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Managing

2019 Clio Legal Trends Report, Pt. 1: Firm Revenue Growth Is Driven by Efficiency

Do we know why some firms grow and others stagnate?

By Jared Correia

In perhaps the most low-key audacious move in music industry history that no one knows about, James Taylor cobbled together three unfinished songs into a suite, in order to complete his iconic “Sweet Baby James” album and earn a $20,000 bonus from his record company.  He called the song “Suite for 20 G.”

Now, in approaching the completion of my annual Clio Legal Trends Report analysis/opus for Attorney at Work, I’m gonna borrow a page from JT and offer my thoughts about the 2019 report in three parts, brought together as a coherent (hopefully?) whole: Call it my legal “Suite for 0 G.”

Buckle up. This is Part 1 of 1-2-3.

What’s the Clio Legal Trends Report?

This year’s Clio Legal Trends report once again examines current and longitudinal data from law firms and consumers to derive legal industry (wait for it) trends. (Access prior reports here.) This is always refreshing because so much actual legal management (not the kind I ascribe, of course) is based on conjecture and guesswork — or, in common parlance, BS.  The Legal Trends Report, now in its fourth year, cuts through that to a large degree. And it may be the only place where data is actually effectively used to drive law firm innovation outside of the legal research space.

Part 2 will cover the slow, painful death of referral-based marketing. Then Part 3 will cover the disconnect between what clients expect from lawyers and what lawyers are unwilling to give.

Part 1: Get Busy (Growing) or Get Busy (Shrinking)

This year, the report focuses on revenue as a metric for law firm success. Because, let’s face it: For every conversation I have with lawyers about work-life balance, most are willing to throw that all away for revenue. So, when the 2019 Legal Trends Report defines what it means to be a “thriving’ law firm, it does so based on revenue considerations. In other words (as you could probably guess), thriving firms make more money than firms that are not thriving.

The report breaks studied law firms into three categories:

  1. Growing = thriving
  2. Stable
  3. Shrinking

The big reveal, though, is how much more quickly thriving firms are growing, as compared with their counterparts.

Growing firms really grow, at a rate of over 30% yearly, and at an average of 112% over five years. And, yes, math-challenged lawyer, that means what you think it means: Growing firms more than double their revenue in five years.

Conversely, shrinking firms get hit hard, with revenues falling 54% on average over five years. 

So, Why Do Some Law Firms Grow and Others Stagnate?

There are several factors, but the 2019 Legal Trends Report indicates that utilization rate is a significant factor in law firm growth. Stable firms had a similar utilization rate to growing firms at the outset of the study period. Over time, however, growing firms outstripped and surpassed stable firms, getting to an average utilization rate of 33% — above the industry average of 31%.

Utilization rate captures how much of your total time converts to billable time (which is different from collected time). So, it’s a metric that renders your earning capacity. A 100% utilization rate would mean that over the course of an eight-hour workday, you have billed eight hours. No one does that: According to the Legal Trends Report, the average time billed in an eight-hour day is two to five hours.

The massive effect of utilization rate on law firm growth indicates what many have suspected for a long time: that the law firms that make the most money are also the most efficient. I suspect that growing law firms apply workflows, use modern technology and share information with clients effectively. (Remember that utilization rate does not take into account collection. So we’re not even addressing the additional advantages of things like electronic payment processing at this point.)

This is great insight, overall, and it’s good to know that the notions smart people have advocated for years about how modern law firms should operate are backed up by data. Of course, every answer gives rise to more questions, as Yoda probably said once, only in more convoluted language. For example:

  • It would be interesting to see whether and to what extent growing law firms utilize new technologies, and whether and to what extent they utilize formal processes.
  • Similarly, client communication methodologies for growing firms are probably unique to the industry. So, what do growing law firms do that resonates with clients that shrinking firms are not doing?

Unfortunately, a new section of the Legal Trends Report only confirms what we already know: Attorneys generally suck at business management.

Does it answer specifically why and how growing firms act the way they do and how that is effectively different from the way that shrinking firms act, or do not act? No. While the raw numbers are intriguing, at this point, not a whole lot is known (or related) about the time frame during which law firms grow, or when growth ends, or if it does, for growing firms.

For example, we don’t know the best time to grow a law firm. When is the highest level of growth achieved, and when does it taper off? Or is there a way certain law firms can extend the colossal growth rate that growing firms see? Given that growth seems to be intimately tied to utilization rate, it would make sense that growth gives way to stabilization when the utilization rate is maxed out. But what percentage represents the max? After that, the supposition would be that growth could only be achieved by hiring.

But, How Do (or Should) Growing Law Firms Hire?

The 2019 Legal Trends Report indicates that growing firms increased their caseload by 57% while hiring only 32% more lawyers.

That could mean that law firms that rely on workflow and delegation are better off hiring nonlawyers, who cost less and have more of the business management skills that most lawyers just don’t have the time or desire to build. Lawyers are the single largest overhead unit for law firms; hiring more staff — like paralegals, sales reps and process managers — is cheaper and more effective than hiring lawyers to handle jobs they don’t do well. Even C-suite-level hires, like law firm CEOs, COOs and CMOs, represent better value than lawyers.

But, until the next Legal Trends Report confirms this, you’ll just have to take my word for it.

One more thing. The 2019 Legal Trends Report indicates that the rates across growing, stable and shrinking law firms were fairly uniform. What that means, in part, is that rates don’t matter, service does. Today two types of legal consumers exist: those who want to and will hire a lawyer, and those who won’t. For those latter types — those dedicated DIY consumers — you either give up on them or sell them products. As for those who are motivated to hire a lawyer, a significant section of the report delves into the proclivities of the modern legal consumer, unearthing results that continue to lay bare the disconnect between legal consumers and legal service providers.

Illustration ©iStockPhoto.com

Read the Rest:

Clio Legal Trends Report Pt. 2: Is Referral-Based Marketing Dying a Slow and Painful Death?

Clio Legal Trends Report Pt. 3: Lawyers Still Failing to Communicate Value

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Jared Correia Jared Correia

Jared D. Correia is CEO of Red Cave Law Firm Consulting, which offers subscription-based law firm business management consulting services, and works with legal vendors to develop programming and content. Jared is also COO of Gideon Software, Inc., which offers intelligent messaging and predictive analytics software built exclusively for law firms. A former practicing attorney, Jared is the host of the Legal Toolkit podcast and speaks frequently at industry events. In addition to his Attorney at Work column, Managing, he writes an advice column for Lawyerist and on tech startups for Above the Law. Follow him @JaredCorreia.

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