At a recent Insight Council roundtable, several Managing Partners discussed how they are addressing the challenges their law firms are facing in today's uncertain market
This year is quite a contrast from the year before, especially in the legal industry. So far this year, many law firm leaders are keeping their eyes on the uncertainty in the market, which is in sharp contrast to 2022 when law firms prioritized talent issues, such as recruitment, retention, and engagement to ensure uninterrupted client service.
As the recently published 2023 Report on the State of the Legal Market suggests, to lead successfully through periods of uncertainty requires leaders to embrace somewhat different priorities and be willing to experiment with new ways of doing things. During the most recent Insight Council roundtable, held earlier this year, 40 Managing Partners from law firms described how they are addressing the challenges that are arising from an uncertain market.
Despite the headlines that speak of lawyer layoffs, law firm headcount was up substantially over the past two years, but so too are direct expenses which were up an average of 15.4% since Q1 2020 and 10.1% since just last year, according to the Legal Market Report. Firms therefore have more lawyers, with each one costing firms substantially more. With turnover also returning to average pre-pandemic levels you can see why firms may be making targeted headcount adjustments.
However, this dynamic has affected every firm differently, and as a result many firms have been proactively addressing these sharp rises in expenses by using tried and true strategies like prepaying what they can and restarting tactics that are designed to monitor expenses closely, so as to know exactly when to adjust to the market.
Our roundtable attendees said they were very optimistic, and many talked about relying on the strength of the firm’s culture to bring its people together by, for example, using a “We are in this together” message to build resilience and strength from within. Amplifying this message in their communications has been key for firms, but promoting transparency also has ensured that engagement levels with their people have remained high.
Sharing regular market conditions and presenting more of the firm’s financial outlook and what it means for their partnership, associates, and staff members has also become important. And being explicit about what the firm needs to do to weather the potential economic downturn has strengthened this collaborative culture at this time as well.
Rates strong, realization receding
One area that roundtable members identified as a development to which they are paying close attention is how quickly clients are paying their bills, which appeared to slow for many firms as clients seemed to have the desire to hold on to their money. Collected realization against worked rates appears to be sliding, which is an uncharacteristic pattern; fortunately, however, many felt that realization was still strong, but that clients were just paying slower… for now. Most roundtable members said they felt that realization remains stable.
In order to stay ahead of any unexpected delays, it’s important for firms not to lose focus on billings and collections — monitoring is key here, but the roundtable members also highlighted the importance of keeping up ongoing conversations with partners and clients. With clients becoming much more selective looking at the value behind the brand — indeed, nearly 50% of clients have substantially adjusted their roster of outside law firms over the past year — it has become more important for firms to understand their clients’ most pressing challenges and goals. This is especially critical so firms can not only tailor their offering specifically to clients’ needs, but also discuss expectations of their client service and billing.
If clients feel and believe the firms’ work is valuable and important, they will be more likely to pay, so it’s important to set out expectations at the beginning of a matter. Better understanding on both sides over what various markets are experiencing will not only help forecast financials but will also help anticipate and prepare the client and the firm for what may lie ahead.
Buyer sentiment remains positive
The Legal Market Report also showed that 41% of clients said they expect their legal spend to increase in the coming year, compared to just 19% that said they expect it to decrease. When looking at this trend on a quarterly basis year-on-year, we see that clients’ anticipated spending typically drops towards the end of the calendar year. In 2022, however, the drop in net spend optimism occurred in Q3 rather than Q4, as traditionally seen. It is likely that this movement demonstrates a preventative attitude on account of concern over a global recession. But the fact that this downward trend hasn’t continued into Q4 of 2022 suggests that there remains plenty of opportunities for law firms to compete for work in the global marketplace.
However, it has been nearly 15 years since the last Global Financial Recession and many law firms’ leadership committees have not led their teams through rocky markets and increasing expenses. This presents a unique challenge — one part of which is making sure everyone is aligned on strategy even as it shifts in real time. As a result, some firms are bringing in experts to help learn from the past and advise on what is happening in the market today so they can best navigate during these uncertain times.
In general, the common theme we heard from the Managing Partners at the roundtable was how important it is for law firms to have a solid and focused core strategy yet be able to adapt as the environment changes to sustain competitive advantage. We know from the Legal Market Report that the market has softened, and expenses have sharply risen; and because of that, many firms are revaluating their strategy to keep pace with the times.
The leaders who manage to keep their strategic focus during this uncertain time will have a much higher likelihood of coming out the other side in a stronger position, prepared to deal with any market fluctuations.
You can learn how to create a strategy that works for your firm and is aligned to the needs of your clients in an uncertain market here.