LegalFutures new report “Innovation in the City” is worth a read for those looking at the long-term future of the legal industry.
It is clear that the BigLaw legal landscape is changing in the wake of the financial crisis, albeit slower than in many other industries. At the very top of the prestige ladder sit a handful of the most recognized law firm brands in the world. These firms, while affected by the crisis to a limited degree, mostly weathered the storm unscathed. Their long lineage, coupled with their extraordinary reputations served to insulate them from many of their peers. Most importantly, their ace card – institutional clients that have been handed down through generations – made them immune to some of the larger market forces affecting the legal world.
The next set of firms has not been so lucky. These large firms, with top-tier talent doing top-notch work but who lack the institutional clients of the most prestigious firms have found themselves facing more pressure from clients. While they have institutional clients, in general the next set of firms (and all of those below) must fight for every engagement. The general counsels of the companies that they represent are themselves being pressured by their executives, and they pass on that pressure to the firms. The pressure comes through tougher negotiations on fees, increased bidding of new matters and sourcing legal expertise from lower-cost providers, such as in-house attorneys and offshore firms.
The recent PwC study done in the United Kingdom for British firms reveals this dynamic:
Top 10 firms have recorded their highest ever average net profit margin at 40%, and Top 11-25 firms have finally started to reverse the previous five year trend of margin deterioration, posting an increase from 26.0% to 28.2%.
Firms in the Top 26-50 are the one banding who have continued to suffer declining margins; they are reporting increased fee earner numbers alongside lower levels of staff utilization, with margins therefore depressed by a high total staff cost ratio of 43%. However, this pool of mid-tier firms continues to include some high-performing firms, who have carved out a successful niche through a combination of sector focus, quality brand and innovation. Those firms whose differentiating qualities are embedded and recognized by clients have taken advantage of opportunities to move up the value chain.
In a world where clients want more for less from their law firms, the overriding question for firms that find themselves outside the very top group is how will they adapt their businesses to meet the new demands? Simply cutting rates in an effort to compete is insufficient. Clients will be happy, but competitors may easily adapt, leaving firms worse off than before, creating a new normal. Alternative structures and new value propositions will need to be found that allow firms to deliver more for less.