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I have previously called out 2012 as The Year of Pain for law firms. The basic premise is that market demand is flat (per the many market reports) and that firms have run out of cost cutting ideas, such that costs are rising (also per the many market reports). The result will be a drop in profit for firms across the market.
But equally interesting is that the pain will not be felt the same across all firms. Another recent market phenomenon is dispersion. In the good-ole days, law firm profitability moved in a group-like fashion. All boats generally moved up with the tide. However, the market is now experiencing more dispersion, in that some boats are sinking while others may be rising. So then the question becomes: Why?
Why are some firms succeeding in this challenging market while others are struggling? Here is my hunch. A number of articles and posts might suggest it is superior management or leadership. That may play some small role, but it is my sense most firms are run as true partnerships. With consensus building and various other efforts, law firm leadership has to please its partners. So unlike a traditional business, leadership does not make such direct strategy decisions and thus have less impact on the success of the enterprise.
Absent that factor, I think there will be two other factors that determine which firms rise and which take the other road.
#1 – Types of Practices and Clients
Less by strategy and more by chance, some firms have less price sensitive practices. Most large firms have always had a mix of practices with varying levels of profitability, however now that fact is becoming much more apparent. So if a firm has a substantial practice or set of practices with rates clients still pay, then they will likely be on the rise. Although I would add – don’t expect this advantage to sustain. For the most part, these profitable practices will feel the pain soon enough. Pricing pressures are sweeping through the market. It’s just that some practices are feeling the effects sooner than others.
On the other side of this coin, there are clients from certain industries putting more fee pressure on law firms. So more by luck (although some may claim leadership and ability to know the future), certain firms who don’t represent such client markets will prosper above others.
#2 – Location
A number of firms are relocating back-office functions to lower rent locations. The idea here is pursuing long-term overhead cost reductions. Well guess what? Some firms are already located in these lower rent locations. So they already have the advantage of lower rent, and lower pay for both staff and lawyers.
As I note, these are hunches. I have not seen any market surveys yet that would direct;y confirm or dispute these factors as true drivers.
Come 2013, I guess we will all find out.