10 major trends impacting Canadian law firms in 2015

Global firms such as Norton Rose and Dentons have moved into Canada and more are on the way. They have swallowed up mid-tier law firms such as Macleod Dixon, Fraser Milner and Ogilvy Renault. Heenan Blaikie is another casualty of the competition being created by these global giants as corporate and securities deals now have more major players vying for fewer deals. These global mergers also create breakoffs of groups of partners who don’t want to be part of a worldwide firm run from New York, London or Brussels. This creates opportunities for small and midsize firms to absorb these disaffected partners, with their institutional clients, which are greatly desired by small firms, and can be run profitably from a smaller, more efficient platform.

Since the financial crisis of 2008, clients are demanding fee discounts of 10% to 50%. They are under pressure from their CEO’s to cut their legal costs and discounts are the easiest way to accomplish that.

Clients are also pushing for alternative billing as they want fixed fees and some certainty on their legal costs and as a result firms must focus on becoming more efficient.

There’s also a rise of innovative NewLaw business model firms providing legal services with much lower overheads, up to 50% lower than large firms and they are stealing work away from large firms because their charge-out rates and fixed fees are also up to half as much as large firms. This puts a lot of strain on maintaining realization rates and profitability in an increasingly competitive legal market environment.

Legal services are increasingly being commoditized in line with the competition created by more players in the legal market, and more lawyers are being pumped out of law schools that aren’t needed to meet the demand. Clients realize that often lawyers aren’t needed to do many simpler legal tasks, and they’re pushing for work to be outsourced to other cheaper jurisdictions or countries, or pushed down to paralegals, contract lawyers or outsourced general counsel to be done more cost-effectively. The mystique of law firms being the only ones who can do legal work is fast fading. There are many other non-law firm competitors in the legal industry now.

Realization rates are dropping. In the Georgetown Law 2014 Report on the State of Legal Market the average overall realization rate in 2014 was 83.5%, which was down 8% from the 92 percent rate reported in 2007, so that’s a big drop in realization over the past seven years. Clients are rebelling against law firms’ steady increase in their charge-out rates over the past decade, and they’re fed up and just will not take it anymore. Large firms have increased their charge-out rates much more than small and midsize firms, so that’s another opportunity for small and midsize firms to steal clients away from large firms.

Technology focus – LegalZoom and other automated legal service providers are quickly picking up market share and commoditizing most routine legal forms and documents. Law firms are automating more of their predecents and routine legal documents to increase their efficiency for fixed fee quoted commodity work.

Client focus is a term you’re hearing more and more, as clients demand that law firms think about client needs and profitability, not just their own. Clients want law firms to focus on their KPIs and their strategic goals.

Finally, mid-tier law firms are under continuing cost pressures as global firms are pushing hard from the top and NewLaw firms are nipping them from underneath. Mid-tier firms such as Heenan Blaikie, Macleod Dixon and Ogilvy Renault didn’t have the sophisticated management structure or the resources needed to compete with the global firms, and the NewLaw firms have cut their overheads in half. So mid-tier firms are increasingly in a Catch-22 situation, with nowhere to run. They will either be swallowed up or blown up, unless they change their business models.  Again, here’s another opportunity for small firms and midsize firms under 50 lawyers to steal clients away from their larger counterparts and hold the NewLaw firms at bay by reducing their overheads and updating their business models.

 

Increasing law firm profitability – what’s working and what’s not?

Cameron's Profits for Partners Blog

Originally published in Canadian Lawyer

Leverage

One of the fastest and easiest ways to increase profitability is to increase leverage by moving work down to the most efficient staffing level.  I’ve noticed some firms are adding non-equity partners to increase leverage and profitability, and this is a trend that continues to build. Clients are pushing hard on rates and don’t want to pay to train associates.  Non-equity partners, by contrast, hit the ground running and don’t incur training and supervision costs. Firms don’t break even on associates until three to five years of call on average, while non-equity partners are profitable right away.

Other ways to use leverage:

– Large national firms are pushing out underperforming partners with practices that don’t meet their minimum size standards, as they continue to lever themselves for maximum profitability.

– Personal-injury firms are outsourcing legal work to India to reduce costs.  This is quite…

View original post 912 more words

Increasing law firm profitability – what’s working and what’s not?

Originally published in Canadian Lawyer

Leverage

One of the fastest and easiest ways to increase profitability is to increase leverage by moving work down to the most efficient staffing level.  I’ve noticed some firms are adding non-equity partners to increase leverage and profitability, and this is a trend that continues to build. Clients are pushing hard on rates and don’t want to pay to train associates.  Non-equity partners, by contrast, hit the ground running and don’t incur training and supervision costs. Firms don’t break even on associates until three to five years of call on average, while non-equity partners are profitable right away.

Other ways to use leverage:

– Large national firms are pushing out underperforming partners with practices that don’t meet their minimum size standards, as they continue to lever themselves for maximum profitability.

– Personal-injury firms are outsourcing legal work to India to reduce costs.  This is quite a step forward in Canada, where until recently our privacy laws have made law firms hesitate to make this move.  If the outsourcing company’s servers are based in Canada and the work is being checked by Canadian lawyers, then this option can work well.

– Large national firms have outsourced administrative tasks such as word processing and billing to reduce costs.  Many firms are also outsourcing entire facilities-management, technology and marketing departments to local outside vendors such as Ricoh and Pitney Bowes Inc.

Cost Containment

“New business-model firms” such as Delegatus services juridiques inc. in Montreal and Cognition in Toronto are effectively acting as outsourced general counsel for large clients.  They operate on a virtual basis to contain premises costs and have also stripped down the management infrastructure required to run their operations. Their lawyers spend most of their time at clients’ offices, using clients’ support staff on files, which helps keep overhead costs down to as much as 50 percent of the average large firm.

Some firms are getting into project management in a big way, and find that clients are very happy to work with them to reduce their overall legal costs by getting more effective and efficient in how their legal matters are handled. This is a significant trend, and one that some law firms are using as a warm-up to alternative billing.

Centralized Management

Firms of all sizes are centralizing their governance systems to increase their efficiency and profitability. By giving managing partners the power to affect partner compensation, these firms allow the managing partners to motivate partners to do non-billable tasks that help to achieve strategic objectives.

Setting up file-approval systems under the control of a managing partner can lead to significant gains in profitability. In my experience, top-down, centralized management is the most efficient and effective way to manage.

Selecting the right clients is also crucial to becoming more profitable. Successful firms evaluate clients for their profitability, their ability to pay, and their fit with the firm’s strategic goals.

Utilization

Some firms are using “full-day” time accounting where lawyers track all non-billable time in addition to billable time. The idea is to get lawyers to account for all of their available time at the office, e.g. eight or 10 hours a day.  By having lawyers and staff account for all of their time, firms are capturing 10 to 20 percent more billable time and adding significantly to profitability as a result.

Firms should also attend to this non-billable information to ensure that their lawyers are not just focusing on the short term and their own billable hours. As management guru David Maister would say, how you spend your non-billable time is where your real profit is in the long term—for instance, your business-development efforts.  Tracking lawyers’ non-billable time can also reveal whether project-management techniques are working effectively and efficiently.

Another recent innovation is smartphone time-capture technology that allows lawyers to log their time while they work it, rather than afterwards, when their memory is hazy. This is the key to maximizing time-capture percentage.

Strategic Planning

Firms that proactively carry out strategic planning are more profitable than firms that don’t. Today’s highly competitive legal market demands that firms maintain a continuous planning mindset if they want to succeed. In the successful firm, the managing partner takes charge of executing the strategic plan and focuses on getting partners to follow through on their assigned tasks in order to achieve the goals of that plan.  The most profitable firms reward partners who complete non-billable tasks and penalize those who don’t.

The firms that do the best in today’s market are the ones with a tight vision.  They keep their team closely focused on the firm’s strategic goals, as opposed to taking a silo approach in which everyone operates independently. The days are past when a law firm could make easy money while letting every partner do whatever he or she wanted.

Partner Compensation

Your firm will make better profits if it rewards partners for the value they provide to clients rather than if it rewards them only for hours billed. Partners also need to be rewarded for profitable practices, in addition to sheer volume of billings. Those who expend extra effort in the firm’s best interests should be rewarded the most, and those who lever work down to others and unselfishly lead their practice groups should get special rewards.

Generally speaking, firms with subjective compensation systems are more profitable than formula-based firms. This is because the formulas usually drive partners to focus on personal production, instead of helping grow the whole firm.  An “eat what you kill” approach can stunt the growth and profitability of a firm.

People

Firms with strongly defined core values for their people do better than firms without them. In order to succeed, a firm needs a strong culture, where everyone buys in. This helps it achieve its goals faster, and makes its staff work harder and feel more fulfilled.

As the push to acquire the best talent continues, small firms are capitalizing on opportunities to hire senior partners who are close to retirement and are being pushed out of large firms.  Some are leaving early, taking their clients with them, to join small firms and enjoy better work-life balance. This can be a great win-win for both the senior partner and the small firm, as these partners can bring big-firm institutional clients that are coveted by small firms and can significantly increase their profitability.