Security concerns and economic pressures have displaced competition for talent as the biggest threats to law firm profitability, according to the 2022 Law Firm Business Leaders Report from Thomson Reuters, the Georgetown Law Center on Ethics and the Legal Profession, and True Value Partnering Institute. The report surveyed business leaders at U.S. law firms, including chief operating officers, chief financial officers, managing partners, and other leaders.
Risks to Profitability
Security breaches, data loss, hacking, and ransomware were rated as high risks by 42% of law firm business leaders. General economic pressures were cited by 32%, tied for the second-highest risk with associate salaries. Last year, by comparison, general economic pressures tied for ninth among risks, cited by only 16%. This year’s report concludes that law firm business leaders’ perception of the highest risks to profitability “has taken an outward shift to the uncertain world outside the office.”
Concerns about competition for talent were clearly top of mind last year, when lawyer recruitment and retention, poaching of staff by competitors, and associate salaries ranked as the top three risks. These remain significant concerns for law firm business leaders, but poaching of staff dropped out of the top 10 risks.
Despite the challenges, a majority of law firm business leaders expect moderate-to-high growth next year in demand for legal services and revenues-per-lawyer. Slightly less than a majority expect growth in profits-per-equity-partner and profits-per-lawyer. Expectations for growth are even higher looking ahead three years, with an overwhelming 84% expecting higher revenues-per-lawyer. However, more than two-thirds of law firm business leaders expect higher direct and overhead expenses over the same time periods.
Among practice areas, a majority of law firm business leaders expect health care, bankruptcy, and intellectual property to see high-to-moderate growth. Mergers and acquisitions, real estate, and personal injury are viewed as most likely to see contraction.
Strategies for Improved Performance
Law firm business leaders identified several steps they plan to take to improve firm performance. Increasing billing rates and cross-selling are the two most common steps, with more than 90% of firms planning to do so. In addition, remote working is viewed by most firms as a means of improving performance, with 88% of firms saying they probably or definitely will support it. That represents a sizable jump from 62% last year. Promoting firm culture is seen as the biggest challenge of remote work, followed by attorney advancement, and client service/responsiveness.
More than three-quarters of law firm business leaders say they likely or definitely plan to use more technology both to reduce costs and for purposes other than cutting costs. The primary technologies that firms plan to purchase that they’re not currently using include AI-powered legal research, contract management, and AI-enabled litigation tools.
Roughly half of the firms surveyed say they probably or definitely plan to expand into new domestic
markets, with the Southwest and Southeast as their preferred regions for expansion.
Support for Change
Law firm business leaders increasingly feel they have the support of the firm in making these and other changes. An overwhelming 84% say they are empowered to drive change in their firms and that percentage has risen steadily over the past two years. Conversely, only 20% say they lack support from firm leadership, down from 24% last year.
“Law firm business leaders are taking a multi-faceted approach to improving firm performance even in the face of mounting challenges,” said Paul Fischer, president of Legal Professionals, Thomson Reuters. “These include financial discipline, talent retention, and geographic and practice expansion. In addition, we’re seeing more willingness to invest in technology not only to reduce costs, but also to increase efficiency, improve the client experience, and produce better firm financials.”
“Rapidly shifting external forces are requiring firms to be more nimble,” said Mike Abbott, head of the Thomson Reuters Institute. “While competition and costs for talent remain concerns, they have been overtaken as profitability risks by economic conditions and cybersecurity. Law firms have expressed to us over the last year that security is of increasing concern, and that they are stepping up vigilance.”
For a copy of the 2022 Law Firm Business Leaders Report visit https://www.thomsonreuters.com/en-us/posts/legal/2022-law-firm-business-leaders.