For the past twenty years, training lawyers to generate revenue has been a tactical afterthought, often bolted on by law firms or practice groups, and left to whatever staff and discretionary budget was available. Today, however, a new, more competitive legal service market is forcing law firm leaders to re-prioritize this function. Much has been written about this increasingly competitive legal landscape. Suffice to say that everything you’ve read about the permanent shift from a seller's market to an oversupply of lawyers is not only accurate, it may well be understated.
For foundation, let’s use recent remarks by Dan DiPietro, head of Citi Private Bank Law Firm Group. He noted three harsh realities about the legal industry: (1) demand for legal services, especially for full-price U.S. law firms, is trending downward, (2) law firm billing rates are trending downward, and (3) cost-reduction strategies (by which PPP levels were sustained in 2009-2010) are exhausted and not repeatable. That game is over.
Firms could decrease partner compensation, but that comes with a host of threats, not the least of which is potential desertion by existing rainmakers. "Reducing partner compensation (including the 'de-equitization' of a percentage of a firm's partnership) can only go so far," says Matthew Gardella, Co-Chair of the Public Offerings & Public Company Counseling Practice at Edwards Angell Palmer Dodge. "Not only can it seriously dampen firm morale, it can lead to defections of the very rainmakers you're trying to retain, particularly when they see multiple members of their support systems leave for greener pastures."
And while the behaviors of certain firms suggest that they may be holding out for a macro-economic recovery to cure their ills, forward-thinking law firm leaders will tell you that a global economic turnaround will merely provide temporary pain relief. “A perfect storm of the due process explosion, deregulation, and the litigation boom created twenty years of golden profitability for law firms,” says W. Lee Thuston, Managing Partner of Burr Forman. “Unfortunately, there are no such similar storm clouds on the horizon. Even with a quick economic recovery, we're still going to see demand sharply reduced by Legal Process Outsourcing, technology solutions replacing bread-and-butter legal work, and clients bringing a much larger percentage of their work in-house.”
Top-Line Revenue Growth
Consequently, this leaves revenue growth as the only viable long-term strategy to maintain profits and assure law firms’ future economic health. This realization, however, raises a number of issues that transcend the marketing department.
The first, and perhaps the hardest to swallow, is that the legal service “pie” that has been growing for two decades is now starting to shrink. Law firms, attempting to maintain and grow their “slice,” will have no choice but to become significantly more combative in order to maintain profitability. "With overall demand for legal services on the decline, we all have to accept the fact that any significant increases in revenue are going to come at the expense of other law firms," says Kennedy Helm III, Chairman of Stites & Harbison.
The second is that most law firms are not adequately preparing themselves for this reality. They seem to be counting on their current rainmakers to continue to carry the revenue-generation load and make up for the impending shortfalls. Since it's unlikely that firms' existing rainmakers have been sand-bagging for 20 years, and will now burst out with 30-40% increases, however, they'll only be able to generate incremental revenue gains.
More Hands on the Oars
Unfortunately for the law firms, that makes the existing rainmakers largely irrelevant to the question of securing their financial futures. "The next move,” according to Helm, “is to get more lawyers involved in the revenue-generation process...to get more hands on the oars. I think I speak for a lot of managing partners, however, when I say, 'I've got plenty of hands; what I need are more oars.'"
Helm's comments speak to the final issue, which is that most firms' lawyers are unprepared to play the revenue-generation game. For twenty years, lawyers regarded proactive business development as a purely offensive strategy, i.e., you gained if you did it, but didn’t lose anything if you didn’t. If you managed to contribute here and there, you’d get a little taste of the rewards, but there were no real penalties for staying on the sidelines. In a Buyer's Market, however, where competitors will constantly be trying to erode law firms' existing market shares, it is imperative that a larger percentage of a firm's lawyers learn to contribute to the generation of top-line revenue.
These issues cannot be considered anything but strategic. They are about survival; they are about which law firms will still be in existence five years from now. How can firms continue to treat revenue generation as a lower-level tactical concern when their futures are on the line? "When you look at law firms and other mature professional service providers, the ones that ultimately seem to prevail are those that embrace business development at the highest levels and as a firm culture,” says Garry Berman, Chair of the Commercial Real Estate Leasing Practice Group at Robinson & Cole. “Realizing that their services and product offerings would inevitably become increasingly harder to differentiate from those of their competitors, these successful firms have determined how to make marketing and developing new business an ordinary part of their everyday routine.”
Only by shifting the discussion about increasing top-line revenue to the Executive Committee level will firms be able to conduct the analysis and make the hard decisions that will give them a chance to maintain or increase profitability, while defending and expanding their market share. The rewards for the firms that do so will be significant, while the consequences for firms that fail to do so will be correspondingly dire.
According to Berman, “I see this as a crossroads that will present a great opportunity for astute law firms. Those firms that find an effective way to elevate the revenue generation process to the executive committee level, in order to push the firm as a whole toward operating as efficient marketers and business generators, and that implement a workable system to leverage their attorneys' contacts and to teach a greater percentage of their attorneys how to sell the firm's services more effectively and efficiently, will have a major advantage over firms that continue to rely solely on the quality of their service offeringsto create business."