Staying Competitive: Law Firm Trends For 2016 And What We Might See In 2017

If you want to stay ahead of the game in the cutthroat law firm market, it’s crucial to keep an eye on what your competition is doing. The only effective way to do that is with the help of real-time business intelligence — information on what law firms are doing today and what you expect them to do tomorrow.

The folks at Thomson Reuters have developed a tool that makes monitoring your competition easy. With the help of the comprehensive data generated by Peer Monitor, they shared useful insights into the biggest law firm trends of 2016 and an idea of what we might see next year.

Demand for Services

To date, 2016 has seen no uptick in the demand for services from last year. Demand performance — the overall appetite clients have for law firm billable hours — has remained flat. While certain periods saw an increase in demand, that was counterbalanced by a contraction during other periods, resulting in a year that, overall, saw no increased demand for law firm services.

This comes as no surprise, as demand performance has been flat for the last few years. There’s no reason to expect 2017 to be any different. Rather than rising, demand could contract next year, owing to companies’ growing desire to bring work in-house and the increasing reliance on alternative legal service providers.

So, how can firms remain successful in the face of stagnant demand? The answer is in adaptability. Traditional billing models are on the way out. Firms need to implement alternative billing arrangements and alter billing models to meet client preferences.

To that end, firms have shown increased willingness to negotiate and offer discounts off standard rates. In fact, the gap between standard and billed rates has tripled in the last 10 years and will likely continue to grow. There’s a logical reason for that: clients may be willing to pay a slightly higher rate if they feel the rate they’re being charged represents a healthy discount in the hourly rate.

Rates

Let’s be honest — the bottom line is what matters most when you’re trying to run a successful law firm. It’s not surprising, then, that firms try to raise their rates whenever they can.

That strategy, to a degree, has been successful. Rate growth is what has driven law firm profitability over the past decade. So far this year, the average firm has been able to negotiate a 2.9 percent increase in the average worked rate, and 2017 is likely to be much of the same, with a likely rate increase of 2.5 to 3 percent.

Relying on rate increases for profitability, however, is a dangerous proposition, especially as clients increasingly push back against high hourly rates and exorbitant legal bills.

Where does this leave law firms? While rates may continue to rise in the short term, firms need to innovate around their workflows to increase margins even if rates stagnate. Often, this means making strategic decisions about staffing and growing the firm.

Law Firm Growth

Despite unchanged demand for services, law firms continue to hire. This has led to decreased per-attorney productivity, which was down about 2 percent in 2016, a decline which is likely to continue. The average attorney in 2016 is on pace to bill 144 fewer hours per year than a decade ago.

In response, firms may increase their billable-hour minimums, especially after this year’s salary bumps, but that doesn’t offer a real solution. Since there’s no indication that demand will explode any time soon, firms will continue to struggle with overcapacity.

The focus, then, needs to be on strategic staffing. While halting hiring altogether is problematic and will lead to staffing gaps down the road, it’s critical for firms to understand why they’re hiring when they are. Rather than continuing to hire across the board, hiring should target particular practices or geographic areas where growth is expected, or certain experience levels where there’s need. The overarching goal is to have a good succession plan in place — hiring the right people now to run your firm in the future. This may mean taking a short-term hit in productivity in exchange for long-term profitability.

How Peer Monitor Can Help

Firms need to implement a strategic vision aimed at increasing long-term profitability. In a flat market, most growth comes from shifting market share.  The only way to remain profitable is to keep up with, if not surpass, your competition. And the best way to stay on top is by monitoring what your competitors are doing right now.

Unlike much of the law firm intelligence that’s available, the data from Peer Monitor isn’t sanitized — it’s actual data from law firms’ accounting systems used for their own metrics. That means it’s not selectively self-reported and doesn’t come with the reporting biases that you see in a lot of surveys. Peer Monitor tells you exactly what the average law firm is experiencing.

Whether you’re looking at demand, rates, profitability, or productivity, Peer Monitor provides up-to-date data to help you make strategic decisions for the future of your firm. With competitive, real-time legal benchmarking at your fingertips, you’ll always be one step ahead of the game.