26 January 2017

Death of the billable hour kills off traditional law firm franchise

The traditional law firm model has been killed off by the effective end of the billeable hour.

Stagnation is the mother of reinvention in the legal marketplace, with the last decade ushering in a new era for lawyers, according to a report by Georgetown University. The billable hour model is effectively dead and the traditional law firm franchise is increasingly at risk after a decade of stagnant demand for law firm services, according to the 2017 Report on the State of the Legal Market, released today by Georgetown Law’s Center for the Study of the Legal Profession and Thomson Reuters Legal Executive Institute. The report warns that law firms must either find ways to effectively adapt to these and other evolving competitive conditions or risk further erosion of their market positions. At the same time, the changing market dynamics present opportunities for firms that are willing to challenge conventional thinking, take risks and innovate new approaches to the delivery of legal services, the report says.

Aftershocks

The study discusses how, 10 years after the “Great Recession” began, its aftershocks still reverberate throughout the law firm market, which has shifted dramatically into a buyer’s market, resulting in a steady erosion of demand, rates, productivity, collection realization, and profitability. While the overall market for legal services continues to grow, law firms are dealing with new competitors and changing client needs. Clients are upending traditional law firm business models not only by demanding lower costs, but also disaggregating services to non-law firm service providers, imposing new pricing models, and reducing use of first- and second-year associates.  

Billeable hour

One of the most 'potentially significant, though rarely acknowledged, changes of the past decade has been the effective death of the traditional billable hour pricing model in most law firms,'  notes the report. Although firms still technically bill a majority of their work on a billable hour basis, budget caps imposed by clients mean that as much as 80 to 90 percent of law firm work is now done effectively outside of the traditional billable hour model.  It issues a warning to firms which merely place “bandaids on the old models” - saying they will face an increasingly uncertain future. Conversely, firms 'that are able to adjust to the new market realities…and redesign their approaches to client service, pricing, legal work processes, talent management, and overall structure will enjoy an enormous competitive advantage.'

Futures

'It has been a difficult 10 years for law firms in many respects, and looking ahead, significant long-term challenges remain,' said James Jones, a senior fellow at the Center for the Study of the Legal Profession and the report's lead author. 'Actions that have helped sustain firm financial performance over the past few years, such as expense controls and reducing the equity partner ranks, are not likely to be as effective in the future. Firms need to embrace a longer-term, fundamental shift in the way that they think about their markets, their clients, their services, and their futures.' 

The report

The 2017 Report on the State of the Legal Market can be downloaded at: http://legalsolutions.thomsonreuters.com/law-products/solutions/peer-monitor/complimentary-reports