2020 State Of U.S. - Thomson Reuters

2020 STATE OF U.S. SMALL LAW FIRMSAddressing These ChallengesAnother theme we have seen frequently throughout the years of conducting this survey is that,despite generally high levels of recognition of challenges by the leaders of small law firms,implementation of solutions to confront these challenges remains wanting.For example, only about 29% of firms saying they have a challenge acquiring new client businesssay that they’ve actually implemented a plan to address that challenge. True, an additional 31%say they’ve made a plan that they have not implemented yet, but here again, this is somethingwe’ve heard for years. We often hear about firms making plans to address challenges, but for avariety of reasons, those plans may never actually be put into action. Making a plan without takingany actions does little to actually alleviate the identified problem.Among the challenges commonly identified as “significant challenges,” getting paid by clients wasthe challenge most frequently met with action. Given the existence of a law firm as a cash-flowdependent business with little other operating capital, this is a wise move.It is notable, as well, that larger small firms, those with 7-10 lawyers or 11-29 lawyers, weregenerally more likely to have actually implemented a plan to address the challenges they face,Figure 2: Addressing Challengesregardlessof the challenge in question.Figure 2 – Addressing Challenges41% 43% 39% 48% 28%31% 36% 30%27%29%21%Total Solo31%2-650% 58% 48% 50% 39% 38% 43% 45% 27% 18%35%31%37%25%31%20%11%7-10 11-29 Total Solo29% 30%22% 20%2-634%33%27% 29%33%32%38% 25%31%41%27%31%13%7-10 11-29 Total Solo2-637% 49% 39% 35% 31%45% 51% 45% 35% 46% 53% 53% 58% 58% 44%51%31%24%34% 35%45%31%24% 26%7-10 11-29 Total Solo2-631%29%28%40%24%27% 31%17%26% 25% 39%30%25% 20% 27% 26%20% 16%15% 17%7-10 11-29 Total Solo2-67-10 11-29 Total Solo2-67-10 11-29n 309 n 117 n 105 n 32 n 48 n 297 n 119 n 97 n 29 n 49 n 240 n 106 n 78 n 26 n 35 n 264 n 69 n 97 n 29 n 50 n 233 n 45 n 86 n 23 n 45 n 235 n 75 n 72 n 25 n 51Challenges acquiringnew client business30%34%16%26% 28% 26%Total Solo2-6Increasing complexityof technology46% 58% 41% 42% 33% 30% 31% 33% 25% 31%47% 56% 43%27%Spending too much timeon admin tasks, notenough on practicing law36% 40%31%Cost control andexpense growth48% 42% 59% 48% 31% 2020 Thomson Reuters. All Rights Reserved.24% 28%25%32%23%24% 47%26%43%43% 48% 39% 42% 45%22%40%37%30%26% 24%25% 27%20%2-626%7-10 11-29 Total Solo2-6n 154 n 72 n 50 n 16 n 15 n 252 n 104 n 85 n 25 n 41 n 261 n 104 n 89 n 27 n 39 n 198 n 69 n 73Keeping up withcompetition from otherfirms in your practice areaWe have implemented changesto address the issues25%27% 21% 29% 33% 24%34%Getting paid by clients27% 38%7-10 11-29 Total Solo 2-636%29%29%50%25%28%13%7-10 11-29 Total Solo**2-67-10n 21 n 27 n 189 n 27 n 62 n 24 n 48 n 131 n 40 n 39 n 17Demonstrating the firm’svalue to potential clientsWe have a plan to address these issuesbut have not yet implementedClients demanding morefor less or rate pressurefrom clients37% 38% 48% 29% 32% 42% 63% 38%35%20%22% 19%20%11%****7-10 11-29 Total Solo 2-6 7-10 11-29 Total SoloIncreasing pace of legaland regulatory changeLack of internal efficiencyManaging staffWe haven’t yet determined howto address these issues11-29n 24Retaining client business**Sample size too small to report5

2020 STATE OF U.S. SMALL LAW FIRMSChanges to Meet ChallengesAmong those firms who said they’ve either implemented a plan to address their challenges, orhave at least developed a plan they have yet to implement, most frequently leaders at thosefirms are looking to improve, upgrade, or add technology to their tech stack to help alleviate thepressures they are feeling. Around a quarter of respondents pointed to changing technology as asolution, regardless of the size of their firm.Other common, though substantially less frequently cited changes included increasing, updatingor emphasizing marketing; monitoring or cutting costs such as salaries or overhead expenses; andimproving payment collections.Figure 3 – Changes ImplementedTotalSolo2–67–1011–29n 299n 114n 104n 30n 52Improve / upgrade / add more technology (hardware & software)26%22%28%30%23%Increase / update / emphasize marketing / advertising / promotions /networking to generate new clients14%13%10%19%20%Monitoring / cutting costs / salaries / overhead / employees / etc.12%4%15%9%14%Improve / increase payment collection / accept credit / debit cards /ACH payments10%7%14%14%9%Meeting / planning / strategizing10%9%10%12%12%Adding more / better attorneys / staff / managers10%4%10%16%9%Better communication with staff / clients9%3%12%7%9%Work smarter / more efficiently / hold accountable for productivity8%9%6%9%12%Update / better website / increase social media presence / SEO /client reviews8%10%8%7%7%Increase / monitor billing rates / hours / increase retainers8%7%6%5%14%Establish / enforce / monitor firm policies / procedures6%6%10%5%5%Employee evaluations / recognition / awards / bonuses5%0%5%7%12%Hire consultant / specialist3%2%2%7%2%Choosing new clients carefully1%2%0%4%0%Other10%19%11%0%16%None / Not sure / NA5%7%1%2%0%Changes Implemented in 2020 2020 Thomson Reuters. All Rights Reserved.6

2020 STATE OF U.S. SMALL LAW FIRMSSources of CompetitionFor most small firms, their headaches do not end with the list of challenges already discussed. Amajority of small law firms of all size also experience threats to their business due to competition,both from other small law firms and from larger law firms that compete for the same clients.These sources of competition are inextricably intertwined with the challenge small law firms feelaround acquiring new client business. The legal services market has, for a number of years, been abuyer’s market. The onset of the economic slowdown associated with COVID-19 will only exacerbatethis reality.For small firm lawyers, it is vital to stake a place in the market that differentiates them from theircompetitors, whether those competitors be other small firms or larger firms with deeper benches.Small law firms looking to compete must clearly establish what sets them apart in terms of the valuethey bring to their clients. As we’ve seen, firms generally feel they do a good job of demonstratingvalue to their clients, but the reality of some of the challenges they face suggests otherwise.In the face of strong competition, small law firms would do well to invest in a robust, integratedFigure 4 –Sourcesof Competitionmarketingplan.Figure 4 – S ources of Competition74%73%79% 78%63%52%51%55% 56%45%22%12%12%5%Other law firmsor similar size6% 5% 6% 7% 4%OutsourcingSignificantly larger lawfirms that competefor the same clients1% 0% 2% 1% 0% 2020 Thomson Reuters. All Rights Reserved.12% 14% 14%12%5%Individual consumersrepresentingthemselves pro seLegal guidance fromDIY legal websitesor services5% 4% 6% 3% 6%6%In-house CounselTotal (n 403)8%Solo (n 46)Other2-6 (n 154)9% 8%6% 8% 6% 5% 4%Law firmmatching services3% 4%None of the above7-10 (n 43)11-29 (n 57)7

2020 STATE OF U.S. SMALL LAW FIRMSChanges in Marketing and SpendDespite widespread recognition for years of the challenge posed with acquiring new client business,and nearly 30% of respondents saying they’ve implemented a plan to address that challenge, morethan half of respondents report no change in their marketing spend in the past three years. The onlyexception to this comes among firms with 11-29 attorneys, where 38% reported no change, with 22%reporting growth in marketing spend of between 1-3%. In general, larger small firms were more likelyto grow their marketing spend than smaller firms, regardless of the rate of growth.Figure 5 –Marketing Change in Spending Last 3 YearsFigure 5 – C hange in Marketing Spending in Last Three Years52% 52%57%54%38%4%8%4%1% 2%Decline morethan 5% annually4% 6% 2% 4% 4%4% 6% 4% 4%Decline 3–5%annually0%Decline 1–3%annuallyNo change22%14%14% 12%10%Grow 1–3%annuallyTotal (n 403)8% 9% 7% 7%Grow 3–5%annuallySolo (n 161)12%7%2%7% 8% 8%Grow more than5% annually2-6 (n 142)7-10 (n 40)8%5% 6%11%15%Don’t know11-29 (n 60)The numbers look virtually identical with regard to planned growth of marketing spend. Smallerlaw firms still see majorities planning no change to their marketing spend. And fewer firmswith 11-29 lawyers plan to grow their marketing spend in the next three years than did so in thepast three years.On a positive note, it is encouraging that even though this survey was fielded during the start ofthe pandemic shutdowns, very few firms reported planning to cut marketing spend in the comingthree years. It is difficult to say whether that still holds true as the state of the economy continuesto be in flux. It should be noted, though, that even those firms planning to hold fast on their currentlevels of marketing spend will find themselves with diminished buying power year-over-year dueto normal inflation. 2020 Thomson Reuters. All Rights Reserved.8

2020 STATE OF U.S. SMALL LAW FIRMSIt is also worth noting that even in the face of potentially contracting marketing budgets, firmscan find opportunities to address their challenges with acquiring new client business through astrengthened focus on marketing activities with a higher return on investment. A smaller overallmarketing budget may actually result in better returns if that smaller budget focuses on a strong,integrated marketing strategy with a focus on maximizing return.One additional note, while the question addresses both marketing and advertising spend, we treatthem as essentially the same for the purposes of discussion here as any advertising should be partof a broader aligned marketing plan, rather than being considered a separate effort.Figure 6 –Marketing Change in Next 3 YearsFigure6–C hange in Marketing Spending in Next Three Years62%50%3% 4% 3% 4% 0%1% 0% 1% 0% 2%4% 3% 3% 3% 6%Decline morethan 5% annuallyDecline 3–5%annuallyDecline 1–3%annually19%22%16%17%21%Total (n 403)6%10%Grow 3–5%annuallySolo (n 161)8%4%1%4%1%6%Grow more than5% annually2-6 (n 142)46%43%No change17%10%Grow 1–3%annually51%7-10 (n 40)9% 8%6%12%15%Don’t know11-29 (n 60)“A smaller overall marketing budget may actually result in betterreturns if that smaller budget focuses on a strong, integratedmarketing strategy with a focus on maximizing returns.” 2020 Thomson Reuters. All Rights Reserved.9

2020 STATE OF U.S. SMALL LAW FIRMSTypes of Marketing ActivitiesFree listings in online directories, social media advertising, and reputation management are themost common types of marketing activities for small law firms, but there is a clear dichotomybetween larger small law firms and solo attorneys in terms of their adoption.More solo attorneys admit that they do no marketing or advertising (33%) than say they engagein any of the listed types of marketing (the highest was 30% who say they use free online directorylistings). In general, a surprising number of respondents say that their small law firm does not doany marketing.Generally, more small law firms say they use print directories than targeted or pay-per-clickFigure 7 – Typesof Marketing despiteActivities the boom over the past several years in online commerce. We do note,onlineadvertising,however, the proportion of firms who do engage in social media efforts, purchase listings in onlinedirectories, or run a blog.Figure 7 – Types of Marketing Activities52%42%39%44%38%30%44%35%34%29%27%21%Free listing inonline directories20%Social mediaadvertising25%40%28%Reputationmanagement27% 25%23%32%28%Purchasing listing inonline directories24%17%25% 26%23%22% 20%28%12%Print advertisingOnline blogging22%17%23% 24%18%Listing inprint directory33%17%14%18%12%18%18%4%Pay-per-click oronline advertising0%3%8% 6%Radio advertising3% 1%5%0% 0%TV advertisingTotal (n 403)Solo (n 161)14%20% 21% 20%19%22%15%4%1% 0% 3% 0% 0%Billboardadvertising2-6 (n 142)Other7-10 (n 40)Our firm doesn’t do anymarketing or advertising11-29 (n 60)“ a surprising number of respondents say that their small lawfirm does not do any marketing.” 2020 Thomson Reuters. All Rights Reserved.10

2020 STATE OF U.S. SMALL LAW FIRMSThe Impact of MarketingDespite acknowledging a challenge acquiring new business, many respondents say that their firm’sclient base, i.e., the number of clients served by the firm, has increased over the past three years.Anothertheir client base has held steady. The largest sign of potential trouble lies amongFigure 8 The25%Impactsayof Marketingthe 24% of solo lawyers who reported their client base has decreased more than 5% per year over thepast 3 years.Figure 8 – The Impact of Marketing25%24%22%26%30%15%8%5%3%0%Decline morethan 5% annually4% 3% 4% 4% 4%3% 1% 4% 3% 2%Decline 3–5%annuallyDecline 1–3%annually26%21%15%12% 13%22%16% 15% 15% 16%18%12%3%Grow 1–3%annuallyTotal (n 403)Grow 3–5%annuallySolo (n 161)18%17%21%16% 17% 14%7%Grow more than5% annually2-6 (n 142)No change7-10 (n 40)Don’t know11-29 (n 60)“ many respondents say that their firm’s client base hasincreased over the past three years.” 2020 Thomson Reuters. All Rights Reserved.11

2020 STATE OF U.S. SMALL LAW FIRMSThe Importance of Existing ClientsFor the majority of small law firms, the bulk of their annual revenues come from existing clients.Roughly half of responding firms report that they receive 30% or less of their revenue each yearfrom new clients. Here again, solo attorneys are the exception, with the majority of solo law firmsreceiving 50% or more of their revenue from new clients each year, owing most likely to the typesof clients served and the services being offered (e.g., family law, criminal defense).Figure 9 New Client RevenueIt is, perhaps, ironic, that solo lawyers were also those who were most likely to have reporteddeclines in their marketing spend over the past three years, and were less likely to increase theirmarketing budgets over the coming three years.Figure 9 – New Client Revenue25% 26%11%11%15% 16%17%13%19%15%21%16%18% 19%5%0-10%8% 10% 8% 7%6%11-20%9% 10% 10%21-30%12%10% 12%61-70%Total (n 403)8% 6% 8% 9% 6%9% 8%41-50%14%71-80%Solo (n 161)6%31-40%14%3% 4%0%51-60%15%9%2-6 (n 142)6%4%1%4%4%8%81-90%7-10 (n 40)4%1% 3%91-100%11-29 (n 60)“ the bulk of their annual revenues come from existing clients.Roughly half of responding firms report that they receive 30%or less of their revenue each year from new clients.” 2020 Thomson Reuters. All Rights Reserved.12

2020 STATE OF U.S. SMALL LAW FIRMSFinding Time to Be a LawyerRoughly 60% of a small firm attorney’s time is spent practicing law. That means that 40% is spentelsewhere. And given that practicing law is what attorneys are paid to do, it is no surprise that 64%of respondents said they face a challenge from spending too much time on administrative tasks.Particularly for small firm lawyers, administrative burdens can be consuming, especially incomparison to their counterparts at larger firms. Larger firms often have deeper benches of alliedprofessionals tasked with managing tasks like IT, marketing, billing, and collections. In smallerfirms, these tasks fall much more commonly to the partners. This can be seen in the 20% of timespent managing the firm by respondents from firms with 11-29 attorneys. These firms arguablyhave more complex operations due to larger staff and overhead, increasing the amount of timethat must be devoted to management.Time being a finite commodity, small firm lawyers should be focused on finding efficient solutionsto internal operations and management so as to optimize the amount of time they can spendFigure 10 Time Allotmentpracticinglaw.Figure 10 – Time Allotment58% 57% 59%61%55%20%13%Practicing law10% 11%15%14%14%5% 5% 5% 5% 6%Managing the firmTotal (n 403)18%Solo (n 161)Growing the firm /marketing activities2-6 (n 142)11% 9%Meeting or speakingwith clients7-10 (n 40)10% 11% 10% 8% 10%Dealing withadmin tasks11-29 (n 60)“Roughly 60% of a small firm attorney’s time is spentpracticing law. That means that 40% is spent elsewhere. 64% of respondents said they face a challenge fromspending too much time on administrative tasks.” 2020 Thomson Reuters. All Rights Reserved.13

2020 STATE OF U.S. SMALL LAW FIRMSMost View Themselves as SuccessfulDespite the numerous challenges they face, most small law firms consider themselves to be eithersuccessful or very successful. This may be part of the reason why many small firms appear reluctantto implement changes to the challenges they see, because the feeling of success can be a stronginhibitor of a drive to change. However, it is important to note that small law firms recognize thatthey face a high degree of competition from larger law firms, and many of these firms are making thesame types of changes small firms have been putting off.To look more directly at the idea of why small law firms largely view themselves as successful, it isuseful to look at how they choose to define success.Figure 11 – Success Characterized1%1%5%5%7%22%28%66%27%70%Total68%Solo lawyern 4032-6 lawyersn 161n 1421%4%4%29%39%66%57%7-10 lawyersn 40Very successful 2020 Thomson Reuters. All Rights Reserved.Successful11-29 lawyersn 60Neither successful nor unsuccessfulNot successful14

2020 STATE OF U.S. SMALL LAW FIRMSThe most common measures of success for small law firms are overall profits, repeat business, andclient satisfaction ratings. It is encouraging to see overall profits edging ahead of overall revenues asa measure of firm success, placing the emphasis for success on the bottom line.Figure 12 Measures of SuccessHowever, how closely these measures of success are monitored may be a different story.Figure 12 – Measures of Success98%83%88%82%79%83%86%80%85% 87%92% 94%85%79%83%78%82%83%79%58%Client satisfactionratings80%79%82%Repeat businessOverall profitsWork/life balance86%70%51%46%42%46%42%38%36%34%Total (n 403) 2020 Thomson Reuters. All Rights Reserved.Case win percentageSolo (n 161)Revenue per partner2-6 (n 142)40%37%43%25%20%Overall revenues48%45%7-10 (n 40)Profits per partner11-29 (n 60)15

2020 STATE OF U.S. SMALL LAW FIRMSDespite 83% of respondents saying that client satisfaction ratings were part of how they definedsuccess, only 36% say they actually track them. A similar, though smaller, divergence can be seenwith repeat business, where only 52% of respondents say they track it as a metric, while 86% saidit was part of how they defined success.Smallwere much more likely to track overall profits and revenues. Interestingly, more firmsFigure 13 firmsMetric Trakingreported tracking revenue per partner than those who said it was part of their definition of success.Figure 13 – Metric Tracking98%91% 91%89%93% 91%90%96%79%77%68%52% 52% 52% 50%57%74%61%55%19%Overall profitsOverall revenuesRepeat businessRevenue per partner66%58%47%46%36%33%28%47%33%30%22%17% 19% 18%21%14% 15%20%19%8%Client satisfactionratingsTotal (n 403) 2020 Thomson Reuters. All Rights Reserved.Case win percentageSolo (n 161)Work/life balance2-6 (n 142)7-10 (n 40)Profits per partner11-29 (n 60)16

2020 STATE OF U.S. SMALL LAW FIRMSThe well-worn business school maxim that “you can’t manage what you don’t measure” holds truefor small law firms, as does its corollary, “measure what matters.” Among those firms who trackedkey metrics, almost none saw declines in those metrics that were not influenced by external forces.Some firms who measure metrics like revenues and profits did see those metrics decline, but thereare a host of economic factors which can lead to such declines. In contrast, those firms who trackedmetrics like client satisfaction or repeat business were highly likely to see those metrics either holdsteady, and in many cases improve, sometime substantially.Figure 14 – Metric Changes1%19%1%8%16%2%11%36%Revenue per partner11%33%Overall profits1%1%6% 6%8%34%55%37%Overall revenues0.5%10%35%37%36%2%17%0.5%Client at businessSignificantly improved 2020 Thomson Reuters. All Rights Reserved.Work/life balanceSomewhat improved65%40%Case win percentageStayed the sameSomewhat worseProfits per partnerSignificantly worse17

2020 STATE OF U.S. SMALL LAW FIRMSGoals and PrioritiesWhen asked to identify their top three goals for their firms, respondents unsurprisingly gravitatedto goals related to the challenges they previously identified. Some 33% of respondents identifiedincreasing or improving business development as a goal. To that we can add: 26% want to be seen as ‘best of the best’ 21% want to differentiate from their competition 19% want to enhance their reputation in the local communityAll of these can easily be seen as goals related to improving business development.Firms were also quick to select goals that addressed their challenges with lack of internal efficiencyor spending too much time running their firms. 2

Out of all the challenges faced by small law firms, getting paid by clients is the challenge they are most likely to have taken steps to address. For the majority of small law firms, the bulk of the pressure they feel from competition comes from other law firms, as opposed to DIY legal websites or alternative legal service providers.