companies that were sustained during the pandemic will need to be restructured or declared insolvent, providing work for those lawyers. As we saw in 2008/2009, some lawyers will move to other areas of practice, while lawyers in mid-sized firms who already have diverse skills will have ample work to handle.

Market Shifts Towards Midsize Firms: Why they are becoming more competitive

Georgetown noted that:

Midsize firms stood alone among the market segments in seeing demand growth in 2022. The report describes this apparent willingness by clients to move work in search of high-quality but more cost-effective counsel as “striking.” While larger firms saw stark deterioration in all practices, midsize firms were increasingly competitive, especially in litigation, labor & employment, and intellectual property.

This news made a woman in a mid-size network very pleased, as it confirms what she has been observing within her own organization. Firstly, it is almost impossible to reach the people in those practice areas because they are extremely busy, but secondly, they are highly skilled and cost-efficient.

Record-Low Productivity: How it presents opportunities for business development

These figures ARE concerning and there’s no sugarcoating it:

While average hours worked per lawyer has been steadily declining for more than 20 years, it fell sharply in 2022, reaching the lowest level ever recorded by Thomson Reuters Financial Insights, an average of 119 billable hours per month.

The report calculates this means the average lawyer billed $98,000 less in total fees than a comparable lawyer in 2007, based on average rates for 2022.

What does this imply? I am not going to be overly optimistic, but I will say that it means lawyers have PLENTY of opportunities to improve their business development efforts. This is the perfect time to focus on those business development plans, execute the strategies that have been delayed, and establish future prospects. When things are calm, it's the ideal time to focus on sales.

Surging Expenses: Understanding the war for talent and direct and overhead costs

This one is truly interesting to me – the two pieces that makeup expenses here are the war for talent, which firms can’t do much about at the moment, and direct and overhead expenses. So says Georgetown:

Both direct and overhead expenses are rising at double-digit rates, the highest since 2009, as a result of factors including higher talent compensation, return-to-office expenses, business development costs, and inflation. The report cautions that “in an environment where revenue generation is slowing, such an expansion in expenses is alarming should it continue.”

Some aspects of this may be difficult, but "return-to-office expenses" - can someone remind me why firms are pushing for this so strongly? 2020 and 2021 were two of the most profitable and efficient years for law firms, yet many firms are insisting that their lawyers and other professionals must be in the office to work, despite the potential negative consequences.

It is important to carefully consider whether return-to-office plans are truly beneficial, both financially and in terms of morale, before enforcing them. I understand there are genuine concerns regarding the training and integration of young lawyers, as well as a desire from senior lawyers to work in the office and be around colleagues. But it is crucial to evaluate the situation using facts and data and make informed business decisions that are best for the firms.

Rates Hindered By Inflation, Falling Realization

The effects of inflation are being felt by all, and while this report focuses on US firms, other countries are experiencing even more severe inflation numbers.

It is important to be considerate when increasing rates and informing clients, and this should not be done through billing.

Additionally, firms are facing decreasing realization rates, which is an issue that can be more easily addressed.

After steadily increasing for the past two years, collection realization has begun to plateau or decrease across all segments of the market. The report suggests this may be due to firms losing focus on billing discipline or clients resisting invoices and payment schedules, or both.

It is important to evaluate and track these issues within your firm, and identify areas for improvement. As market conditions may influence these rates, you may not see a significant increase, but if the issue is related to billing discipline, it can be easily rectified by the firm, as well as by reevaluating client management.

Thomson Reuters recommends a thorough examination of all aspects of the business, including talent management, practice management, workflows, operations, and finances, and implementing the necessary solutions and technology to successfully navigate the upcoming year.

As Paul Fischer, president of Legal Professionals at Thomson Reuters suggests, "Law firms need to closely examine all aspects of their business...and employ the necessary solutions and technology in order to successfully navigate the year ahead."

In uncertain times, it's important to return to basics: assessing what we know, identifying opportunities for efficiency, determining the best ways to serve clients and staff, reflecting on past successes and failures, and making necessary changes. We've been in this situation before and have gained more knowledge and experience.

REFERENCE:
State of the Legal Industry: No Need to Panic – We’ve Been Here Before
https://www.jdsupra.com/legalnews/state-of-the-legal-industry-no-need-to-3469478/