2012: Law Firm Leaders Cautiously Optimistic

The American Lawyer released the results of its ninth annual survey of law firm leaders this week and it is clear that while 2011 started out looking good for firms, the last few months indicate that firm management cannot count on a robust economy heading into next year.  Despite the economy, 73% of law firm leaders are optimistic about their firm’s future in 2012.  So firms are fine-tuning their strategies like never before to differentiate themselves from their competitors and looking for greater efficiencies in their internal operations.

Only 20% of respondents expect to see revenue growth in their corporate practices next year, compared to more than one-third of respondents last year.  And clients are taking longer to pay their bills, according to 43% of the respondents.  Billing rates are continuing to rise, with 93% of firms expecting to increase rates by 5% or less.

Cautiously optimistic, firms are holding steady on the size of their first-year associate classes, with 58% keeping their class size the same as in 2011.  More than one-third of respondents expect to reduce their equity partnership ranks and 49% of firms have made efforts to align partner compensation with a willingness to cooperate in new initiatives such as project management.

Leaders are not as optimistic about profits per partner as they were last year.  The majority (58%) of survey respondents expects PPP to grow 5% or less, which is higher than the 41% who responded last year.  A healthy 26%, however, expect profits to increase by more than 5%, although this is down considerably from last year’s 38%.

Strong client relationships are critical and “firms are building closer ties with key clients—89 percent of survey respondents said they’ve accomplished this in the past year.”  More than half of all respondents have a formal client feedback program in place.

In fact, relationship-building has become so important that it is now an essential skill for partners. “The old model had room for the entrepreneurial partner and also the partner who did a good job maintaining a relationship with a client,” says John Murphy, chair of Shook, Hardy & Bacon. “Now there is more emphasis on growing business, so the partner who is maintaining the status quo is falling behind.”

Clients continue to be assertive, with 81% of respondents reporting that more clients are requesting discounts and 55% reporting that clients are requesting deeper discounts.  When asked if clients have refused to pay for work by first- or second-year associates, 54% responded in the affirmative.  Almost all of the respondents had some alternative fee arrangements in place in 2011.  Most common was the flat fee for an entire matter (92%); 82% used capped fees; and 74% used contingency fees.  However, in terms of the actual amount of work (percentage of matters) that utilized AFAs in 2011, the average was only 16%.

Big gains are being seen in alternative staffing arrangements. The use of contract lawyers is more popular, with three-quarters of respondents using this arrangement in the past year, up from 55% in 2010.  Thirty-seven percent of respondents outsourced work to lawyers managed by third parties (up from 25% last year), while 28% outsourced work to non-lawyers managed by third parties, almost double the percentage from last year.

Posted by Marianne Purzycki