What Law Firms Need to Know to Prepare for the Next Recession

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(Originally published in the American Lawyer, November 6, 2018)

Those that fail to adapt to the changing industry will be hit harder when the next recession arrives.

By Richard Lau & Thomas Suh, LegalMation

Today, in the legal industry’s eighth year of economic expansion following the Great Recession[1], it is easy to be lulled into a false sense of security. “Who knows when the next recession will be?” we ask.  “The next recession can’t be as severe as the previous one,” we tell ourselves. “And if we survived the disastrous effects of the Great Recession, then of course we can handle a smaller one…right?”

This type of thinking sets lawyers up for a very rude awakening. Since 1945, the average duration of a period of economic expansion has been 4.9 years, essentially putting us three to four years overdue for another recession.[2] Moreover, there are strong indications that while the next recession may be milder for the national economy overall, it could potentially hit the legal industry much harder than the national downturn would suggest. Chief among these is the tendency of large corporate clients to forgo entrusting an entire matter to a single firm and instead assigning portions of a matter to a variety of entities, or even sometimes outsourcing high-volume tasks to teams of non-attorneys overseas.[3]

Since the recession ended, these clients have had little incentive to let go of these cost-saving strategies and expectations. This has resulted in the range of law firm services and functions contracting over time – a phenomenon that Thomson Reuters has referred to as “the steady erosion in the traditional law firm franchise” – partially explaining why the demand for law firms’ services has remained flat since 2010 despite the overall increase in legal spending over that same period. [4] Indicative of this paradigm shift is the growth and prominence of the legal procurement professional: An individual in a corporation’s procurement department whose primary responsibility is to “shop around” for legal services and decide which firms or alternative legal service providers (ALSPs) to hire.[5]

The tactics used by law firms to survive the Great Recession will not be effective during the next recession. These tactics, broadly, include raising prices; cutting expenses, primarily via layoffs; and slowing or shrinking equity partner ranks.[6] Going forward, however, raising prices will be less effective because of the aforementioned paradigm shift. Higher rates will simply drive business toward cheaper firms and ALSPs, accelerating the continued erosion of the law firm franchise. Layoffs and de-equitizing partners present a different problem. Those solutions are exhaustible, and the expenses and lawyer/partner headcounts haven’t come close to their peaks in 2007.[7] Law firms can’t rely on cuts in those areas to maintain profitability again because there is simply less available to cut.

So, what steps can law firms use to survive the next recession? Instead of speculating, we can take a data-driven approach by looking at which firms have experienced the most success in terms of both profitability and market share post-recession and examining what novel tactics they have employed to achieve that success.

Thomson Reuters Legal Executive Institute released a study in 2017 that tackled that very question.[8] The study gave firms a composited score based on revenue per lawyer, overall profit and hours billed (as a rough analog for captured market share). The firms were then ranked, with the top quartile of firms dubbed the “dynamic firms” and the bottom quartile the “static firms.” The difference between these two cohorts is stark: The dynamic firms increased their market share (and corresponding profits) by about two percent on average, while the static firms saw their market share shrink by about five percent on average.[9] These dynamic firms were the only firms that managed to increase their attorney roster without a substantial decrease in per-lawyer productivity,[10] which suggests that capacity (i.e. number of available lawyers) was not the limiting factor in the failure of other firms to increase market share.

The study made two somewhat surprising findings. First, dynamic firms often gave their clients fewer discounts and pre-bill write downs than other firms.[11] Second, dynamic firms actually increased their overhead expenses, spending proportionally double what static firms did for business development and coaching and triple for technology-related expenses, which, according to the study, “seems to represent a difference in philosophy [ . . . ] that could be characterized as ‘investment versus status quo.’”[12] These findings were true across the board, regardless of size or region,[13] and appear to contradict the traditional wisdom regarding what to do in response to clients demanding more value for their money – namely cutting prices and reducing expenses.

So what actionable insights can we draw from this? The first and most obvious is that all firms, big and small, must be able to change and adapt, for those that attempt to cling to the status quo will suffer before the next recession even begins. The second insight is that law firms should drive up value of their services to meet their prices rather than reduce their prices to match their perceived value.

To these ends, there are two basic approaches for law firms. The first is to off-load tasks (especially high-volume, repetitive tasks) that truly do not require attorney time and expertise, even if that means reevaluating tasks that have always been deemed important. The second is to enhance the capabilities of attorneys by allowing them to provide more value when performing the tasks that do need their expertise. It is extremely important to note that both approaches are mutually supportive: The former lets attorneys devote more time to the latter, and the latter allows better, high-level strategic decisions to be made about the former. It is impossible to ignore one approach in favor of the other.

Key to both approaches is the reevaluation of the law firm’s relationship with ALSPs. While most lawyers tend to think of independent e-discovery or document review firms when hearing the term, this industry has expanded to encompass a greater variety of tasks, including project management/administrative services, and the drafting and revision of contracts and litigation documents, performed by a greater variety of providers, including automation and artificial intelligence powered tools and services.[14] These ALSPs provide an opportunity for firms to incorporate technology into their business model,[15] especially now that ALSPs are leveraging artificial intelligence. Lawyers now have access to commercial tools and services that can actually automate the creation of junior attorney work product in a way that mitigates data security concerns that firms claim prevented them from using other types of ALSPs.[16] Technology plays a key role in the second approach as well, and many of the legal tech products on the market today are decision-making aids that aim to help attorneys make better-informed, data-driven decisions. [17] These tools are typically aimed at either predictions (e.g. predicting the likely jury award for a case to assist in settlement negotiations) or assisting with legal research (e.g. using natural language processing to augment search tools).[18]

Despite the increasing availability and reliability of these tools and services, lawyers have historically been unwelcome to these intrusions in the legal industry, both cause and result of the aforementioned “erosion of the law firm franchise.” Law firms continue to express lingering doubts quality of the output these tools and services can provide and continue to express doubts about their value proposition.[19] And ultimately, it’s the client’s assessment of the quality and value of the legal services that will determine their price. Firms that cannot see the benefits and value of ASLPs will be left behind and will have a much more difficult time in the next recession.

Perhaps the ultimate solution, however, is one rooted beyond the mere adoption of key technologies by law firms.  Perhaps the time has come to reinvent the relationship between client, law firm and ALSPs.  Instead of viewing each other in a customer/service provider relationship, a reimagined “partnership” would lead to more transparent and mutually beneficial relationships.  More specifically, all three parties could openly discuss and identify specific pain points and efficiencies to be achieved, and all three parties could agree on a three-way arrangement that benefits all parties.  For example, the client could commit to using the law firm exclusively on a certain type of matters across multiples jurisdictions, and in return, the law firm would provide specific client-centric processes and fee arrangements, all made possible by the third leg of the stool – the technology vendor that is able to materially increase efficiencies, all of which lead to better results and costs savings for the client; increased profitability and “client sticky-ness” for the law firm; and wider use of the technology by the vendor.

Richard Lau is a Production Manager of legal technology company LegalMation.  Thomas Suh is the co-founder and president of LegalMation.

[1] Figure uses June 2009 as the end date for the Great Recession.

[2] See Hugh. A. Simons and Nicholas Bruch, “When Will Disruption Hit the Legal Industry?” The American Lawyer Daily, Sept. 11, 2017.

[3] See Thomson Reuters Legal Executive Institute and Georgetown University Law Center, 2017 Report on the State of the Legal Market, (the “2017 Market Report”), Thomson Reuters Legal Executive Institute, Georgetown University Law Center, and Oxford Said Business School, Alternative Legal Service Providers: Understanding the Growth and Benefits of These New Legal Providers, Feb. 19,2017 (the “ALSP Report”).

[4] 2017 Market Report, at 10-11

[5] I can find no indication of this profession existing as a standalone position before 2007; Buying Legal Council, a trade organization for the nascent legal procurement profession, was founded in 2013. See also Deb Tesser, “Legal Procurement 101, An Interview with Dr. Silvia Hodges Silverstein” Evolve the Law: ATL’s Legal Innovation Center, Sept. 13, 2018, and Deb Tesser, “Is Legal Procurement The Disruptor We’ve been Waiting For?” Evolve the Law: ATL’s Legal Innovation Center, Sept. 18, 2018.

[6] Simons and Bruch.

[7] Thomson Reuters Legal Executive Institute and Georgetown University Law Center, 2018 Report on the State of the Legal Market, 2018 (the “2018 Market Report”), at 13-14.

[8] Thomson Reuters Legal Executive Institute, 2017 Dynamic Law Firms Study, Nov. 2017 (the “Dynamic Law Firms Study”).

[9] Id at 2.

[10] Id at 6.

[11] Id at 7.

[12] Id at 10.

[13] Id at 2.

[14] See ALSP Report. Among the entities and services, the report lists as fitting this definition are: Big 4 accounting firms bundling legal services with their consulting/accounting services, Legal Process Outsourcing which employ teams of contract lawyers/non-lawyers to whom high volume legal drafting, and technology enabled services that provide law firms/legal departments with customized software or web-tools for workflow enhancement or automation.

[15] See ALSP Report at 3. (“Absent client pressures it is unlikely that law firms alone would be driving the use of alternative service providers. Those firms that do proactively embrace partnerships with ALSPs will stand apart from their peers.”)

[16] ALSPs Report at 13.

[17] See, “20 Most Promising Legal Technology Solution Providers – 2018,” CIOReview.com, 2018. “20 Most Promising Legal Technology Solution Providers – 2017,” CIOReview.com, 2017.

[18] The most prominent vendor in this space is probably Bloomberg Law’s Litigation Intelligence Center. See

“Bloomberg Law Introduces Litigation Intelligence Center, Streamlining Workflow And Access To Specialized Tools” PR Newsire, April 18, 2018 accessible at https://www.prnewswire.com/news-releases/bloomberg-law-introduces-litigation-intelligence-center-streamlining-workflow-and-access-to-specialized-tools-300632276.html.

[19] ALSPs Report at 13.

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A leading global retail giant achieves significant savings on legal fees on its high-volume litigation matters using LegalMation’s Complaint Analysis tool.

The Legal Operations group of a leading global retailer with significant litigation volume across the country was searching for technology tools to increase efficiency and consistency on its litigation matters, lower its legal spend, and obtain more value from outside counsel. Working with LegalMation, the retailer identified two litigation areas with large volume where the deployment of LegalMation’s Complaint Analysis tool could have a significant impact: employment and premises liability tort litigation.

The retailer conducted a pilot of LegalMation’s Complaint Analysis tool by asking select outside counsel to run complaints through the LegalMation Complaint Analysis tool and compare the outputs to those generated by the firm’s typical workflow.  LegalMation’s Complaint Analysis tool was able to generate an answer, requests for production and interrogatories that were almost identical to those generated by outside counsel and tailored to the facts and allegations of each.

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  • Increased consistency and quality in work product

Large Firm Case Study

An Am Law 100 labor and employment law firm was searching for ways to become more competitive and capture more market share

Handling over 5,000 employment related litigation matters per year across the country, the Am Law 100 law firm (the “Firm”) needed a quantifiable solution to lower its servicing costs and provide more value to its national clients. The Firm engaged in extensive testing of LegalMation’s platform across multiple offices to determine its effectiveness.

Using LegalMation’s Complaint Analysis tool, the Firm was able to reduce the attorney time spent preparing answers, affirmative defenses, and initial written discovery (requests for production, interrogatories, and other jurisdiction-specific requests) from an average of 6-8 hours per matter, to less than 1 hour (including review time by an attorney). The Firm tested LegalMation’s tools across multiple types of employment cases across various jurisdictions and concluded that the resulting draft documents were not only produced incredibly fast, but were also consistent in quality.

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Results

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  • Higher profit margins on volume matters, particularly those on AFAs
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A high-caliber general litigation boutique reduced paralegal and associate time and money expended on key early litigation tasks by 75%+

A general litigation boutique with around 40 attorneys needed to cut costs in order to stay competitive in a very crowded local market and also sought to minimize reliance on support staff.

Using LegalMation’s platform, the boutique law firm was able to reduce the attorney (and paralegal) time spent preparing answers, initial discovery (requests for production and interrogatories), and discovery responses, including objections, from several hours per matter, to less than 1 hour (including review time by a supervising attorney). The boutique firm tested LegalMation’s Complaint Analysis tool and Discovery Analysis tool across multiple practice areas and concluded that the resulting draft documents were not only produced incredibly fast but also with consistency and quality similar to its own junior attorneys and paralegals. In particular, the boutique law frim, which did not have the luxury of a large support staff, found LegalMation’s Discovery Request tool particularly helpful in dealing with burdensome discovery requests served on its clients.

Today, the boutique law firm is able to offer more competitive proposals for its matters and through the efficiency gained by LegalMation’s platform compete against national law firms with more resources.

Challenge

  • Downward price pressure due to a crowded local market
  • Limited associate/paralegal resources to handle routine drafting tasks
  • Compete against national law firms with more resources
  • Differentiate from competitors during marketing pitches
  • Lack of work product consistency from associates/paralegals

Solution

  • Deploy LegalMation’s Complaint Analysis tool to generate initial draft responsive pleadings, and the Discovery Analysis tool to quickly generate shells and responsive objections throughout the life of a case

Results

  • 70-85% time savings on key litigation tasks
  • Higher profit margins on volume matters, particularly those on AFAs
  • More distinctive marketing
  • Higher levels of associate satisfaction
  • Reduced staff overtime
 

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A national insurance carrier achieves significant savings on its high-volume, low exposure litigation matters through its adoption of LegalMation’s Complaint Analysis tool

A national insurance carrier with significant litigation volume across the country for its insureds, was searching for technology, tools, and processes to increase efficiency on its litigation matters to lower its litigation costs. This national insurance carrier partnered with LegalMation to identify an area of litigation where LegalMation could have a significant and immediate impact and decided to deploy LegalMation’s Complaint Analysis tool for all of its third-party motor vehicle tort litigation.

LegalMation worked closely with the national insurance carrier to customize the output from its platform to generate documents that mirrored the current output of the national insurance carrier’s attorneys and paralegals.  LegalMation was able to automate the creation of an answer, requests for production of documents, interrogatories, requests for admissions, and deposition notices, all tailored to the facts and allegations of each complaint and almost indistinguishable from those manually created by the insurance company’s attorneys and paralegals.  LegalMation was able to generate this output in 2-3 minutes—a significant time savings over the insurance company’s prior practice for generating this output.

Following a pilot program consisting of processing all of its complaints for a single jurisdiction through LegalMation, the national insurance company made LegalMation an integral part of its workflow for all jurisdictions where LegalMation currently operates. In these jurisdictions, when a new motor vehicle-related lawsuit is served on the insurance company or its insureds, the assigned counsel or paralegal runs the complaint through the LegalMation Complaint Analysis tool, downloads the initial outputs, which are then reviewed by the attorney or paralegal and finalized, all within a few minutes.

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  • Reduce legal secretary/paralegal overtime

Solution

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  • Reallocation of staff/captive counsel time away from process/volume work to higher value strategic tasks
  • Increased consistency and quality in work product

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