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Traditional partnership model under pressure

Law firms ‘scrambling to address the rapidly-shifting legal marketplace,’ study finds  

5 February 2013

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By Manju Manglani, Editor (@ManjuManglani)

Recent trends in the legal market are placing increasing stress on the traditional law firm partnership model, a new study has found.

The report notes that law firm partnerships are under increasing pressure due to the disparity in compensation between the highest and lowest paid equity partners and a failure by law firm leaders to set and manage partner expectations.

It adds that partners are feeling increasingly disenfranchised and law firms, caught between profit pressures and client demands, are struggling to strike an appropriate balance between models that provide necessary centralised management and structures that preserve the essential independence of professional judgment.

“Firms are being challenged to refocus their strategies and take steps to manage their businesses more effectively. They are scrambling to address the rapidly-shifting legal marketplace,” said James W. Jones, senior fellow at the Center for the Study of the Legal Profession at Georgetown University Law Center and lead author of the report.

“The good news is that many firms are beginning to see positive results from these efforts. Almost all law firm leaders are acknowledging that fundamental changes are occurring in the market and the need to act decisively to address them.”

The report examines how the market for legal services in the US and throughout the world has changed. It notes that a combination of sluggish growth in demand for legal services, declining productivity, falling realisation rates and the need for further expense reductions led to modest growth, at best, in law firms in 2012.

It predicts that, in 2013, most firms will continue to struggle to maintain profitability as a result of these pressures.

“We do expect to see some growth in revenues and continued rigorous efforts to manage expenses, but overall we anticipate that there will be only modest growth in profits per equity partner in the current year – probably in the low single digit range,” it notes.

According to the report, some of the factors that have the potential to alter the shape of the legal market include the rapid pace of globalisation and persistent overcapacity in the market, as well as growing pressures on the traditional partnership model.

It suggests striking a balance between the traditional partnership model and the managed professional business model.

“Plainly, to be successful in today’s world, most every firm of any significant size must respond to the changing competitive realities of the market by centralising many of the decisions previously made in more collegial ways and by embracing a consistent strategic vision that is uniform across the firm and that drives decisions and actions in all of its practice areas,” the report notes.

In a recent Managing Partner article, Nick Carter-Pegg, head of professional services at accountancy firm BDO, also noted: “When law firms have changed their management style and governance to be run as modern firms, underneath the partnership wrapper will be efficiently and professionally-run businesses that are focused on delivering services to meet the needs of demanding clients and that have a governance oversight that is appropriate for large global businesses.” (See ‘Breaking traditions: The end of traditional partnerships?’)

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