"The law firm of the future."

This is a topic that demands a great deal of discussion, because widespread change is a fact of life in the legal industry now.

A senior partner at a law firm recently asked me “How do we communicate to people that the future is NOW?” His firm has been embracing these “futuristic” policies for many years, and he recognizes that change in the industry is not happening fast enough.

In May, Altman Weil published the 2017 edition of their “Law Firms in Transition” survey, which polled the managing partners and chairs at 798 US law firms with 50 or more lawyers (this year’s survey received 386 respondents from 50% of the 350 largest US law firms). If you haven’t already read at least the executive summary for this survey, I highly encourage you to look through it. Amid the second quarter of this year, Altman Weil said:

"In 2017, there are few law firm leaders who would dispute the permanency of more price competition, a need for greater efficiency, an influx of new kinds of competitors, and the inexorable force of technology innovation. Law firms are slowly changing – more slowly than we think is wise, but changing nonetheless.”

The survey summary goes on to look at key findings, including:

• Decreasing demand: We still haven’t returned to pre-recession levels for the demand for legal services at outside firms (and we're unlikely to - in fact, according to this survey, 52% of firms report that their equity partners are not sufficiently busy and 65% said their non-equity partners aren't busy enough – yikes). Altman Weil’s CLO Survey, released in November 2016, gives us some insight here, and we’ll look at that shortly.
• Surplus of lawyers: This shouldn’t come as a surprise to anyone in the US, as we’ve been talking about this in the industry since 2008. However, even though we seem to know this as an industry, 56% of the law firm leaders surveyed still believe that increased headcount is a requirement for success. 
• Contract lawyers & alternative service providers: More firms are using contract lawyers and seriously reviewing their staffing strategy to answer client needs. Clients are also jumping to ASPs, which is impacting the decreased demand for legal services at outside firms. 
• Inefficient delivery of legal services: This is where the opportunities lie – many experts are giving lawyers and law firms a blue print for how to operate more efficiently, but the May survey reveals that despite almost all the firms surveyed understanding that practice efficiency will be a permanent trend, only 49% have "significantly changed their approach to the efficiency of legal service delivery." Altman Weil says it best – "This represents a frightening disconnect." 
• Pricing: This is another opportunity for law firms – as Altman Weil points out, it's "inextricably linked to improving efficiency and providing client value." But their experience has been that most lawyers don't know how to have robust pricing conversations (or even why to have them). We need to be doing a better job of driving this change in the industry. 
• Law Firm Innovation: Innovation is on the rise among firms, with half of the respondents reporting that "their firms are actively engaged in creating special projects and experiments to test innovative ideas or methods" and "49% of firms are currently using technology to replace human resources with the aim of improving efficiency." There's still a lack of firms making use of AI tools, and less than a third even exploring them. Considering how many clients are paying attention to these tools, and expecting their firms to lead the charge in innovation (because they believe innovation = efficiency), I agree with the sentiment that "the day is not far off when ignorance will carry a steep cost." 
• Resistance to change: The pace of external change is not going to slow down, and law firm leaders know it. The reason for the slow changes internally at firms is attributed to low awareness and resistance among non-leadership partners.

So that's what law firm leaders are thinking in the second quarter of 2017 – what have clients been saying? 

To many of us, and law firm leaders in particular, the results of the most recent Altman Weil Chief Legal Officer survey don’t come as a surprise. Clients are unhappy, the demand for legal work is increasing, but they’re keeping it in-house or taking it to alternative providers, and a lot of unhappy clients just switch law firms without trying to fix the issues. I highly recommend taking a look at Jill Switzer’s post for Above the Law, “Is Everything Old? The 2016 Chief Legal Officer Survey.”

Let’s look at the salient points.

Cost Pressures Are Still Number One

This should surprise literally no one:

"Cost pressures are a primary concern for CLOs, encompassing both internal budget constraints and outside counsel fees."

In terms of how CLOs are managing internal pressures, they’re looking to improve efficiencies through technology and the restructuring of internal resources. They’re also embracing data and project management. Because in-house lawyers are doing this in large measure, it adds to their frustration when their outside law firm partners are not making the same efforts.

Why does that matter? Because, as has long been the case “[e]xternally, outside counsel present a broad target for cost cutting.” “Cost-cutting” to CLOs means discounts and AFAs, as well as reducing their outside legal spend or shifting work to lower-priced firms.

Jordan Furlong wrote an excellent piece, “You’re not selling what we’re buying,” where something he said really stood out to me:

"The real reason why demand is falling at law firms is that clients have diversified their purchases, but law firms haven’t diversified their offerings. Law firms are steakhouses. Clients are looking for restaurants."

The CLO survey bears that out – clients are bringing more work in-house, where not only lawyers are doing it, but also professional staff. Other work, such as legal research, document review, e-discovery, due diligence, and others, is being outsourced to non-firm vendors. For those lawyers reading this who think that’s probably a minority:

"More than half of all law departments report that they outsource some work to nonfirm vendors (up from 43% in 2012, when we last asked the question, to 57% this year). The two types of work most likely to be outsourced are litigation discovery (including e-discovery) and document review."

That’s a 14% jump in four years.

It also represents a real opportunity for law firms, not just in the way that they manage the budgeting process and fees for their clients. But what other services could your firm be offering clients so that you’re a one-stop shop for legal services? What makes you a restaurant, instead of a steakhouse?

The Evolution of Technology

As I mentioned before, CLOs are embracing data in larger numbers, and using technology to help them in the acquisition of this data. The survey reveals that legal departments are still new to the game when it comes to this, but they report that “law firms aren’t even in the game.”

It’s fairly dismal that:

"When asked how many of their top ten law firms have provided useful spend analysis to the law department, 73% of CLOs reported that none of them had."

Law departments are going to be making improvements here over the next few years, and Altman Weil says that “we expect to see steady increases in both the use of more sophisticated data analysis, and the value that CLOs will derive from it.”

That means there’s a HUGE opportunity for law firms here – but the time to jump on this is NOW before the learning curve gets too steep. Altman Weil agrees.

"We think law departments would reward law firms that seized this obvious opportunity to provide meaningful data – and the bar for success here is low."

Breaking Up Isn’t Hard to Do

Most of us would hope that if our clients are unhappy with us, that they’d talk to us about it and work with us to make changes, rather than moving to another law firm. But for many of us, making a switch when we’re unhappy is easier and less uncomfortable than having those difficult conversations about what’s going wrong. Because there are so many options for smart, talented lawyers out there (remember that surplus of lawyers I mentioned?), clients don’t have to look far for someone who will competently do the work that they need with slightly better service.

If you’re absolutely sure that none of your clients will ever choose another firm or another lawyer over you, then you can skip this section. But if not, then you might be curious to know what the CLO survey had to say about the reasons that law departments switch firms. There are some key themes – according to the survey, in the last year:

• Problematic service (think “responsiveness”): 53% of respondents “shifted a portfolio of work worth $50,000 or more because of a client service issue”
• Cost: “41% switched to another firm in pursuit of lower fees”
• Efficiency: “30% moved their work to a firm that was more effective in managing matters”

Dissatisfaction with firms and their unwillingness to change has been brewing for some time.

For the last seven years, Altman Weil has asked CLO respondents to rate their law firms on a scale of zero to ten, assessing the level of their commitment to change. On this scale, "zero equals ‘not at all serious’ about change and ten equals ‘doing everything they can.’” Before I tell you what the CLOs have ranked the firms, take a few seconds to give yourself a rating, and then consider what your clients would rate you – and write them down.

For the 8th year in a row, respondents have ranked law firms at a three.

Three.

Altman Weil says this is for (no pun intended) three reasons:

• “About one third of CLOs are either satisfied with the current delivery model (17.4%), or they have asked for changes and their outside counsel have complied (13.4%).”
• “Another third (34.1%) of CLOs said they are focused on prices and outcomes rather than the service delivery model. This isn’t necessarily an expression of satisfaction or dissatisfaction with the model, but rather a statement about the primarily transactional nature of their relationship with outside counsel.”
• “The final third is more openly dissatisfied with the law firm model. Among this group, 14.5% say they have asked for changes, but have not gotten the results they wanted; 11.7% have not asked for changes, but have used firms less or dropped them entirely because of unsatisfactory service delivery. Finally, 9.1% believe it’s not their job to ask – instead law firms should act proactively to improve.”

It’s this final third that firms need to be most worried about – and do you know which third your clients fit into? Keep in mind as well that because the second group is focused purely on the transactional nature of the relationship, their motivations for staying with you and your firm will be very specific. So you should know which of these three groups each of your clients falls into, and what you need to be doing to help keep them as clients of your firm.

So how can firms change? I invite all of you to share your thoughts and comments on these issues and to dive into these two surveys and the associated articles to get a little better understanding of why the future is now – while much of this information isn’t new or groundbreaking to many law firm leaders, it can be an incredibly valuable educational tool for helping to inform and motivate some of your slower-to-change partners.

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[Lindsay Griffiths strengthens lawyer connections as the Director of Global Relationship Management at the International Lawyers Network. This post was originally published on Lindsay's terrific blog, Zen and the Art of Legal Networking. Connect with Lindsay on LinkedIn and follow her additional writings on JD Supra. ]

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