That is the telling, and damning, portrait laid bare by managing partners and chairs at 798 US law firms with 50 or more lawyers who were polled by American legal management consulting firm Altman Weil.
“Law firms are slowly changing – more slowly than we think is wise, but changing nonetheless,” says the survey entitled “Law firms in transition 2017.
But it’s evident that firm leaders are not pleased with the progress made within their firms to meet and confront the challenges posed by a rapidly changing marketplace that has too many lawyers and not enough demand for services. Indeed, according to 61 per cent of firm leaders, overcapacity is “diluting” firm profitability.
Eighty-eight per cent of firm leaders said they have “chronically” underperforming lawyers, and 82 per cent of them blame weak business development skills while 59 per cent point the finger at an flat or declining market.
There are more alarming figures. Fifty-two percent of firms report their equity partners are not sufficiently busy, and 62 per cent of firms said their non-equity partners are not busy enough. Lawyers other than partners and associates are not busy enough in 43% of law firms while in one out of four firms even associates don’t have full workloads.
With profits declining, nearly all firms (96 per cent) are reducing compensation, asking for individual improvement plans (79 per cent), removing chronic under-performers (73 per cent), and de-equitizing full partners (57 per cent). Lawyers hoping to become partners may have to think twice. Sixty-eight per cent of firm leaders think fewer partners will be awarded equity status in the future – and that this is an permanent trend in the future.
“Experience shows that the right response is to make a plan for improvement with a clear timeline, and to remove those lawyers who are not able to turn their performance around,” according to the authors of the survey. “This can be a difficult and painful process, but it is a critical step in addressing a fundamental threat to law firm financial health and long-term viability.”
And yet, more than half of law firm leaders still believe that headcount growth is a prerequisite for their firm’s success. But the way they are going to go about it is different. While nearly all of the firm leaders plan to pursue organic growth and the acquisition of laterals this year, half of all law firms said they have significantly changed their staffing strategy since the financial crisis. Firms no longer shy away from using contract lawyers, staff lawyers and part-time lawyers in a bid to cut costs and improve efficiency and profitability in light of growing competition, particularly from clients themselves as business is moving in-house — and managing partners are concerned. With reason. Two-thirds of firms report losing business to corporate law department insourcing.
Firms, at least some of them, are looking at pricing to improve efficiency and provide greater client value. Thirty-nine per cent of law firm leaders said their firms have made significant changes in their strategic approach to pricing, 44 per cent have not, and 17 per cent are considering it. However only 30 per cent of law firms are routinely linking discounted capped and alternative fees to changes in how work is staffed and delivered.
“This is a hugely significant and extremely troubling result that goes to the heart of successful change and illustrates a critical misunderstanding in many firms,” says the survey. “The strategic elements of a law firm’s business model are all interlocking gears in the same engine. A firm that does not consider the interaction between scope, staffing, pricing, project management and margin cannot achieve optimal performance.”
Improving practice efficiency is also top of mind for the overwhelming majority (94 per cent) of respondents. But only half said they have “significantly” changed their approach to the efficiency of legal service delivery, a finding that has prompted the authors of the survey to describe this as a “frightening disconnect.” Knowledge management and legal project management are the most common initiatives but they are proving to be difficult to put in practice.
A growing number of law firms are also exploring innovation. Half of respondents said their firms are “actively engaged” in creating special projects and experiments to test innovative ideas or methods. What’s more, nearly half of firms are currently using technology to replace human resources to improve efficiency. But not artificial intelligence, not yet at least. Only 7.5 per cent of firms said they have begun to make use of legal AI tools, and 29 per cent are beginning to explore their options. The majority (64 per cent) “are not doing anything” or are not even aware of what is going on in this area. “This is coming, and the day is not far off when ignorance will carry a steep cost,” warns the survey.
Partners are the source of the problem, “since their cooperation determines in large part whether change takes root in their firm.” Nearly two-thirds of law firm leaders say partners resist most efforts to change, and more than half (56 per cent) say most partners are unaware of what they might do differently.
The survey also takes a swipe at firm leaders. It points out that almost all law firms are doing strategic planning at both the firm and practice group level. But “many are doing so without a broad and deep understanding of the environment. This is a cardinal sin and can be catastrophic.”