Plummeting profits at law firms? Digitization as an answer (!)

US law firms have been experiencing sharply declining profits for over a year now. The Law Firm Financial Index (LFFI) even clocked in at the lowest indexation ever. After a boom — with two consecutive years of record profits — specialists have had their hands in their pockets. What are the causes of the declining profits?

In 2022, law firms in the United States saw a doubling of overall costs compared to the year before. Logically, maximizing profits when a company faces an excessive increase in costs is a huge challenge. After a period of working from home, as a result of the coronavirus pandemic, and associated measures, employees returned to the office en masse, with an immediate impact on overall costs as a result.

Another, even more important, parameter that influences this increase is the increased salary cost of employees. In addition to high inflation, there is - also in the US - a 'War for talent'. Recruiting staff with the necessary qualities and specifications resulted in an enormous increase in salary costs, much higher than a year before. Logically, these factors resulted in a (significant) decline in the profitability of law firms in 2022.

Investing in digitization as a key

Normally, declining profitability involves a natural reflex of austerity. Especially in times of crisis, investing in digital innovation is not easy. In the US, however, there is no panic reaction. Offices examined the “hourly invoice” model and found that there was no problematic situation in this regard: the number of invoiced hours remained the same and the rates also continued to increase organically.

While this model also needs to be reviewed — that's another discussion — the US legal industry's response to these challenges appears to be startling. Instead of traditional savings in times of crisis, on the other hand, people opt for a substantial urge to invest in new technologies. This remarkable approach by the US law firms shows that (finally) the realization has grown that the legal sector should move with the times and is better at embracing technological innovation than rejecting it.

America as a trendsetter... or not?

Developments in the Anglo-Saxon world often appear to be a harbinger of the same evolution in Europe. However, we are already increasingly aware that digitization contributes to a more efficient operation and better service from (and within) the legal sector. Concretely, for example, the Order of Flemish Bars (OVB) has initiated a vision for digital innovation in the (Flemish) legal field by setting up Taskforce The Day After Tomorrow.

The goal of promoting digitization among all lawyers who are members of the bar is certainly an important and noble first step. Nevertheless, it is absolutely necessary to further deepen this approach in concrete action points and policy initiatives that also effectively perpetuate digital transformation in small and large offices. Important hurdles still need to be overcome in this area.

For now, it is a long shot whether Flemish - and by extension European - lawyers will follow the example of their American colleagues. Will the digitalization train continue in fits and starts, are people even resolutely opting for savings, or, on the other hand, will investments in technology be encouraged and intensified? “To be continued...”

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