Profit margins are expected to improve as firms benefit from a leaner cost structure.
Los Angeles, CA (PRWEB) March 11, 2012
Until 2007, the Law Firms industry benefited from strong demand for commercial services due to booming investment markets and corporate activity, such as initial public offerings (IPOs) and mergers and acquisitions (M&As). The global recession led to dramatic declines in these activities, however, and a subsequent drop in demand for legal services. This trend weakened the top-tier firms in 2009, since they receive the bulk of their revenue from major corporate clients. “It was those same firms, however, that picked up the majority of countercyclical work,” says IBISWorld industry analyst Kevin Culbert. More recently, the industry has started to benefit from an increase in corporate activity, which is expected to drive revenue growth as the economy slowly improves. Consequently, revenue is expected to grow 1.0% annually to $290.7 billion in the five years to 2012.
Unfortunately, countercyclical activity and an increasing number of IPOs have not been enough to right the balance sheets of some operators in the Law Firms industry. While profit margins declined following the recession, firms were quick to cut costs. In some cases, the drive to reduce expenses has led to mass layoffs and salary freezes, especially among associate lawyers. These leaner operations are expected to pay off over 2012, with profit margins forecast to improve slightly. Additionally, a massive swing in the business model for many law firms may occur in order to bring perceived value of legal services in line with expected outcomes. Says Culbert, “Clients are growing weary of paying top dollar, pushing them to look for alternative pricing arrangements.” Some firms are trying to accommodate this shift by moving away from traditional hourly rates to performance-based pricing.
Prior to the recession, midsize regional firms were viewed as too large to specialize in a single practice area and too small to compete for large commercial clients. Nevertheless, they have become attractive alternatives to national firms with hefty price tags. Smaller firms with less commercial focus have generally been able to continue with business as usual because areas like family and criminal law are less cyclical. The Law Firms industry is highly fragmented, with the majority of operators being small practices or medium-sized firms. Only domestically generated revenue contributes to industry market share, so firms that generate the majority of their revenue from abroad, such as Baker & McKenzie, have a lower market share relative to their total revenue. Other larger firms include Skadden, Arps, Slate, Meagher & Flom; Latham & Watkins; and Jones Day. While industry concentration is low, it will likely increase over time because of the high number of mergers that have occurred between firms. The globalization of major international companies prompted many legal firms to follow suit. Since the mid 1990s, merger activity between firms has heated up, with a number of major firms merging with entities in the UK and Europe. Merger activity has also correlated with an increase in firm offices opening overseas. For more information, visit IBISWorld’s Law Firms report in the US industry page.
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IBISWorld industry Report Key Topics
This industry comprises offices of legal practitioners, known as lawyers or attorneys, which are primarily engaged in the practice of law. Establishments in the Law Firms industry provide expertise on a range of areas or in specific areas of law, such as criminal, corporate, family and estate, patent, real estate or tax.
Key External Drivers
Industry Life Cycle
Products & Markets
Products & Services
Globalization & Trade
Market Share Concentration
Key Success Factors
Cost Structure Benchmarks
Barriers to Entry
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