Managers of law firms have seen the future, and the future looks lean.
Big firms - and many small ones, too - still sport hefty profits almost six years after the financial market meltdown unleashed tumultuous changes, from downsized firms and law schools to severely curtailed career dreams.
But pricing pressure from clients and the corresponding need to cut costs have become lasting features of the legal landscape.
That is the major takeaway from a survey by legal-consulting firm Altman Weil of managing partners at more than 300 U.S. law firms with 50 or more lawyers. In interviews conducted in March and April, law firms told the Newtown Square-based company that clients are driving the need for cost-cutting and the move away from hourly billing to non-traditional charges, such as flat rates and contingency fees.
If it were only that, Altman's survey wouldn't add much to what most lawyers already know from their daily lives to be true. It's a very tight market out there: Legal spending has been anemic, even as pay for firms' top lawyers remains very high, and for many firms the path to profitability has been through cost-cutting, not adding business.
But the truly revealing data show how radically attitudes have changed among law-firm leaders. More than nine out of 10 respondents to the survey said they expected ongoing pressure from clients on price. That is more than double the number of managers who answered the same question affirmatively in 2009, the first year of the Altman survey.
The survey produced the same results regarding the need to cut support staff, competition from other firms on profitability, and use of non-staff contract lawyers. Only a small percentage of partners answered in 2009 that those tactics would be permanent features of the big-firm landscape. By 2014 though, more than two-thirds said they are embedded in law-firm management strategy.
"In the face of discounted rates, more work being taken in-house, and the unwillingness of clients to pay high fees for perceived low-value work, something has to give," said Eric A. Seeger, an analyst at Altman Weil and an author of the report. "It is going to be harder to sustain year-over-year profitability gains, the way we had been seeing for so many years."
There is, as Reed Smith L.L.P. global head of strategy Michael Pollack remarked a few years back, a normal tendency during difficult times to project the present endlessly into the future, as if a bottom never will be found and fortunes won't change. But sometimes a gloomy outlook is based in reality.
What big law firms have going for them is the inefficiency for large public companies to staff for every legal contingency. It is also not so easy for a company to disentangle itself from its law firm. Relationships matter, and as everyone who has had a bad experience with a contractor can attest, selecting a service provider based on price alone can be disastrous.
The Altman survey shows that so-called mega-firms, the firms with 1,000 or more lawyers, have been much more aggressive in establishing new business practices, such as alternative-pricing structures that enhance efficiency and leave clients feeling they are getting more value. At least two big firms in Philadelphia - Morgan, Lewis & Bockius L.L.P. and Reed Smith - are moving ahead with these pricing strategies. Hundreds of law firms around the country now have so-called pricing managers, many of whom are not lawyers, to help firms move away from charging clients by the hour.
But the profession remains resistant to change. One of the other salient findings from the Altman survey is that many law-firm managers doubt that firms themselves will be the source of much change.
When asked where change would arise, 34 percent said that clients themselves would force change on firms. And 32 percent more said technology innovation would be the primary factor. Only 10 percent said that law firms themselves would be leading the charge.