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Indeed, one key metric — profits-per-equity partner (PPEP) — is down for the first time since 2009, which occurred during the last global financial crisis.

This scenario and lessons in how law firms are attempting to navigate these choppy waters is mapped out in the 2023 Report on the State of the Legal Market, issued today by the Center on Ethics and the Legal Profession at Georgetown University Law Center and the Thomson Reuters Institute.

The annual report reviews the performance of U.S. law firms and breaks down the factors that most impact financial success and drive the need for a strategic view of firms’ market positions, operations, and future plans.

This year’s report shows that throughout 2022, growing political and economic uncertainty significantly reduced clients’ appetite for transactional work — which had become the white-hot driver of demand throughout 2021 and the early part of 2022. Indeed, possibly the most prominent development in the legal industry in 2022 was the substantial slowing in demand growth that firms experienced throughout the year. On a year-to-date basis through November 2022, overall legal demand contracted by 0.1%, which stood in stark contrast to the 3.7% growth rate recorded for all of 2021.

Not surprisingly, this collapse in demand growth, especially in the transactional practice, fell more heavily on larger law firms. At the same time, many law firms continued to add new lawyers at a healthy pace. As a result, productivity declined, even as direct and overhead expenses remained high, much to law firms’ dismay.

The combination of all these factors pulled down PPEP from its 2021 levels, although it still remains in a relatively good position historically.

However, the report shows that growing uncertainty over macro-issues, such as economic sluggishness in the United States and throughout the world, the challenge of returning to the office, and the rising costs of talent all set the stage for a very difficult 2023 for the legal industry.

One interesting note to the report was the relative strength of the Midsize law firm segment, which stood alone among other market segments in seeing positive demand growth in 2022. The report attributes this to clients’ willingness to move work in search of high-quality but more cost-effective outside counsel.

Looking to the leadership of Luis Urzúa

The report also noted that in times of uncertainty, organizations have a tendency to hunker down to protect against both real and imagined dangers. To steer a firm successfully through such periods requires leaders to embrace somewhat different priorities and be willing to experiment with new ways of operating.

To illustrate further, the report relates the incident of the terrible mine collapse in Chile in August 2010 that trapped 33 miners for 69 days deep underground. Facing certain catastrophe, the miners rallied around their shift foreman, Luis Urzúa, who was a recognized leader and trusted by the men.

The report notes that Urzúa’s leadership skills were a key reason that the miners survived. Taking note that organizations rarely if ever face uncertainties as severe or as consequential as those that confronted the Chilean miners, the report states that nevertheless, it is often in extreme situations that critical leadership traits are most visible.

Urzúa’s leadership manner emphasized telling the truth, requiring teamwork, and staying focused to great success. It allowed his team of miners to concentrate on the singular task at hand — surviving their ordeal together — despite the dire circumstances in which they found themselves.

The report also suggests that as law firms confront a period of significant economic and market uncertainty, the lessons that were exemplified by the leadership of Luis Urzúa can provide some useful guidance for many law firm leaders as they navigate the uncertainties of 2023 and beyond.

You can download the full “2023 Report on the State of the Legal Market” by filling out the form below:

This process then kicked off a volley of communications — internal and external — and necessitated forwarding emails, PDF letters, and spreadsheets for analysis and follow-up. The legal operations team provided some central support, but this was often challenging because data limitations made it difficult to account for past rate increases and freezes across different firms. Overall, the efforts felt somewhat ad hoc and very time-consuming.

“It has always been important to us to get this right,” says Antony Klapper, Deputy General Counsel in Product Liability & Regulatory at VWGoA. “We want to be fair to our law firms, whom we view as trusted partners. At the same time, we must manage our company’s finances responsibly — and execute all of this efficiently with a leanly-staffed team.”

Trisha Fletcher, Legal Operations Specialist at VWGoA, emphasizes these points as well. “Collectively, our team had a strong desire to find a better way to do this.”

Taking a new approach

The VWGoA team launched a new initiative to process rate increase requests more effectively for 2022 and beyond — one that would ultimately win them an ACC Value Champion Award.

The first step, the team decided, was to establish a more centralized, uniform approach. This would be managed by legal operations with strategic guidance from legal leadership. Of course, there would still be coordination with in-house counsel, but in a more efficient way — built around a centralized process, featuring stronger use of data analytics, benchmarking, and core decision governance from leadership.

The next step then, was to improve the in-take process. Outside law firms were asked to submit their rate increases within a designated window of time and through a common portal. This allowed the team to consider them all together, performing side-by-side comparisons of similar firms to ensure more consistent treatment under then-current market conditions. This commonality also enabled the use of greater analytics capabilities to assess past rate increase history, as well as internal and external benchmarking comparisons.

Within this framework, the team also began examining firms’ compound annual growth rate (CAGR). A law firm’s billing rate CAGR shows a multi-year view of the firm’s rate increase history, accounting for past increases and rate freezes. Standardizing the figures this way enabled better side-by-side comparisons across the portfolio, and showed which law firms were high or low outliers based on their multi-year rate history.

The VWGoA team also found it very helpful to use data to model the dollar impact of the requested increases per timekeeper for the coming year. This was instrumental in identifying the most impactful requests in order to focus on managing costs.

Seeing the benefits

Through this new approach, VWGoA legal leadership and legal operations were able to implement more effective governance and decision logic to streamline the rate decisions in light of portfolio metrics and company financial considerations. By streamlining and consolidating the process, they freed up considerable hours that their staff had previously spent responding to rate increase requests as they came in, managing them all through one common workflow. They saved further time be setting auto-approval thresholds for certain rate increase increments.

In the end, the projected savings for the coming year were significant, with rate increases for various timekeepers, for example, trimmed to about one-half of the increment originally sought. The VWGoA team devoted particular attention to adjusting high outliers and managing the impact on budget in a sustainable way.

Beyond time and money savings, the team built a process that leveraged better data to drive better decisions. The result is a strong business case showing how those in legal can use technology and data more effectively to increase productivity and execute against business metrics.

From law firms’ perspective, understanding the data that informs a client’s financial position is a helpful way to focus their rate increase conversations onto a productive end for both sides.

“We recognize that, in this economy, many clients are facing challenging headwinds,” says Susan Vargas, Partner at King and Spalding. “As trusted partners, we are glad to talk about goals and metrics to strengthen our relationship in mutually beneficial ways — and we welcome informative data to help us do that.”

Indeed, as global economies moved away from the worst of the pandemic, it seemed early on that 2022 could provide a sense of normalcy, if not a return to traditional business practices. However, the rocky shoals of the war and global economic turmoil soon put an end to that sunny thinking. Yet many professional service firms and their corporate counterparts in the US and around the world found ways to remain profitable, resilient, and forward-thinking enough to allow some positive direction as we all head into 2023.

The Thomson Reuters Institute, through its blog posts, podcasts, market reports, and in-depth analysis, has chronicled many of the changes that swept through the last year, offering insights into how many organizations are adapting and what solutions are being successfully utilized.

If there were trends to discern in this very busy year, it was that twin issues of talent and technology implementation were impacting corporate departments and professional service firms to a greater degree as the year went on. And some of the most-read pieces on the blog site reflected that. For example, one piece that was very widely received described the different power skills that allow employees to flourish in new hybrid work environments; also, the changing regulatory stance toward the practice of law, especially around whether non-lawyers can own law firms, was of keen interest to our readers.

Further, many law firms, government agencies, tax & accounting firms, and corporate departments were beginning to grasp that the technology needed to meet the growing demands of the digital economy was of paramount importance. Indeed, as we moved toward the end of 2022, it was clear that technology adoption and maximizing its use simultaneously was among the biggest challenges and most promising opportunities that organizations are facing going forward.

Key market reports & in-depth podcasts

Throughout the year, it was the goal of the Thomson Reuters Institute to bring together people from across the legal, corporate, tax & accounting, and government communities and ignite conversation and debate in order to shed some insight on the newest industry developments and the most critical opportunities and challenges market participants are experiencing.

You can explore our top trending Thomson Reuters Institute insights that shaped 2022, or you can relive some of our highlights from this year here. And for further coverage of the legal, tax & accounting, corporate, and government sectors, visit the Thomson Reuters Institute.

We did this in part by providing coverage of these topics on the Thomson Reuters Institute blog site — such as podcasts, videos, and key market reports — and by hosting world-class events, which kicked off in Amelia Island at our 29th Annual Marketing Partner Forum, which brought together global law firm leaders and the best strategic thinkers from around the world to discuss the steep challenges facing firms in the legal market; and continued in New York City with our 21st Annual Law Firm COO & CFO Forum, along with many more in-person and virtual events throughout 2022.

As our reach expanded over the year — the Thomson Reuters Institute blog site reached more than 1 million annual page views this year for the first time in its history — our coverage expanded as well. We created two new resource centers on the site, to accompany those dedicated to covering the legal, tax & accounting, corporate, and government areas. Our new resource centers — Environmental, Social & Governance (ESG) and Technology & Innovation — allow us to offer readers dedicated content and insight into those areas.

Throughout the year, the blog site offered a steady stream of analysis and market insight reports that shed light on what participants in the legal, tax & accounting, and corporate fields were experiencing in their respective marketplaces in today’s economy. For example, in the 2022 Report on the State of the Legal Market, we saw that the legal market has remained resilient, even though numerous key challenges remain for many law firms, including a hot market for legal talent that has driven up costs. Even so, the report showed that many law firms have managed the difficult market with a good level of success last year.

On the other side of the table, our reports on corporate law departments and corporate tax departments shed further light on the immense pressure these departments were under from their corporations to transform the way they operate, with special emphasis on working more efficiently and cost-effectively. Indeed, coming out of the pandemic, it appears the dramatic changes undertaken by corporations during that time — especially around talent management and adopting new technology — may only be the beginning.

Also, our series of twice-monthly Insights podcasts offered in-depth discussions throughout the year on topics ranging from the viability of the new cryptocurrency economy to the most common misconceptions in the legal industry around artificial intelligence, and from how financial institutions were managing Russian sanctions to how organizations can benefit from client feedback programs.

Now, as we move into 2023, the Thomson Reuters Institute will continue offering insight into the latest events and trends, bringing leaders together, and mapping out the opportunities and challenges facing corporations and professional service firms going forward.

However, according to new figures from Thomson Reuters Market Insights, client service today may be less of a differentiator among firms and more table stakes to even get in the door. Additionally, with a probable recession on the horizon and an increasing portion of buyers anticipating a decrease in their external legal spend (17% through the first half of 2022, compared to 22% in Q3 2022), delivering value and efficiency will likely move up clients’ agendas. And that means law firms may need to automate some of their lower-value processes in order to deliver more of what clients really want.

When asked about why they would favor one firm over another, the percentage of corporate clients that pointed to overall service as the reason fell to 31.9% over the past year (October 2021 to September 2022), compared to 38.8% the year prior. Specifically, there were major drops in how many of the 5,000-plus in-house counsel surveyed actually viewed client service (from 16% to 6%) and speed (from 7% to 5%) as major law firm differentiators.

In the place of service, more clients pointed towards viewing expertise and business savvy as key differentiators among law firms. And while this doesn’t necessarily mean that service is less important, it shows rather that firms’ emphasis on service has led customers to expect it on every engagement, says Rachel Heathcote of Thomson Reuters Market Insights.

Service as an expectation

“What it shows to me is that everybody is doing service really well, so nobody is standing out for their service. It’s not a differentiator; it’s just table stakes,” Heathcote explains. “So what we have to be careful about if you’re a law firm is that if you are delivering poor service, then there’s a danger of losing out to competitors that are delivering high service.”

Heathcote also noted that one particular sub-category of service did see an increase in the percentage of clients citing it as a reason to choose a particular law firm: responsiveness rose to 15% from 12% over the same time frame. Coupled with expertise and business-savvy increasing as firm differentiators, this may indicate a client base that is increasingly asking for more active business value out of their engagements rather than simply a good client service relationship.

At the Thomson Reuters Institute’s Emerging Legal Technology Forum in Toronto in October, Fernando Garcia, general counsel at multiple small to midsize corporate law departments over his career, noted that just as law departments are clients of law firms, so too are internal business stakeholders the clients of these departments. And internally, a law department’s objectives are increasingly aligning with the larger business and chiefly focused on providing financial value.

When evaluating outside counsel, Garcia pointed to nine key points of value he wants to see in any relationship with a law firm, including:

1. 1. 1. Make my life easier;
      2. Make us look good as a law department;
      3. Give me the tools to achieve our goals;
      4. Don’t force me to chase you;
      5. Don’t work just to cover yourself, be part of the solution;
      6. Make it such that it’s practical, simple to understand, and we can deal with it;
      7. Quality support on a timely basis;
      8. Reduce a risk but never say no; and
      9. Help me never get caught off-guard.

While there are certainly service elements in play, it’s perhaps no surprise that each of those value points largely deals with business objectives rather than building relationships. “Whatever it is, you’re adding value by letting me add value to my stakeholders and our board,” Garcia adds.

Law firms, no matter the size, are beginning to hear this call loud and clear. The Thomson Reuters Institute’s 2022 Report on the State of US Small Law Firms released in November found that even among law firms with 30 attorneys or fewer, the largest challenge remained spending too much time on administrative tasks and not enough time practicing law. Indeed, 80% percent of small law firms surveyed pointed to time spent doing administrative work as a challenge, even more than acquiring new client business or any other challenge identified. Yet even so, 82% of those small firms said they did not feel they were addressing the time it takes for administrative tasks as well as they should.

This is where technology can play a role. By automating some parts of the administrative process, law firms can free up their most important asset — their people — to do what they do best: use their skills, expertise, and experience to add value to the client’s business. It’s no surprise then that while the report found most small law firm technology budgets are staying the same overall, the technologies seeing the largest increase in investment dollars mostly have to do with back office automation, such as billing & invoice software, timekeeping software, and customer relationship management software.

Now as we move into a post-pandemic yet economically unstable environment, it may be a good time for law firms to re-visit conversations with their clients about preferred methods of communication, where new technologies can fit into the process, and what the client ultimately values in their law firm engagement, adds Heathcote.

“People were working in a different way during the pandemic. It was crisis time, and everybody was working remotely,” she says. “But now, some people are in the office, some people are at home, and people’s situations have changed. So it’s a good conversation to re-visit, especially now that things have settled down.

“In fact, it’s a good conversation to re-visit at the outset of any matter, because those preferences could differ depending on what the matter is or what stage it’s in.”

You can learn how to stay on top of clients’ changing priorities by leveraging market trends and practical advice, here.

Our 2023 program consists of the following:

Pre-Conference Workshop (11/1)
The 2023 Law Firm Financial Performance Forum 

This half-day workshop offers an interactive setting for law firm executives to engage peers in discussion and debate.

Wednesday Welcome Dinner (11/1)

Join us for a festive evening at RPM Italian DC, located in the Mount Vernon neighborhood mere blocks from our conference venue. RPM Italian offers a modern and stylish approach to classic Italian fare featuring homemade pastas and contemporary flair. Seating is limited to the first 75 registered law firm guests.

The 22nd Annual Law Firm COO & CFO Forum (11/2 – 11/3)

Please join us for our day-and-a-half program devoted to key trends and developments impacting the business of law.

Public Health Guidance:
Thomson Reuters is committed to the health and well-being of all conference attendees and event partners. Out of an abundance of caution, we are requiring all guests to be fully vaccinated against COVID-19 at least two weeks prior to the program. Full vaccination is defined as two doses of the Moderna, Pfizer-BioNTech, or AstraZeneca vaccine or one dose of the Johnson & Johnson vaccine. We do not require booster vaccinations to participate.

Save the date! Stay tuned for our agenda release in Q1 2023.

Online registration now available.

Seating is extremely limited and available on a first come, first served basis to allow for collaborative and candid discourse.

Stay tuned for our agenda release in Q1 2023.

Registration is complimentary with registration for the 22nd Annual Law Firm COO & CFO Forum.

Public Health Guidance:
Thomson Reuters is committed to the health and well-being of all conference attendees and event partners. Out of an abundance of caution, we are requiring all guests to be fully vaccinated against COVID-19 at least two weeks prior to the program. Full vaccination is defined as two doses of the Moderna, Pfizer-BioNTech, or AstraZeneca vaccine or one dose of the Johnson & Johnson vaccine. We do not require booster vaccinations to participate.  Guests will be asked to complete an online attestation form closer to the conference date to confirm acknowledgment of this policy.

Over the past few years, however, there has been a growing feeling that the digital economy is over-heated. Thanks to a boom in tech investments, too many companies with too much cash chased too few customers’ attention. That has led to price increases; and, with that, unsustainable customer acquisition costs. In addition to that, digital ads have become less effective due to adblockers and privacy regulations. People are less generous with their consent as they’ve grown tired of the overload of digital ads. Some even argue that microtargeting never really worked.

This dynamic has led to the rise of the partnership model and what is sometimes called the Age of the Ecosystem. In this situation, organizations end up pairing with others to accomplish solutions that neither may be able to tackle on their own. For instance, modern companies can’t rely solely on inbound or outbound marketing to secure leads and maintain a sustainable growth rate. Instead, they’ve directed their attention to what is usually referred to as near-bound marketing.

The idea then is to leverage these partnership teams to build, nurture, and expand an ecosystem around the company.

Partnerships for law firms

Of course, law firms don’t have a problem with the digital ad economy. They never relied on it in the first place, and in many countries, firms must comply with strict marketing regulations.

Nevertheless, my recent experience building a partnership team has taught me how even law firms can benefit from the Age of the Ecosystem to better generate new business, cut costs, and offer better client service.

The Big Four audit & accounting firms have shown how powerful this model can be with their popular one-stop shops that now mix legal advice with compliance and accounting services that offer clients a more holistic service at a lower cost. Firms don’t have to offer all these services in-house as a PWC does; rather, they can cultivate an ecosystem around them, via outside partnerships, that includes many of these capabilities.

Many law firms already have cross-border partnerships in place by which they refer clients to each other. A German law firm probably doesn’t have legal expertise in Australian jurisdiction and vice versa, so these international partnerships and collaborations have already proven to be beneficial for firms and clients alike. It’s just not streamlined, professionalized, and leveraged to its full potential — yet.

Every day, we can see situations in which partnership models among law firms and legal tech companies might flourish. In the past few years, law firms have spent too many resources trying to develop their own tech solutions. And while it may have been good for marketing or public relations, few firms succeeded because developing user-friendly technologies is not within a law firm’s expertise. This thinking also is based on a misunderstood assumption that legal tech is made for lawyers. As a result, many law firms have spent too many resources implementing legal tech solutions instead of using legal tech to improve their client service in the first place.

By teaming up in these partnership models, law firms and legal tech companies can work together to provide excellent legal services: Legal can offer the content; and tech offers the process.

Three different partnership models

Inspired by the near-bound movement, I see three potential partnership models that could be interesting for law firms to pursue.

First is the referral partnership, which is suited for smaller law firms. In its essence, this is a simple commercial partnership in which the law firm acts as a reseller of a tech solution or just advices clients to use a specific solution. This partnership becomes more powerful if the firm can leverage it to add value to their clients, either by being in charge of implementation or by using process tools to offer their expertise through legal content, negotiations, oversight, etc. Nevertheless, this is an easy way to get started because there is a low barrier to entry.

The second model is the integration partnership, which works best for medium-sized law firms. This model is an expansion of the referral partnership that now has the law firm integrating multiple tools with their core digital platform or simply with each other. In this model, law firms build tech stacks of interconnected tools for their clients, covering such areas as contract management, data protection and compliance tools, board room solutions, and more. While it may be a more expensive solution and requires more technical expertise, the value is also higher.

Finally, the third model is the strategic partnership which is mostly for larger law firms. Under this model, law firms and tech companies would partner up to co-develop, co-launch, and co-market new solutions for the clients. Think of it like the Alexa and Spotify partnership. By co-launching, the two separate entities created a synergy that made both products so much better. I see great potential for law firms and tech companies to explore similar models.

The possibilities are endless, of course, as there are multiple variations to all these partnership models. I’ve worked with variations of all of them and seen great benefits for all parties.

Wisely, law firms and their tech-savvy partners should get together and embrace the Age of the Ecosystem.

Click here to download a copy of the 2022 Report on the State of the Midsize Legal Market.

Register today!

Law firms often have a bit of an advantage in an economic downturn. History has shown that law firms often experience a bit of a lag before the slowdown hits them. When the economy slows, businesses often reach for their lawyers for help with taxes, real estate, litigation, staffing, or even bankruptcy.

The Great Financial Crisis is an example. While most of the rest of the economy had slowed considerably throughout 2008, law firms didn’t really feel the downturn until 2009. The same was true in 2020 during the dark times of the pandemic. As many businesses felt the effects of the pandemic and related shutdowns deeply, many law firms still experienced very strong years due in part to some smart management and a late-in-the-year spike in demand.

You can access the latest Thomson Reuters Institute Insights podcast, featuring a discussion with Jeff Connor of McGuireWoods, here.

However, it’s not enough just to see an economic slump coming, you have to prepare for it. That’s part of the job of people like Jeff Connor, Chief Financial Officer at McGuireWoods, a full-service law firm of around 1,000 lawyers in Richmond, Va.

In this week’s podcast available on the Thomson Reuters Institute channel, we speak to Connor about the tough questions that law firms may be facing in the coming months and years. Connor has more than 25 years of experience in the legal industry. Prior to joining McGuireWoods in 2015, he held senior management positions at two Am Law 100 firms, an Am Law 25 firm and a boutique firm ranked among the top 20 most profitable Am Law firms.

In the podcast, Connor discusses how much someone whose function is to manage the firm’s finances — like firm CFOs for example — spends their time thinking about challenges related to talent management. Indeed, as a co-chair of Thomson Reuters’ upcoming 21^st Annual COO/CFO Forum, to be held in New York City on October 26-28, Connor is moderating a panel talk titled, Reimagining Purpose & Compensation in Modern Legal Services that takes on how law firms are managing their talent in the post-pandemic era dynamic and innovative means.

Yet, this is not to say that broader concerns over the economy, and in particular inflation aren’t causing concern among law firm leaders. In the podcast, Connor highlights some of the sessions of the coming event to which he is most looking forward, including a discussion on stress and demand in the global economy among a panel of economic experts and a roundtable discussion on US politics and foreign policy that promises to be fascinating in this election year.

And while there are far too many topics and potential solutions to cover in one 30-minute podcast, those looking for deeper insights can take advantage of the more wide-ranging discussions during the Forum that will likely touch on many of the issues confronting business professionals leading not only large law firms today, but smaller and midsize firms and other types of professional services firms more broadly.

Episode transcript.