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Written by Norman Clark
Published: 06 May 2019
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Service delivery capability, not size, is what will determine the profitability -- and perhaps the survival -- of most traditional law firms between now and 2030.

 

Consider how technology has changed he way that law firm staffing and profitability interact. Only twenty years ago, one partner frequently was supported by two or even three secretaries. Today that ratio has flipped, with one secretary typically supporting two or three partners. 

We are beginning to see a similar paradigm shift in associate staffing. Traditional concepts of staffing leverage, with their assumptions about the most profitable ratio of associates to partners, are being turned upside down and becoming increasingly irrelevant. As technology enables associates to perform many of their traditional functions five, ten, or twenty times faster, and with exponentially greater accuracy and analytical quality, a staffing ratio of four associates to one partner, instead of being reasonably profitable, could become quite unprofitable.

Under the old paradigms, and within certain upper limits that depended on the nature of the tasks performed, the higher the leverage the better. In the future, however, law firms can expect to see leverage becoming an alarm setting rather than a threshold for improved profitability. Very high workflow leverage ratios could become a threat to profitability if the transition to advanced technology and AI is not accompanied by equally sophisticated quality assurance systems and processes.

Currently, rework – the unbillable time required to fix mistakes – is the largest cause of fee write-offs in most small law firms. If an underlying operating process or service delivery procedure is flawed, applying technology will only permit a firm to make the same mistakes and lose fees faster. Moreover, the exponential increases in productivity will challenge partners to keep up with the tidal wave of work produced by associates and their new electronic “colleagues.”

Small law firms with with whom my colleagues and I work seem to understand this better than some much larger firms. (At the same time, I must point to at least one notable "Big Law" exception: DLA Piper, which is making significant investments in improving lawyer productivity.) We are beginning to see how advanced technology -- even without artificial intelligence -- is pushing high staffing ratios to a tipping point for unprofitability. One of the emerging strategies is to invest in technological systems and tools to make each associate many times more productive, than to keep trying to build leverage by hiring more lawyers.

In short, one of the most important long-range consequences of the emergence of advanced technology in the legal profession is, simply stated: Bigger is no longer better...

...but "more" is.

Norman Clark

 

For more insights about the impact of advanced technology on law firm profitability, see Sustainable Profitability in a Disrupted Legal Market, by Walker Clark co-founders Norman Clark and Lisa Walker Johnson, published in February 2019 by Globe Law and Business. Click here for more information.