April 2014 • Volume 102 • Number 4 • Page 160
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Adapting to the New Legal Marketplace
Sharper competition is challenging law firms, law schools, and bar associations.
The legal market has changed fundamentally since 2008. Many factors have contributed to this evolution and the economic recession has certainly accelerated that pace of change.
The most obvious change is increased competition and its ramifications for the legal profession. We can see this competitive intensity and how it has played out in at least four areas of our business - large law firms, smaller firms and solos, law schools, and bar associations. How we respond to these challenges is significant because, as Charles Darwin said, "It is not the strongest nor the most intelligent who survive, it's those that are most adaptable."
Large law firms
The Georgetown Law Center for the Study of the Legal Profession and Peer Monitor recently published its 2014 Report on the State of the Legal Market. The authors conducted a number of surveys of corporate counsel and large law firm managing partners to uncover dominant trends affecting the legal market.
The report concludes that the "supply of legal services has significantly exceeded demand, as reflected in the ongoing struggle of (large law) firms to maintain prior levels of productivity." It is well documented that the overall budget for outside legal counsel has shrunk over the last five years, meaning that most firms cannot increase or even maintain their revenue from current clients.
To increase revenue, firms must either beat out other firms for existing business or acquire lateral partners who bring different clients into the firm. This has resulted in a very competitive market.
That extremely competitive climate has also fueled the shift from a seller's to a buyer's market. Prior to 2008, outside counsel generally directed how a client matter would be run, staffed, and billed. As companies sought to maintain profits during the recession, CEOs tightened budgets and asked their in-house counsel to spend less on outside legal expenses and to forecast what the costs would be. In turn, corporate counsel started asking for more efficiency and greater predictability from their outside counsel.
Most law firms were, at first, slow to accept this change and even slower to package their services for a price. With supply of legal services exceeding demand, the market quickly moved to give clients the controlling hand. Over the last five years, clients have increasingly asked for value, which has come to mean "efficiency, predictability and cost effectiveness in the delivery of legal services."
Since law firms have for many years billed on an hourly rather than a per-matter basis, this new requirement has been difficult to meet. Most firms now recognize the new dynamic, but changes to a financial model supported by long-standing culture have been less than nimble.
Small firms and solos
Since the majority of ISBA members are in firms of five or less, you may challenge the relevance of discussing competition facing large law firms. The answer is simple - the supply of legal services exceeds the demands of paying clients, so this issue floods the entire spectrum of law firms and lawyers.
"Paying clients" is a key descriptor, because according to the ABA we now have the highest unmet legal needs in our history. But we have a large consumer base that is either unwilling or unable to afford those legal services at current rates, so supply exceeds demand.
Many of those unwilling to pay lawyer rates have turned to online document sites like LegalZoom or RocketLawyer, where for $69 to $169 a consumer can download legal documents. We traditional lawyers caution that consumers still need lawyers to interpret and advise on these documents, but the sites now offer referrals to lawyers with pre-negotiated rates well below market. Forbes noted, "Traditional lawyers are fighting a fierce, rear-guard action against their online competitors who are trying to do to $300-an-hour attorneys what they've previously done to travel agents, insurance salesmen and high commission brokers."
We can bemoan the situation and rant all we want, but this has become a reality. In 2011, LegalZoom generated $156 million in sales - money that did not go to legal services rendered by traditional ISBA member-lawyers. Like our sisters and brothers in large law firms, perhaps we have been slow to adapt to changes in the marketplace.
One of the slowest institutions to change is the legal academy. In their defense, law schools have to deal with restrictions of tenure and outside regulators, but the economic reality of the marketplace has now caught up to them. As legal jobs for recent graduates have evaporated, law school applications have dropped from 602,300 to 385,400 in the last three years according to the Law School Admission Council. And at the same time applications and admissions are dropping, the cost of attending law school and student loan debt is rising.
Fewer firms and clients are willing to pay to train new lawyers on the job and they blame law schools for not teaching practice-ready skills. In addition, law firms are outsourcing more legal research and discovery to lawyers in foreign countries, who are paid far less than a first-year U.S. lawyer. Many new grads unable to find a salaried job are forced to hang out a shingle. These new lawyers find themselves woefully unprepared to practice law, develop a client base, or run a business.
More academic institutions recognize they must reduce their costs while adding skills-based courses encompassing technology, client development, and everyday practice issues. But to do so, accreditation standards like physical library space and scholarship requirements must evolve. And schools must revamp their curriculum and the persons who teach those courses.
Of course, bar associations are not immune to these changes in the legal market. They face increasing competition from smaller affinity lawyer groups and online CLE vendors and challenges posed by financial pressures and changing demographics.
I've noted many times that younger people don't join organizations in the same numbers as earlier generations. There is a smaller pool of prospective members as jobs and law graduate numbers decline. As lawyers and human beings, we face greater time challenges as technology keeps us connected and accessible 24/7.
The ISBA has worked hard this year to recognize and meet these challenges. We have defined the value we provide to members with free online CLE, free Fastcase, free E-Clips, and access to affordable malpractice insurance through our ISBA Mutual Insurance Company - and many thanks to the Mutual for their financial support. We have streamlined operations and reduced board and officer expenses. We are studying our lawyer governance as well as our internal administrative structure to make sure we are providing needed member services in productive and efficient ways. Our New Lawyer Task Force is implementing ideas to attract and benefit recent law grads.
Last year at this time I knew we were at a crossroads, but I now feel confident we are not only surviving but thriving. I know the incoming officers, their appointees, and our incredible staff will continue to look at challenges and adapt the ISBA to the future.