New Data Shows Value and Differentiation Key to Legal Business
The Thomson Reuters Institute's "2023 Report on the State of the Legal Market" is the subject of the Successful Firm Project's upcoming Playbook Event. This year's annual report shows how decreased demand, rising expenses, changing client preferences, and economic turmoil are impacting the profitability of firms.
From the report summary: "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."
Upcoming Playbook Event:
TRI Presents: What Successful Firms Need to Know about the Evolving Legal Market
Legal Marketplace Innovations Insights Strategist
Thomson Reuters Institute
While the legal industry saw an overall growth decline, the Midsize firm segment saw positive demand growth in 2022. We asked playbook presenter Bill Josten, Legal Marketplace Innovations Insights Strategist for the Thomson Reuters Institute, about key findings from the report and what firms can learn.
SFP: The TRI report tracks the demand for law firm services and shows a decline in 2022. What are some of the contributing factors to the decline and how is the demand trending so far into 2023?
Josten: The biggest contributor to the decline in demand in 2022 was a waning of transactional practices. Corporate and M&A practices took big hits, particularly among large firms. In fact, for the first time since 2015, we saw Midsize law firms post the best growth in demand among all the segments of law firms we track.
So far in 2023, the trend toward Midsize law firms appears to be continuing. Particularly strong for these firms is growth in so-called “countercyclical practices,” those practices that tend to go up when the economy goes down, including litigation and labor & employment. Overall, demand is essentially unchanged from a year ago, but has shown some improvement from the mid-point of last year.
SFP: What lessons can the legal industry learn from Midsize firms that saw positive demand growth in 2022?
Josten: Our research indicates that there are a couple of things working in favor of Midsize firms. First, they are seen as more cost-effective options. For many, that might equate to “cheaper,” but cost is really only part of the equation. It’s not just that they’re less expensive, it’s that many Midsize firms can offer cost savings without any diminishment in quality. For clients, that equates to value.
And that’s really the lesson for all law firms: Clients are looking for value. Even among very high-priced law firms, we still hear feedback from clients that the firms are worth the money and cost really isn’t an object with them because the firm delivers consistently strong results and good value for the money they charge. Firms of all sizes should really be looking to identify what their clients' value and think about how they can deliver against that definition. The key phrase we hear a lot is “cost-effective quality.”
Smaller firms with a cost advantage can really lean into the idea that clients can realize some pretty significant cost savings without a loss in quality of outcome – but then it’s incumbent upon them to really deliver those results. For larger law firms, they need to focus on the value that the spend delivers for clients in terms of access to leading expertise, efficiency and innovation in service delivery, and the history of the client’s relationship with the client (or similar clients) to highlight consistently quality results.
SFP: The report summary suggests "leaders be willing to experiment with new ways of operating." What are some of these new ways law firm leaders should explore?
Josten: The sky is really the limit here. We are quickly trending back to our pre-pandemic position of the legal market being a largely mature market, meaning there isn’t much “net new” work to be won but rather any work that will be new to one firm will likely be work that another firm lost. In this situation, differentiation is key. Research from the Thomson Reuters Institute shows that clients respond well to working with law firms that
1) utilize diverse teams,
2) innovate, both with and without reliance on new technology, and
3) deliver a truly collaborative experience for the client, but in terms of how the firms work internally and how they communicate with the client.
Key issues such as how to support ESG initiatives, aligning with client’s hybrid working or return-to-office goals, or navigating macroeconomic issues all provide fertile ground for law firms to differentiate and create new ways of operating. Vital to these efforts, though, will be understanding what will move the needle for the client, i.e., what matters most to them. And to know that, law firm leaders need to be asking their clients.
Successful Firm Project Playbook Event: What Successful Firms Need to Know About the Evolving Legal Market
June 13, 12 pm EST
with Bill Josten, Legal Marketplace Innovations Insights Strategist for the Thomson Reuters Institute