Law firm complacency runs into brick wall of pandemic

Altman Weil’s 2020 Law Firms in Transition Survey reports on law firm strategy, management and performance trends, providing a snapshot of where firms were immediately before the pandemic hit.

Through mid-March 2020, most firms were looking at a continuation of the status quo — doing enough to stay even with peer firms and rising on the tide of general economic prosperity.

“Law firms, by design and temperament, are slow moving organizations,” says Altman Weil principal and survey co-author Eric Seeger. “As the economy improved over the last few years, firms felt minimal urgency to change. But, now, law firm complacency has run into the brick wall of the coronavirus pandemic. This is an opportunity for a reset if firms are willing to take it.”

Highlights from the survey include:

• Performance accelerators: Firm leaders identified higher billing rates and increased billable hours as the top factors they anticipated would drive firm performance in 2020. Those hopes are now dashed in most law firms.

• Profitability tactics: The three most effective techniques to improve law firm profitability, all rated as effective by more than 80 percent of firms using them, are cutting underperforming lawyers, transitioning to smaller, cheaper space and reducing staff.

We expect more firms to pursue each of these options in 2020.

• Discounted fees: A median of 21 percent to 30 percent of firms’ legal fees come from discounted hourly rates, and 31 percent to 40 percent of fees in firms with 250 or more lawyers, according to the survey. The current crisis will surely cause clients to push more aggressively for additional pricing concessions.

• Overcapacity: Equity partners were not sufficiently busy in 31 percent of law firms, non-equity partners were not busy enough in 50 percent of firms, and 50  percent of all firms say overcapacity is diluting profitability — results reported largely before the current calamity took a bite out of lawyer workloads.

• Early stage of business model change: A majority of firms assess their progress on pricing, staffing and efficiency strategies as either nonexistent or at an early stage of maturity characterized by ad hoc efforts that are neither standardized nor centralized.

This limited degree of experimentation explains the moderate levels of effectiveness reported for most business model change and the fact that those levels have stalled over the last four years of the survey.

• Responses to recession: Launched before the pandemic, the survey included a question on a “hypothetical moderate recession” and captured the change in law firms’ responses before and after the actual recession began to take shape.

The top response in both time frames was to strengthen client relationships. Three responses that jumped dramatically after the crisis hit were plans to increase cash reserves, cut overhead and reduce hiring of first-year associates.

“For years, survey participants have told us that they are not changing more because they aren’t feeling enough economic pain, clients aren’t pushing for it, and partners resist,” said Altman Weil principal and survey co-author Tom Clay. “We don’t know yet how deep or long this recession will run, but clearly this is a time for reevaluation and as such it presents a significant opportunity for forward looking leaders. We hope many of them will rise to the occasion.” 

Conducted in March and April 2020, the Altman Weil 2020 Law Firms in Transition Survey polled managing partners and chairs at 794 U.S. law firms with 50 or more lawyers.

Completed surveys were received from 182 firms, including 26 percent of the 500 largest US law firms and 26 percent of the Am Law 200.