THE LVS LAW FIRM PERFORMANCE INDEX

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1 Outlook San Diego THE LVS LAW FIRM PERFORMANCE INDEX Legal Vertical Strategies If gross miscalculations of a person s value could occur on a baseball field, before a live audience of 30,000 and a television audience of millions more, what did that say about the measure of performance in other lines of work? - Michael Lewis, author of Moneyball The book and academy-nominated film Moneyball chronicles how the Oakland A s transformed the business of baseball by proving statistics rather than subjective observations were a better measure of a team s success. Taking a page from Moneyball, Legal Vertical Strategies consultant Debra Baker now demonstrates that objective measures are a better predictor of performance in the legal industry as well. She has developed the LVS Law Firm Performance Index to assess law firm business risks and opportunities in the context of three performance indicators: Business Climate Demand Competitive Landscape LVS applies this framework to the San Diego market in a first-ofits-kind analysis of the local legal landscape. The report provides unbiased insight into the factors impacting demand for, value of and overall performance of lawyers working in this market. Lawyers can use the information in this report to address a variety of ongoing business challenges, including: How do we retain existing clients and attract new ones? Should we brand around individual attorneys or the firm as a whole? What is the optimal size of our firm? Should we market our practice expertise or our industry knowledge? How can we be more profitable? What can we do to build a firm culture allowing us to attract and retain talented lawyers? How should I develop my own practice to achieve my personal career goals? WHO NEEDS THIS REPORT Law Firm Leaders: This report will help law firm management teams and practice group leaders make informed decisions when developing strategic plans and addressing business challenges. Incorporating data into communications about key decisions facilitates attorney buy-in and improves the success rate of key initiatives. Individual Attorneys: Whether an associate on the partnership track, a solo practitioner or a senior partner thinking about succession planning, this report helps individual attorneys evaluate risks and opportunities in order to achieve personal and professional goals. Legal Professionals: Now more than ever firms are hiring legal professionals to strengthen their business organizations. Administration, marketing, professional development, recruiting and finance professionals can use this report to arm themselves with the evidence they need to validate their business recommendations, enhancing credibility and increasing value to firm leaders. The report is available exclusively through Legal Vertical Strategies and includes with it a free consultation to help firms apply the research to their specific business needs. For more information, contact Debra Baker at or dbaker@lvstrategies.com. Outlook San Diego: The LVS Law Firm Performance Index EXECUTIVE SUMMARY 1

2 Executive Summary If gross miscalculations of a person s value could occur on a baseball field, before a live audience of 30,000 and a television audiences of millions more, what did that say about the measure of performance in other lines of work? - Michael Lewis, author of Moneyball Introduction To achieve the highest level of performance, law firms need to understand the outward-facing factors that impact the business of law. The LVS Law Firm Performance Index provides insight into these external drivers: - The trends that generate or limit demand for specific types of legal services. - The needs and decision-making process of potential buyers in a given market. - The landscape of lawyers competing for the same clients. Armed with this knowledge, law firms can develop and execute strategies based on objective rather than subjective evidence, reducing risks and increasing returns. The Benefits: Strengthen and expand existing client relationships by understanding the trends, needs and drivers that impact their businesses. Define and better communicate strengths and differentiators. Streamline business development activities around prospective clients where there is a higher likelihood of success. Align external facing business activities with internal goals around talent management, operational efficiency and profitability. The Performance Indicators Are you in demand? Because of the dynamic nature of legal services, predicting demand in a given market is challenging. Legal matters typically fall into one of four categories: Commodity, Routine, Complex, Bet-the-Company. The largest volume of work falls into the first two categories while the most profitable work lies in the latter two. Risk Bet-the- Company Complex Value Routine Commodity

3 A variety of trends impact the volume (amount) and nature (value) of legal services. The LVS Performance Index evaluates global, national and local trends to predict demand for different practices: Economic Industry Regulatory/Litigation Geographic Who needs your services? Corporate buyers of legal services vary based on business type, size and market reach. The buyer profile provides insight into the value (cost) of different types of legal needs. Size also impacts the way clients make decisions about whom to hire. LVS segments the business market into five categories: Multinationals Public Companies Large Private Companies (greater than $75 million in revenues) Mid-Sized Private Companies ($10-$75 million in revenues) Small business enterprises (less than $10 million revenues. Pricing of legal services is generally associated with the level of risk and complexity of a matter. The larger the company, the more complexities in running the business and the greater the value of legal services that facilitate this process. The business segment can also dictate how decisions about who to hire are made. Small companies make decisions quickly and rely heavily on referrals from trusted advisors when deciding who to hire. Large companies have more formal hiring processes, so firm brand and the ability to demonstrate and validate expertise is more important. Can you get the business? Law firms do not compete on an even playing field. The richest firms are getting richer. They are able to attract the best lawyers and win the highest volume of premium legal work. At the same time, the firms that make up Big Law are increasingly segmented. A new tier of super-rich firms now controls the largest share of the premium legal services market. Large firms in the tier below are under increased pressure to compete for the premium work that remains. Trends impacting these firms have a trickle-down effect on other regional, local and solo firms. Although these sub-groups will continue to evolve, Legal Vertical Strategies segments the law firm competitive landscape into five tiers: Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 An emerging Global 25 law firms that LVS believes will ultimately control the legal market. The remainder of the AmLaw 200 firms based on revenue. Regional and other firms outside the AmLaw 200 with multi-city offices. Single office/city law firms with more than four people. Solo attorneys and firms with up to four people.

4 NOTE: This report focuses on the market for business legal services. A more detailed discussion about consumer-focused attorneys will be addressed in a future report. What is your baseline competitive position? The LVS Competitive Matrix pinpoints the relative competitive position of each tier of firm based on the type of client and value of work needed to achieve those goals. LVS Baseline Competitive Matrix BTC High Risk Tier 3,4,5 Tier 3,4 Tier 2,3 Tier 1,2 Tier 1,2 Complex Tier 4,5 Tier 3,4,5 Tier 2,3 Tier 1,2 Tier 1,2 Routine Tier 4,5 Tier 3,4,5 Tier 2,3,4 Tier 2,3 Tier 2,1 Commodity Tier 4,5 Tier 3,4,5 Tier 3,4,5 Tier 3,4 Tier 3, 2 Small Medium Large Private Public Multinational NOTE: The baseline matrix depicted here generalizes the competitive positioning of firms absent consideration of internal or external dynamics. The matrix compares nature of work (low to high risk) against type of business (small to multinational) to identify which tiers of firm are most competitive for the specific type of work and client. As part of a broader strategic review using the LVS Law Firm Performance Index, the baseline competitive matrix allows firms and individual attorneys to evaluate and adjust strategic goals and objectives based on market realities. Outlook San Diego Law firm competition in San Diego has never been greater. Demand is limited. Pressure from clients to rein in costs remains high. Internal pressure for lawyers to increase productivity and generate more revenue is creating instability inside many seemingly solid firms. San Diego is home to more than 75,000 businesses. But only 14% have more than 20 employees, less than 100 are publicly traded and only a handful have multinational operations. As a result, the amount of high-value legal work is limited. Firms need to decide whether to compete for premium legal work or to pursue higher-volume opportunities downstream with small and mid-sized businesses. Because of the dynamic nature of legal services, predicting demand in a given market is challenging. San Diego s diverse industry base, educated workforce and desirable locale have helped it emerge more quickly from the recession than many other areas. Yet despite the relative strength of the economy, deal and investment activity have yet to return to pre-recession levels. Litigation, long believed to be recession proof, is stable although an increasingly complex regulatory environment may contribute to a spike. With more than 14,000 lawyers, San Diego is the third largest legal market in the state and the 30 th largest in the country. More than a third of the AmLaw 100 firms have a presence here, making demand for the small amount of premium work available incredibly competitive. Law firm mergers and lateral partner movement inside these firms, however, is creating instability and opening doors for smaller firms with who understand their competitive strengths and can communicate their value clearly to clients.

5 Why you need this report The highest performing law firms have a clearly defined vision about why their firm exists and a set of internal-facing strategies in place to create and strengthen firm culture consistent with that vision. They can then develop external-facing strategies to meet their performance goals. External dynamics impact how law firms will achieve these goals in many ways: The ability to generate business is dependent upon global, national and local trends that impact demand for legal services. Developing strong client relationships requires a deep understanding of the unique characteristics and demographics of businesses in the market. In order to demonstrate and differentiate to a client requires an in-depth knowledge of the competitive landscape. Operations, profitability and professional development are all dependent upon decisions that arise out of business creation, client relationships and competitive differentiation. The Law Firm Performance Index provides the data firms and attorneys need to align external-facing strategies with the overall vision and culture of the firm.