The Haves and Have-Nots: Why Now is the Time for Law Firms to Invest in Innovation

Invest in Innovation

The Haves and Have-Nots: Why Now is the Time for Law Firms to Invest in Innovation

by Chris Cartrett, Executive Vice President

There have been several indications suggesting business is better for law firms this year than in previous years. We see this in both sentiment analysis and empirical financial data.

For example, our own polling of business of law professionals found 49% said business in their law firm was better off this year as compared to last year. Another 8% said it was much better. A cross-analysis by law firm size showed that the larger the firm, the more likely the respondent was to say business is better.

While our survey results were published in May of 2018, newer empirical reports tabulating numbers for the calendar year have similar findings. For example, the 2019 Report on the State of the Legal Market, by the Center on Ethics and the Legal Profession at Georgetown Law and the Thomson Reuters Legal Executive Institute, found “the market as a whole experienced healthy average revenue growth of 5.5 percent for the year.”

It’s a positive development especially since the market has struggled since 2008. However, there were also warning signs. Some aspects of the legal market report mirrored the sentiment we saw in our survey a year earlier: larger firms and specialist firms did better than the rest.

The report found the industry results “were driven significantly by AmLaw 100 firms (and, indeed, within that grouping, by AmLaw 50 firms), as well as by some niche firms in the midsize group. Performance by other firms – including particularly firms in the AmLaw Second 100 and some firms in the AmLaw 100 and midsize groups – were well below the market averages.”

These findings are not isolated. The 2019 Client Advisory by the Citi Private Bank and Hildebrandt Consulting drew similar conclusions. Bruce MacEwen of Adam Smith, Esq. meticulously analyzed the Citi data and concluded:

“In short, demand for law firm services may be growing again in real, inflation-adjusted dollars for the first time in nearly a decade, but which firms are getting their slice of that larger pie is more up for grabs than ever.”

Taken together, we believe these data points underscore the notion that this isn’t just a matter of some law firms outperforming others. Instead, it suggests the gains experienced by distinguished law firms are coming at the expense of their competitors. In other words, the increase in legal demand may very well be disguising the true delta – this isn’t just a +1 on the scoreboard for the distinguished, it may also be a -1 for everyone else.

Clients are Changing; Law Firms Must Change with Them

Any signs of growth are a welcome indication in the legal community, but law firms can’t overlook the fact that the industry has experienced an irreversible metamorphosis.

It’s a fact that clients have changed – in-house teams are handling more work and alternative legal service providers have conceived new ways of doing things that don’t require a lawyer’s intervention (just look at all the predictions about ALSPs). While we believe GCs will always need law firm services in some way, shape or form, there are more and more entries on an invoice for which they are unwilling to pay.

The Report on the State of the Legal Market drives home the reason why:

“There will always be ‘bet the company’ or other unique cases in which clients will insist on the best lawyers they can find, with no real consideration of cost. But those instances are few and far between. In the vast majority of cases, clients will award work based on their assessment of which firm can perform the work most predictably, efficiently, and cost-effectively – again, with quality being assumed.”

How are those AmLaw 50 firms – and those filling a niche – earning those results? I’m certain some of those gains have come in part because those firms have invested in process, innovation and technology all along. These firms are actively looking for opportunities to serve clients in new ways – and act when they find one.

Maybe it’s the Billable Hour, but Probably Not

When it comes to law firm innovation, the billable hour is a usual suspect. Certainly, there are firms that have found a competitive edge in alternative fee agreements, but industry-wide growth of AFAs has been flat for years. GCs have only dabbled, and many will readily admit they are comfortable with a billable hour because they grew up in a law firm before moving across the table.

This in no way detracts from the benefits of AFAs. Firms that can offer these profitably are to be admired. AFAs provide predictable legal expenses that incentivize efficiency, which is the very point: innovation isn’t necessarily about changing the billable hour, it’s about improving law firm efficiency. If you can estimate the number of hours based on historical data and stick to it – where quality is assumed – the result is the same.

Easy areas to improve efficiency are centered on operations: client intake, conflict checks, time management, research, knowledge management, reporting, invoicing, and billing, among others.

Billing is a classic example. As client requirements have become more complex, some law firms have responded by assigning more eyeballs to review these in hopes of avoiding a billing error. If those eyeballs belong to lawyers, that is more time they spend on administrative tasks rather than revenue-generating activities.

The economics simply don’t work: you can’t have six people passing a pre-bill back and forth for two weeks just to invoice a client. If that invoice winds up with errors and appeals anyway, then your losses multiply. Clients are adding increasingly complex billing requirements and they are using technology to enforce these. Law firms cannot respond to this by adding headcount just to print pre-bills and mark them up with a pen.

Importantly, this is just one example. There are dozens more like this within law firms that are ripe for improvement. My assessment is that the firms that have been doing this for the last several years are those that appear in legal market reports as outperforming the rest. In addition, firms that are enjoying the current upside are doubling down on their bets while the times are good.

Change Management is Usually the Caveat

While there should be a sense of urgency to innovation, we also can’t get carried away or panic. Law firms that do, tend to take on more than can handle. This is a pitfall for throttling a project before it even gets started.

Why? Because change management will derail any effort.

Firms that want to improve processes need to have an executable change management plan to accompany innovation initiatives. Instead, pick a well-defined problem and then take it one steady step at a time. Indeed, now is the best time to start or expand innovation efforts the industry hasn’t seen in a decade.

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