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Law firms will see a greater focus on price competition, non-hourly billing and use of project management, according to survey

Over 75 percent of law firms surveyed indicate that they believe that more price competition, more non-hourly billing and the use of project management to improve efficiency of service delivery will be permanent changes in the legal landscape, according to a survey, Law Firms in Transition, from legal consulting firm Altman Weil.

“The primary impact on law firms of the recent recession will be a greater focus on efficiency and productivity driven by client demands for cost control,” said Altman Weil principal Tom Clay. “But most firms are still in the early stages of figuring out how to successfully institutionalize those changes in their organizations.” The majority of law firms do not expect the changes to negatively affect their bottom line. In fact, only 27 percent of those surveyed believe that lower profits per partner will result.

Non-hourly billing. The survey reported that 94.5 percent of law firms offer some alternative fee arrangements (AFAs), and all firms with 150 or more lawyers do so. The majority of firms indicate that their use of AFAs is primarily in response to client requests, rather than a proactive strategy. Additionally, half of all firms say their fee arrangements are either less profitable than matters billed hourly, or they are not sure how they compare. When asked about tactics employed to implement AFA programs in their law firms, 80 percent report they require centralized approval for AFAs; 61 percent use cost analysis to determine fee structures, and 45 percent have AFA Committees. However, less than a third of firms track profitability outcomes, feature fee options in marketing communications, provide project management training, or set annual targets for AFAs. Law firms raised their standard hourly billing rates in 2010. The median increase is three percent according to the survey, closely aligned with the 2010 US rate of inflation, currently reported at 2.2 percent.

Lawyer staffing structures. Partnership in US law firms is now harder to attain and will remain so according to the survey. Nearly 40 percent of firms made fewer partnership offers in 2009, and 50 percent indicated that they will or might do so in 2010. Over a quarter of all law firms reported de-equitizing partners in 2009 and 37 percent will or might do so this year. The majority of firms expect each of these trends to be permanent going forward. “This is a key element in the changing equation of law firm finance,” Clay explained. “Firms will maintain their profits per partner, in large part, by managing the number of partners they admit.”

The short term outlook for associates is not bright. Sixty four percent of firms reported shrinking their summer programs in 2009 and 54 percent anticipate doing the same in 2010. Just over half of all firms reduced or discontinued hiring first year associates last year, and 38 percent will do the same this year. Longer term, firms are uncertain of associates’ fate. While 42 percent predict that smaller first year classes will be a permanent phenomenon, 45 percent expect the opposite. And only 32 percent predict that associate salary reductions will continue in future.

When asked about other staffing alternatives, firms expressed a growing enthusiasm for contract lawyers. In 2009, 39 percent of law firms reported using contract lawyers. In 2010, 53 percent will or might do so; and 52 percent expect that contract lawyers will become a permanent part of their staffing plans. By contrast, less than 10 percent of firms outsourced or offshored legal work in 2009 or plan to do so in 2010. Only 28 percent of law firms expect outsourcing of legal work to be permanently adopted in the future, and 22 percent expect the same for offshoring. “Despite the potential for cost savings, law firms remain highly skeptical of outsourcing and offshoring and will likely only adopt them when pushed by clients to do so,” Clay commented. “This is the same scenario we’ve seen with alternative fees.”

Workforce reductions. Law firms cut personnel from the bottom up in 2009. Sixty-seven percent of law firms made cuts in support staff; 43 percent cut paralegals and 44 percent cut associates. By contrast, only 25 percent cut equity partners and 26 percent cut non-equity partners from their ranks. These are seen the end of personnel cuts, according to the survey, but they will be more limited in 2010. Support staff is still a target, as are non-equity partners. While making cuts, firms are also planning growth. Half of all firms indicated they will be more aggressive in increasing lawyer headcount in 2010. The overwhelming strategy of choice for growth is acquisition of laterals followed by the acquisition of groups.

Financial performance. Despite the difficult economy, slightly more firms had revenue gains than losses in 2009. Forty-six percent of firms reported increases in gross revenue; 44 percent reported decreases; and, 10 percent had no change from the prior year. Revenue per lawyer was also up in 47 percent of law firms in 2009. Profits per equity partner (PPEP) increased in 56 percent of firms. PPEP increases were driven by cuts in overhead costs in 69 percent of law firms which were primarily cuts of personnel. Forty two percent of firms cut costs by more than four percent and an additional 27 percent cut costs by one percent to four percent.