Will Rogers once said, "Even if you are on the right track, you'll get run over if you just sit there." He was not talking about the legal industry, but his humorous quip is something that law firm leaders should be mindful of when they are developing their strategic plans because most industry analysts agree that the demand for legal services as a whole, which has been flat for several years, does not appear to be improving anytime soon. In fact, the Thomson Reuters Peer Monitor Index (PMI) found that the demand for legal services was negative in the latter part of 2016. This means that most firms (and lawyers) are finding it hard to grow organically.
The reasons for this flat-to-negative demand for legal services is the subject of many articles and books. Richard Susskind is one author who has written several books on the future of the legal profession—one being Tomorrow's Lawyer. Susskind writes about factors that have led and will continue to lead to obstacles when it comes to resolving the growth challenges in the legal industry. Susskind identifies technology and client-driven cost pressures as two of the primary reasons why the demand for legal services is not growing.
Before the age of the Internet and the growth of nontraditional legal service providers like LegalZoom, lawyers were the primary source of knowledge and service for all clients. Susskind and other pundits have opined that greater access to information coupled with the economic shift caused by the Great Recession has led many legal consumers (large and small) to cut back on the amount that they are spending on traditional legal services by relying more on in-house legal expertise, using online and nontraditional legal services, and demanding alternative fee structures to meet their legal needs.
Adding to the industry problem of the tightening demand for legal services is the "graying of the bar," which is a demographic reality. The American Bar Foundation (ABF) tracks some of these demographics in its Lawyer Statistical Report, last issued in 2016. In 1991, 46 percent of the bar was under the age of 40, and 20 percent of the bar was over the age of 55. In 2005, these percentages changed dramatically with only 26 percent of the bar then under the age of 40 compared with 34 percent being over 55. Although the ABF study does not show the current percentages, conventional thinking is that that disparity is even wider today due to decreasing law school admissions over the past decade and a still-troubled entry-level job market. The ABF's Lawyer Statistical Report shows that law school enrollment dropped by almost 20,000 from 2011 to 2014. Further, the ABF reports that less than 60 percent of the 2015 graduating class had full-time employment within 10 months of graduation. So the industry has fewer and fewer new lawyers while the average age of the bar continues to increase.
Adding to the issue of an aging bar is the pending retirement of the baby boomer lawyers. Many large firms offer generous retirement and pension benefits to their partners. Many of these plans are unfunded. Dewey & LeBoeuf, Heller Ehrman, and WolfBlock are just a few law firms that went under, in part, because younger rainmakers left their firms. Some of those departures were no doubt fueled by concern that more and more law firm profits were needed to meet obligations of the retiring partners. Julie Triedman of The American Lawyer, who has been regularly reporting on the risks to firms relating to pension liabilities, reported that more than half of the AmLaw 200 partners are baby boomers. Also, Altman & Weil has reported that 63 percent of firms it surveyed in one study reported that more 25 percent of firm revenue was tied to lawyers over the age of 60. So there is a lot of revenue connected to these aging lawyers.
Despite these economic and industry challenges, law firms remain profitable and many are reporting rising revenue. Some of the rise in revenue and profitability is due to rate increases, but most firms that are growing are doing so by lateral acquisition of legal talent. Altman & Weil's Merger Line shows that there has been a dramatic increase in law firm mergers since 2010, a year in which 39 law firm mergers were reported. From 2013 through 2016, the average number of law firm mergers has skyrocketed to 87.5 a year.
Most law firm leaders now recognize that growing by lateral acquisition is essential for growth. For those firms that have unfunded pension liabilities, it is essential to have an increasing pool of revenue and profits so that they can not only pay their younger rainmakers but also pay the baby boomers in retirement. If the soon-to-be-retiring partners feel insecure about their retirement nest eggs, not only will younger rainmakers depart for greener pastures but the industry will see more and more baby boomers parting ways with their current firms and moving their business to firms that can pay them what they are worth today as well as in retirement.
This is good news for those lawyers who are looking to leave their current firms because the market for lateral recruiting is and will continue to be a "seller's market" for the next decade. Lateral partners need to become savvier in asking questions about their potential new firm's long-term financial soundness as well as management's plan to help integrate them into the firm culture. As more senior level lawyers look to leave their firms, they will be looking for their new firm to help their team—which likely includes younger service partners with little or no experience in client acquisition—with organic growth. Very few firms today offer meaningful training and development programs for service partners to become rainmakers.
For buying law firms to compete successfully in this increasingly competitive marketplace, they will likely need to develop a lawyer-centric mentality. Law firm leaders will have to build and strengthen platforms and programs that will allow laterals to integrate into the new firm's culture and not just survive but thrive. That means that the law firms that are most likely to "win" in this marketplace will need to implement development programs for lateral teams to help with client acquisition. These law firms should follow Susskind's advice and continually innovate in order to satisfy not just the evolving client needs but also those of the senior rainmakers who may be losing confidence in their existing firm's ability to survive their retirement.
While law firm succession planning is a topic for another article, the firms that develop succession plans—not only to account for paying out the baby boomers but also to develop and encourage the next generation of law firm leaders to successfully transition the firm clients to a generation of lawyers that heretofore have largely been following the lead of the baby boomers when it comes to law firm management—are the ones that will be on buy-side of the mergers for years to come.
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