No doubt, most law firms – including “MidLaw” – have seen profits squeezed the past ten years. A growing oversupply of lawyers, an increasingly demanding client base, a persistent global recession, and numerous other market forces, have led to intense competition. Clients – especially the large institutional variety – know this and have been pressing law firms hard to discount rates and implement alternative free agreements.
So how are midsize firms faring as the economy rebounds? Read on.
Each spring, we present the MPF Leadership Conference, a conference designed especially for law firm managing partners. Our 2014 Leadership Conference was held in Atlanta on May 8th with 85 managing partners in attendance. They lead firms ranging in size from 10-500 lawyers, with most in the 20-100 lawyer range.
During the Conference, we employed audience polling technology to gather input on key issues facing law firm leaders. The responses are instantaneous, anonymous and provide great bench-marking data. This year, we asked several questions firm economics and profitability and we’re pleased to share in this month’s column some of the highlights.
Encouraging News for Mid-Size Law Firms
Among the first questions we asked firm leaders was: “How is your firm performing financially so far in 2014?” 43% said they were performing as expected, while 36% said they were doing better than expected. Only 3% said they were not doing well.
We next asked about revenue per lawyer compared to a year ago. 56% said RPL was up, with 24% reporting an increase by more than 5%. 35% said it was “about the same” as last year with just 9% reporting a decline.
Not bad, considering all the doom and gloom we’re been reading and hearing about the past five years.
Alternative Fees Arrangements – A Slow-Motion Riot
Despite all the fuss, alternative fee arrangements aren’t exactly taking over the manner in which law firms charge for their services.
When we asked MPF Conference participants about the percentage of revenue generated through alternative fees, nearly half said less than 5%. 21% said 6-10%. 27% reported that they proactively pitch AFAs to clients with 2/3 of them saying clients aren’t all that interested. Nearly half say they adapt AFA only when clients press for them, with 25% saying they haven’t had to deal with it. Not exactly a tidal wave of change, is it?
Susan Hackett, former General Counsel of the Association of Corporate Counsel, describes the trend as a “slow-motion riot.” My friend and colleague Bob Denney says the issue of AFAs reminds him of a quotation from Shakespeare’s Macbeth: “A tale told by an idiot, full of sound and fury, signifying (almost) nothing.”
Firm-wide Profit is the Preferred Barometer of Financial Health
We next asked the managing partners, “If you had to select just one metric to measure your firm’s financial health, what would it be?” The top three in order were: Firm-wide profit (25%), Revenue per Lawyer (21%), and Profit as a Percentage of Revenue (19%).
We (and most consultants we know) believe that Revenue per Lawyer (RPL) is the best single indicator to assess firm-wide financial performance.
Strategic Planning Leads to Improved Performance
For several years, we’ve drilled down on the issue of strategic planning and its impact on firm performance and profitability. Historically, about 40% of MPF Conference participants said their firms had a firm-wide strategic plan. This year, however, a whopping 71% said their firms had a plan. Naturally, we thought this was a statistical anomaly. Separately, we conducted an online survey in March 2014 in which 152 firms participated. 59% said they had a firm-wide plan.
So maybe it’s not an aberration after all. Maybe, just maybe, law firms are starting to value and recognize the importance of a well-executed firm-wide strategic plan. Why? Because it works!
Of those with a plan, 65% report positive results with 28% not sure. Of course, planning without implementation is a colossal waste of time effort and energy. Those who reported the best results from planning also gave their firms high marks on implementation.
Start Grooming Your Future Firm Leaders Today
Our closing question at this year’s event asked about whether the current associates of the firms are “up to the task” of inheriting the firm. 65% said no. Wow! Succession planning is among the most neglected aspects of firm leadership and management. Consider, for example, that 70% of first generation firms don’t survive their founding partners.
Now is the time to identity and groom future leaders of your firm. Get young lawyers involved in leadership and governance at the department or practice group level. See who rises to the challenges of the position and move them into more meaningful positions in firm governance. A firm-wide strategic plan and passionate, committed leadership are absolutely critical to a successful law firm of the future.
About the Author
John Remsen, Jr. is President and CEO of The Managing Partner Forum, the country’s premiere resource for managing partners and law firm leaders. He is also President of TheRemsenGroup, one of the country’s leading consulting firms for mid-size law firms, and can be reached at 404.885.9100 or JRemsen@ManagingPartnerForum.org.