Canadian Lawyer

"It's clear that those relationships or those 'investments' have not borne any fruit." SHAHIR GUINDI, OSLER HOSKIN & HARCOURT LLP The practice is based on an enduring but fallacious presumption in the legal profession that by getting a foot in the door it will eventually lead to highervalue mandates. It simply does not work, says Ottawa-based legal consultant Jordan Furlong, a view unreservedly shared by all legal players. "This idea that lawyers have that if we do this for a very low rate but it will be of such high quality and value that the clients will be blown away and happily come back for more is a mistaken assumption because most firms are indistinguishable from each other in terms of the work that they do," says Furlong, a partner with global consulting firm Edge International. "Having done it for a quarter of the price, why would the client come back to pay the regular price?" Besides devaluing the work performed by lawyers, it can end up disparaging a firm's brand and stigmatize it with the damning label of being a lowcost producer. More fundamentally, it betrays an abysmal misunderstanding of the market forces at play. There is no doubt the lasting and unforgiving economic climate has triggered a crisis that arguably was already in the making in the legal market before the 2008 financial crisis. Last year was yet another of modest growth as law firms continued to struggle with the interrelated impacts of sluggish demand for legal services, declining productivity, falling realization rates, and austerity measures intended to preserve profitability, according to a report on the state of the legal market recently published by the Center for the Study of the Legal Profession at the Georgetown University Law Center. A report conducted jointly by DiPietro's Citi Private Bank and Hildebrandt Consulting LLC echoed those same findings. It's no secret demand for legal services has dipped over the past couple of years. In the U.S., the demand compound annual 26 June 2013 www.CANADIAN growth rate was a robust 3.7 per cent between 2004 and 2007, a figure that actually declined by 0.4 per cent in the 20082012 period, according to the Citi study. More specifically the demand for legal services in 2012 grew by a paltry 0.5 per cent, as tracked by the Thomson Reuters Peer Monitor database. Demand for legal services also has been marked by skimpy growth in the United Kingdom and mainland Europe; only Asia and Latin America, driven by high-growth economies, saw demand on the uptake. P roductivity, as measured by the total number of billable hours recorded by a firm divided by the total number of lawyers in the firm, also suffered in 2012 just as it essentially did in the three preceding years. In 2012, the number of lawyers in U.S. firms grew by two per cent while demand registered only 0.5-percent growth. That meant productivity took a hit in 2012, remaining negative at 1.5 per cent. Just as telling is the dramatic decrease over the past couple of years in realization rates, the percentage of work performed at a firm's standard rates that are actually billed to and collected from clients. Though law firms have not shied away from raising rates, realization rates continued their downward trend. In 2012, law firms raised their rates by an average of 3.4 per cent, but realization rates fell to a historic low of 83.6 per cent due to client resistance. Am Law 100 firms fared even worse, achieving realization rates of 82.8 per cent, according to Peer Monitor. In stark contrast realization rates stood at 92 per cent before the financial crisis in 2007. No surprise then that annual profits per equity partner, the most commonly used measure for law firm success and financial health, have taken a beating. While compound annual growth rate for PPEP in the L a w ye r m a g . c o m U.S. stood at six per cent between 2004 and 2008, it plunged to 1.7 per cent for the period of 2008 to 2012, reveals the Citi study. That has proven to be hard medicine to swallow for partners who experienced healthy profit margins during good times, according to Citi, remarking many are still clinging to the expectation profitability will revert back to the levels before the financial crisis struck. The boom years that law firms enjoyed preceding the global financial crisis debatably masked a business model that was slowly beginning to unravel. The signs were there; no one was really paying attention. Even before the economic downturn in 2008, productivity growth was essentially flat in categories such as equity partners, income partners, and associates — signs that too many lawyers were chasing not enough work. More revealing, the financial success of law firms rested on a house of cards: annual rate increases prior to 2008 averaged six to eight per cent per year at a time when the U.S. inflation rate never exceeded four per cent, points out the Georgetown Law report. "Truth be known, between 1985 and 1995, irrespective of any law firm's strategic plan, the overall strategy in the legal business was to bill more hours and to work harder so they got partners and associates to put in more hours," notes McKenna. "From 1996 to 2007, irrespective of what the strategic plan said, every year firms automatically raised their fees — and the client paid. Then in 2008, the shit hit the fan. Now you can't raise your fees without a great deal of client pushback and you can't get any leverage because you are de-equitizing [partners] and there's more lawyers than demand for legal services. So how do you make money?" asks McKenna rhetorically. Therein lies the conundrum. Moreover, things are not expected to get much better

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