B u s i n e s s Impact Whi te Pap er Series
Top 5 IT Trends
Affecting Law Firm
Profitability
© December 2013, Aderant Holdings, Inc. All Rights Reserved
Top 5 IT Trends Affecting Law Firm Profitability
The financial crisis of 2008 significantly impacted not only the economies of North America,
Europe, and Asia Pacific but also the law firms of those regions. Reduced demand, revenue,
productivity, and profitability across the legal industry have now triggered significant changes
in not only the law firms themselves but also in their relationships with clients.
This whitepaper explores the following trends and the specific IT implications for law firms:
1.Alternative fee arrangements (AFAs)
2.Bring your own device (BYOD)
3.Law firm mergers and acquisitions
4.Globalization of law firms
5.The cloud coming to legal industry IT
Aderant believes that these trends, while potentially representing risk to law firms, also offer
well positioned law firms a tremendous opportunity to leverage information technology to
create a competitive advantage and grow profitability.
The charts below highlight legal industry changes in revenue, productivity, and profitability.1
U.S. Law Firms
Percentage of Growth or Decline by Category
50%
40%
30%
20%
10%
2013 Data:
First Nine Months
0%
-10%
Total Demand
for Hours
Revenue
Demand
2004-2007
5%
Equity Partner
Rates
Realization
Expenses
Profits per
Equity Partner
2007-2010
Source: Citi Private Bank Law Watch
U.S. Law Firms
Percentage of Growth or Decline by Category
Total
Spending
50%
2%
40%
30%
20%
10%
0%
-10%
Equity Partner Income Partner Associate Equity Partner Income Partner Attorney
Productivity
Productivity Productivity
FTE
FTE
Leverage
2004-2007
2007-2010
Source: Citi Private Bank Law Watch
2
Top 5 IT Trends Affecting Law Firm Profitability - 3
According to the LegalView Legal Market Index, January through September 2013, demand
for legal firm hours dropped by 5% from about 6.1 million in 2012 to 5.8 million. Total
spending also decreased from $2.0 billion to $1.8 billion. The largest and smallest firms took
the biggest hits. Among the Am Law 100, the nation’s top-grossing firms, hours decreased
by 6.4% and fees by 3.5%. Among firms outside the Am Law 200, hours were down by 5.7%
and fees by 2.5%. 3
Median First Year
Associate Salary
$125K
$85K
2008
2013
Not surprisingly, law firms have responded to these pressures by reducing overhead and
new hires in order to remain profitable. According to a recent study by Blue Hill Research,
average revenues per lawyer have remained flat since 2008, while the median first year
associate salary has fallen from $125,000 to $85,000. This trend to contain labor expenses
is further evidenced in lower hiring statistics on new law school graduates. The National
Association for Law Placement’s annual survey showed that in 2011, 49.5% of law school
graduates obtained jobs in law firms; the same figures for 2011 and 2010 were 50.9% and
55.9% respectively. 4
Labor cost containment has reached up to the partner level as well. Many firms continue
to raise their expectations for partner economic performance and are actively weeding
out partners who don’t meet the new standards. Wells Fargo Private Bank’s Legal Specialty
Group surveyed 120 firms and reported that 15% intended to cut partners in 2013, which
continues a three year trend. Also, 55% of the 113 managing partners and firm chairs
responding to a recent American Lawyer survey said they planned to ask one in five
partners to leave the firm in the coming year. Five percent reported that they planned to
“de-equitize” between 11 and 20 partners in 2013.5
These macro-economic trends within the legal industry certainly place pressure on firm
profitability. However, many firms are adapting to these macro-trends as well as the
following micro-trends and are actually increasing profitability. When all costs have been
squeezed out, intelligent deployment of information technology provides the key.
Top 5 IT Trends Affecting Law Firm Profitability - 4
TREND 1 - Alternative Fee Arrangements Demand New Reporting
and Tracking Systems
In every industry clients are becoming more savvy and sophisticated in their buying
practices and the legal industry is now facing this same buyer trend. Alternative fee
arrangements (AFA) are one example of this trend. Clients are now asking for increasingly
complex billing structures that shift away from the traditional hourly billing model.
According to a Citi Managing Partner Survey, AFAs grew as a percentage of revenue from
7.6% to 13.4% between 2008 and 2012 for Am Law 50 firms headquartered in the U.S. When
firms headquartered outside the U.S. are included, the 2012 number jumps to 15.7%.6
Alternative Fee Arrangements in Large Firms
Trends in AFAs as a Percent of Revenue
12
9
6
7.6%
8.2%
10.8%
11.8%
13.4%
2008
2009
2010
2011
2012
3
0
Source: Citi Private Bank Law Watch
7
The 2012 Altman Weil Flash Survey “Law Firms in Transition”, reported that nearly every
law firm surveyed reported clients requesting AFAs. But only 14% reported that their
non-hourly projects are more profitable than their hourly projects. The survey also found
that 33% of firms that are proactive rather than reactive in their use of AFAs are more
than three times as likely to enjoy higher profitability on their non-hourly work. Clearly,
an opportunity exists for firms willing to make the effort to figure out how to use AFAs
effectively.
Top 5 IT Trends Affecting Law Firm Profitability - 5
Implications for Law Firms
“Can you imagine
if a law firm had a
breach?”
Quarmby asked.
“We wouldn’t work
with them again.”
Law firms today need accurate, reliable, and scalable reporting to effectively manage
alternative fee arrangements and other complex billing structures clients request. Law
firms that utilize comprehensive practice and case management systems can accurately
analyze these client requests and price AFAs accordingly. The benefits of having this
added functionality provide a clear advantage and make remaining profitable with new
costing and pricing demands a more likely outcome. In addition, possessing sophisticated
IT systems to provide clients the necessary billing reporting can become a competitive
advantage for proactive law firms.
TREND 2 - Clients Increasingly Demand BYOD Security from their
Law Firms
In the United States as well as Europe and Asia Pacific, employers are increasingly allowing
staff to use their own personal phone, laptop, and tablet devices for work and to access their
employers’ networks. In a May 2012 survey of 1,400 CIOs, Robert Half found that 33% of U.S.
employers allowed access to corporate networks from personal devices.9
This trend is affecting private law firms as well but often to the dismay of their clients. The
2013 International Legal Technology Association (ILTA) survey of 494 firms found that the
percentage of law firms that provided any type of financial support for smartphones (to
their employees) declined from 87% to 81% between 2009 and 2013.10
While attorneys are increasingly relying on their personal devices for work, law firm
clients have serious misgivings. At the recent “Legal Departments Under Pressure” panel
discussion, banking clients expressed deep concern that their outside law firms employ a
bring your own device (BYOD) policy. Panelist Lani Quarmby, associate general counsel at
Bank of America who oversees outside counsel management, offered a blunt take,
“Can you imagine if a law firm had a breach?” Quarmby asked. “We wouldn’t work with
them again.”11
Jeffrey Isaacs, global chief compliance officer of Goldman Sachs’s legal department,
proclaimed, “everyone on Wall Street” has separate business and personal phones, but
that law firms have resisted requiring their attorneys to do so because they fear it will be
a “competitive disadvantage” when recruiting talent if they enforce stricter data security
standards for smartphones, tablets, and other devices.”12
As enterprise BYOD programs become more commonplace, 38% of companies expect
to stop providing devices to workers by 2016, rising to 50% by 2017 according to a global
survey of CIOs by Gartner, Inc.’s Executive Programs.13
In a recently commissioned study by Forrester Group, 202 BYOD program decision
makers in enterprises in the U.S., the UK, France, and Germany found that the key drivers
for the adoption of BYOD programs include: increasing employee productivity and
responsiveness, improving employee work flexibility, and cutting costs.14
Top 5 IT Trends Affecting Law Firm Profitability - 6
The Key Strategies Driving Firms to Deploy BYOD Programs
70%
Increase worker productivity
Provide easy access to corporate information for employees who
are away from the office
63%
Enable employees to use their personal smartphones for work
activities
52%
Enable employees to use their personal tablets for work activities
52%
Provide easy access to corporate information for employees who
work from home or telecommute
Security Concerns
48%
Reduce corporate-liable device costs
40%
Provide employees with flexibility to choose their own devices for
work activities
40%
27%
Cut device inventory costs
Employee
Client
Satisfaction Satisfaction
Reduce corporate-liable data costs
23%
Improved brand perception
22%
Competitive differentiation
21%
Reduce corporate-liable voice costs
20%
15
Implications for Law Firms
In The American Lawyer’s most recent Am Law Tech survey, roughly four out of five of the
83 law firm CIOs and technology executives who responded to the survey said their main
concern about allowing attorneys to bring their own devices to work was ensuring data
security. At the same time, 70% said the biggest benefit would be “more cheerful users.”
Employers are clearly seeking an increase in employee innovation and productivity.17
In addition, employers that do not offer BYOD programs are increasingly at a recruiting
disadvantage, as more and more competitors offer this flexibility and ease of use to
prospective employees.
But how do law firms manage employee preferences to allow BYOD with their clients’
preference to not allow BYOD? This becomes another potential IT opportunity to create
a point of differentiation via IT system sophistication. Law firms that can articulate and
demonstrate their systems’ data security integrity, regardless of device, will comfort clients
and may even drive new business from security minded clients.
Top 5 IT Trends Affecting Law Firm Profitability - 7
TREND 3 - Law Firm Mergers Will Continue to Challenge IT
Infrastructure
The ongoing expansion and integration of major international companies prompted many
legal firms to follow suit. Legal industry consolidation is likely to increase over time because
of the industry’s high level of merger and acquisition activity. Since the mid-1990s, merger
activity between firms has heated up, with a number of major firms merging with entities in
the United Kingdom, Europe, and Asia Pacific. Merger activity has also correlated with an
increase in firm offices opening overseas.18
In 2012 there were 96 cross-border mergers announced during the year, substantially
more than in any prior year. Some of the mergers were very significant, including the
combinations of:
2012 Cross Border Mergers
U.K.-based Ashurst with Australia’s Blake Dawson
Australia’s Mallesons Stephen Jacques with China’s King & Wood
SNR Denton with Canada-based Fraser Milner Casgrain and Paris-based Salans
Norton Rose with Calgary-based MacLeod Dixon
Norton Rose with Fulbright & Jaworski
London’s Herbert Smith with Australia’s Freehills
K&L Gates with Australian-based Middletons
Canada-based Fasken Martineau with Johannesburg-based Bell Dewar19
Top 5 IT Trends Affecting Law Firm Profitability - 8
Merger Activity in U.S. Based Firms
70
90
85
80
60
65
Number of Mergers
60
53
40
45
47
41
30
39
30
40
31
27
50
30
20
20
10
0
61
35
49
52
59
54
55
57
27
45
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Number of Mergers
Average Size of Target Firm
70
50
10
0
Average Size of Target Firm
Source: Hildebrandt Institute Merger Watch
20
The traditional path to partnership seems to be changing as well with more firms opting
to grow their partner base through mergers as opposed to promotion within. The recent
Altman Weil Flash Survey found that lateral hiring remains the preferred growth strategy,
with larger numbers declaring their intentions to hire groups of lawyers and acquire smaller
law firms. Two thirds of firms think increased use of contract lawyers is a permanent trend,
and firms expect more reductions in partner-track associates than in non-partner-track
associates or paralegals.21
Given the strong influence of governing bodies in the legal profession and the over-arching
emphasis of professional standards, lawyers will be required to maintain a strong client
focus. However, as the profession continues to adapt to market forces, law firms that
manage their organizations with an eye on maximizing efficiencies will continue to prosper
and grow.
From an IT perspective, mergers which create organizations with wide geographic range
risk creating IT system latency issues. Latency is defined as the time delay between the
moment an action is initiated and the moment the effect is detected. For example, a
law firm with offices in Europe and in Australia may experience system response latency
approaching 500ms. This system “lag” not only creates user frustration but the latency can
trigger synchronization and database errors. For organizations expanding globally, proper
IT architecture is critical to avoid system latency issues.
Top 5 IT Trends Affecting Law Firm Profitability - 9
Implications for Law Firms
The ability to integrate financial and operations systems of the two (or more) firms is
critical to achieving the expected benefits of a merger. Other challenges include time
zone conversions, currency translations, compensation modeling, and equity valuations.
Having disparate systems between parties injects both risk and time delay in the success
of any merger transaction between law firms. Insuring accurate costing, billing, CRM, case
management, and full tracking is essential in the current business environment.
The opportunity becomes in positioning the firm with the information systems technology
sophistication to easily integrate another firm’s data and operations. Firms that possess this
level of IT infrastructure become more valuable merger partners.
TREND 4 - Increasing Globalization Will Stretch IT for Law Firms
As economic growth continues, legal services will remain essential to protecting rights in
the facilitation of commerce. Areas including labor, corporate, litigation, real estate, and
tax are expected to be especially in demand across all growing economies. As globalization
proliferates there will be increases in trade openness, financial integration, and governance.
Law firms that deploy practice management systems based on leading industry standards
and tools are best positioned to scale for growth and profitability in an increasingly
globalized marketplace.
Rapid changes to the global economy, legislative arena, and the technology market now
require law firms to react and transform at an ever quickened pace. In PWC’s most recent
Law Services Global Forum, the most successful global firms were those with partners
who focused on continuously evaluating profitability and adjusting business practices to
meet changing requirements. The greatest issues found included: maintaining internal
transparency, the continued commoditization of work, and compliance requirements for
global law firms to employ accrual accounting practices.24
In addition, cross-border issues including time zone, currency, and calendar
synchronization are only a few logistics items that add to IT complexity for global law firms.
Minimizing system and network latency and having a solution that optimizes timeliness
and availability of information will be critical to growth and maintaining a profitable law
firm.
Recent trends of globalization are widely expected to continue based on several factors
including: the entry of China into the WTO in 2001, enlargement of the EU to 27 members,
and the growth of internet users from 800 million in 2005 to 2.4 billion in 2013. As the chart
below illustrates, the shift in GDP growth is anticipated to move from mature economies
toward the Asia Pacific region.
Top 5 IT Trends Affecting Law Firm Profitability - 10
Global Outlook for Growth of Gross Domestic Product, 2014-2025
United States
GDP Growth
Europe*
of which: Euro Area
2014
Japan
2014-19
Other mature**
2020-25
All mature economies
China
India
Other developing Asian economies
Latin America
of which: Brazil
of which: Mexico
Middle East and North Africa
Sub-saharan Africa
Russia, Central Asia and Southeast Europe***
All emerging and developing economies
WORLD TOTAL
0%
1%
2%
3%
4%
5%
6%
7%
8%
25
Note: Projections are based on trend growth estimates, which–for the period 2014-2019–are adjusted
for adjustments for remaining output gaps. *Europe includes 27 members of the European Union
(excluding Croatia) as well as Switzerland and Norway. **Other mature economies are Australia,
Canada, Iceland, Israel, Hong Kong, South Korea, New Zealand, Singapore, and Taiwan Province of
China. ***Southeast Europe includes Albania, Bosnia and Herzegovina, Croatia, Macedonia, Serbia
and Montenegro, and Turkey.
Just as many western-based corporations have been making investments in the Asia Pacific
and other lower cost regions, so too have their law firms in response to the pressure of
expense control. A growing number of firms have moved parts of their support and other
functions to lower cost locations. Following the earlier examples of Clifford Chance (in
India) and Baker & McKenzie and White & Case (in Manila), we have seen Allen & Overy
and Herbert Smith both opening and expanding facilities in Belfast. Typically, these
“remote” operations begin as centers for back office administrative and support functions
that do not need to be physically located in a firm’s main office, but they often quickly grow
to include a wide variety of other activities, sometimes including litigation support, basic
document drafting, and some legal research.
Top 5 IT Trends Affecting Law Firm Profitability - 11
With the anticipated growth in the Asia Pacific region, western-based law firms looking for
international growth will need to make strategic decisions on how best to benefit from that
growth. Some alternatives include mergers and acquisitions, strategic alliances, supply
chain enhancements, and outsourcing. Regardless of the path chosen, reliable management
tools are required to maintain optimal decision-making, oversight, and profitability.
Implications for Law Firms
In order to maintain client service levels and profitability, law firms looking to expand
globally require critical functionality from their IT infrastructure. Managing a global law
firm demands the ability to be nimble and apply management uniformity and flexibility
across multiple currencies, regional calendars, and time zones. In addition, each local office
may have its own tax requirements as well as linguistic and cultural norms to be supported,
reconciled, and consolidated to the controlling entity. Again, information system
sophistication and flexibility will either support or hinder the global expansion of a law firm.
TREND 5 - Law in the Cloud
One of the most publicized IT trends over the past several years has been the “cloud
computing” phenomenon. Cloud computing serves as a catch-all term to describe the
delivery of hosted IT services over the internet. Companies typically report large cost
savings as the primary driver to deploy computing services remotely versus at an onsite
location. The three main services provided in the cloud include:
Platform as a Service
(PaaS)
Software developers use this in an
environment in which operating system
features can be changed
on-the-fly and new performance can be
evaluated quickly.
Software as a Service
(SaaS)
Infrastructure as a Service
(IaaS)
Software applications are
This permits users to outsource
hosted by a cloud vendor
computer equipment and the
and made available to users
operations that support the
over the internet.
organization.
Top 5 IT Trends Affecting Law Firm Profitability - 12
Gartner expects that IaaS, PaaS, cloud management, and security devices will grow from $7.6
billion in 2011 to $35.5 billion in 2016, a cumulative average growth rate (CAGR) of 36%.22
Many of the largest technology companies offer cloud versions of their applications and
predict stronger growth in this model as opposed to traditional on-premise deployments.
Users also realize benefits of cloud computing in hardware and software flexibility and at
lower cost than on premise. IDC reports that enterprise cloud application revenues reached
$22.9 billion in 2011 and are projected reach $67.3 billion by 2016, attaining a CAGR of 24%.23
Implications for Law Firms
Law firms have lagged in adopting the cloud trend for several reasons. First, firms fear losing
direct control over applications and security. While certainly a valid concern in the early
days of cloud, many highly secure and sensitive data applications across many industries
have since migrated to the cloud. Second, few IT leaders look forward to a “rip and replace”
conversion of current on-premise systems to cloud offerings. Third, a lack of vendor options
is a deterrent. This situation is currently changing and adoption will ultimately increase.
The cost savings and IT flexibility benefits will ultimately drive more law firms to the cloud.
Firms not ready for that conversion today should seek systems and are “cloud ready” and
can be easily converted at a later date. The cost benefits of the cloud can become significant
drivers to future profitability increases for law firms.
Top 5 IT Trends Affecting Law Firm Profitability - 13
The Right IT Strategy Can Deliver Many Advantages
To maintain and grow profitability law firms must adapt to ever changing market conditions
and dynamics. The growth of alternative fee arrangements and increased security
requirements demanded by clients are only expected to increase. Mergers, cloud based
infrastructures, and continued globalization will also continue and add complexity and
cost to operating a law firm. However, Aderant believes that firms that embrace information
systems and technology to proactively manage these changes will position themselves with
a competitive advantage to profitably grow, manage, and protect their firm.
Aderant has focused its product efforts to utilize a well proven database, leverage a service
oriented architecture (SOA), and deploy a technology framework that optimizes data and
network flows to address the issues of distance and network limitations as well as enable
seamless upgrades as technology and products evolve.
The key to leveraging state of the art law firm practice management systems and technology
lies largely in the services and support provided by the technology partner. In a rapidly
changing market, “off-the-shelf” rarely addresses the complexities of your firm and your
clients. Partnering with a vendor that employs industry leading experts with decades of law
firm experience gives Aderant clients powerful, flexible solutions that deliver a competitive
advantage and increased profitability.
ABOUT ADERANT
With more than 35 years dedicated to delivering practice management solutions, Aderant
is the world’s largest independent legal software provider offering comprehensive practice
and financial management solutions for law and professional services firms of all sizes
worldwide. With more than 3,200 clients, their products and services are designed to help
securely, effectively, and profitably manage your firm and gain a competitive advantage.
From case and financial management to business intelligence, CRM to legal calendar and
matter management, Aderant offers a wide suite of legal software solutions to optimize
operations, protect assets, and increase the bottom line. Ultimately, the focus is to help
manage, grow and protect businesses with innovative, proven solutions that are backed by
superior service and ongoing support.
Top 5 IT Trends Affecting Law Firm Profitability - 14
Endnotes
1 Citi Private Bank Law Firm Group data (“Citi data”) are based on reported results from some 205 US headquartered firms. The sample
includes 89 Am Law100 firms, 54 Am Law 2nd 100 firms, and 62 additional firms.
2 Ibid
3 http://www.americanlawyer.com/PubArticleALD.jsp?id=1202627395312
4 http://www.nalp.org/2011selectedfindingsrelease
5 Law-Firm Partners Face Layoffs, Jennifer Smith http://online.wsj.com/news/articles/SB10001424127887323689604578221891691032424#
6 Citi Private Bank Law Firm Group data (“Citi data”) are based on reported results from some 205 US headquartered firms (noted above).
7 Ibid
8 2012 Altman Weil Flash Survey, Law Firms in Transition http://www.altmanweil.com/dir_docs/resource/2d831a80-8156-4947-9f0f1d97eec632a5_document.pdf
9 http://www.cio.com/documents/pdfs/ebook4-BYOD-final.pdf
10 http://www.iltanet.org/MainMenuCategory/Publications/WhitePapersandSurveys/2012-Tech-Survey.pdf
11 http://www.americanlawyer.com/PubArticleALD.jsp?id=1202609681934&Am_Law_100_Firms_Mum_on_Question_of_Smartphone_
Security#ixzz2l7r1Zz1u
12 Ibid
13 http://www.gartner.com/newsroom/id/2466615
14 http://www.trendmicro.com/cloud-content/us/pdfs/business/white-papers/wp_forrester_measure-value-of-consumerization.pdf
15 Ibid
16 Ibid
17 http://www.accellion.com/blog/2013/10/the-pressure-is-on-law-firms-to-get-byod-right/
18 IBISWorld Industry Report 54111 - Law Firms in the US, September 2012, Above the law: Firms will cut costs and change business
models to boost demand
19 Georgetown Law, 2013 Report on the State of the Legal Market
20 Hildebrandt Institute Merger Watch as cited in 2012 Cleint Advisory Hildebrandt
21 2012 Altman Weil Flash Survey, Law Firms in Transition http://www.altmanweil.com/dir_docs/resource/2d831a80-8156-4947-9f0f1d97eec632a5_document.pdf
22 Gartner: Forecast Analysis: Enterprise Infrastructure Worldwide, 2011-2016, 3Q12 Update Published: 18 October 2012 ID: G00234775.
23 http://www.idc.com/getdoc.jsp?containerId=236184
24 http://www.pwc.com/us/en/law-firms/assets/pwc-2013-LFS-Global-Forum-Exec-Sum.pdf
25 The Conference Board Global Economic Outlook 2014, November 2013
26 Citi Private Bank Law Firm Group data (“Citi data”) are based on reported results from some 205 US headquartered firms (noted above).
www.aderant.com | 1-888-604-2366 | [email protected]
© December 2013, Aderant Holdings, Inc. All Rights Reserved
Top 5 IT Trends Affecting Law Firm Profitability - 15