A report released this month doesn’t lay out a rosy outlook of the national BigLaw market.
The report outlines decreasing attorney productivity and lost revenue. A few experts on shifts in the legal market say the study’s results are well worth considering, but its definition of productivity isn’t the only way to look at things. And while Colorado isn’t immune to the pressures on the legal market defined in the report, the state’s small presence of major law firms makes it necessary to view the market through a different lens than that of major law firms examined by the study.
The State of the Legal Market report, released by Georgetown Law’s Center for the Study of the Legal Profession and Thomson Reuters, comes out annually. This year’s report highlights factors such as flat demand, decreasing profit margins, declining revenues, a drop in productivity and loss of market share to other types of legal service providers as threats to law firm profitability. The report goes further to say that firms might not be prepared to take on the downturn because strategies firms have used to mitigate past slumps, such as raising hourly rates and cutting attorneys and staff, likely won’t be as effective anymore.
Productivity is traditionally defined as hours billed per lawyer each year. The study focused mainly on BigLaw and defined firms below the top two tiers of the AmLaw rankings as midsize. According to the report, the average lawyer today bills 156 fewer hours annually compared to the beginning of 2007, which results in lost revenues of $74,100 per lawyer for firms. The report calculated the figure based on an average hourly rate of $475.
Eli Wald, a law professor at the University of Denver Sturm College of Law, explained that large law firms employ only about 10 percent of lawyers in the U.S., and because only a small number of them have a presence in Colorado, the report’s applicability to Colorado should be taken with a grain of salt.
“We only have a handful of large law firms, and they account for a lot less than 10 percent [of lawyers], so we need to make sure that we’re comparing apples to apples and not apples to oranges,” he said.
He explained differences in base targets for billable hours are one key distinction between a firm in a primary market, such as New York or Washington, D.C., and that in a secondary market like Denver.
A base billing target in Colorado might be 1,800 hours per year, Wald explained, while firms in the biggest markets may have targets upward of 2,000 hours, and the difference has an important implication for productivity.
“You might think in that context, that if the decline is 156 hours, to begin with, maybe the decline is not undesirable,” he said. “There may be a loss of revenue, but it may be that the loss of revenue ends up rendering the hours more sustainable over time, and then the firms are able to retain talent that otherwise leaves.”
Consultant John Boyd, who teaches about law practice management at the University of Colorado Law School, said law firms tend to respond to downturns with layoffs because raising billing rates and decreasing partner profits are alternate ways for reducing costs that have not been well received in recent years, he said, and salaries comprise a huge part of law firms’ expenses.
But he said the traditional definition of productivity doesn’t account for increases in efficiency that might present a gloomy outlook at first glance because of the drop in revenue from fewer billable hours.
“Real productivity is about doing work better, faster and cheaper,” Boyd said. He explained law firms have faced increased pressures from clients since the mid-2000s to lower billing rates and increase efficiency through strategies such as alternative fee arrangements.
Major law firms are especially subject to these types of pressures because they tend to work with large clients with the bargaining power to influence how they pay for legal services.
Boyd said firms can increase their real productivity through “unbundling” legal work into tasks that firms can delegate to different employees or to use technology in the most efficient ways.
“Hourly billing is a mindset that a lot of firms have, and the lawyers charge for their input, and not their output, which could be something like results,” he said.
Wald said Colorado firms can use the advantages of a midsize market to help mitigate pressures faced by the biggest firms, such as relatively lower fees, specialized expertise and more attractive situations for partners. Law firms in secondary markets tend to have a high partner-to-associate ratio, closer to 1:1 than the 1:3 common to big-market firms.
Wald explained this makes it more difficult to adapt by downsizing staff, but could also make Colorado a more attractive market because of the decreased likelihood of firing partners or de-equitizing them.
Colorado firms can also capitalize on the broader range of expertise they have over major-market firms, Wald added.
He explained the major firms tend to have expertise in corporate and transactional work, but Colorado firms also have expertise in markets such as water law and the energy sector.
“They respond by trying to offer things that large law firms outside of our state have a hard time offering,” Wald said.
— Julia Cardi