Economic Trends in Southern California Law Firms

Leadership Exchange Magazine of the Association of Legal Administrators
November, 2008

Although the current economic downturn will not affect all firms equally, it is likely to have a broad impact across the legal profession. Based on strategic planning analyses and profitability forecasts from many smaller law firms (usually less than 100 attorneys), the economic climate for California firms is trending towards tougher times. Some of the reasons for this are:

Competition for clients and revenues continues to heighten:

  • As larger firms lower their ‘minimum revenue’ parameters and as more national and international firms determine that a California office is critical to keeping control of their global clientele;
  • As ‘boutique’ firms offer specialty skills at lower billing rates to effectively cannibalize the menu of projects which, to a smaller firm, traditionally provide high margin services;
  • As cost-conscious businesses respond to globalization and the outsourcing trend by hiring in-house counsel and by questioning more and more the basis for fee billings;
  • As client companies themselves get swept up in mergers, acquisitions or dissolutions and disappear from the client roster.

Competition for talent and labor costs continues to increase:

    • As economically unrealistic salaries are required to recruit attorneys with book knowledge, but much lesser value in providing services which can translate to collectible revenues;
    • From the absurd job climate where any associate (and, in many firms, any partner) can effectively become an independent agent for sale to a high bidder (although this seems to be changing slightly toward an employer market); and
    • As result of the infrastructure battle between Traditionalist and Boomer generation lawyers, versus X-generation partners and the younger Y-generation (aka the Why? and/or the Millennial generation) who demand that senior attorneys understand and accept a new priority of personal life ‘needs’ over professional obligations – even during work hours – which impacts targeting of billable hours as well as the cost associated with meeting such demands.

Competition to ‘merge’ continues to increase:

    • As reaction to perceived ‘urgency’ for consolidation often outweighs strategic planning for long-range goals and objectives, consideration to merge has become a strategic priority – driven largely by the need to provide Associates with opportunities for growth and Partners with opportunities for retirement; and
    • As many of these mergers miss the expectation of higher profits when “economies of scale” may not become a reality or the promise of the large book of business doesn’t materialize.

Other factors substantially impact the bottom line:

    • As corporate clients are starting to “push back” against ever increasing billing rates. Average hourly partner rates in large firms are $550 and can go as high as $850 or more;
    • As expenses continue to rise – health insurance, benefits and rents have gone through the roof, while average cost per attorney has risen to $250,000 – not including the attorney’s compensation;
    • As technology advances continue unabated, adding material costs to the law practice infrastructure;
    • As collection of accounts receivables in this tough economy are becoming less reliable and a much higher priority; and
    • As aging partners are choosing not to “retire due to both the volatile economy and a general trend towards working longer.

This current economic downturn is likely to continue well into 2009 (if not beyond). The biggest management challenge – especially after having so many years of very healthy profits – will be to manage partner expectations while navigating through these tough times.