As for COVID, the economy and the daily challenges of practicing law and running a law firm, it’s been a tough three years. Still, smaller law firms are optimistic about their future prospects — and with good reason.
That’s what she says 2022 Small State Law Firms Survey conducted by Thomson Reuters in conjunction with the American Bar Association’s Solo, Small Business and General Practice Division.
Nearly six in 10 attorneys at small firms — defined in the survey as attorneys with 29 attorneys or fewer — say they expect growth in revenue per attorney, billable hours and profit per attorney over the next 12 months. For all key figures – billing rates, productivity, realization rates – more and more lawyers expect moderate or high growth for the next year.
The same is true for the next three years, as small firm attorneys continue to expect high to moderate growth in revenue, profits, demand for services, and other metrics.
Given this optimism, it shouldn’t come as a surprise that small-time law firms consider themselves successful. According to the survey, 90% of small firm lawyers rate their firm as successful or very successful. Less than 1% characterize their company as unsuccessful.
However, the survey shows that companies assess their success differently depending on their size. Soli and law firms with 2-6 lawyers saw their success ratings decline over the past year but bounced back in 2022. For firms with 7-10 attorneys, the percentage of attorneys who describe their firm as very successful has increased steadily over the past three years from 29% to 35%. But for firms with 11 to 29 attorneys, that percentage dropped from 39% to 23%.
Of course, evaluating a company’s success depends on how it measures success. In the 2021 survey, repeat business was the most commonly cited definition of success, closely followed by customer satisfaction ratings and work-life balance. This year, overall profit was the most frequently cited measure of success, followed by repeat business, customer satisfaction, and work-life balance.
As in years past, the survey finds that small businesses face competition from both the top and bottom as they view their competition not only as similarly sized companies, but also as larger corporations and legal self-help websites.
“The growing popularity of do-it-yourself legal websites continues to spill over into small business constituencies,” according to the survey. “The percentage of lawyers from small law firms who see such websites as their main competitors made a significant jump in 2021 and has remained high in 2022. Such competition – easily accessible via computers and smartphones and viewed by consumers as a more cost-effective alternative to law firms – is a duty for small law firms to improve efficiency and customer service.”
Even if companies are optimistic about the future, they also recognize that they face challenges. The survey shows that the biggest challenge small businesses face is spending too much time on administrative tasks and too little time on practicing law. The average attorney at a law firm spends only 56% of their time practicing law, compared to 58% in 2020.
Other top challenges they identified most often:
- Acquisition of new customer business.
- Cost control and spending growth for real estate, salaries and the like.
- Keep up with the competition.
- lack of internal efficiency.
- Customers demanding more for less or price pressure from customers.
- Increasing complexity of technology.
When asked about the challenge of rising costs, companies most often respond by increasing their billing rates, followed by the introduction of new technologies, according to the survey. Other answers are:
- Reduction of unprofitable services or customers.
- change marketing strategy.
- Changed personnel key.
- Shifting work to employees with lower billable rates.
- Real estate cost reduction.
On the technology front, the survey finds that small businesses are either increasing their technology spending or holding the line. For the slightly larger firms with 11 to 29 attorneys, the percentage that increased their investment in technology nearly doubled in 2022 to 38% from 20% the previous year. At the same time, the number of companies planning to cut tech spending fell from 8% in 2021 to 5% this year.
Where are these tech dollars going? Mostly case management software, billing and invoicing software, and practice management software.
Some of that also goes to non-legally specific technologies like websites, hardware, and billing or accounting software.
Interestingly, the survey doesn’t seem to have asked about electronic payment technology – a technology that other surveys have found has seen a sharp increase in its use in recent years.
But the survey shows that small businesses are less concerned about getting paid by customers this year. While in 2020 64% of companies viewed pay as a significant to moderate challenge, that number has fallen to 54% this year. “And the proportion of companies with the greatest urgency on this issue, those who rated it as a significant challenge, has been reduced by more than half, from 19% in 2020 to just 9%,” the survey reads .
“[T]There is evidence here that small law firms are showing their ability to rise to the challenge and address some of their most pressing needs,” the report concludes. “Continued strategic focus on their goals and the challenges that may stand in their way will allow them to fully capitalize on the growth opportunities they foresee.”
Past survey years: