This is our 25th annual report on what’s going on in the legal profession, not only in the United States but also in other parts of the world. Much has changed, of course, particularly in the last five years. As always, some of our findings are obvious and we note them because they may have unexpected consequences. Other findings are included with little commentary, but we believe they may be significant now or in the future. 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 for many years to come.
Red Hot Practice Areas
Energy. This area is red hot for many firms in certain foreign markets and throughout the United States, but particularly in Texas, Ohio, North Dakota, South Dakota, West Virginia, and western Pennsylvania. Oil, natural gas, and coal are the main drivers. Alternative energy sources (for example, wind-driven and solar) are almost cold.
Regulatory. Federal and state regulatory developments will affect many industries, particularly in health care, energy, and financial services.
Health Care. Most provisions of the Patient Protection and Affordable Care Act (“Obamacare”) went into effect Jan. 1, 2014, with due dates of some provisions extended because of operational delays and difficulties with the National Health Care registry website, adding more confusion to a broad and complex area. Questions remain about certain issues, including how state and federal health care exchanges will work and whether some employers will stop providing health insurance to their employees.
Firm Management and Business Development Issues in 2014
In addition to issues affecting legal practice areas, the 25th annual “Hot, Not” report noted the following trends in firms’ business development practices and law office management.
Issues Affecting Business Development
Client Feedback. Despite its importance, a recent Martindale-Hubbell report confirms that getting feedback is still more honored in the breach than in the observance. Sad.
Social Media. Using social media continues to be one of the most popular business-development strategies – or is it “marketing”? Either way, in both content and delivery, social media are still hot, with LinkedIn and Twitter regarded as the most productive.
Content Marketing. Content marketing is now being referred to as the “legal marketing buzz phrase of the year.” [Watch for a column on content marketing in the April 2014 Wisconsin Lawyer.]
Business Development Versus Marketing. More firms are putting increased emphasis on business development and cross-marketing to current clients as compared to “marketing” to prospective new clients.
Marketing by Industry. This certainly is not a new strategy, but now a growing number of firms, such as McGuire Woods, are forming and marketing additional industry teams instead of practice groups. Actually, both approaches are needed. Some clients want substantive area experience while others want knowledge of their particular industry.
Chief Marketing Officer (CMO). The CMO’s role is becoming even more strategic, to offer ideas and provide implementation on issues that are important to clients such as pricing, business analysis, and project management.
Issues Affecting Law Firm Management
Hourly Rates. Many firms, particularly the largest ones, have raised their rates – again! But that’s not the whole picture. You have to look beyond the standard rates. Except with “bet the company” work, these firms then offer widespread discounts and write-offs, which result in lower realization. In fact, as reported in our mid-year update, full realization – the percentage of collections compared to the dollar value of billable time (DVBT) – has continued to decline. Another factor contributing to lower realization is the increase in aged accounts receivable as clients take longer to pay and contest firms’ charges.
Alternative Fee Agreements. While many clients exert pressure for something other than hourly fees, what they are really seeking is transparency: What will the total legal bill amount to? Fixed fees are obviously one approach but so are hourly fees with a cap or a base fee with a bonus or “kicker” based on results. In other words, the billable hour is not dead.
Smaller Firms Are Getting a Bigger Piece of the Pie. Mid-size and small firms are receiving more work that used to go to big-name firms. According to the Wall Street Journal, mid-size firms are now getting 41 percent of the big-ticket litigation. Three years ago they got only 22 percent.
The reasons? 1) Many smaller firms have partners and associates who were trained at the country’s biggest firms and then left; 2) their rates are lower; and 3) lawyers at these firms are more attentive to their clients’ needs and desires than are lawyers at the large firms.
Entry-Level Hiring. Mid-size and smaller firms continue to benefit from the availability of qualified laterals who have either been pushed out of large firms or leave of their own choice for a different type of environment. However, some of the mid-size firms continue to hire young lawyers as opposed to laterals because, as one managing partner put it, “There’s a deep talent pool and it’s a buyer’s market.”
Succession Planning. This continues to be one of the hottest and most important issues. Small and mid-size firms are now recognizing this, too. It involves much more than transitioning clients to remaining lawyers in the firm. Many other factors must also be addressed, including retirement funding, mandatory retirement, firm infrastructure, compensation, and grooming future firm and practice leaders. [See the article “Succession Planning: Where Will Your Firm’s New Leaders Come From” elsewhere in this issue.]
Virtual Law Firms. The trend continues. But what is a “virtual law firm” and are they here to stay? Chad Burton discusses these issues in his recent piece on the excellent “Attorney at Work” website. His conclusion may surprise you.
Malpractice Claims. Although there are no definite figures yet for 2013, according to seven major insurers the number of law firm malpractice claims increased last year as angry clients filed suits over conflicts of interest and other alleged missteps.
Hot Practice Areas
Financial Services. Even for banking, the financial services area is hot. Initial public offerings (IPOs) have been surprisingly hot but may be showing signs of cooling.
Litigation. This is a hot practice area, but it varies widely by firm. “Bet the company suits,” however, are cooling. Large companies continue to send work to mid-size and smaller firms due to their lower billable rates.
Labor and Employment. Wage-and-hour and whistleblower suits continue to increase, and collective bargaining continues to be a hot issue.
Intellectual Property. Patent litigation continues to be hot because of infringement claims filed by 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. Garmin International claims to be the first company to fight back by using a new process, inter partes review (IPR), to avoid litigation. Trademark suits have also increased. Patent prosecution also continues to be hot.
Real Estate. This area is hot due in part to a big increase in multifamily-housing developments. The single-family-home residential market also has seen home prices inching up and double-digit sales increases in many states.
Corporate. This area is hot despite efforts by general counsel to keep more work in house. Mid-size and even some smaller firms continue to receive more work, in part because of their lower billable rates.
Practice Areas Getting Hot
Interns’ Rights. This is a small but growing area due to recent legislation in Oregon and proposed legislation in New York state to give unpaid interns the same protections as employees.
Privately Held and Family Businesses. These practice areas are getting hot.
B Corporations. This is a new legal category of company, created by B Lab in Wayne, Pa., that expands the entities’ fiduciary responsibilities not only to shareholders, but also to other stakeholders, such as employees, neighbors, and the environment. Nineteen states and the District of Columbia have passed B Corp legislation, and 850 companies now carry the B Corp certification.
Education. There are many issues in this practice area, but hourly billable rates remain low, as do profits.
Elder Law. Like it or not, we’re all getting older.
Alternative Dispute Resolution (ADR). The high cost of litigation has reawakened interest in mediation and arbitration.
Hot Geographic Markets
Asia and Latin America. High growth in national and regional economies continues to increase demand for legal services.
South Africa. International heavyweight Hogan Lovells acquired a major firm here.
Germany. As we reported a year ago, Germany, particularly in Frankfurt and Berlin, is an appealing market for U.S. and “Magic Circle” firms. (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.
Dubai. Morgan Lewis is the latest firm to plant its flag here.
Seattle. Established firms are growing here and new firms are arriving, particularly from California, due to the wide range of national and international businesses operating in the area. Hot practice areas include real estate, technology, intellectual property, and financial services.
Houston. Hot practice areas in this location continue to be energy, health care, and technology.
Ohio, West Virginia, and Western Pennsylvania. These areas are hot, particularly because of the Utica Shale Play. However, while production continues to rise, the pace of drilling natural gas wells has slowed in northern Pennsylvania in response to low gas prices.
Law School Trends
For-Profit Law Schools. A private-equity firm launched Infilaw in 2004, shortly after buying the Florida Coastal School of Law in Jacksonville. Infilaw then launched two other for-profit schools, the Phoenix School of Law in Arizona and the Charlotte School of Law in North Carolina. The schools have had no trouble getting students but, judged by other metrics, they have been less successful. Graduates’ bar-passage rates have generally been below state averages and so have job-placement rates. Now Infilaw is trying to buy Charleston School of Law in South Carolina but is running into opposition from alumni and students; it also is the defendant in two federal law suits.
Non-JD Programs. Enrollment has increased 13 percent in the last three years. Why? These programs are attracting people such as physicians and environmental consultants who do not intend to practice law but think they need grounding in legal basics.
Seeking New Paths for Young Lawyers. The New York City Bar Association is exploring some alternatives for young lawyers who are struggling to find jobs after graduation. One is to place them in apprenticeships with large banks and other employers. Another is to set up a law firm at which young lawyers could gain experience – and, it is hoped, earn a decent living – by helping individuals and small businesses that cannot afford market-rate legal fees.
What 2014 Holds for the Legal Profession: Another Perspective
In 2014, lawyers nationally should see more litigation, fewer full-service law firms, higher partner rates, more alternative-fee arrangements, more lateral hires, and more marketing via smartphones.
By Larry Bodine
Here’s what you can count on in 2014: a dozen full moons, a single Friday the 13th, two solar and two lunar eclipses, Mercury in retrograde three times, and no February 29. That much is certain for the legal profession. There are no guarantees for the 251 working days of 2014, but the following seems likely:
A Surge in Litigation in 2014. Research in both the Litigation Outlook 2014 by BTI Consulting and the Litigation Trends Survey Report by Fulbright & Jaworski predicts a surge in litigation in 2014. According to BTI, 61 percent of corporate clients expect to see a jump in the number of litigation matters they will handle in 2014.
Continuing Decline of the Biglaw Business Model. Over the last three years, the relative portion of legal work given to the largest, full-service law firms has declined from 26 percent of legal fees billed to only 20 percent, according to LexisNexis/Counsellink research. Fully 30 percent of legal work will go to firms with 50 or fewer lawyers. Of legal billings, 22 percent will go to “large enough” firms (200-500 lawyers).
Average U.S. Law Firm Partner Rates Are Increasing. According to the Enterprise Legal Management Trends Report, partners’ average rates increased 2.7 percent over the previous year (from a national average of $371/hour to $381), on top of a 2.5 percent increase during the previous 12-month period (from $362 to $371). The recession is over.
The partner average rate is of course an amalgam of different law firm sizes, practice areas, and locations, but it’s a reasonable indicator of how hourly rates are trending.
Expect More Alternative-Fee Arrangements. Alternative-fee arrangements (AFAs) accounted for 19 percent of firms’ revenue in 2013 – up from 16 percent in 2011, according to the Citi Hildebrand 2013 Client Advisory. It found that 16 percent of AFAs are more profitable than projects billed at an hourly rate. Another 40 percent are approximately equally as profitable as hourly projects, according to 2013 Law Firms in Transition.
Growing by Hiring Laterals is Preferred Growth Strategy, according to Citi Hildebrand. According to Altman Weil, 89 percent of law firms will pursue growth by hiring laterals. The last time there were more associates than partners at large law firms was 2008.
Smart Lawyers Will Get a Mobile Friendly Website. Gartner research reported that as of 2013, mobile phones overtook PCs as the most common Web access device. Lawyers who have websites that display well on a smartphone will generate new business and open more files. “Responsive design” is the Google-recommended method that ensures a law firm’s website adapts to any size screen. Try a 60-day free trial offered by LawLytics in Tucson, Ariz., at http://bit.ly/TrialMobile.
Additional Predictions
For the curious among you, see the following resources for additional reports about the status of the legal profession:
For more predictions, see 21 Expert Predictions for the Legal Industry in 2014. For a good time, visit Lawyers & Astrology to see which law practice the stars recommend for you.
Larry Bodine, Seton Hall 1981, is the director of publications for the National Trial Lawyers Association. A lawyer, journalist, and marketer, Bodine writes often and advises law firms on business development.
Cisco Systems is exploring a similar route. It plans to team up with the University of Colorado Law School on a program in which students will be paid to work full time in the company’s legal department while taking extra classes to make up for missed coursework. The goal of Cisco’s general counsel is to bring on board several companies and firms that will take two or three students a year on this basis.
Pro Bono. Despite reports showing a drop in the number of pro bono hours in the last few years, to paraphrase Mark Twain, “the reports of its death are greatly exaggerated.” There are many examples in addition to New York state, which has increased the voluntary goal for lawyers from 20 to 50 hours per year.
The lead article in the November 2013 issue of Of Counsel addressed the subject and included examples such as the IMPACT project, launched by the Association of Pro Bono Counsel, and the programs of several major law firms to provide nonlitigation pro bono opportunities. The author concludes by stating, “One thing that’s certain is that the young generation of lawyers has as much, or perhaps more, interest in performing free legal work and giving to their communities as their older colleagues,” and that “law school graduates are attracted to firms that have successful pro bono programs.”
Other Issues
General Counsel Compensation. A survey recently released by Equilar Inc. reports that median total compensation for general counsel at Fortune 1000 companies has jumped almost 5 percent from last year. The reasons? Corporations’ profits are rising even as they face a host of new regulations and other legal challenges, and chief legal officers are being given broader responsibilities that require business as well as legal acumen.
Merger Mania. Although talks involving two major mergers were called off right before Thanksgiving 2013, the number of completed mergers shot up in 2013, and more are under consideration. Some have resulted in even larger international firms, while others have mostly involved larger or mid-size U.S. firms acquiring – and that is the proper word – much smaller firms.
However, historically, half the mergers fail and should not have occurred. Furthermore, some top legal officers at Fortune 100 companies say this merger mania does not impress them. One example: IBM general counsel Robert Weber said, “I’m pretty skeptical about the value these big mergers give to clients.” [See the sidebar, “Law Firm Combinations Up 47 Percent in 2013.”]
Legal Project Management (LPM). There is no question that LPM is necessary, but a growing number of chief operating officers (COOs) believe that the process gets more attention than do the results.
Nonlawyer Competition. Several developments indicate that nonlawyers may play a larger role in providing legal services. The Washington State Supreme Court has approved a rule creating nonlawyer legal technicians. The New York State Bar has recommended going ahead with a pilot program to permit trained nonlawyer advocates to provide out-of-court assistance in specific areas to low-income New York residents. In California, the State Board of Trustees has expressed interest in a limited-practice licensing program. In August, the American Bar Association (ABA) said it was softening its position on fee sharing with nonlawyers.
Add these developments to the ongoing litigation on whether firms can have nonlawyer owners (which was discussed in last year’s report), and it appears nonlawyers will have a strong effect on the profession.
Nonlawyers to Have a Voice in the Profession? Professor James Moliterno of the Washington and Lee School of Law suggests letting nonlawyers serve in leadership and policy position in the ABA and state bar associations. He wrote, “Turning to creative nonlawyers presents the most advantageous way for the legal profession to grow and change on its own terms.”
Questions Raised About Litigation Funding. As reported in our mid-year update, “a new wave of investors are funding law suits in hopes of collecting when verdicts come down.” Kent Gardiner, chair of Crowell Morning, stated, “I think you would find a notable percentage of the Fortune 100 have engaged in some kind of funded litigation.” But Baker Bott’s Lisa Thomas wrote that the communication necessary for litigation funding groups to perform their due diligence on the merits of cases raises discoverability issues for eventual litigation. Another concern of critics is that third-party investors will exert undue control over legal decisions and the overall cost of litigation will increase.
Divorce is Getting Easier. Technology is making this practice area easier. Wevorce, a start-up online service, has run a pilot program that separates the process into discrete steps that are easily managed without requiring the parties to go to court. And Philadelphia-based Fox Rothschild has launched a divorce app designed to provide resources and tools for the various stages of the New Jersey divorce process.
Conclusion
The outlook for the profession is much better than the pessimistic pundits are predicting. Between retirements and reduced hiring of law school graduates, the number of lawyers will gradually decrease. But if you look at the total market for legal services and not just the number of lawyers, there will be further growth, as new laws and regulations are passed and more nonlawyers and entities exist to provide them.
Law Firm Combinations Up 47 Percent in 2013
A surge in acquisitions of small firms drove the increase in law firm combinations.
There were 88 law firm mergers and acquisitions announced in the United States in 2013. The total is up 47 percent from 2012, and is the highest number of law firm combinations recorded in the seven years that Altman Weil MergerLine has been compiling data.
“The surge in 2013 numbers was driven by a boom in acquisitions of small law firms,” says Altman Weil principal Ward Bower. “These kinds of deals are smart, low-risk moves to enter new markets and acquire new clients, and we expect the trend to continue in 2014.”
Of the 88 law firm combinations reported in 2013, 82 percent were acquisitions of firms with 20 or fewer lawyers. This number of small firm acquisitions as a percentage of all combinations has been growing steadily since 2007 when only 63 percent of deals fell into that category, according to MergerLine data.
Even among the larger 2013 deals, most involved a bigger firm that was at least five times the size of a smaller firm with which it combined. The noteworthy exception was the announced merger of Stinson Morrison Hecker, a 300-lawyer firm headquartered in Kansas City and Leonard Street Deinard, a 200-lawyer, Minneapolis-based firm.
“Most law firm combinations these days are really acquisitions, not mergers,” commented Bower. “The complexity of a true merger of equals is exponentially greater. There are any number of potential pitfalls on the way to the altar.”
Geographically, the Southern United States was the most active single region for law firm combinations in 2013, representing 25 percent of all recorded deals. Fifteen percent of all deals occurred between firms in the Middle-Atlantic region. Multi-regional combinations accounted for another 30 percent of the total.
There were five cross-border combinations in 2013, representing 6 percent of all deals. The largest was Hogan Lovells’ acquisition of 120-lawyer Routledge Modise in Johannesburg, South Africa.
The complete list of 2013 law firm mergers and acquisitions as well as an archive from prior years and a seven-year trend summary are available online at www.altmanweil.com/MergerLine.
Source: Altman Weil Inc., News Release of Jan. 8, 2014, used with permission.
