Law firm forecast sees declining profits

Declining profits could be on the dockets of many law firms again this year.

New Jersey legal consultancy Hildebrandt International expects profit-per-partner, a measuring stick of firm success, to decline 5 to 15 percent.

If the forecast released earlier this month proves accurate, it would mark the second consecutive year in which the average profit for law firms has fallen, a dubious distinction almost unheard of in the legal profession. Profits ranged from between flat and minus 10 percent in 2008, Hildebrandt said. Companies battered by the reeling economy are scaling back on legal counsel, unless of course they need bankruptcy advice. To compensate, firms are taking such drastic measures as reducing bonuses, freezing associate salaries, postponing new initiatives, instituting layoffs, and weeding out unprofitable partners.

Mike Williams, managing partner of Indianapolis mid-size firm Krieg DeVault LLP, thinks the mega firms that have locations in the "money centers" – Chicago and coastal cities – are hurting the most.

Krieg DeVault has weathered the storm relatively unscathed, Williams said, although at least a handful of local rivals have trimmed support staff to cut costs.

"There's no question that with the downturn in the economy, some of the legal services that clients have used law firms for, it's not happening now," Williams said.

Real estate, financing, and merger-and-acquisition activity is particularly slow. Conversely, the deepening recession is generating more lawsuits driven by massive layoffs.

The Hildebrandt report said the gloomy conditions provide law firms a chance to adjust their business models to appeal more to clients, including offering them alternative billing options.

The billable hour is as outdated as the law library, advocates for alternative billing say. The more hours billed, the more money a firm makes, which could encourage inefficiency, they say.

The option that could challenge the billable hour is a fixed-fee structure that gives clients a more accurate upfront estimate for the cost of services, allowing them to better budget for the expense.

A contracting economy arguably is fanning the argument for fixed fees, said Bob Birge of Law Firm Marketing Network, who has supported the fixed-fee model for years. Yet, firms have been reluctant to abandon billable hours because they've driven profits.

"Things have been good," he said. "Why shake it up when everybody's been making money?"

If billing correctly, firms can maintain profits while keeping clients satisfied, Birge said. If a fee for a real-estate transaction typically ranges between $5,000 and $10,000, for instance, a firm might charge $7,000.

But, Birge added, "Because nobody else does it, no one does it."

Indeed, the Hildebrandt report said some firms would have a difficult time making changes it recommended.

"We've gone through a period where everyone got used to growth and expansion," said James Jones, a vice president of Hildebrandt, in a statement. "People haven't really had to look at doing more with less."