Law firms could be losing an average of 12 per cent of their clients annually, with the rate of attrition likely to get worse due to the economic climate.
Firms are seeing their billable hours from existing clients drop by a rate of one per cent a month, according to a study by LexisNexis’s Redwood Think Tank, which surveyed a group of eight law firms of varying sizes in the US and the UK. The law firms were Baker Botts, Bryan Cave, Kilpatrick Stockton, Lowenstein Sandler, Morrison & Foerster, Osborne Clarke, SJ Berwin and Thelen.
According to Redwood director Kristina Satkunas, who co-authored the report, the rate of client attrition is key to the survival of law firms. “While at first glance this may not sound like a lot, an attrition rate of 12 per cent per year is a significant amount of work for firms to have to replace – even before they can gear up for growth,” she said.
The research also shows that clients with the highest rates of attrition were those with realisation rates of less than 80 per cent.
“While professionals often argue that clients will leave if they don’t cede to pressure to discount their rates, the statistics indicate that bargain shoppers are likely to leave anyway,” Sutkanas said. “This principle is important to keep in mind during times of economic uncertainty.”
SJ Berwin finance director Mike Giles, whose firm has one of the lowest attrition rates at 2.4 per cent a year, said that in his experience the downturn will not necessarily translate into a loss of work.
“There are a number of people here who believe things will get worse before they get better, but tough times don’t necessarily translate to increased client attrition,” he said. “There’s a risk that we could lose clients, but there are opportunities for us to gain work as well. I think it cuts both ways.”
Another finance director at a City law firm was not so optimistic. “It’s inevitable that some big clients are going to go into administration, so it’s going to be hard to replace that work,” she said. “Of course, the administrators themselves will provide work, but that’s only going to go to a small number of law firms. The rest of us will have to find work from elsewhere.”
According to the Redwood report, low client attrition rates are likely to be down to factors such as cross-practice selling, which increases a client’s dependence on a law firm and by extension fosters loyalty.
In the case of SJ Berwin, Satkunas said there were two other major factors that helped keep the attrition rate low.
“This includes the firm’s culture and pay structure, which encourages multiple partners to work individual client matters, and the fact that its practice mix includes a lower amount of litigation than is the case at other firms,” she said.
The Redwood research shows that 44 per cent of SJ Berwin’s largest clients have three or more partners materially involved in their matters. This is significantly more partner involvement than any other firm in the study, which showed that the average firm had one or two partners for each client.
According to Giles, the high ratio of partners and the team approach to clients comes down to SJ Berwin rewarding lawyers for the number of hours they bill rather than the number of clients they win for the firm.
“If one starts rewarding for origination, everybody will argue that they were responsible for origination,” he said.
The report also found that firms that do a high proportion of disputes work are likely to have a much higher ;rate ;of ;client attrition, as the work tends to be a one-off. That said, the study also suggested that cross-selling from litigation into other practice areas is often possible.
According to Satkunas, there are four core factors that will mean a client is likely to be retained by a law firm. “The firm needs to ensure that the client provides it with a large amount of legal work and has a mature, established relationship with the firm,” she said. “Also, the client should send work to more than two of the firm’s practice areas and have more than two partners ;significantly involved in the management of the client’s matters.”