Mid-sized law firms are getting squeezed by these external and internal factors.
Sustaining a successful mid-size law firm in today’s legal market is challenging. In 2016, many mid-sized firms decreased in size, became unstable or simply dissolved. Surviving firms in this category realized only a minuscule increase in gross revenue. The most recent Am Law 200 figures show that the Second Hundred, as the Am Law 101 to 200 are known, struggled in 2016. This group includes mid-sized national players, regional firms, prestigious specialist firms, as well as local law firms whose operations are focused on their home state. For nearly half of these Am Law mid-sized firms, growth has evaporated, and profits are declining. Here are some of the external and internal factors that are squeezing the mid-sized law firm:
Clients are demanding greater value and transparency for their legal service expenditures. This has led to shifts in the traditional billable hour pricing model as clients insist on fixed or flat fee work, or enlist third-party billing review companies to reduce their legal fees. Additionally, corporate clients often require their law firms to add administrative staff to comply with more complex billing, reporting, and compliance requirements.
Fundamental market shift
Certain consumer market segments are substantially reduced or simply gone. Estate plans and incorporation documents are frequently provided by legal internet services rather than an attorney. Corporate clients are increasingly likely to divide responsibilities for different aspects of a single matter to various law firms, in-house lawyers, or non-traditional vendors.
In-House continues to grow
More and more corporations are expanding their in-house legal departments, a trend that has been accelerating for years. The growth of in-house capabilities and the work these groups are prepared to handle has significantly reduced the role of outside legal representation.
There are fewer publicly traded companies
With fewer publicly traded companies, there are fewer potential clients. Landing an account with a large corporation today is more lucrative and will involve more work, but there are fewer such accounts to go around, and they are overwhelmingly represented by the large firms.
Many firms have too many partners and not enough work. Some partners do not contribute equally to revenue generation and some should have already retired, but can’t or won’t due to financial constraints. For a mid-sized law firm, this kind of top-heavy structure severely hinders profits. Losses are managed by cutting support staff and associates, making it even more difficult for the firm to compete.
Rent, health care, insurance, utilities, taxes, and compensation are just a few examples of costs that creep up each year. In the past, law firms would raise their rates to cover annual increases in expenses. In today’s market, these rising costs can’t always be recouped by higher legal fees because clients will demand savings or services in other areas.
Not running the firm like a business.
While some firms have management committees with strong business backgrounds, many do not. Most mid-sized law firms are started and led by attorneys who are dedicated to the practice of law but may be lacking in business experience. While this traditional law firm structure may have worked in the past, it is no longer compatible with today’s fiercely competitive market-driven environment. Avoiding change and continuing to think that the market will one day recover to pre-recession levels is a recipe for failure.
Local Firms Are the Exception
One bright spot within the Am Law Second Hundred shows 90% or more of their lawyers located within their home state, and was also among the strongest performers within the Second Hundred, even outperforming national firms.