Peer to Peer Magazine

32 Many firms have expanded geographically in the past decade. While some of the new offices that have been opened are profitable, many are not. Smaller, often unprofitable, offices will come under scrutiny and many will be closed. Another area firms may look to cut is in nonequity partners. The Am Law data shows this class of lawyer has been the fastest growing in the post-downturn era. There are 5,000 more nonequity partners today than there were in 2007. Some of those partners are profitable subject-matter experts or young business developers working their way up to equity partner status. Some however are unprofitable holdovers from a previous era when associates simply had to put in their time to become partner. As firms look to cut costs in the next downturn, many of these partners will be let go. Law firms will face a different competitive landscape in the next downturn. The alternative service provider market was just emerging in 2008. Many of the companies that inhabit that space today either didn't exist or had just started to develop their service offering in 2008. That situation has clearly changed. In the next downturn corporate counsel will have a much wider range of options than they had in the previous downturn. As they look to cut costs and rethink the operational strategies of their law departments many will turn to alternative service providers. Innovation matters We are at the early stages of being able to track whether there is a correlation between innovation and financial performance, in large part because it is difficult to define what an innovative firm is. Do all firms have to care about innovation? Is it about technolo? Process? Practice approach? No firm can ignore the evolution of legal services delivery or the changing demands from clients. But firms do seem to approach and define innovation differently. Elite firms have always been innovative, but more on the practice front. They focus their innovations on the unique legal solutions they bring to clients' problems. Creative deal structures, untested legal theories, etc. They are dealing with the same pain points other firms are in terms of pressures on demand and rates, but to a lesser degree. Their biggest challenge is being far enough ahead of what may becoming commoditized and adapting. They say their generalist approach allows for that agility. Beyond those firms who play exclusively in the high-end space, additional pressures arise as to the way they deliver, staff and charge for their service offerings. It's those firms that should start partnering with ASPs and using technolo to better position themselves to offer value to the client--and many are. But technolo can't be the final solution. Firms have to alter other aspects of the business. Do you need as many lawyers? Do they need to have the same skill sets? Should you be charging the same way? Are you compensating for the behaviors you want? There is a feeling among some firm leaders that the investment they are making in technolo will never be recouped. The cost is being put into funding ways to eliminate work lawyers once did. Theoretically it frees them up to do higher-end work. But how much of that is there? Firms know, however, that clients want to see the benefits of technolo regardless of a firm's service offerings. That's where financial performance comes in. Firms can't invest if they don't have the money to do it. Conclusion The healthy financial returns seen in 2018 shouldn't be discounted. Firms worked hard and pulled off strong results. The hope is that they are taking those returns and investing for the future, when pulling in as much revenue may be a more difficult proposition. But there are ways to tweak business models that would allow firms to maintain profitability in a lower-demand era. And those methods go beyond cost-cutting. Innovation, for all of the noise surrounding it, just may be at a premium. Firms just have to be smart--and open-minded--about how they define it. ILTA 1 To account for changes in the firms included in the Am Law 200, growth figures only include firms that were in the Am Law 200 for consecutive years. Firms that entered the Am Law 200 this year have there for been excluded.

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