The new normal of the post-Great Recession legal world continues to take shape in Wisconsin and around the country, with trends in areas like law firm economics, client expectations, emerging practice areas, lawyer recruitment and retention, and marketing and business development that often go beyond the merely evolutionary.

Jim Jones, senior fellow and director of programs on trends in law practice at the Center on Ethics and the Legal Profession at Georgetown University Law Center, remembers a conference speaker who made the point that human organizations go through long periods with a working model that everybody tinkers with to try to improve.

“Then, from time to time, revolutionary change happens, and a whole new model comes into place. It takes time for people to recognize that model has changed, and for a time, people continue to try to improve the old model,” he says. “A few outliers say, ‘We’re dealing in a whole new world.’ We think we’re probably at one of those turning points right now.”

As such, especially sandwiched between competition from both the Big Four financial services behemoths and online legal services providers, firms and lawyers should be challenging their traditional assumptions and business models, according to the “2019 Report on the State of the Legal Market” released by Georgetown and the Thomson Reuters Legal Executive Institute.

Overall Economics

That advice and overall thrust does not appear likely to change in the 2020 report, Jones says, adding that he expected law firms to have had a “decent” year in 2019 but not as successful overall as 2018 – and that firm revenues would be up more than demand.

“Demand is up a little bit, but demand is one of those troubling areas that has remained stagnant” since at least 2012, Jones says. “They’ve had pretty aggressive raises this year, not quite as aggressive as in 2018, but up in the 4 to 4.5 percent range. That’s still a lot lower than before 2007.”

The Georgetown-Thomson Reuters research also has shown that firms are doing better overall on collections, with realization rates remaining steady at between 84 percent and 88 percent depending on the practice area, after a period of decline, Jones says. Expenses are also “creeping up,” due at least in part to increases in associate salaries.

Probably the worst news that Jones sees is that productivity continues to decline, by probably 1 to 1.5 percent in 2019, because firms are adding lawyers more quickly than legal matters. “If I were to characterize the overall performance of the market, it’s essentially a period of relative stagnation in which firms have managed to do what they needed to do in terms of growing profitability for partners,” he says. “But they’ve needed to pull a lot of switches to do that.”

One of those “switches” has been slower growth, and in some cases reduced size, of equity partner headcount, Jones says. “We’re seeing more and more lawyers in different kinds of positions – more associates, more nonequity partners, more lawyers given all kinds of specialty titles,” he says. “They’ve managed to hold profits per partner where they needed to be – by that I mean, to avoid people leaving. It’s an exaggeration to say most firms, or even a majority of firms, are doing exceptionally well.”

Shifts in the Market

Flat demand for law firms does not mean that demand for legal services is flat, Jones says. “It’s an anomaly that over the same number of years demand has been stagnant, we have seen increases in corporate spend for legal services,” he says. “What’s happening to that money?” Some is staying in-house as more routine matters are kept there, he adds, while other funds are going toward the Big 4, legal process outsourcing firms, or legal placement management firms.

Based on a global survey by Thomson Reuters and Oxford University, Jones says the overall size of the alternative service provider market is more than $10 billion – small compared to the total legal services market, but growing year over year at more than 20 percent. “These are all services that law firms used to provide,” he says. “They charged a lot more for them than these ASPs are charging for them. … We were charging for associates to do all this work.”

Law firms also need to realize that clients are moving toward an integrated services model in which they don’t see legal problems or business problems – they just see problems, period. As such, they’re asking outside counsel to work with not only their in-house departments but also people from other law firms, and even accountants and other service providers, Jones says.

He remembers talking a few years ago with a litigation partner in a well-heeled New York City firm who told him that in well over half the litigation matters in which he was involved, he was the only lawyer from his firm. “I’m part of virtual teams with partners from other firms, accountants, business consultants, with a high emphasis on increasing the use of technology to make work more efficient and cost effective,” he told Jones. Firms will need to accept those shifts or “hemorrhage business to other providers,” Jones adds.

The “2019 Legal Trends Report” from Clio notes the same paradox that Jones speaks of, with lawyers and firms struggling to maintain business while clients scuffle to find representation – or forego it entirely. The fastest-growing firms achieved their performance with an average increase in lawyers’ utilization rates from 28 percent to 32 percent in the past five years, which doesn’t seem like more than an incremental gain, but it has resulted in revenue growth of more than 100 percent, says George Psiharis, chief operating officer at Clio.

That’s largely because firms were able to handle more work – more clients and for more hours – with the same numbers of attorneys, essentially by working smarter, Psiharis says. “They were more efficient in their work process but also had a really thought-out client experience component to their journey, especially in that initial inquiry stage,” he says. “If practitioners can make use of high-bandwidth face time with clients, they’re more likely to be satisfied. We realize it can’t be done in person all the time.”

The fact that utilization rates hover around 30 percent surprises some in the legal industry, but solo practices and small firms are often busy with other aspects of the practice, while others just don’t have enough work. Psiharis believes keeping track of those rates is a good first step. “Not many people are trained or conditioned to think about their firm that way – understanding that incremental improvements drive disproportionate impacts,” he says.

Realization rate is another important success metric, with the most successful firms reaching 90 percent, in part by avoiding the sticker shock of sudden rate increases, Psiharis says. While hourly rates are increasing overall for attorneys, they’re tied pretty directly to the consumer price index; for nonattorneys, they’re pretty flat, he says. And then firms need to track collection rates, which tend to be higher if firms allow electronic payments, he says.

Firms in Wisconsin tend to have somewhat lower hourly rates and higher realization rates than the national average, according to Clio’s state-by-state breakdown. Firms had an average hourly rate of $205, lawyers $214, and nonlawyers $151; adjusted for cost of living, those figures were a bit higher, at $220, $229, and $162, respectively. Utilization rates were 36 percent for lawyers and 23 percent for nonlawyers, while realization rates hit 81 percent and collection rates 88 percent in the state.

Measuring Profitability

Law firms overall are beginning to reevaluate how they measure profitability, with the traditional quarterly revenue-per-equity-partner a useful but not necessarily optimal metric, says Marcie Borgal Shunk, president and founder of The Tilt Institute. The Tilt Institute counsels law firms on practice management and profitability matters.

“There’s a lot more conversation about how to measure profitability within the law firm and, more importantly, how to then roll that out and measure performance against profitability, and consider how that fits into the suite of metrics firms are using,” she says. “We’re moving in the right direction, but we’re a far cry from other industries.”

Borgal Shunk puts realization rates overall in the low- to mid-80s, and holding steady as opposed to declining as they did for most of the 2010s. Hourly billing rates are increasing modestly, which means the overall impact is positive. The prevalence of alternative fee arrangements has held steady at 20–25 percent of the market among larger organizations. “I wish it were more of a major trend,” she says. “That number is smaller when you get into the middle market. There are certainly companies and practice areas that tend to be more likely to utilize alternative fee arrangements,” including intellectual property and contracts in general.

Client Expectations: Missing the Mark

To test how well firms are performing vis-à-vis client expectations, Clio sent inquiries to more than 1,000 law firms, and more than 60 percent never responded, Psiharis says. “That lined up with how clients self-reported their experiences trying to find a law firm,” he says. And few of the responses they did receive “were at a level we considered to be excellent.”

A companion survey of 2,000 consumers found that most clients expect responses within 24 hours, and that they wanted to learn, in a transparent way, how the engagement would proceed. “The vast, vast majority of responses via email – less so by phone – missed the mark. And those would be the people who responded – a minority,” Psiharis says.

About 85 percent of the revenue that flows through Clio’s product is tied to hourly billing, he says, and those who attempted to raise their rates faster than the speed of inflation did not necessarily raise their revenues; that was linked more closely to utilization rates. “Client expectations are changing,” he adds. “The way people are used to shopping for things and doing business is getting overhauled. When folks bring those expectations to law, they have a pretty jarring experience.”

Clio’s research has shown that about 60 percent of potential clients shop online for lawyers and other professionals, and 60 percent look for referrals from personal connections, with an overlap of people who do both; few people switch from one to the other. A slight majority of clients shop for more than one attorney, although most do so because they are unsatisfied with the first contact.

“They’re ready to stop as soon as they find a good person,” Psiharis says. “They’re not looking to put a lot of effort into their search. That goes back to the importance of getting back to them quickly, and providing clear information. … If firms are doing that really well, they’re driving clients toward them.”

Borgal Shunk believes the use of e-billing has a major impact on clients’ confidence in a firm’s transparency because they can better access and analyze how they’re spending and how they can better manage their matters. While specific client requirements might have changed, however, what clients want from law firms is much the same. “They’re continuing to look for lawyers who understand their business, lawyers who have the combination of legal skills and practical savvy to help them resolve legal issues, and who focus on value,” she says.

Clients have become increasingly interested in specialization, Borgal Shunk believes. “You require a deeper knowledge in a single area,” she says. “And then as a complement to that, you need to take a collaborative approach because the complexity of each issue is such that … you often will need multiple specialists to handle a complex issue.”

Firms will drive clients away if they don’t answer emails or calls promptly, or if clients feel the firms are not providing value – which isn’t strictly about rates but also involves the emotional energy put into the relationship, Borgal Shunk says. “They want to feel that same connection coming back from lawyers. … It’s a one-size-fits-one approach, tailored to that client’s needs, as opposed to the generic service delivery model.”

Differences in communication styles can be generational, Borgal Shunk notes, with partners who are baby boomers preferring the phone and not wanting to deal with email, but millennials who represent clients in some cases saying, “Don’t you dare call me. If you can’t send it via a text, it’s not worth relaying,” she says. “That can certainly create issues, if you’re not in tune with their differences and preferences.”

Marketing and Business Development Amid Competition

From a business development perspective, larger firms on the coasts have been targeting the Midwest and in some cases Wisconsin specifically to make acquisitions and expand their footprints, notes Catherine Alman MacDonagh, CEO and founder of the Legal Lean Sigma Institute LLC. The Legal Lean Sigma Institute provides consulting support and programs to the legal profession.

“There are a lot of competitive advantages to be found, not the least of which is that the overhead and the costs of running a law office can be significantly less,” she says. “There are a lot of good companies and good businesses that I think firms would want to have as their clients.”

Alman MacDonagh focuses on process mapping and Lean Six Sigma, which requires an unprecedented amount of collaboration between firms and clients, both cross-functionally and also cross-organizationally. This process mapping of legal work helps firms and clients to speak the same language and ensure they’re in agreement on who is doing what.

Outside counsel want firms to do more than pay lip service to efficiency, responsiveness, and teamwork – firms should produce the data as proof, Alman MacDonagh says. “They want evidence of those things,” she says. “We’re also seeing more clients rely on their outside counsel for advice and help with how they can become more efficient. Some firms might view this as pressure; the wise firms will view this as an opportunity.”

Firms that haven’t learned the basics of business process improvement need to do so, and it’s low-hanging fruit, Alman MacDonagh says. “Figuring out what are the right things to do, and putting in the right processes to make sure people are doing those things, and making sure you have good metrics to know they’re in an acceptable range – that’s completely transformative for most firms,” she says, adding that she’s worked with firms ranging in size from 12 employees total to the AmLaw 10.

“It’s completely scalable,” she adds. “But the fact of the matter is, it’s an extremely crowded marketplace. Just saying you’re good at things is not enough to stand out and cut through the noise. All of this is about creating competitive advantage.”

Hiring and Retention in a Tight Market

On the other side of the equation, firms are working as hard as ever to recruit and retain lawyers and other employees due to the tight labor market, says Brandy Russell, managing director of the in-house practice group at Major, Lindsey & Africa, a legal recruitment firm in Chicago. “Unemployment is very low, and we find that it’s harder than it’s been in years past to find candidates looking to make a move,” she says. “Those who are active in multiple practices are more sought after by employers; they are also in a position where they can make demands.”

Recruiting for lower- to mid-level positions and lateral moves, particularly those involving relocation, have been especially challenging, Russell says. Senior-level positions continue to garner a reasonable amount of interest, but that’s often from “up-and-comer” candidates. “Most companies want to hire somebody who has done that exact job in that exact industry,” she says. Employers are “needing to be a little flexible and creative in what their requirements are, and how they work to attract good talent.”

Instead of putting up postings and expecting the talent to flow toward them, employers “have to actively go into the pool and find those passive candidates,” she adds. “You have to find people who aren’t looking for their next job to increase the pool of talent.”

In-house departments have come under pressure to increase compensation if they want to attract talent from the law firm world because bonuses have risen in the latter sector, Russell says. For public companies, that sometimes means offering equity, sometimes even to those at more junior levels. Some companies are offering both a sign-on bonus and a retention bonus. And candidates are becoming savvier and asking more about benefit packages, such as parental leave or vacation policies, she says, while companies tout those as selling points.

Compensation in smaller cities and towns in Wisconsin will tend to be lower than Chicago and certainly New York, which means that companies looking to perform national searches for top positions will need to “push the needle a little bit,” Russell says. “There’s always a challenge to attract talent from other areas. … There’s more selling and education to be done about areas that are not necessarily on the most-populated-cities list. If it weren’t such a tight market, you would see more interest in these locations.”

Candidates looking to move on frequently feel like they have “hit a ceiling” in their current position, Russell says. They aren’t necessarily looking to move up the ladder but might want exposure to other practice areas or geographies. “Companies that have been most successful at retaining talent have been very good at keeping talent engaged and providing them with those growth opportunities, if not a hierarchical change in title,” she says. Breadth of experience positions a candidate well for eventually moving up to general counsel, she adds.

Providing flexibility to employees to handle their personal needs, whether picking up a child early from school or going to a doctor’s appointment, builds a culture that helps with retention, Russell says. “The freedom and trust in somebody to be autonomous in their approach to work is something employees respond positively to,” she says.

Russell expects to see growth in contract legal services providers, to help law firms with high-volume litigation and major transactions, because the market is so tight. “It’s harder to find talent available for short-term assignments,” she says. “More people are looking for that permanent employment. The temp-to-perm model is a way to attract talent. It gives companies a little bit of a trial run. There’s a benefit to both sides.”

Diversity and Inclusion: New Approaches

Although the legal profession remains majority male and heavily white, especially at the partner level in law firms, firms and legal departments are becoming more open to thinking innovatively and experimenting with new approaches to diversity and inclusion, in some cases borrowing from other industries, says Lisa Kirby, chief intelligence and knowledge sharing officer at Diversity Lab. Diversity Lab is an incubator for innovative ideas and solutions that boost diversity and inclusion in law.

“There’s a new mindset as the realization is starting to set in that the process has been really slow, and the legal industry is lagging behind, especially law firms,” she says. “It’s still hard for underrepresented groups to crack partnership. Even though women have been 50 percent of law school graduates for 20 years at least, and minorities are steadily increasing (around 25 percent), yet women are only 20 percent of equity partners, which has only increased a few percent, and minorities are just under 10 percent. The percentage of Black partners has gone down the past few years.”

In response to this, the Diversity Lab in January launched the Move the Needle Fund in partnership with five large law firms and 30 corporate legal departments to collectively pursue diversity goals. The partnership will be transparent, accountable, and collaborative, experimenting with research-based, innovative initiatives, Kirby says. “Diversity Lab is going to measure everything they do and report on it, so that these experiments serve as models for the legal profession and beyond,” she says.

Firms and companies will share results with one another and participate in educational opportunities around the behavioral interventions that will be involved, based on ideas from fields like behavioral economics and social psychology, which haven’t been tried before in the legal profession in this context, Kirby says.

“We are implementing the experimental ideas within the firms,” she says. “We are going to work with each of the five firms to implement them and leverage the legal departments, who are serving as coaches, to help the firms as they make progress toward their goals.”