The Best of Times… The Worst of Times

Originally published for Thomson Reuters Legal Executive Institute on November 5, 2014

The current legal landscape presents stark contrasts—it is at once the best of times and the worst of times, as Dickens would have put it.

It is the best of times in at least two respects. First, many participants are doing very well financially, especially the largest law firms and the most successful specialty firms. Second, as I wrote last week, technology and other developments present unprecedented opportunities to improve the quality and lower the cost of legal service, while simultaneously improving the financial and personal rewards for those who deliver it.

Meanwhile, there are many ways in which the participants in the legal service ecosystem are not doing well. This week, I want to focus on some of the challenges in the current legal landscape.

First, let’s start with the clients. Business clients are frustrated by what they regard as excessive fees charged by their law firms. While the clients must constantly accomplish more for less, their law firms appear to be unable or unwilling to do the same. If their law firms are AmLaw 200 firms, the frustration is compounded by the continuing reports of partner profits averaging more than a million dollars annually.

Individual clients have a similar outlook. A very high percentage of “average citizens” have a very difficult time finding a lawyer who is both competent and affordable.

Next, let’s look inside the law firms. While the largest law firms continue to report very high average partner compensation, the averages belie the diversity of financial performance within BigLaw. Beyond that, most firms confront serious challenges, even if they continue to produce high income. The market is paying less per unit of value that law firms deliver, putting pressure on firm margins and total revenues; and realization has declined steadily for several years. In further efforts to reduce legal costs, many clients are moving their work in-house or to less expensive providers, further reducing law firm revenues. Meanwhile, the partners with the greatest client followings continue to command very high incomes, and other costs continue to rise, making it much harder for firms to manage the elements of their business models.

These issues contribute to challenges for many of the lawyers in law firms. Most partners feel increased pressure to produce greater economic value for their firms in terms of new business and revenues, while the client outlook and competitive forces make that ever harder to do. Partners who may have flourished in previous times find it difficult to adapt to the new reality.

Most law firm associates aren’t feeling very good either, especially in the largest firms. The expectation to log high levels of billable hours is more intense than ever; associates often feel more like “hour loggers” than professionals. The chances of making partner, especially equity partner, are becoming more remote. It is not what most associates had in mind when they signed up for law school.

Of course, it could be worse. At least law firm associates have jobs. Consider the outlook of recent law graduates and current law students. Career prospects are far less robust than they once were. Law firm hiring is off significantly and careers with the new entrants in legal service are slow to materialize. There are glimmers of hope with expanded corporate law departments and elsewhere, but not enough to employ the large number of students preparing for a career in law.

Meanwhile, two other major participants in the legal ecosystem—law schools and the community of new entrant companies seeking to revolutionize the world of legal service—face their own challenges, which will be discussed at length in future blog posts.

For all of these players, it is a time of contrasts. Most fundamentally, it is a contrast between what is and what is possible. Looking forward, the most interesting and important developments will be in how these participants embrace what is possible while keeping the best parts of what is now. The future belongs to those who embrace change earliest and most effectively.

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