Industry interview with Thomson Reuters Peers Monitor: Into global gears
This article was also featured as an industry interview in the April 2016 issue of Briefing. To read the issue in full, download Briefing.
Law firms need ready access to reliable data to make their operations more efficient and competitive – but how do they know just how competitive they really are? For that they’ll have to compare performance with the datasets of other firms. Thus runs the proposition of Peer Monitor from Thomson Reuters. “We provide a global benchmarking platform,” says client development head Brent Turner. “All firms have finance and timekeeping systems, and in the digital age we live in it’s clearly possible to automate reporting of that data.
“A standardised taxonomy means we can view firms in Australia, the UK or the US in the same ways. And aside from monthly benchmarking for firms that sign up [they can create their own peer groups of as few as five], you get a fantastic view of the overall health of the global industry.”
From hours billed to agreed and collected rates, data can be analysed by factors from fee earner seniority to specific jurisdiction and practice, to reach some 75 potential measures of profitability, he says.
Diving into such data can provide a range of useful insights – not least a picture of overall demand. And here Peer Monitor finds a distinct postrecession disconnect between appearance and reality.
“We are, of course, measuring demand in the eyes of law firms rather than consumers,” continues Turner. “With the explosion of data and complexities of globalisation, you’d probably expect legal service demand to be fairly healthy.” But that isn’t what the firms’ figures suggest – the level is little better than neutral.
The conclusion? “That demand simply isn’t going to law firms in the same way. Corporate law departments are breaking matters apart and keeping more aspects in-house,” says Turner. At the same time, the slice going to alternative provider ‘disruptors’ of the traditional model has increased from 4% in 2012 to just over 6% today.
“They’re drawing partners away from large law firms with more flexible working and transforming into a more powerful pool of players,” says Turner.
Profitability, on the other hand, is also increasing at around 4% on the year – so something else is clearly happening. “Since 2008, firms have tightened their attitudes to expenses and shrunk their equity numbers,” says Turner. “But how long can they keep that up? A traditional law firm model can’t cut equity and overheads too far – so I’d argue they probably need to find some other levers of profitability.”
In fact, he says, equity partner “replenishment” – the rate at which a staffing resource is replaced (over 100% indicates a growing population) – is currently at 85%. Income partner numbers are falling even faster (80%) – but associates are growing (130%) and indeed offsetting the fewer at the top of the pyramid. It’s another disconnect – and the conclusion isn’t too hard to fathom. “Clearly, firms are looking to move lawyers off the partnership track for want of career opportunities,” says Turner. “But at the same time – one theory at least – is that they see a need to reach their younger top talent earlier. Some of the largest firms are making offers to associates a year and a half before they’ve even set foot in the door. They need to manage to forecast their demand – but nobody wants to be the firm that doesn’t have the talent in place if demand suddenly picks up.”
Even more notable, he says, is pressure to find the best lateral hires. Firms are rowing back a bit on associate remuneration – but recruiting is still the largest overhead within the shrinking sum of total expense. “Marketing and occupancy costs are also rising,” says Turner.
So do firms, perhaps, really need to get better at predicting the growth potential of their practices? If on top of this, they would (presumably) notice Peer Monitor’s trend that litigation (representing over a third of the total market) is one of the most susceptible to the client’s chopping block as the work is removed or reprocessed.
Turner explains: “Litigation bubbles up to the top in analysis of highest-cost work – and so it’s being chipped away. Those billable hours are under assault.” Fortunately, however, corporate – and especially real estate – work, is a pipeline for the filling pretty much across the board at present.
What isn’t helping at all, he says, is that firms are being squeezed not just during initial rate negotiation (as clients have those extra options), but also once the work’s done and dusted.
“Collected realisation measures the difference between what comes through the door and that headline rate,” he says. It was once 80-90%, but is now somewhere in the high 70s.
“The industry has lost around 10p in the pound. Firms are pushing back with alternative fee arrangements, but fundamental rate integrity is not good.”
It’s yet another example of where firms may need to invest in improving process to keep the profit levels healthy – for fewer partners perhaps, but rather more in the way of competition. You’d struggle to say no pressure – they’d do well to know where they stand.