Put Up Against the Wall
The spending budget of customers on external legal expenses has been significantly cut. This is acknowledged by all market participants. The reduced number of solvent customers has encouraged competition on the legal services market. And very often the financial aspect is regarded as the main tool in the competitive fight.
The legal services market continues its steady decline. This is particularly evident due to the financial results of law firms — capital growth is only in hryvnia terms, and even then it is true not for every law firm. Budget income is mainly generated by litigation, tax and corporate practices. The practice of restructuring shows good results as well. These areas are characterized by fierce competition between law firms, which tends to become even more severe.
What does a customer pay for
Within the confines of the research program “50 Leading Law Firms of Ukraine 2015”, participants were asked to name the five main specializations which account for the largest part of their law firms’ income. Based on the data received, it is possible to find out both the most popular and the most profitable practices (by means of calculating the proportion, accounting for each separate practice, out of total income). By the way, last year, the total income of the 50 leading law firms of Ukraine amounted to 4 billion UAH. This is more than in 2014, but taking into account the hryvnia’s devaluation, the real profitability of law firms dropped by at least 25-30 %.
Now a little bit of methodology. The income of a law firm implies return on the provision of legal services. In cases, when the law firm’s income isn’t limited to the provision of legal services, we asked the respondents to indicate just the amount of income earned directly from the provision of legal services. The period, for which the law firms were asked to provide information on income, covers the first three quarters of 2015 and IV quarter of 2014. It gives the opportunity to determine a legal firm’s income for 12 calendar months. Then the data obtained were compared with the same period of the previous year. Because not all the research participants agreed to disclose the amount of their income, we use the method of income recovery in order to calculate the law firms’ ranking. Based on the assumption of the comparable financial efficiency (which is the correlation of revenue and number of lawyers) of all the law firms working in the same field, we calculate the average performance indicators for every group in order to assess the profitability of each separate law firm.
Of course, top firms cannot represent the whole market, but the leaders of our research are firms with the most effective business models, which can, as a consequence, serve as indicators of the processes taking place on the Ukrainian legal services market.
Last year, the dispute resolution practice generated about one third of all income. In terms of today’s reality on the legal services market, it is difficult to find a law firm that does not offer services in the field of dispute resolution practice.
With due regard to the current market situation, quite good results have been shown by the corporate law practice. The practice of taxation ranks among the top three practices of the year. Services in this field are provided by almost half of market participants. But it is the main sphere of activities only for a few boutique law firms. Banking and financial law, which used to be profitable, ranked fourth last year due to the implementation of restructuring projects. The practices of intellectual property, competition law and international arbitration have almost equal performances. But what is most interesting is that services for these practices are provided by almost a quarter of market participants, while the main income is shared only between three or five players. The share held by other law firms in these practices is far more moderate.
“The legal services market is increasingly raising the question of whether a law firm should create a special sales department or traditionally leave it to the partners of the firm. The sales departments of some law firms have already been quite successful. Thus, this tool has proved to be worthy of attention. Besides, one shouldn’t forget about cross-marketing and its potential as to providing services for returning customers. Not all full-service companies can boast of cross-selling advanced to the level of a competitive tool”, Oleksiy Didkovsky, Managing Partner at Asters Law Firm says, drawing attention to this fact.
The crisis has forced lawyers to review their approach to the price for legal services. Previously any reduction in price was immediately regarded as dumping. But now price dumping is considered the dominant competitive tool on the market. By lowering the price, law firms reduce their profitability and are sometimes even forced to provide services at low cost-price. Working on a flat hourly rate is now seen as pure fiction. Lawyers prefer to talk about quality criteria when choosing Counsels or at least about a reasonable correlation between price and quality, but among customers it is the price what is really highly regarded.
“Naturally, in conditions when competition is fierce the winner is the one who can offer the customer the most optimal conditions for solving his problems. It should be realized that all the services must be prompt, of full value and high quality. Besides, they should be accessible to the customer. This accessibility does not necessarily mean dumping of tariffs for legal services. More often it entails ’transparent’ pricing which can be easily understood by the customer”, says Roman Marchenko, Senior Partner at Ilyashev & Partners Law Firm.
Although the previous experience has shown that the notion of customer’s loyalty is rather ephemeral, there is hardly a law firm that would voluntarily refuse to work on the retention of customers, including but not limited to offering some preferential advantages. They include customer-oriented approach, provision of additional services except for legal ones and, of course, a great variety of all sorts of bonuses and discounts. Most law firms prefer working according to similar algorithms, when maximum discounts are given to customers enjoying a good reputation since their cooperation began.
For many law firms personnel costs make up the largest part of their expenditure item. They include, of course, not only salaries and social payments (both statutory and corporate). Such expenditures usually involve all sorts of bonuses, payment of educational, entertainment and marketing activities, as well as other associated costs.
Last year was the first time when we investigated the level of salaries on the legal market. We asked law firms to specify the range of the monthly income of their partners and salary-earning lawyers with reference to the positions held (junior and senior legal staff, Counsels). Summarizing the results obtained, it can be concluded that the income of lawyers varies within a broad range. Even if the firms are of the same rank, it is possible that the claimed income of the partner of one law firm might be lower than the salary of a senior lawyer working for another firm. If it comes to a comparison of not large, especially regional, law firms and major players, the salaries earned by the staff of the same competence level may differ significantly.
In the context of the financial crisis and optimization of budgets (which is true for many of the participants of the Ukrainian legal market), staff costs undergo the inevitable audit. According to the experience of some law firms, after the accompanying expenses have been cut down the next step is reduction of employee benefits or staff optimization. The practice of fixing salaries in a local currency at last year’s exchange rate is almost universal; the market knows examples of the introduction of a short-time working week, unpaid periods of leave and dismissal of highly-paid lawyers with the subsequent hiring of employees ready to work for lower salaries.
Law firms, however, prefer not to abuse radical measures. The most effective way of dismissing personnel — “no person, no problem” — is associated with a number of risks and may harm the interests of the firm both in the distant future (when the market finally stabilizes, the firm will suffer a shortage of human resources), and in the short term (violation of business processes, a fall in the firm’s reputation as a reliable employer, etc.). Thus, legal firms try to approach personnel optimization very carefully, with due regard to the situation on the market and keeping future prospects in mind.