"Uncertain" Prospects for Legal Industry, Say Citi/Hildebrandt As Law Firms Face Pressure on Profits - Law Blog - WSJ

"Uncertain" Prospects for Legal Industry, Say Citi/Hildebrandt As Law Firms Face Pressure on Profits - Law Blog - WSJ

"x x x.

“Continued sluggishness in demand growth in much of the world will exacerbate the ongoing struggle in many firms to maintain profitability at acceptable levels. This is particularly true given other economic factors that are also at work in the current market: continuing client resistance to fee increases, growing levels of direct and indirect expenses, and the increasing cost of maintaining leverage.”

That last bit refers to what happened to law firm payrolls after waves of associate layoffs in 2008 and 2009. Leverage is the term used in the legal industry to describe the ratio of partners with equity stakes, as compared to non-owners. Those non-owner ranks include so-called “income” partners who do not own equity stakes, attorneys who are counsel/of counsel, and associates, whose labor is a key driver of profits at large law firms.

In 2001, top tier firms looked like this, according to the report:

85% associates
7% income partners
6% counsel/of counsel
2% other lawyers

But as firms shed associates, the composition at those firms shifted so that more expensive senior lawyers made up a larger portion of the payroll. Here’s the 2010 snapshot:

73% associates
11% income partners
10% counsel/of counsel
6% other lawyers

Not necessarily a problem, except that — alas — those more expensive income partners aren’t as productive as associates or equity partners, according to the report’s analysis of annual productivity by timekeeper (2001-2010). At top tier firms associates billed nearly 1,775 hours per year, equity partners billed more than 1,750, while income partners billed about 1,600 hours.

“If current conditions persist, firms will be increasingly challenged to examine new models for the delivery of legal services,” Michael Abbott, general manager of the Hildebrandt Institute, said in a statement. “New business models based on redesigned work processes, greater emphasis on project management, and new approaches to expense management and professional development may unlock greater efficiencies. The most successful firms will continue to be those that can achieve and deliver the greatest value to their clients.”

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