Thomson reuters cio advisory board state of legal industry by steve daitch and dave cunningham aug 2008
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Consulting ServicesOverview:State of The Legal Industry
Steven P. Daitch, with Dave Cunningham
August 24, 2008
2
2008 Legal Industry Executive BriefingPre-Briefing Survey Results
2
3
Methodology
• 105 Managing partners and executive directors from the AmLaw 150, UK Magic Circle, Canadian LEXPERT Top 30 attended the third Legal Industry Executive Briefing in May.
• 50% of the attendees completed a pre- Briefing e-mail survey. Survey was designed to identify current issues for content presentations.
4
2008 Outlook
Almost two-thirds of attendees expect their 2008 billings to increase compared to 2007
When compared to 2007, do you expect your firm's 2008 billings to…?
Drivers of Growth:
- Increase in rates (91%)
- Addition of attorneys/staff (74%)
- More billable hours (41%)
- Added practice groups/areas (27%)
- Added international offices (18%)
- Merger or partnership (9%)
100% -
75% -
50% -
25% -
0% -
15%
38%
5%
5% 6-10%
>10%
Stay theSame
29%
Decrease
6%Increase
65%
5
2008 Outlook
Many attendees foresee an increase in year over year billings, but not as optimistic as last year
When compared to 2007, do you expect your firm's 2008 billings to…?
29%
6%
65%
100% -
80% -
60% -
40% -
20% -
0% -
2%2%
96%
Increase
Decrease
Stay the same
2007Survey Results
2008Survey Results
6
2008 Outlook - Opportunities
• The most commonly mentioned opportunities for law firms include:– Expansion of existing or new practice areas (16 mentions)
• Litigation activity commonly mentioned– Improve overall performance/efficiency/matter management
(12 mentions)– Increase productivity/utilization/billable hours (11 mentions)– Expansion into new geographies/markets (9 mentions)– Expansion with existing clients/cross selling (8 mentions)– Cost reduction/manage expenses and hiring (5 mentions)– Strengthen current relationships during time of economic
pressure (4 mentions)
7
2008 Outlook - Risks
• The most commonly mentioned risks for law firms include:– Economic conditions/recession (45 mentions)– Slowdown in business (10 mentions)– Rate pressures (5 mentions)– Associate retention/utilization (5 mentions)– Higher expenses (2 mentions)– Lack of focus (2 mentions)– Not enough attorneys (2 mentions)
8
Practice Area Growth or Decline
96% Almost two-thirds of attendees expect litigation volume to increase over the next 12 months
On the flip side, 60% of attendees expect the volume of corporate/ transactional work to decrease
What do you expect will happen to the overall volume of litigation or corporate/transactional work at your firm over the next 12 months?
60%6%
35%33%
6%62%
0% 25% 50% 75%
Litigation Corporate/trans
Increase
Stay the same
Decrease To what degree do youexpect it to fall?
1-4%
5-10%
>10%
To what degree do youexpect it to rise?
1-4%>10%
5-10%
9
Estimations for litigation volume has declined from a year ago but it is still expected to grow
Corporate/transactional estimates is substantially different from last year
What do you expect will happen to the overall volume of litigation or corporate/transactional work at your firm over the next 12 months?
Practice Area Growthor Decline
100% -
75% -
50% -
25% -
0% -
6%
33%
62%
2008Survey Results
11%7%
85%
2007Survey Results
Litigation
Increase Stay the same Decrease
100% -
75% -
50% -
25% -
0% -
60%
35%
6%
2008Survey Results
0%7%
93%
2007Survey Results
Corporate/Transactional
10
Practice Area Growthor Decline
Litigation Growth (n=36) Corp/Trans Decline (n=38)
IP (8 mentions) Construction (2 mentions) Mergers & acquisitions (8 mentions)
Bankruptcy/ restructuring (5 mentions)
White collar (4 mentions) Private equity (4 mentions)
Securities (4 mentions)Banking & Finance (3 mentions)
Real estate/ real estate financing (4 mention)
Product liability/torts (4 mentions)
Structured finance (2 mentions)
Litigation decline received one mention: Tort, general business
Litigation practice areas receiving one mention: Commercial, General Litigation, Employment, Health care, Consumer, International Trade, Regulatory, Antitrust, International Arbitration, Business Tort, Complex Litigation, Class Actions, Accountants Liability, Corporate Investing
Corporate/transactional practice areas receiving one mention: Bankruptcy, Capital Markets, Securities, Securitization
Which practice area(s) at your firm do you expect to see the greatest growth/fall?
11
Practice Area Growthor Decline
Don’t know
31%
No
15%
Yes
54%
Over half of the attendees have a suite of applications to help manage litigation
Most firms have a combination of home grown and purchased applications
Do you use a suite of applications to help manage litigation ?
75% -
50% -
25% -
0% - 0%0%
21%
36%43%
Combination of home
grown and purchased
Multiple providers
Don’t know
Home grown
Single provider
Providers mentioned:
Microsoft, Concordance, Interwoven, Introspect, Elite
12
Key Mid-Year Metrics
12
13
PPEP – Middle TierPPEP – Top Tier
12.6%
CAGR
6.2%
CAGR
3.2%
CAGR
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
2000 2001 2002 2003 2004 2005 2006
Superior
Average
Under
$0
$200
$400
$600
$800
$1,000
$1,200
2000 2001 2002 2003 2004 2005 2006
Superior
Average
Under
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2000 2001 2002 2003 2004 2005 2006
Superior
Average
Under 13.5%
CAGR
7.0%
CAGR
4.3%
CAGR
13.6%
CAGR
8.5%
CAGR
4.2%
CAGR
PPEP – Bottom Tier
• Database includes 133 firms broadly representative of the legal industry in the United States
• Firms divided into 3 tiers based on PPEP (top, middle, bottom)
THE WIDENING PROFITABILITY GAP
Substantial and widening differences in PPEP within each tier of profitability occurred during 2000-2006 and will likely intensify in 2008
• Each tier divided into 3 segments based on PPEP growth (2000-2006)
– Superior Performers – Average Performers – Under Performers
14
PROFIT PER EQUITY PARTNER
The downturn in the economy in 2001 and upward pressure on expenses in the years leading up to 2001 caused profits to be flat and this is likely to recur – and worsen – in 2008
Profit per Equity Partner Yearly Growth
PPEP Growth
3-Year CAGR = 10.3%
6-Year CAGR = 9.3%
0.2%
14.8%
10.4%11.2%
9.0%9.3%10.2%
2001 2002 2003 2004 2005 2006 2007
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Revenue Growth
Expense Growth
Revenue Growth
3-Year CAGR = 10.3%
6-Year CAGR = 9.8%
Revenue and ExpenseYearly Growth
REVENUE AND EXPENSE GROWTH
2007 saw margin compression for the first time since 2001 – a dynamic that will worsen in 2008
Expense Growth
3-Year CAGR = 9.2%
6-Year CAGR = 8.5%
9.0%
10.4% 10.9%10.3%
9.6%
11.2%12.2%
8.8%
13.2%
9.2%8.9%9.5%
8.8%
3.3%
2001 2002 2003 2004 2005 2006 2007
16
Additional Observations
Expected Primary Drivers of Net Income
• 72% of respondents see demand increases as a primary driver of income growth
• 55% of respondents see increases to their stated rates as a primary driver of income growth
• 18% of respondents think discounting pressure will strongly impact profit growth
PROFIT EXPECTATION
Profit growth expectations continue to wane as the majority of MPs expect growth to lag that of the last 7-8 years
Level of Projected Growth
1%4%
8%
15%
63%
13%8%
47%
31%
10%
35%
9%
32%
8%
17%
Decrease Unchanged < 5% 5% - 10% > 10%
100% -
90% -
80% -
70% -
60% -
50% -
40% -
30% -
20% -
10% -
0% -
3rd Quarter 2007
4th Quarter 2007
1st Quarter 2008
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Global Presence
AmLaw Designation
Regional View
Preliminary 1Q08
REVENUE AND EXPENSE
While firms across all segments continue to experience margin compression in 1Q08, the AmLaw 100 has been harder hit
Revenue (% change) vs. Expenses (% change)
5.1%
0.3%
5.8%5.0%5.4%
12.8%12.0%
9.9%
AmLaw 100 AmLaw 200 Other All Firms
Revenue
Expenses
18
CASH CYCLE
Most firms improved their cash conversion cycle through 2006 but saw the cycle lengthen in 2007, a sign that it may prove difficult to shorten the cycle in 2008
Net Cash Conversion Cycle (Number of Days)
111106
115
50
60
70
80
90
100
110
120
130
2000 2006 2007 Flash
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Global Presence Growth Rates 2007 over 2006 Flash Results
THE IMPORTANCE OF FOOTPRINT
International firms experienced double digit PPEP growth in 2007 while regional firms outperformed national firms
Net Income (% change)
14.2%15.6%
5.9%
8.4%
10.8%
Global International National Regional All Firms
Equity Partner FTE (% change)
4.9%
2.5%
0.8% 1.1%1.7%
Global International National Regional All Firms
Profit per Equity Partner (% change)
8.9%
12.8%
5.0%
7.2%
9.0%
Global International National Regional All Firms
20
Key Trends in Litigation
20
21
“It’ll rise, if not significantly. As long as the economy is in decline it will continue to rise. Companies are faltering, or at least defaulting
on loans, contracts etc.”
“The litigation market will remain choppy this year . . . In securities we will see work when deals blow apart.”
“When business opportunities are lost, all [companies] have left are claims, and they pursue them.”
“Work is up from last year, which was a kick-ass year”
Practitioners’ Perceptions
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Practitioners’ Perceptions
“Not generally affected in litigation by a downturn in the economy. Not quite counter-cyclical.”
“There is usually a spike in recessionary times, but I am not sure we’ll see it this time because litigation is now so
expensive”
“In a downturn clients are less likely to litigate and open the spigot”
23
Clients’ Perceptions
“Whenever we do something new, boom, there comes the law firm suing us”
“Class Action du jour”
Litigation follows inexplicable cycles, with waves followed by wonderful, brief periods of calm”
“We get sued when we don’t do what we saying we’re going to do . . . [and] there are a huge number of lawsuits where we didn’t do
anything wrong but we get sued because we’re huge and someone got mad”
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Corporate Legal Spend ($bn)$31bn Litigation or related
$31B circa 8% growth
Exp
en
ditu
re (
$,B
illio
n)
Corporate Legal Spend (2006-08)
$0
$10
$20
$30
$40
$50
$60
$70
2006 2007 2008 (projection)
Bet the Company Litigation
Class Action
Investigations
IP Litigation
Regulatory
General Litigation
Rest of Market
Source: BTI Survey of Corporate Counsel
25
Growth in Corporate Legal Spend ($bn)~60% Litigation or related
Breakdown of Growth in Corporate Legal Spend ($,Billion)
$0.90
$0.58
$0.31$0.09$0.23
$0.16
$1.57
General Litigation
Regulatory
IP Litigation
Investigations
Class Action
Bet the Company Litigation
Rest of Market
Source: BTI Survey of Corporate Counsel
26
Messages for Managing Partners
• Litigation is not homogeneous
• Work-types and business sectors can move independently of the economy and each other
• Some firms are booming, while others are not
• If your litigators are struggling is it the overall market, a sector issue, or that they are failing to compete effectively?
• Plaintiff firms are diversifying
• Likely to appear in new areas of work
27
Messages for Managing Partners
• Clients seem to prefer the courts to arbitration
• International arbitration and mediation remain popular
• Costs are a truly important issue
• Perceived efficiency in staffing and project management are key competitive strengths
• E-Discovery is a major burden for clients
• But this presents opportunities for firms to manage the process well
28
Focus: Litigation Consulting Services
John Sweeney, PresidentLitigation Consulting Services, a Thomson Reuters Company
28
29
Focus: Strategic Technology Assessment
David B. Cunningham, Managing DirectorBaker Robbins & Company
29
30
Law Firm Technology Scorecard
• Developed with a consortium of law firms to provide more integrity and depth than industry surveys and anecdotal observations.
• Established a standardized approach and industry database for costs, staffing and process maturity.
• Establishes a 360 degree view of technology effectiveness to provide context for the benchmarks.
31
IT Maturity Model
32
IT Maturity Model, continued
33
Rebalancing the Valueof the IT Department
IT Operations(Infrastructure, PCs,
Support, Facilities, etc.)
IT Operations(Infrastructure, PCs,
Support, Facilities, etc.)
• Costs• Risks• Staffing
IT Internal Consulting(Business Analysis,
Application Management, Practice Liaisons, etc.)
IT Internal Consulting(Business Analysis,
Application Management, Practice Liaisons, etc.)
• Usability and Lawyer Effectiveness
• Business Process Improvement
• Information Integrity
34
IT Process Maturity (1 of 4)
35
$14,067
$11,413
$6,302Level 1
IT Maturity/Risk
Co
sts
pe
r E
mp
loy
ee
Level 2 Level 3
Comparison of IT Maturity and Cost- 40 Technology Scorecard Firms 2006-2008
36
Consulting ServicesRESPONDING TO LEGAL INDUSTRY CHALLENGES
36
37
Market Consolidation,
Segmentation, and Global Expansion
Increasing Need for
Cost Control
Increasing Competition
for Talent
Intensifying Competition for Clients
Growth in Costs of Litigation
• Strategy• M&A Advice/Counsel• Compensation and
Performance Management
• Firm Management
• Strategic Business Development
• Business Development & Marketing Dept Analysis
• Pricing Strategy• Client Feedback• Existing Client and Market
Share Intelligence Analysis
• SAM-Legal [Strategic Account Management]
• Rainmaking Advantage• Client Retention
Strategies Through Business Intelligence
• Insightful Client Relationship Development
• Procurement and Records Management Services
• Strategic Technology Services
• Managed Technology Services
• Financial Systems Implementation
• Records, Risk Management & Compliance
• Practice Group Automation
• Intellectual Property Practice Management
• Web Portal Design• Merger Technology &
Process Integration
• Leadership • Talent Management• Organization
Development• Talent Integration• Practice Management
• Corporate Litigation Readiness
• Litigation Support Services
• Project Management Services
LitigationReadiness &
Support
Law FirmStrategy
Infrastructure& Cost Control
Leadership Development &
Talent Management
Client Developmentand Growth
38
Law Firm Advisory Services Overview
Brad Robbins John SweeneyBrad Hildebrandt
Strategic Technology Planning/Facilities
-----------------------Dave Cunningham
Steve Falkin -----------------------
CTO
Financial Systems(Assess &
Implementation) -----------------------
Nathan Bowie Barbara Schane
Jackson (HI)
-----------------------ED | CFO | CIO
Client Development
& Growth-----------------------
Silvia Coulter -----------------------MP | CMO | HR
Knowledge Management/Information
Access -----------------------
Peter Buck-----------------------
CIO | CKO
Infrastructure (Buying Services)
-----------------------Nick Quil
-----------------------ED | CFO
Law Firm Strategy
-----------------------Lisa Smith
-----------------------MP | ED | COC
Leadership Development
& Talent Management-----------------------
Larry Richard-----------------------
MP | HR
ManagedServices
-----------------------Jamie Berry
-----------------------MP | LM | CIO | CTO
E-Discovery Services
-----------------------John Sweeney
-----------------------MP | LM | CIO | CTO
Litigation Readiness
-----------------------Pam Downs
David Rohde -----------------------
MP | LM | CIO | CTO
LitigationServices
-----------------------Jim Mittenthal
-----------------------MP | LM | CIO | CTO
ComputerForensics
-----------------------Eric Mazur
Jamie Berry -----------------------
MP | LM | CIO | CTO
BusinessIntelligence
-----------------------Don Gibson
-----------------------CMO | CBD
RiskManagement/Compliance
-----------------------Meg Block
-----------------------MP | ED | CFO | GC
Client Relationship Management-----------------------Alan Nathanson-----------------------
CMO
Market Consolidation, Segmentation, and Global Expansion
Increasing Need forCost Control
Increasing Competition for Talent
Intensifying Competition for Clients
Growth in Costs of Litigation
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