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LAW FIRMS INSIGHTS
Forward Thinking Thought Leadership
Law Firm Trends, Opportunities, and Challenges:
A Changing Landscape and the Road Ahead in 2015
As indicated in the 2015 Report on the State of the Legal Market1, law firm financial
performance was modestly better in 2014 than in 2013, with revenue growth across the
market stronger than in the previous year, when demand growth was negative. Yet, while
the rise in demand growth signals a healthy road ahead for the legal industry, law firms
remain confronted with challenges precipitated by the economic downturn. The dynamic
shift in the economic market nearly seven years ago generated fundamental change within
the legal profession. As such, maintaining a competitive edge within a changing landscape
requires law firm leaders to gain perspective on the new realities of the legal market and to
adjust existing strategies in order to best position their firms for growth.
What are the significant factors reshaping the legal market? CohnReznick examines trends
leading into 2015 and discusses how these shifts will impact strategy and operations of law
firms immediately and in the future.
Challenges Remain for Smaller Firms as the Revenue Gap Widens
One area in which small to mid-sized
firms stand to benefit is the absence of
conflicts of interest that can prevent
some large law firms from representing
certain clients. For example, in many
cases, conflicts of interest that bar law
firms from investigating banks they
have previously represented have left
lucrative assignments on the table for
smaller firms. As the number of lawsuits
against banks continues to rise, small
to mid-sized firms have greater
opportunities to solicit banks as
defense clients.
Recently, firms with more than 150 attorneys saw revenue per lawyer jump by 8.5% over the
previous year, according to the Survey of Law Firm Economics. At these law firms, revenues and hours paid by clients have increased, while
smaller law firms continue to struggle, according to recent studies. However, small firms with less than nine attorneys saw revenue fall by 8%.
The most recent data available to CohnReznick indicates that while demand for legal services has been flat since 2013, large firms were
paid about 10% more by clients in the first half of 2014, according to a study by TyMetrix2. Yet, the bump is incongruent with an overall 11.6%
year-over-year drop in demand for legal services.
The main difference between small and large firms is the type of clients they attract. While large firms count corporate clients as loyal clients,
smaller firms often rely on individuals and small business owners that typically put off legal work or are slow to pay their attorneys.
Small law firms may also be at a disadvantage as many laws and ordinances are available on the internet and at the library, as is how-to
information, legal documents and forms, prompting many laypeople to attempt to represent themselves. Individuals who go to court “pro se”
(for themselves) often feel that legal services are overpriced and that the law is less complex than it is. Small law firms, especially sole
practitioners, lose business to people who represent themselves and do their own legal work, rather than hire an attorney.
Laws vary from state to state, as do attorney licensing requirements, because state governments regulate the practice of law. Attorneys
typically need to be licensed in states where their clients do business, unless the state grants reciprocity. To meet state requirements, many
national or multistate corporations often hire law firms in each state where the company has a presence. Many large corporations, however,
prefer to have one law firm handle most of their multistate legal needs, which has led to law firm mergers, bigger practices, and tougher
competition for small firms.
Merger Activity on the Rise
Mergers occur among law firms of all sizes and increase revenue and boost client count at a time when demand for legal services remains
flat. As the economy recovers, CohnReznick believes more small and mid-size firms will continue to merge and acquire other firms as a way
to grow. Large firms are also joining together in efforts to broaden their geographic reach and reduce expenses. The global economy
contributes to large corporate clients who require a wide range of legal services domestically and abroad, and desire one law firm to
handle most of their legal needs. As a result, large law firms are getting larger, adding expertise like antitrust and international law.
Regional and mid-sized law firms merge to better compete by adding staff and expertise that clients desire.
1
http://www.law.georgetown.edu/academics/centers-institutes/legal-profession/upload/FINAL-Report-1-7-15.pdf
2
http://www.americanlawyer.com/id=1202676074751/Am-Law-Firms-See-Slowing-Demand-for-Hours-but-Higher-Fees
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Effect of the Economy
Law firms with a large transactional business, such as for real estate
or financing matters, are strongly affected by swings in the local and
national economy. U.S. Gross Domestic Product (GDP), an indicator
of potential demand for legal services, can fluctuate up to 5% yearly;
law office employment, a reflection of demand, can vary even
more. Changes in local demand for transactional services affect
the amount of business law firms do, which impacts billing rates and
employment levels.
Most U.S. law firms are small, local and may earn a large percentage
of revenue from a few clients. Loss of a major client can be devastating,
especially to small law practices serving a limited geography. Firms
that specialize in only one industry, such as real estate, airlines, or
investments, depend highly on that industry’s well-being. Economic
forces that negatively affect an industry in turn impact specialized
law firms disproportionately.
Trends in Law Firm Management: Shadow Juries, Billing
Arrangements, Dispute Resolution Methods, and More
Litigation attorneys and firms are increasingly hiring “shadow juries,”
individuals who attend a trial solely to help litigators shape their
cases. These juries are demographically matched to the actual jury
and observe the trial as it happens to provide instant feedback to
litigation attorneys on their reaction to trial proceedings and
witnesses. Shadow juries require low administrative overhead and
wages, which generally are about 1% of trial costs.
Another trend that began during the global recession in 2008 and
is gaining popularity is the accommodation of alternative billing
arrangements. Large law firms are increasingly willing to accommodate
alternative billing arrangements, and more firms now offer flat fees for
some legal matters. Previously, such arrangements were unpopular;
however, clients now pay 15% to 30% of their legal bills through
non-hourly methods. The trend has gained more popularity among
clients who desire billing arrangements that are more predictable
and fair. CohnReznick anticipates the demand for alternative fees
to continue.
Similarly, alternative methods to resolve legal disputes are on the
rise. Attorneys, courts, and clients are turning to the use of mediation
and other forms of Alternative Dispute Resolution (ADR) due to court
backlogs, and the time and expense required for a court resolution.
These alternatives for resolving disputes use an independent mediator
to determine a binding settlement, rather than go to court for a
legal judgment.
New rules are encouraging attorneys, law firms, and corporate law
departments to engage in pro bono work more frequently. When
attorneys help people with limited economic means, some of the
Technology Trend
More than 30% of lawyers use a tablet computer, according
to the American Bar Association’s Legal Technology Survey,
and that number is growing. Tablets allow lawyers to work
anywhere and access documents and other information
remotely. This trend is important because law firms are
allocating less space per timekeeper than in the past. This
can impact other areas including real estate, office space,
construction, etc.
Oversupply and Law School Applicant
Shortage—“Right Sizing” the Profession
Fewer people are applying to law school. In the first half of
2014, the number of law school applicants was down by more
than 37% compared to 2010, according to the National Law
Journal, which analyzed data from the Law School Admission
Council. Several factors have contributed to a drop in interest
in the legal profession. Salaries for first-year associates have
dropped from a high of $160,000 in 2009 to $125,000,
according to the National Association for Law Placement.
The financial crisis forced many law firms to reduce staff, and
competition for existing jobs has become fierce. Meanwhile,
record numbers of law students enrolled and graduated from
law school, creating an oversupply of lawyers. Many view the
reduction in law school applicants as “right sizing” in
the profession.
Oversupply has left many lawyers struggling to find work in the
legal field. Some have left to explore other professions. Law
firms were forced to cut staff during the late-2000s recession,
and there continues to be an overcapacity in terms of the
number of lawyers available to work compared to demand
for legal services. As a result, more new lawyers are being
hired on terms less favorable than their counterparts enjoyed
before the recession.
customary rules about conflicts of interest are suspended so that law
firms cannot be disqualified from representing regular clients. A study
by the American Bar Association indicates that nearly three-fourths of
lawyers in the U.S. do pro bono work, providing more than 20 million
hours of free legal services per year. New York recently required
lawyers to perform 50 hours of pro bono work as a condition of
getting a license. Law firms gain goodwill from providing legal
services to the needy or to non-profit organizations.
Law firms with new business models are attracting attorneys and
clients who desire a different pace than offered by traditional law
groups. Usually these newer law firms pay attorneys only when they
work, but do provide benefits between client assignments. These law
firms can charge less, because they reduce overhead by not having
to pay full-time salaries or bonuses, rent offices for attorneys who work
at client sites or from home, or maintain high-priced partners. Clients
benefit from the more affordable legal services offered by such firms.
Law firms with a high risk tolerance are accepting equity in startup
companies, especially in high-tech and biotech companies, in lieu
of receiving cash payments for fees. Startups and young firms require
legal work and business advice, but often can’t afford fees until
products come to market, which can take years in biomedical fields.
Legal firms take an equity position, usually in the form of stock, in
these small, private companies with the intent of sharing in the
sometimes large profits that occur when firms are sold or go public.
Differentiation by Expertise
The largest law firms have grown by adding expertise across a number
of areas of law, such as corporate, tax, labor, environmental, and
intellectual property. Others have expanded by adding other legal
specialties and some non-legal services, including lobbying. Changing
political and economic circumstances has led to more demand for
legal advice on current issues and topics, such as immigration law,
securities law, corporate governance, health care and pensions.
CohnReznick foresees an increase in demand for legal services due
to the greater complexity of conducting business, particularly for
global companies and in specialty industries related to science
and technology. Rapid advances in fields like biotechnology and
pharmaceuticals will result in more legal transactions and litigation.
Analysts predict demand will increase for specialized areas of law,
including intellectual property and technology law that support
these industries. Corporations are expanding their in-house legal
departments as they deal with new regulatory challenges and
increased litigation. Some of these teams, which often are very
specialized, have even started offering their services to other
companies in the same industry as a way to bring in additional
revenue. This model could hurt existing law firms that serve
specific industries.
Contact
What Does CohnReznick Think?
The trends addressed above require law firms to establish
a well-structured plan to guide their firms. Understanding a
firm’s strengths and marketing them accordingly is crucial.
“The blueprint for success will be a quality product, excellent
service, value added-expertise, and a competitively priced
service,” says Richard Puzo, a CohnReznick partner and the
Firm’sLaw Firm Industry Practice Leader. To accomplish this,
timekeepers should embrace these fundamentals and
management should set forth a plan to bolster the expertise
of practice groups. A budgeting process should be established
to keep the costs of services competitive. By reengineering
how a firm delivers services, it is possible to achieve great
success even during these turbulent times.
For more information, please contact Richard Puzo, a CohnReznick
partner and the Firm’s Law Firm Industry Practice Leader, at
[email protected] or 973-364-6675.
To learn more about CohnReznick’s Law Firm Industry Practice,
visit cohnreznick.com/lawfirms.
February 2015
About CohnReznick
CohnReznick LLP is one of the top accounting, tax, and advisory firms in the United States, combining the resources and technical expertise
of a national firm with the hands-on, entrepreneurial approach that today’s dynamic business environment demands. Headquartered in
New York, NY, and with offices nationwide, CohnReznick serves a large number of diverse industries and offers specialized services for
middle market and Fortune 1000 companies, private equity and financial services firms, government contractors, government agencies,
and not-for-profit organizations. The Firm, with origins dating back to 1919, has more than 2,700 employees including nearly 300 partners
and is a member of Nexia International, a global network of independent accountancy, tax, and business advisors. For more information,
visit www.cohnreznick.com.
© 2015 CohnReznick LLP
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information
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