Law Firm Economics (Program Recap)
By Catalina Vallejos, Marketing Specialist and Brandon Korch, Business Intelligence Manager at Finnegan, Henderson, Farabow, Garrett, & Dunner, LLP
The first in-person LMA event since the onset of COVID dealt with the lifeblood of the legal industry – law firm economics. At this event, Daniel Burke, Director of Pricing and Practice Analysis at Troutman Pepper, moderated a panel discussion between Lori Brown, Chief Operating Officer at Hogan Lovells, Jacob Morvay, the newly-minted Chief Financial Officer at Steptoe & Johnson, and Herb Thomas, Chief Marketing Officer at Whiteford, Taylor & Preston.
The conversation started with an appraisal of the legal industry on the possible precipice of a recession. Firms are noticing that there is currently a drop in demand in practices like corporate, real estate, and tax. However, recent years have been hugely profitable, so while revenue may be contracting compared to recent years, there’s still demand for legal services.
When considering staffing levels, firms are looking to lessons learned from the 2008 recession. During that time, the two schools of thought law firms used to deal with the global climate were to adjust headcount and increase billing rates or to cut compensation and try to keep people employed. Firms who chose not to increase rates found it took them 7 to 8 years to catch up with firms who continued to increase billing rates throughout the last recession.
With regards to the immediate future of billing rates, there was a consensus that Herb Thomas put succinctly by saying, “the time is uniquely right for rate increases in an inflationary period and recession looming.” Firms can and are using the cover of inflation to increase their rates. As described by Lori Brown, operating costs have gone up significantly, and firms need to focus on retaining partners while being able to compensate staff. If firms miss out on rate increases, they run the risk of falling behind their peers.
If clients respond to rate increases with downward pressure, the panelists suggested there wasn’t one particular way to react. Per Jacob Morvay, each response will be bespoke to each firm. It will depend on factors such as a firm’s client base, the type of work the firm does, how the firm sees the marketplaces it operates in, and the quality of legal talent. Firms will likely prioritize their response by keeping the most important partners happy and working to maintain profit margins. Additionally, firms might respond by dealing with leakage, leveraging technology, and supporting the quality of life of the attorneys, both in the workplace and in their daily lives.
The panelists also discussed pain points and responses if a firm’s profitability suffers. Again, there was agreement amongst the panel that a firm’s reaction would likely be specific to the firm itself. Fundamentally, a firm’s leadership needs to be willing to have conversations about addressing decreasing profitability. Generally, firms would need to focus on increasing efficiencies. While there was acknowledgement that a firm can’t cut its ranks to achieve profitability, in moments like these, underperformers, consultants, and third-party providers are always at risk. The panelists emphasized that to safeguard one’s status in these moments, people need to be reminded of your value, and to never assume firm management knows you are doing good work.
Helping the firm stay profitable also means being able to say “no” to clients asking for a fixed fee or blended rate, because in these situations clients want to pay less. When faced with requests like these, firms should consider how to package their services in a way so that the clients see significant value in what is being provided. The panelists acknowledged that this could mean not responding to every single RFP or discount request.
The discussion largely revolved around the consciousness of risk mitigation in the near to medium-term future while maintaining profit. Lawyers are good at practicing law, but there’s often room for improvement when it comes to project management, understanding a firm’s finances, or business development. Given the uncertainty of the future, lots of lawyers will benefit from the services, skills, and perspectives provided by legal marketing professionals.