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Thomson reuters cio advisory board state of legal industry by steve daitch and dave cunningham aug 2008

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  • 1. Consulting ServicesOverview:State of The LegalIndustrySteven P. Daitch, with Dave CunninghamAugust 24, 2008
  • 2. 2008 Legal IndustryExecutive BriefingPre-Briefing SurveyResults 2
  • 3. Methodology• 105 Managing partners and executive directors from the AmLaw 150, UK Magic Circle, Canadian LEXPERT Top 30 attended the third Legal Industry Executive Briefing in May.• 50% of the attendees completed a pre- Briefing e-mail survey. Survey was designed to identify current issues for content presentations. 3
  • 4. 2008 Outlook When compared to 2007, do you expect your firms 2008 billings to…? Almost two-thirds of attendees expect their 2008 billings to increase compared to 2007 100% - 5% Drivers of Growth: Stay the Same - Increase in rates (91%) 75% - 29 - Addition of attorneys/staff (74%) - More billable hours (41%) % 50% - 38% - Added practice groups/areas (27%) - Added international offices (18%)Decrease Increase - Merger or partnership (9%) 6% 65% 25% - 15% 0% - 5% 6-10% >10 % 4
  • 5. 2008 Outlook When compared to 2007, do you expect your firms 2008 billings to…?Many attendees foresee an increase in year over year billings, but not as optimistic as last year 100% - 96% 80% - 65% 60% - Increase Decrease 40% - Stay the same 29% 20% - 2% 2% 6% 0% - 2007 2008 Survey Results Survey Results 5
  • 6. 2008 Outlook - Opportunities• The most commonly mentioned opportunities for law firms include: – Expansion of existing or new practice areas (16 mentions) • Litigation activity commonly mentioned – Improve overall performance/efficiency/matter management (12 mentions) – Increase productivity/utilization/billable hours (11 mentions) – Expansion into new geographies/markets (9 mentions) – Expansion with existing clients/cross selling (8 mentions) – Cost reduction/manage expenses and hiring (5 mentions) – Strengthen current relationships during time of economic pressure (4 mentions) 6
  • 7. 2008 Outlook - Risks• The most commonly mentioned risks for law firms include: – Economic conditions/recession (45 mentions) – Slowdown in business (10 mentions) – Rate pressures (5 mentions) – Associate retention/utilization (5 mentions) – Higher expenses (2 mentions) – Lack of focus (2 mentions) – Not enough attorneys (2 mentions) 7
  • 8. Practice Area Growth or Decline What do you expect will happen to the overall volume of litigation or corporate/transactional work at your firm over the next 12 months?  Almost two-thirds of attendees expect litigation volume to increase over the next 12 months 96%  On the flip side, 60% of attendees expect the volume of corporate/ transactional work to decrease >10% 1-4% To what degree do you Increase 62 expect it to rise? 6% % 33 5-10%Stay the same % 35% >10% Decrease 6% 1-4% To what degree do you 60% expect it to fall? 0% 25% 50% 75% 5-10% Litigation Corporate/trans 8
  • 9. Practice Area Growth or Decline What do you expect will happen to the overall volume of litigation or corporate/transactional work at your firm over the next 12 months? Estimations for litigation volume has declined from a year ago but it is still expected to grow Corporate/transactional estimates is substantially different from last year Litigation Corporate/Transactional 100% - 100% - 93% 85% 75% - 75% - 62% 60% 50% - 50% - 33% 35% 25% - 25% - 7% 11% 6% 7% 0% 6% 0% - 0% - 2007 2008 2007 2008 Survey Results Survey Results Survey Results Survey Results Increase Stay the same Decrease 9
  • 10. Practice Area Growth or DeclineWhich practice area(s) at your firm do you expect to see the greatest growth/fall? Litigation Growth (n=36) Corp/Trans Decline (n=38) IP (8 mentions) Construction (2 mentions) Mergers & acquisitions (8 mentions) Bankruptcy/ restructuring (5 White collar (4 mentions) Private equity (4 mentions) mentions) Banking & Finance (3 Real estate/ real estate financing (4 Securities (4 mentions) mentions) mention) Product liability/torts (4 Structured finance (2 mentions) mentions) Litigation practice areas receiving one mention: Commercial, Corporate/transactional practice General Litigation, Employment, Health care, Consumer, areas receiving one mention: International Trade, Regulatory, Antitrust, International Bankruptcy, Capital Markets, Arbitration, Business Tort, Complex Litigation, Class Actions, Securities, Securitization Accountants Liability, Corporate Investing Litigation decline received one mention: Tort, general business 10
  • 11. Practice Area Growth or Decline Do you use a suite of applications to help manage litigation ? Over half of the attendees have a suite of applications to help manage litigation Most firms have a combination of home grown and purchased applications Don’t Providers mentioned: know 75% - Microsoft, Concordance, 31% Interwoven, Introspect, Elite 50% - 43% 36% Yes 25% - 21% 54% 0% - 0% 0% No Combination Multiple Don’t Home Single 15% of home grown and providers know grown provider purchased 11
  • 12. Key Mid-YearMetrics 12
  • 13. THE WIDENING PROFITABILITY GAP Substantial and widening differences in PPEP within each tier of profitability occurred during 2000-2006 and will likely intensify in 2008 PPEP – Top Tier PPEP – Middle Tier PPEP – Bottom Tier 12.6%$2,000 Superior CAGR $1,200 Superior 13.6% $1,000 Superior$1,800 Average Average CAGR $900 Average$1,600 Under $1,000 Under 6.2% $800 Under 13.5%$1,400 CAGR $700 CAGR $800$1,200 8.5% $600 7.0% CAGR$1,000 $600 $500 CAGR 3.2% $800 4.2% $400 CAGR $600 $400 CAGR $300 4.3% $400 $200 CAGR $200 $200 $100 $0 $0 $0 2000 2001 2002 2003 2004 2005 2006 2000 2001 2002 2003 2004 2005 2006 2000 2001 2002 2003 2004 2005 2006 • Database includes 133 firms broadly representative of • Each tier divided into 3 segments based on PPEP growth the legal industry in the United States (2000-2006) • Firms divided into 3 tiers based on PPEP (top, middle, – Superior Performers bottom) – Average Performers – Under Performers 13
  • 14. PROFIT PER EQUITY PARTNERThe downturn in the economy in 2001 and upward pressure on expenses in the years leading up to 2001 caused profits to be flat and this is likely to recur – and worsen – in 2008 14.8% Profit per Equity Partner Yearly Growth 11.2% 10.4% 10.2% 9.3% 9.0% PPEP Growth 3-Year CAGR = 10.3% 6-Year CAGR = 9.3% 0.2% 2001 2002 2003 2004 2005 2006 2007 14
  • 15. REVENUE AND EXPENSE GROWTH 2007 saw margin compression for the first time since 2001 – a dynamic that will worsen in 2008Revenue and ExpenseYearly Growth Revenue Growth 13.2% 12.2% 3-Year CAGR = 10.3% 11.2% 10.9% 10.4% 10.3% 6-Year CAGR = 9.8% 9.5% 9.6% 9.2% 8.8% 9.0% 8.8% 8.9% Expense Growth 3-Year CAGR = 9.2% 6-Year CAGR = 8.5% 3.3% Revenue Growth 2001 2002 2003 2004 2005 2006 2007 Expense Growth 15
  • 16. PROFIT EXPECTATION Profit growth expectations continue to wane as the majority of MPs expect growth to lag that of the last 7-8 years100% - Level of 90% - Projected Growth Additional Observations 80% - Expected Primary Drivers of Net Income 70% - • 72% of respondents see demand increases as a 63% primary driver of income growth 60% - • 55% of respondents see increases to their stated 50% - 47% rates as a primary driver of income growth • 18% of respondents think discounting pressure will 40% - 35% strongly impact profit growth 32% 31% 30% - 20% - 17% 15% 10% 13% 3rd Quarter 2007 10% - 8% 8% 8% 9% 4% 4th Quarter 2007 1% 0% - 1st Quarter 2008 Decrease Unchanged < 5% 5% - 10% > 10% 16
  • 17. Global Presence AmLaw Designation REVENUE AND EXPENSE Regional ViewWhile firms across all segments continue to experience margin compression in1Q08, the AmLaw 100 has been harder hit Revenue (% change) vs. Expenses (% change) 12.8% 12.0% 9.9% 5.1% 5.8% 5.4% 5.0% Revenue Expenses 0.3% AmLaw 100 AmLaw 200 Other All Firms Preliminary 1Q08 17
  • 18. CASH CYCLEMost firms improved their cash conversion cycle through 2006 but saw the cycle lengthen in 2007, a sign that it may prove difficult to shorten the cycle in 2008 Net Cash Conversion Cycle (Number of Days) 130 120 115 111 110 106 100 90 80 70 60 50 2000 2006 2007 Flash 18
  • 19. THE IMPORTANCE OF FOOTPRINT International firms experienced double digit PPEP growth in 2007 while regional firms outperformed national firms 15.6%14.2% 12.8% 10.8% 8.9% 9.0% 8.4% 7.2% 5.9% 4.9% 5.0% 2.5% 1.7% 0.8% 1.1%Global International National Regional All Firms Global International National Regional All Firms Global International National Regional All Firms Net Income (% change) Equity Partner FTE (% change) Profit per Equity Partner (% change) Global Presence Growth Rates 2007 over 2006 Flash Results 19
  • 20. Key Trends inLitigation 20
  • 21. Practitioners’ Perceptions “Work is up from last year, which was a kick-ass year”“It’ll rise, if not significantly. As long as the economy is in decline itwill continue to rise. Companies are faltering, or at least defaulting on loans, contracts etc.” “The litigation market will remain choppy this year . . . In securities we will see work when deals blow apart.” “When business opportunities are lost, all [companies] have left are claims, and they pursue them.” 21
  • 22. Practitioners’ Perceptions “In a downturn clients are less likely to litigate and open the spigot”“Not generally affected in litigation by a downturn in the economy. Not quite counter-cyclical.” “There is usually a spike in recessionary times, but I am not sure we’ll see it this time because litigation is now so expensive” 22
  • 23. Clients’ Perceptions“We get sued when we don’t do what we saying we’re going to do . . . [and] there are a huge number of lawsuits where we didn’t do anything wrong but we get sued because we’re huge and someone got mad”“Whenever we do something new, boom, there comes the law firm suing us” “Class Action du jour” Litigation follows inexplicable cycles, with waves followed by wonderful, brief periods of calm” 23
  • 24. Corporate Legal Spend ($bn) $31bn Litigation or related Corporate Legal Spend (2006-08) $70 $60 $31B circaExpenditure ($,Billion) $50 8% growth $40 Bet the Company Litigation $30 Class Action Investigations $20 IP Litigation Regulatory $10 General Litigation Rest of Market $0 2006 2007 2008 (projection) Source: BTI Survey of Corporate Counsel 24
  • 25. Growth in Corporate Legal Spend ($bn) ~60% Litigation or relatedBreakdown of Growth in Corporate Legal Spend ($,Billion) $0.90 General Litigation $1.57 Regulatory IP Litigation Investigations Class Action Bet the Company Litigation $0.58 Rest of Market $0.16 $0.31 $0.23 $0.09 Source: BTI Survey of Corporate Counsel 25
  • 26. Messages for Managing Partners• Litigation is not • Work-types and business sectors can homogeneous move independently of the economy and each other• Some firms are booming, • If your litigators are struggling is it the while others are not overall market, a sector issue, or that they are failing to compete effectively?• Plaintiff firms are • Likely to appear in new areas of work diversifying 26
  • 27. Messages for Managing Partners• Clients seem to prefer • International arbitration and mediationthe courts to arbitration remain popular• Costs are a truly • Perceived efficiency in staffing andimportant issue project management are key competitive strengths• E-Discovery is a major • But this presents opportunities for firmsburden for clients to manage the process well 27
  • 28. Focus: LitigationConsultingServicesJohn Sweeney, PresidentLitigation Consulting Services, a Thomson Reuters Company 28
  • 29. Focus: StrategicTechnologyAssessmentDavid B. Cunningham, Managing DirectorBaker Robbins & Company 29
  • 30. Law Firm Technology Scorecard• Developed with a consortium of law firms to provide more integrity and depth than industry surveys and anecdotal observations.• Established a standardized approach and industry database for costs, staffing and process maturity.• Establishes a 360 degree view of technology effectiveness to provide context for the benchmarks. 30
  • 31. IT Maturity Model 31
  • 32. IT Maturity Model,continued 32
  • 33. Rebalancing the Valueof the IT Department IT Operations IT Internal Consulting (Infrastructure, PCs, (Business Analysis, Support, Facilities, etc.) Application Management, Practice Liaisons, etc.) • Usability and • Costs Lawyer • Risks Effectiveness • Staffing • Business Process Improvement • Information Integrity 33
  • 34. IT Process Maturity (1 of 4) 34
  • 35. Comparison of IT Maturity andCost- 40 Technology Scorecard Firms 2006-2008 $14,067 Costs per Employee $11,413 $6,302 Level 1 Level 2 Level 3 IT Maturity/Risk 35
  • 36. ConsultingServicesRESPONDING TO LEGALINDUSTRY CHALLENGES 36
  • 37. Market Increasing Intensifying Increasing Growth in Consolidation, Competition Competition Need for Costs ofSegmentation, and for Talent for Clients Cost Control LitigationGlobal Expansion Law Firm Leadership Client Infrastructure Litigation Strategy Development & Development & Cost Control Readiness & Talent Management and Growth Support• Strategy • Leadership • Strategic Business • Procurement and • Corporate Litigation• M&A Advice/Counsel • Talent Management Development Records Management Readiness • Business Development & Services • Litigation Support• Compensation and • Organization Performance Development Marketing Dept Analysis • Strategic Technology Services Management • Pricing Strategy Services • Project Management • Talent Integration• Firm Management • Client Feedback • Managed Technology Services • Practice Management Services • Existing Client and Market Share Intelligence • Financial Systems Analysis Implementation • SAM-Legal [Strategic • Records, Risk Account Management] Management & Compliance • Rainmaking Advantage • Practice Group • Client Retention Automation Strategies Through Business Intelligence • Intellectual Property Practice Management • Insightful Client Relationship • Web Portal Design Development • Merger Technology & Process Integration 37
  • 38. Law Firm Advisory Services Overview Market Consolidation, Increasing Intensifying Increasing Growth in Segmentation, and Competition Competition Need for Costs of Global Expansion for Talent for Clients Cost Control Litigation Brad Hildebrandt Brad Robbins John Sweeney Client Infrastructure Knowledge Strategic Client E-Discovery Managed Development (Buying Services) Management/ Technology Relationship Services Services & Growth ----------------------- Information Planning/ Management ----------------------- ----------------------- Nick Quil John Sweeney Jamie Berry ----------------------- ----------------------- Access Facilities ----------------------- ----------------------- ----------------------- Silvia Coulter Alan Nathanson ED | CFO ----------------------- ----------------------- ----------------------- MP | LM | CIO | CTO MP | LM | CIO | CTO ----------------------- Peter Buck Dave Cunningham ----------------------- CMO MP | CMO | HR Steve Falkin CIO | CKO ----------------------- CTO Law Firm Leadership Financial Risk Business Litigation Litigation Computer Strategy Development Systems Management/ Intelligence Services Readiness Forensics----------------------- & Talent (Assess & Compliance ----------------------- ----------------------- ----------------------- ----------------------- Lisa Smith Don Gibson Jim Mittenthal Pam Downs----------------------- Management Implementation) ----------------------- ----------------------- Eric Mazur ----------------------- ----------------------- Meg Block ----------------------- David Rohde Jamie Berry MP | ED | COC CMO | CBD Larry Richard ----------------------- MP | LM | CIO | CTO ----------------------- ----------------------- ----------------------- Nathan Bowie Barbara Schane MP | ED | CFO | GC MP | LM | CIO | CTO MP | LM | CIO | CTO MP | HR Jackson (HI) ----------------------- ED | CFO | CIO 38