As always, some of our "Hot, Not" findings are obvious. Others are not, but we think they might be significant. What is most important to recognize is that, more than ever before, the outlook for each firm will vary depending on its size, practice areas, strategic focus, and geographic markets. The resulting picture is a montage of a profession that is in a state of flux and will continue to be so, not just in 2013 but for many years to come.
Red Hot Practice Areas
Energy. This area is red hot for many firms throughout the United States but particularly in Texas, Ohio, West Virginia, and western Pennsylvania. Oil and gas are the main drivers while air and water quality continue to be significant environmental issues.
Health Care. Most provisions of the Patient Protection and Affordable Care Act ("Obamacare") go into effect Jan. 1, 2014, and there are still questions about certain issues. Major ones for employers, their advisors, most states, and even the federal government are the setting up of health care exchanges and whether some employers will stop providing health insurance to their employees.
Robert Denney of Robert Denney Associates Inc. provides strategic management and marketing counsel to law firms, companies, and nonprofit organizations throughout the United States.
Sports Law. As discussed in Steven T. Taylor's excellent lead article, "Mega-Deals, Media Rights, Replacement Refs, and Penn State Fuel Practice Area" in the November 2012 Of Counsel, sports law is not really a separate area because it involves various practice areas such as mergers and acquisitions, labor and employment, intellectual property, and advertising. For a discussion of Wisconsin lawyers building a practice in sports law, see "Sports and the Law: A National Niche and a Baseball Deal to Remember," by Joe Forward in the September 2012 Wisconsin Lawyer.
Hot Practice Areas
Intellectual Property. Patent applications have increased since the Leahy-Smith America Invents Act (AIA), passed in 2011, converted the patent system from a "first to invent" to a "first inventor to file" system. Attorneys Ed Pardon and Shane Brunner discuss the significant reforms to the law in "Boosting Creative Competition: America Invents Act" in the October 2012 Wisconsin Lawyer.
Patent Litigation. There has been a substantial increase in the formation of nonpracticing entities (NPEs), often referred to as "patent trolls," which buy portfolios of patents and then bring suits against companies that appear to be infringing on them. As a result of the AIA, the courts now play the primary role in determining damages. Furthermore, the U.S. Justice Department has just started examining whether NPEs may be disrupting competition in high-tech markets.
WebXtra Article
See Bob Denney's "The Newest Big Issue: Non-Lawyer Ownership or Investment in Firms" for background and a discussion of the pros and cons of this issue: robertdenney.com/communiques.html
Banking. The Dodd-Frank Act affects all banks, whether or not they are large enough to require examination by the Consumer Financial Protection Bureau. Most of the laws needed to implement the Act have not yet been passed or taken effect.
Regulatory. Federal as well as state regulatory developments will affect many industries besides banking.
Labor and Employment. Wage-and-hour and whistleblower suits continue to increase, and collective bargaining continues to be a hot issue. In addition, the National Labor Relations Board has begun enforcing areas that also affect nonunion employees. This includes issuing new guidelines on social media policies. In the May 2012 Wisconsin Lawyer article, "Retaliation: New Developments in State and Federal Employment Law," attorney Anna Pepelnjak explains how recent decisions will make it easier for employees to prove retaliation cases while making it harder for employers to define, and therefore avoid engaging in, retaliatory conduct.
Practice Area Getting Hot
Online Gaming. There is a growing movement at the federal level and in some states, such as New Jersey, toward legalizing Internet gambling, the high-growth sector of the gaming industry. Currently unknown is whether Wisconsin will join this movement and, if it does, how legalizing online gaming may affect the state's 26 casinos and bingo parlors.
Financial and Firm Management Trends 2013
In addition to trends affecting legal practice areas, the 24th annual "Hot, Not" report noted trends in law office management, including how firms are capitalized, the issue of nonlawyer investors in firms, partner compensation and responsibilities, succession planning, associate hiring and salaries, billable rates and client expectations, business development and more.
Billable Rates. Despite client pressure to reduce fees, in the last year billable rates rose 3.4 percent for partners and 7.5 percent for associates, according to a survey of 550 firms by Valeo Partners, a legal consulting firm. Now two other surveys have just reported that many firms will increase rates again in 2013. Even if they intend to then discount these increases, a smarter move by these firms would be to announce they are not raising their rates next year.
Backlash on Charges. In addition to responding negatively to fee increases, clients are now objecting to firms' charges for such items as legal research, photocopying, faxes, and lawyers' meals. They regard these as normal overhead and part of a firm's cost of doing business.
Partner Compensation. The spread from highest-paid to lowest-paid has increased dramatically and is now up to a ratio of 20:1 or even more in some BigLaw firms. The drivers include the bonuses and guaranteed compensation being paid to lateral entries. This compensation trend is causing not only dissatisfaction among "homegrown" partners but also financial problems for some firms. In "Untying the Gordian Knot: Law Firm Compensation," March 2012 Wisconsin Lawyer, attorney Michael Moore reviews the most common compensation systems and why effective compensation systems must be aligned with a law firm's culture and values.
Nonequity partnership. The number of firms offering nonequity partnership positions may have declined a little. One reason could be the substantial retirement incentives a few firms have offered.
Lateral Partners. Various surveys and reports indicate that firms will continue to recruit lateral partners, because firms' number one goal is to generate revenue and the quickest way to do that is to recruit partners who can bring substantial books of business. But we ask, "Haven't these firms heard about Dewey LeBoeuf?" (See the "Law Firm Bankruptcies" entry below.)
Integrating Laterals. Despite the continuing trend to hire laterals, few firms have in place programs to integrate them. This is true even in MidLaw and SmallLaw firms that do not hire first- or second-year associates but recruit third and fourth years.
Shrinking Partner Offices. Ten years ago, the average partner's office was 600 square feet. Now, the average is down to 225, according to Studley Inc., a real estate firm that represents tenants with offices in key U.S. markets nationwide and in London.
Mandatory Retirement. Because some senior partners want to – or need to – continue practicing, and because of an NLRB suit several years ago, many firms have either dropped or are not enforcing their mandatory retirement policies. This is reducing the "generational turnover" needed for both management and client-responsibility succession. In view of this, some firms are offering retirement incentives or asking the more senior partners to submit a personal business plan that addresses both retirement and succession.
Associate Hiring. The cut-back in hiring of first-year associates continues. This will eventually create a generation gap, affecting future management and client-responsibility succession.
Associate Starting Salaries. According to the National Association for Legal Career Professionals (NALP), the median starting salary for law graduates in the class of 2011 dropped 5 percent from 2010 and 17 percent from 2009. In BigLaw firms, the median starting salary remained at $160,000, but it ranged from $40,000 to $65,000 for new hires elsewhere.
Staff and Contract Attorneys. BigLaw and MidLaw firms continue to increase their percentage of staff and contract attorneys. In a few firms, some contract attorneys are even considered for equity partnership if they are in major, higher-revenue practice areas.
Gender Gap. It continues. According to the National Association of Women Lawyers, women still account for only 15 percent of equity partners, 26 percent of nonequity partners, and 46 percent of associates. They also only account for 30 percent of active federal district judges.
Pricing Director. Although pricing director is a new type of position, BigLaw firms have filled more than 50 such spots in the last 20 months. Toby Brown, Akin Gump's first director of strategic pricing and analytics, describes them as "the hot new hires of 2012." According to Susan Hackett, CEO of Legal Executive Leadership, pricing directors help their firms determine costs and then the best price lawyers should quote clients for the profitable performance of their services.
Nonlawyer Managers. For years, larger firms have had practice-group administrators. Now several firms are hiring nonlawyers with business backgrounds to manage practice groups so that the lawyers can focus on client work and relationships.
Capital. In 2012, Greenberg Traurig issued a call for additional capital from equity partners, its first in more than 10 years. CEO Richard Rosenbaum stated the action was taken to add to the firm's "equity cushion" because of the "current uncertainty in U.S. and global markets." However, most law firms are under-capitalized. If they are going to survive and achieve their growth objectives, some may need outside investors.
Back-office Cost Cutting. Big firms continue to learn from their large corporate clients by either outsourcing certain functions or moving billing, human resources, and other support functions to less expensive locations, such as Lexington, Ky., and Rochester, N.Y.
Law Firm Bankruptcies. Austin firm Bertolino has become the second known firm to file for bankruptcy, following mega firm Dewey LeBoeuf earlier in 2012. Several legal pundits say there will be more. Paul Lippe, founder and CEO of "Legal OnRamp," predicts at least 10 more "AmLaw 250" firms will fail by the end of 2013. Bruce MacEwen, president of law firm business advisor Adam Smith Esq., says some law firms in the middle market also will fail.
Shrinking Market? Although MidLaw and SmallLaw firms are generally doing well, many BigLaw firms are confronting flat or declining revenues, decreases in partners' billable hours and, despite cost-cutting initiatives, rising expenses.
Cooling Practice Areas
Litigation. In "BigLaw" firms, litigation has probably had the most decline of any major practice area in 2012. However, it is still hot in most firms that concentrate exclusively in litigation and in "MidLaw" and "SmallLaw" firms because of their lower billable rates.
Financial Services. Except for banking, the financial services practice area is cooling. Initial public offerings (IPOs) are cold.
Bankruptcy. This could heat up if the economy does not show more strength.
Mergers and Acquisitions (M&A). This could heat up if the economy shows more strength.
Real Estate. This area might become warm because distressed commercial properties' still-low prices are attracting investors. The residential market may already be warm: home prices have been inching up, and sales increases in many states are in the double digits.
Warming Geographic Markets
Shanghai. Covington & Burling and Kilpatrick Townsend & Stockton are two of the U.S. firms that opened offices in Shanghai in 2012.
Seoul. The attractiveness of Seoul is a result of the U.S.-Korea Free Trade agreement (effective March 2012), which expands opportunities for U.S. exporters to sell more made-in-America goods to Korean customers.
Germany. For U.S. and "Magic Circle" firms, Germany is an increasingly appealing market. (The Magic Circle firms are the five leading law firms headquartered in the United Kingdom and the four or five leading London-based commercial barristers' chambers.) Germany has the largest population and strongest economy of countries in the European Union, but there are many strong German law firms, so competition is fierce.
Houston. High oil prices and a boom in drilling continue to attract firms from other states.
Ohio, West Virginia, and western Pennsylvania. These areas are heating up because of the shale boom.
Nashville. It may be the fastest-growing business center in the South.
International Mergers and Alliances. They are red hot! Australian firms are particularly active. Freehills merged with the U.K.-based firm Herbert Smith, and Mallesons Stephen Jaques announced it is merging with Beijing-based King & Wood. Now Middletons is in "advanced" merger talks with K&L Gates. Meanwhile, France-based Salans is merging with SNR Denton. U.S. firms are also active. Fulbright & Jaworski is merging with the U.K. firm Norton Rose, and Reed Smith has formalized a strategic alliance with Athens-based Papapolitis & Papapolitis.
Law School Trends
Law School Class Sizes. In light of the continuing poor job market for graduates, more than 60 of the 202 accredited law schools in the United States cut the size of their 2012 entering class.
Law School Applications. Applications to U.S. law schools numbered 65,119 in fall 2012, down 14 percent from the previous year. And the number of Law School Admission Tests (LSATs) administered in October 2012 was at the lowest level since 1999.
Law School Curricula. Schools continue to cut some traditional courses and introduce more practical skills, such as a course on corporate compliance at the University of Houston. Boston College of Law has created the position of faculty director of experiential learning.
Legal Education. The ABA has announced a task force to address the weak legal job market, the high cost of a legal education, and the delivery of legal services. The task force is expected to conclude its work in 2014. For the Dairy State experience, be sure to see "Pace of Change: Are Law Schools Keeping Up?" by Dianne Molvig in the August 2012 Wisconsin Lawyer.
Apprenticeships. An article in the January 2012 issue of The Wall Street Journal suggested that states ask law school graduates to serve one-year apprenticeships before they become eligible for admission to the bar. This suggestion deserves serious consideration. A graduate of medical school becomes a physician but, in most states, must complete an internship or residency before he or she can receive a license to practice. Why shouldn't the legal profession have the same requirement?
Pro Bono. New York recently became the first state to require law school graduates to perform pro bono work (50 hours ) before they can be admitted to the bar. This requirement will benefit the new lawyers, their eventual employers, and the entire legal profession.
Other Issues
Nonlawyer Investment in U.S. Firms. Nonlawyer investment will become a red hot issue! It is generating more debate as Jacoby & Myers files an even broader challenge against New York's rule prohibiting it, and the ABA considers presenting an option for consideration by its House of Delegates in 2013.
Bigger Role for In-house Lawyers. Responsibilities are expanding and pay is increasing for general counsel as they become part of top management, particularly in big companies in highly regulated industries. They continue to keep more work in-house and are building up their compliance teams to identify corruption and other issues before regulators do.
Online Legal Services. California startup firm LawZam is the newest online firm to enter this growing market by offering consumers free access, via video, to lawyers throughout the United States.
E-Discovery Vendors. In recent years, a few law firms have formed e-discovery practice groups. Now Drinker Biddle & Reath has become one of the first to form an e-discovery subsidiary to process data for clients.
Emergency/Disaster Plans. Hurricane Sandy and its aftermath make clear that law firms need to have disaster plans. Unfortunately, many firms affected by the storm did not, and others found their plans were inadequate. For good advice on putting together a plan, see attorney Tom Watson's article "Prepare a Disaster-Recovery Plan Before Disaster Strikes," in the July 2012 Wisconsin Lawyer.
"Deus ex Machina." A steadily increasing number of state courts are using digital technology to replace court reporters.
Courthouses Closing. Los Angeles recently became the latest – and largest – city to announce it is closing some courthouses because of funding shortfalls.
Conclusion
Yes, many large clients will keep more legal work in-house, and both the number and type of alternative legal-service providers will continue to increase. However, our "take" on the total legal market is that it will grow but will also become even more segmented, with some of the less-innovative firms falling by the wayside.
What trends and issues are you seeing and experiencing? Tell us about your experience. Post a comment at the end of this article.
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