‘Demand mobility’ and power shift went unrecognized by some in BigLaw, report says
There has been a “sorting out” in the legal market in the last few years, as many BigLaw firms didn’t even notice that budget-conscious clients were moving around legal work and gaining market power, according to the 2024 Report on the State of the U.S. Legal Market.
During the “transactional decade” that began after the financial crisis in 2008 to 2011, low interest rates drove transactional practices, leading to steady profit growth, according to the report released this week by Thomson Reuters and the Center on Ethics and the Legal Profession at the Georgetown University Law Center.
During this period, a “shift in market power from law firms to their clients continued to grow,” according to the report. Clients increasingly sought requests for proposals for legal services, imposed budget caps for legal projects and unbundled legal work, spreading around matters to different firms.
Buoyed by transactional practices, many firms didn’t notice that their clients had “quietly pushed certain kinds of legal work down market,” a phenomenon that the report terms “demand mobility.” As a result, “some firms retained a false sense of security even as client work was slipping away.”
“Looking ahead to 2024 and beyond, it’s obvious that clients are likely to continue to be quite aggressive about moving work to more cost-effective law firms, given the potential savings they could see,” the report said.
“Law firms looking to retain clients in this environment will need to focus on emphasizing the value and efficiency their work provides to the client while avoiding the pitfalls of devaluing work by emphasizing price. As much as clients are looking to cut costs, they are also being asked to do more with less—those law firms that can demonstrate these capabilities will be better positioned to retain client work.”
The report is available here, and a Jan. 9 press release is here.
The report described 2023 as “an encouraging” but “not outstanding” year for firms.
Demand for legal services increased 1.1% on average, but midsize firms drove the increase. Demand was flat at the nation’s top 100 grossing firms but increased 0.6% at Am Law Second Hundred firms and 2.4% at midsize firms.
The biggest driver of demand growth was litigation, a countercyclical practice that increased by a 15-year high of 3.2%. Countercyclical practices, which also include bankruptcy and employment, tend to see more work during difficult economic conditions.
The “historic boost” in litigation work, along with increases in other countercyclical practices, helped push the legal market “into positive territory despite the continuing contraction of transactional practices,” the report said.
Firms have also increased rates and head count, the latter happening “relatively consistently and at times quite aggressively,” the report said. “The result is many more attorneys vying for a share of work—a formula for declining per-lawyer productivity.”
Midsize firms are “leading the way in head count growth,” increasing lawyer count by more than 7% since January 2022. The nation’s top 50 growing firms, however, have “pursued aggressive reductions in associate headcount throughout most of 2023.”
“Dynamic law firms” with good financial metrics shifted to transactional work during the transactional decade; shifted practices away from price-sensitive areas; balanced demand and staffing projections; expanded nonlawyer professional roles and technology; and “were able to consistently push work down the firm’s food chain, thus optimizing profit potential through leverage.”
Reuters covered the report and spoke with William Josten, manager for enterprise legal content at the Thomson Reuters Institute.
“For 2024, I think it’s going to be a fairly volatile year,” Josten said, noting the unpredictability of election years. “I don’t know that we can count on there being another ‘stable year’ for several years to come.”