State of the Legal Industry: the Key Word is “Adaptation”

Recently, I noticed an EXPLOSION of interest in my post from last year on the state of the legal industry, where we talked about relaxing because the industry was familiar with contractions. This is still true, but the word for this year is ADAPTATION.

I’m just gonna say it now, if you’ve been here a while, you already know that I’ve said this before. Back in August of 2016, we starting talking about how the law firm of the future was going to need to be flexible – what did I mean by that?

• Having strong strategic goals and plans in place that drive the firm and its lawyers, and are evaluated and modified on a regular and ongoing basis to quickly respond to changes in the marketplace.
• Engaging with industry thought leaders, both within the legal industry itself, and within their own specialty industries.
• Instituting a strong client feedback loop that allows for open communication with their clients to ensure that their needs are being met, and that the firm is adapting and growing with them.

It’s eight years later, and this is still true. So, we’re not going to panic. What does the latest report on the state of the US legal market from the Center on Ethics and the Legal Profession at Georgetown Law and the Thomson Reuters Institute say? Several key things.

First and foremost,

The legal industry may be in a greater state of transition today than at any time since the end of the Great Financial Crisis of 2008-’11 (GFC), as the market shifts dramatically in what types of legal services are most in demand, how differing segments of law firms are addressing these challenges in varying ways, and what will be the ultimate impact of generative artificial intelligence (Gen AI) on the legal profession.

This is not meant to scare anyone. If the GFC taught us anything, it was that we needed to be flexible and adaptable, right? So with any luck, you were ALREADY doing that. We know that this is easier for midsized and smaller firms, because moving BigLaw is like turning around an ocean liner. But it’s not impossible.

Clients always drive change and demands, and so with that strong client feedback loop that I know you all have, you have already been addressing what clients want and need as those things come up – and not in a reactive way, but in a proactive one because for many years now, lawyers have been acting as true business partners to their clients.

The report does mention Pan Am Airways, “the one-time airline industry leader which fell into financial and operational dissolution when its management misjudged the travel marketplace and failed to adapt to change.” But Pan Am isn’t the only example – we all know about Blockbuster, Kodak, etc.

Law firm leaders who fail to respond to marketplace changes and pivot quickly enough to prepare for the future may see their firms destined for the same fate as Pan Am.

While this sounds like a scary and terrifying future, we have been preparing for this for the fifteen years the report alludes to. Thanks to those companies who have gone before us, (hopefully) most law firm leaders have foregone the arrogant idea that we’re above these kinds of catastrophic failures and we recognize that no industry is safe from change.

We engage with each other, seek feedback from clients, lose sleep at night, and are NOT secure in the knowledge that things won’t change. We know that they will and that we must be the ones spearheading those adaptations, even when we’re not completely sure what they may be.

But there are some other key findings in the report that we must take a look at which will impact all of us in the coming year/years:

• In 2023, rates for new work matters grew by more than 6%, but realization rates fell – my suspicion is that this is happening outside the legal industry as well, based on anecdotal evidence. Let’s see what this means in 2024+.
• Law firms are taking drastically different approaches to staffing, with large firms cutting associates and midsized firms growing their ranks aggressively – given these varying approaches AND the difference that we’ll see in coming years for how associates are trained, I’m VERY curious how these lawyers will turn into the experts we need them to be.
• We’re seeing a persistent high growth in expenses and a resurgence in direct expense growth (increases in salary and associate hiring trends), which says to me that firms have not embraced the WFH trends we believed would be permanent after COVID. Will this change? Given that clients continue to be SO cost-conscious and are looking for high-quality and low-cost firms, there will be increased pressure on firms to reign in those salaries.
• “sagging productivity and declining realization have combined to put a pinch on law firm profitability growth such that even the high pace of rate growth has been largely unable to remedy the situation” – This isn’t going to fix the situation above either and clients will push back on rate increases at some point. They will stop accepting inflation as a reason for rising rates.
• “corporate clients seem to be reverting to prior preferences for specialist knowledge, responsiveness, and global coverage when selecting their outside counsel” – As always, the same rules apply – what differentiates your firm from other firms? Showing up, being great and smart and responsive are going to be table stakes. ESPECIALLY if you are as or more expensive than the other folks.

And of course, AI is on the table. I’m going to say it again because it bears repeating – do NOT just start using AI because you think it will be a differentiator or because it’s the cool new kid on the block. As with ANY new tool or idea, look at what your firm’s goals are FIRST. Identify what you want to achieve and what the strategies are to get you there. If and only if AI is a tool in the toolbox for you, then great, implement it. If not, then only get to know how to use it because your clients will probably be using it and you need to understand their legal risk.

Otherwise, figure out what other tools should be in your toolbox. AI will absolutely disrupt our industry, but whether or not it is YOUR firm’s tool to use today or tomorrow is determined by what your goals are.

How are you focused on adapting today?