Few observers of the legal market would disagree that, at least since 2008, the market has changed in fundamental ways. Not only has demand growth slowed dramatically, but the competitive dynamics of the market have shifted as well. Clients who once deferred to their outside law firms on all key decisions
impacting the legal services they purchased no longer do so. Instead, clients increasingly demand that outside counsel offer more efficient services with more transparency into both work processes and costs. Clients are also more prepared than ever before to disaggregate matters, to retain work in-house, and to bring in additional (even non-traditional) service providers – all in an effort to reduce costs and improve efficiency.

One overall impact of these market changes has been the slow but steady erosion of law firm share of clients’ total legal spend. That erosion, combined with sluggish growth in overall legal expenditures, has resulted in a dramatic increase in competition in the market for law firm services. As firms have
scrambled to meet this new competitive challenge, the market has noticeably segmented, with a relatively small number of firms emerging as highly successful while most others continue to struggle with the unrelenting pressures of an increasingly unforgiving market.

Thus far, most firms – even those performing at the lower end of the economic scale – have been able to maintain some semblance of stability by bolstering their PPEP through an intentional thinning of their ranks of equity partners, aggressive expense management, and annual rate increases (albeit smaller increases than prior to 2008). Now, however, the effectiveness of those levers is beginning to wane. In most firms, there isn’t much additional trimming that can be done in the equity partner ranks. (Indeed, some firms are now moving away from two-tiered partnerships altogether, citing the need to give non-equity partners more “skin in the game.”) Expense management has been quite successful over the past several years, but with annual expense growth in most firms now hovering at around 3 percent, there isn’t much fat left. As for annual rate increases, as previously noted, under mounting pressure from clients, there has now been a discernible slowing in the growth of worked rates, combined with a continuing decline in realization. All of which is to say that the economic pressures felt by most firms are not likely to dissipate in the foreseeable future. Under these circumstances, it would seem that more firms would be actively embracing the need to change their basic operating models – to design and implement new approaches to staffing and legal work processes, to explore new opportunities for collaboration with other service providers, and to adopt and market innovative strategies for the pricing of their services. While a few firms have been proactive in pursuing these opportunities, the vast majority has not. Like Kodak, they have been locked in a kind of denial driven inertia, a belief that somehow the model that brought them past success will see them through now as well. As with Kodak, their approach might work for a while, but ultimately the firms that succeed will be those that not only understand the dynamics that are driving the current legal market but also have the courage to make the changes necessary to respond to them.

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