The results underline the sentiment around the legal market since late 2022 – firms in most segments and geographies are facing a squeeze; demand and pipeline is falling and likely to fall further, whilst inflation is pushing costs higher in every spend category. The stats embedded within this first BigHand report that emphasise that law firms need to address their financial health with urgency now come thick and fast. These four responses jumped out of the page at me and, taken together, make up a clear call for urgent and decisive action:
- 75% confirmed they have experienced a drop in client demand in the last 12 months;
- The same percentage believe client demand will continue to decline in the next 12 months;
- 87% report that clients have become more cost conscious in the last year; and
- 63% now say they are actively highlighting their use of technology to improve efficiency and value for money.
That last response bridges the gap from the challenge to potential solutions but I also read it as another stark reflection of the depth of the challenge that firms now face; for a long time, many private practice lawyers have resisted over-emphasising their capacity for efficiency and technology improvement, for fear of undermining their billable hour-based fees and the ‘premium’ nature of their legal services. This finding is in line with my real-world experience, that proactively communicating your firm’s tech, innovation and efficiency credentials is moving to ‘best practice’ and will, in a matter of years, be ‘table stakes’ – do it or risk being overlooked and pre-emptively de-selected from pitches and tenders.
The report summarises some of the ways in which firms are responding to this acute, and intensifying, economic challenge. 30% of firms say they have opted to raise prices, on top of their originally planned rises. Whilst the editorial rightly questions whether this is the best approach to winning and retaining work in an environment which many clients are finding economically tough, there could be a degree of interpretation gap here. Of course, many firms are having to adjust their original price rise plans in light of rampaging inflation and continued pressure on lawyer recruitment and pay. In many cases, I think this is probably imperative – fail to cover your cost increases without a very clear plan to recover the lost margin (which many firms, as we see from the report, are still grappling with) and you risk a downward spiral in profitability terms. In a high inflationary period, clients are going to expect some general inflation in professional services too and understand that law firms have dramatic cost increases to cover. I don’t think this is necessarily a mis-step.
Where future failure could be sowed, however, is to try to rely on blanket price hikes and generic ‘knee-jerk’ cost reduction (especially focused on support staff or investment in
technology and innovation) to get the firm through this squeeze on profits. The world has changed and clients, without a doubt as shown in the report, are looking for demonstrable effort by firms to improve value, deliver more for less and deploy technology – now very much including generative AI – more smartly. Only then will the savvy client accept rate increases – many will be willing to pay more per unit and for the best advice from lawyers but still look for overall legal spend to be falling. Firms can’t have it both ways any longer.
So, the focus needs to be on better processes, technology, digital products and services for clients, resource management and utilisation, and on procurement and cost management. This first BigHand report suggests that interest and focus in those areas is increasing, but it remains at a low level. For example, 83% of lawyers are still manually allocating tasks between remote and office-based staff and only 29% of respondents reported they were focusing on developing stronger client relationships to address the fall in demand. These kinds of findings highlight the risk of some firms risking too slow a response to this downturn and finding themselves, perhaps permanently, economically hobbled as a result.
A final reflection on the report is a brief reference to something I will return to later in the series: what are firms already doing to manage this potential hit to profits? 22% of respondents suggested they were opting to accept, presumably in the short term only, lower profitability. A proportion of other firms mentioned various tactical responses – fee earner headcount reduction, support staff cuts, reducing spend on travel and expenses, changing remuneration and benefits. But in my experience, firms are also looking at broader, more strategic initiatives and we may hear a lot more in coming months about an acceleration in firm combinations (in part to achieve economies of scale and in response to financial pressure), greater use of support staff and paralegal outsourcing and lower-cost locations, direct replacement of labour with AI-enabled technologies and major financial transformation programmes to address the often poor performance of lawyers on utilisation, leverage, realisation and cash collections.