Overcapacity, Competition Plague Law Firms

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By Ellen Rosen

May 13 — If lawyers needed another data point that all is still not well in the legal market, a new survey provides just that.

Consulting firm Altman Weil, in its seventh annual survey of law firms, has found that market demand has returned to pre-recession levels in just 32 percent of law firms surveyed, with an additional 41 percent of firm leaders anticipating that demand will return in the next few years. One-third of the firms surveyed with 250 or more attorneys don't expect demand to return “in the foreseeable future.”

Not surprisingly, overcapacity is a problem at many firms. More than half of those participating in the survey said partners “are not sufficiently busy.” At firms with 250 or more lawyers, the number of partners who don't have enough work jumps even higher.

Overcapacity dilutes profit. As a result, 61 percent of all firms say there's a drag on profitability and 74 percent of firms with more than 250 lawyers report the same.

Eric Seeger, an Altman Weil principal and survey co-author, said eliminating overcapacity through job cuts isn't necessarily a solution.

“To truly right-size staffing levels would require getting rid of good people who sometimes are your friends,” he told Bloomberg News May 13. “Many firms are concerned that if they cut as deeply as necessary to match staffing with demand, it will come at a great cultural cost.”

Laterals Up

Even with overcapacity, lateral hiring hasn't slowed. Seeger said that even at firms plagued by overcapacity, “hiring laterals with books of business makes sense.” Many look to such hires as a “primary growth strategy,” he added.

He said firms are realizing that lateral hiring strategies can be “risky” and slow to produce results. Consequently, firms are focusing more on acquiring small firms or considering larger-scale mergers.

The survey also found that “non-traditional competitors”—especially clients—are siphoning business from firms. Sixty-seven percent of responding firms said they lose business to in-house legal departments. Clients' use of technology, outside legal vendors and non-traditional law firms is also, in a sense, poaching law firm business.

Despite these trends, two-thirds of the 320 firms participating in the survey reported increases in gross revenue, revenue per lawyer and profit per equity partner in 2014.

With assistance from Edward Dufner and Thomas Black in Dallas

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

The survey is available at http://www.altmanweil.com/dir_docs/resource/1c789ef2-5cff-463a-863a- 2248d23882a7_document.pdf.

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