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Law Firm Revenue Report Cautiously Optimistic, Argues for Change

By Gabriella Khorasanee, JD on March 10, 2014 | Last updated on March 21, 2019

"Failure is not fatal, but failure to change might be." -- Coach John Wooden

Those are the words that introduce Citi Private Bank's 2014 Client Advisory on law firm revenue. Noting a 2.7 percent growth in revenue in the first three quarters of 2013, the study noted a "fundamental shift in the market for legal services," which led to its disappointing prediction they "do not project a return to pre-2008 levels of performance."

Because of the changed demand environment for legal services, law firms will need to make internal changes to avoid the fates of Dewey & LeBoeuf and Patton Boggs. Here, we'll take a look at what law firms are doing to manage profit margins and costs, and what they can do to improve.

Trimming the Fat While Growing

The study noted a trend that firms are reviewing the performance of equity partners, and reducing the partner head count depending on performance, while also citing lateral hiring as a tool for growth. Firms should look at practice areas that may be financial drains, and decrease partners in those areas. On the flip side, a great way to beef up a potentially lucrative practice area is with hiring laterally -- the firms just need to be sure that the new hires are a good fit and meld well with the firm culture.

Hiring Lower-Cost Lawyers

The lag in new associate hiring over the years means that there are fewer lower-cost attorneys at law firms. Recognizing the need for lower cost services, the study states that 70 percent of the firms surveyed "are using permanent, lower cost, non-partner track lawyers," and views "this as a permanent shift in the legal staffing model."

For large firms looking to increase revenue, this lower cost option may be a potentially huge area for growth. Perhaps firms can bring on lower cost alternatives in-house, such as focused groups in e-discovery or compliance, rather than sending that work out externally. That way, firms can offer their clients more comprehensive service.

Don't Sell the Firm Short

The study noted the pressure law firms are getting from in-house law departments about costs, and noted the growing use of alternative fee arrangements. Another growing trend the study noted is pre-negotiated discounting, used together with alternative fee arrangements. Some law firms have even hired people to project-manage case loads, with one of their main responsibilities being to keep an eye on profitability. While you want to accommodate corporate clients, you have to make sure that you are still maintaining a margin on the services the firm provides.

Effective Management

The study noted that "to be effective, the firm leader is best performed as a full time role." We're seeing something similar happen in corporate legal departments with the growing addition of Legal Department Operations Managers taking care of the "business" of the law department. Law firms may want to take note and have partners focus on their clients, and hire another lawyer just to deal with the management of the firm.

While firms are not at pre-2008 levels, the study is cautiously optimistic about growth. The legal industry is at crossroads, with the landscape changing. The firms that change their profit models to adapt will be the ones that come out ahead.

What is your firm doing to adapt to the changing legal landscape? Let us know at @FindLawLP on Twitter.

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