Yesterday the Hildebrandt Institute and the Law Firm Group at Citi Private Bank released their annual Client Advisory which reviews the factors that impacted the legal industry in the past year and offers a prognosis as to where the market is headed in the near term. For this year, the Client Advisory forecasts that “2012 will be a year of challenge and uncertainty, with continued soft demand and rising costs impacting firm efforts to maintain profitability at acceptable levels.”
As we reported last month, the legal market ended 2011 with demand growth slightly positive, but overall performance for the year was fairly lackluster as the industry experienced growing pressures on law firm profitability. While the first half of the year started strong, growth in demand for legal services slowed considerably in the second half of the year, and this was seen most notably in corporate and transactional practices. However, there were bright spots, such as IP litigation as well as labor & employment, litigation and real estate which showed positive demand growth in 2011. But there are also reasons to remain cautious:
It seems premature, however, to say that the market has stabilized. Moreover, even if stabilization has occurred, it is still at a significantly lower level than in the pre-recessionary period. Since it is unlikely, based on overall economic conditions, that the demand for legal services will grow robustly for the foreseeable future, the legal industry will be forced to live with uncertainty for some time to come.
Going forward, this uncertainty “will be exacerbated by both constrained growth in revenues and rising expenses,” creating “significant challenges for many law firm leaders.” There will be “[c]ontinued sluggishness in demand growth” that will make it difficult for firms to “maintain profitability at acceptable levels.” Other factors such as client pushback on rates, increasing direct and indirect expenses, and the increasing cost of maintaining leverage will all contribute to a challenging year ahead for law firms.
“If current conditions persist, firms will be increasingly challenged to examine new models for the delivery of legal services,” said Michael Abbott, general manager of the Hildebrandt Institute. He adds:
New business models based on redesigned work processes, greater emphasis on project management, and new approaches to expense management and professional development may unlock greater efficiencies. The most successful firms will continue to be those that can achieve and deliver the greatest value to their clients.
The Advisory incorporates data from the Hildebrandt Institute’s Peer Monitor Index, which presents data from 116 U.S.-based law firms and from Citi Private Bank’s Law Watch Quarterly Flash: Full Year 2011, which includes data collected from 178 firms, including 81 Am Law 100 firms, 47 Am Law Second 100 firms and 50 additional firms.
Posted by Marianne Purzycki