Law firms industry outlook
Focus on efficiency and improving the back-office
Firms will operate through the remainder of 2021 with a heightened focus on efficiency, as they look to achieve quick wins by improving back-office processes. Technology implementations and cloud migrations continue to be key challenges, but they are more likely to be investments in 2022, as firms prioritize lower-investment and less disruptive improvements in the short term. There is also more awareness around cybersecurity risks and challenges, but little evidence of elevated measures to combat them.
Further reduction in real estate spending
Although many law firms have been downsizing their office spaces for the last decade, the pandemic’s remote-work model has accelerated the opportunity for further reduction. Almost two-thirds (64%) of law firms plan to spend even less on real estate in the next three to five years, according to the Aderant Business of Law and Legal Technology Survey, which polled 201 business of law and legal professionals from firms worldwide in late summer 2020. This indicates the decade-long downsizing trend will continue, with more firms making remote or flexible working arrangements permanent.
This long-term adoption of a remote-work environment is probably driving the top challenges of 2020 cited in the Aderant survey. Operational efficiency (39%), technology adoption (32%) and cybersecurity (30%) were the most frequently cited challenges in a list of 15.
Operational efficiency in the back office through process improvement
The pandemic has boosted business at many law firms, exposing the long-overdue need to improve operations in order to scale efficiently. However, only 48% of law firms plan to achieve these efficiencies by spending more on software, while 70% plan to do so by increasing investment in process improvement, according to the Aderant survey, which was published in May.
This shows that law firms are looking to optimize current processes using the technology stack in which they already have invested. Process improvement also is usually less disruptive to internal operations than technology implementation and is preferred when looking for quick wins or a short-term return on investment.
But what about growing revenues?
Firms might finally be ready to address many of the front office operational issues they have been avoiding or putting off. This realignment of priorities is evident in how Aderant survey respondents identified the top three challenges facing their firms: 29% said retaining and growing existing business from clients, up from 19% in 2019. It is the first time in the four-year history of the survey that more firms cited this challenge than pricing pressure (28%). In other words, firms are seeking to improve profits by growing revenue instead of by just cutting costs.
However, based on our conversations with law firm executives, while the desire to grow a firm’s top line is preferred over continuing to cut costs, many firms still don’t know where or how to start.
Because of the pandemic, firms have a litany of opportunities to embrace the change that has been forced upon their leadership teams, and they should incorporate these opportunities into their strategic planning sessions at their partner meetings this summer and fall. Whether it’s addressing go-to-market approaches, sales, networking, training of rising stars, building cross-functional working teams, understanding the profitability metrics and opportunities within its current client mix, or even the continued importance of succession planning, firm leaders have finally reached a point where these difficult conversations must be on the agenda.
Cloud migration: Immediate challenge but long-term solution
The top three technologies with the biggest impact on efficiency at a firm continue to be document management (82%), financial management/enterprise resource planning (75%), and time and expense management (74%), as determined in the Aderant survey. We expect a sizable portion of technology investment will be to move these technologies and similar ones to the cloud.
Although many firms desire to move document management and time and expense management systems to the cloud, they are reluctant to make this investment until their older, on-premises financial management (enterprise resource planning, or ERP) systems are updated or migrated—and migrating the ERP system can immediately disrupt daily operations. With operational efficiency being a top challenge, even a short-term disruption for long-term improvements is not palatable following the tumultuous year of the pandemic. This reluctance is creating a bottleneck of technology improvements, which will continue to hold firms back from the operational efficiencies they desire.
The current focus on process improvement over tech adoption shows that although a cloud migration may be on the road map, implementation may be delayed in order to tackle less daunting process improvements in the short term. Aderant reports that only 8% of firms plan to move their practice management solution to the cloud within the next 12 months, and 31% plan to at least a year from now. But firms can’t afford to wait much longer to join the cloud migration. Some are annually spending tens of thousands of dollars—or even more—to maintain on-site server rooms and the associated salaries for technicians, security upgrades and other related support. Firm leaders need to recognize that migrating to the cloud benefits their attorneys and balance sheets more than maintaining the status quo.
Cybercriminals take aim
Cybersecurity is increasingly challenging law firms, a trend consistent with what the entire middle market experienced during the pandemic. The number of firms that rate cybersecurity as a top challenge increased to 30% in 2020 from 17% in 2019, according to the Aderant survey.
Cybercriminals probably will continue to target law firms with ransomware, as firms are becoming increasingly paperless and hold terabytes of highly sensitive and valuable information. For firm executives, the associated operational and reputational risks are worth losing sleep over.
To deter and repel hackers, firms can implement technologies such as firewalls and two-factor authentication, ensure that software is updated, patched and maintained, and back up files in secure repositories. However, many firms face a pair of challenges: deciding which technology makes the most sense depending on the makeup of the firm, and obtaining approval for increased spending to protect the firm. We have found that if a firm can align its security programs to an appropriate security framework, it is much more likely to obtain the funding and support it needs to sufficiently secure the firm.
The view forward
It’s clear that law firm leaders continue to look to manage expenses in the back office as a strategy to increase profits, especially through identifying quick wins and making any relatively easy changes. However, we are seeing a reluctance to invest in strategic technology and revenue-growing activities—which might negate cost management efforts relative to other firms that are strategically aligned to grow revenue, scale, and gain market share.