Originally published in the Legal Executive Institute
By Joseph Raczynski
NEW YORK — Believe it or not, Big Law is primed to be disrupted within the next several years. At least according to one version of the future from LegalWeek’s fascinating snapshot of the state of the legal industry in 2018. Steve Kovalan and Nicolas Bruch, both Senior Analysts at ALM Intelligence, compiled statistical evidence and built a case surrounding the trends of the recent past to predict the near future.
Bruch defined three distinct periods; the pre-downturn era, the current period, and the future of the legal market. The pre-downturn was a timeframe from 1994-2006 when it was a sellers’ market. Law firms could dictate the terms to most interactions with their clients on price and product.
By contrast, the current period is an evolution of what happened after the financial crisis and ensuing recession, from roughly 2007-2017. During this period, Alternative Legal Service Providers (ALSPs) started to make serious in-roads into the legal market, impacting law firm profit margins.
The next phase, which Kovalan and Bruch pegged happening from 2018-2026, envisions a future of the legal market that’s hyper focused on artificial intelligence, the Big Four accounting & consulting firms, and what may happen to Big Law.
Since the downturn in 2008, law firms have had to rethink their business model. There has been rapid growth of the global law firm, and it continues striving to become bigger. However, while Big Law continues to endure the arms race of increasing numbers of global attorneys, they have also seen slowing overall growth and volatile financials.
The numbers have demonstrated years of extreme inconsistency, with amazing profits-per-partner (PPP) one year and a drought the next. Law firms have also been in a constant battle with the push-back they get from clients on billing and pricing issues. Further entangled in those issues are woes that are compounded by the rise of law departments, ALSPs, and rapidly developing legal technology, which is a means to an end for all parties, said Bruch and Kolavan.
One point they underscored how much in-house lawyers are growing as a force. The annualized growth rate of in-house lawyers is 4.7% compared to 0.4% for the growth of Am Law 200 lawyers.
As they closed their session, Bruch and Kovalan focused on a few salient points around law firms in the AmLaw 200, which are facing a period of high volatility and where over the last three years:
- 61% have seen revenue decline;
- 83% have revenue-per-lawyer decline;
- 85% profit-per-lawyer decline; and
- 67% profit per equity partner decline.
Ultimately, the take-away from the pair was that there will be three groups that bubble to the top during this future phase: specialty regional law firms; boutiques; and the largest of large law firms.
They hedged their bets and surmised that while Big Law is threatened — because much of their work can be commoditized — that in the short run their profits are still very healthy. Nonetheless, the very real threats to those profits that Big Law faces now come from AI and the Big 4 accounting and consulting companies, such as the EYs and KPMGs of the world that are rapidly engaging in the practice of tax, finance, M&A, and labor.
As Kovalan and Bruch suggested, the times ahead will be fascinating in the ever-evolving landscape of the legal industry.