Forecast 2014: Law Firms Face Eroding Brand Loyalty, Need For Succession Planning
It is now five years since 2008 and the great economic trough that affected the legal profession like no other recession. Back then, we advised: "Forget about the recession. It's a fact of life. Pay attention to what the eventual recovery will look like and position your firm to take advantage of it." Many are still waiting for that recovery.
For those who think that the 2013 to 2018 period will eventually resemble 2003 to 2008, think again. Interest rates—and yields—continue at historic lows and, despite some hints to the contrary, the Federal Reserve Board seems poised to continue a policy of monetary expansion for at least another year. The Affordable Care Act ("Obamacare") roll-out is a disaster and serves only to fog up the lenses of economists and business leaders who are groping for some predictability upon which to base decisions. Hence, good money still sits on the sidelines.
That said, there is still opportunity in uncertainty. Every morning, the market for legal services is in a state of perfect equilibrium—everyone who needs a lawyer has a lawyer. The good news is that economic uncertainty is a great disrupter of equilibrium. Businesses are working to become more efficient and increase their margins, despite having to adjust to uncertainty. That means taking nothing for granted and questioning all prior assumptions and empirical evidence. Businesses will have to do different things and do things differently. That will shake up the equilibrium.
When the market equilibrium is disturbed, opportunities present themselves to those who are observant enough to spot them and courageous enough to take advantage of them. "Doing what we've always done," and "Sitting tight and riding it out," are no longer viable strategies. Yet, lawyers and law firms are naturally risk averse. It is politically easier to find comfort in past successes and expect them to continue, even though the world has inexorably changed.
Reflecting on the past five years, we have noted two major trends that should factor into the plans of law firm leaders.
• The gradual erosion of "brand loyalty" between clients and their lawyers, coupled with increasing pressure on businesses to cut their legal spend—a cost element that had historically been overlooked because nobody had any bright ideas as to how to measure the value of legal services.
• The aging of the baby boomers, who occupy the most senior positions in law firms and who account for as much as 35 percent of partner headcount and more than 50 percent of fee originations. This is exacerbated by the failure of some firms—especially smaller ones—to develop a strong "next generation" capable of taking over for retiring seniors.
Here's what these trends mean and some suggestions about what to do.
There will always be lots of high-rate, high-margin work for the elite firms that handle the most complex and highest risk matters. For this kind of work, the client's perception of value received is nearly unlimited, thus these few firms can charge whatever the market will bear without fear of losing business.