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Small law firms are more optimistic about positive growth in the upcoming year than they were in 2021, according to the 2022 Report on the State of U.S. Small Law Firms from Thomson Reuters.

Nearly 60% of lawyers expect growth over the next 12 months in revenues per lawyer, billable hours, and profits per lawyer compared to 51% in 2021.

Furthermore, 90% of small firm lawyers already rate their firm as successful (64%) or very successful (26%).

The survey, conducted in August and September 2022, received 400 responses from lawyers in small law firms with 29 or fewer attorneys. Forty percent of these respondents were solo lawyers and more than half had practiced for over 21 years.

How small law firms define their success

Respondents were asked how their small law firm defines success. The most common metrics include:

  1. Overall profits (86% of small law firms)
  2. Repeat business (85%)
  3. Client satisfaction ratings (83%)
  4. Work-life balance (81%)
  5. Overall revenue (81%)

In contrast, the most commonly cited definitions of success in 2021 were repeat business, client satisfaction ratings, and work-life balance

The metrics that small law firms use to track their success differ slightly from their definition of success. Overall revenue (92%) and profits (89%), repeat business (56%), and per-partner revenues (50%) and profits (45%) were the most tracked metrics.

While overall revenues and profits have remained one of the most important success metrics for small law firms, the focus on revenues per partner and profits per partner has declined slightly over the last three years.

At the same time, the focus on client-facing metrics like repeat business and high client satisfaction has increased slightly.

“Greater focus on client-facing factors may be increasingly important for small firms as they simultaneously try to address challenges like rising competition and to grow revenues and clients served,” the report said.

The biggest challenges for small law firms

The biggest challenges that small law firms report has experienced notable changes over the last three years.

The top challenges for small law firms in 2022 include:

  1. Spending too much time on admin tasks, not enough time practicing law (80%)
  2. Challenges acquiring new client business (72%)
  3. Cost control and expense growth (e.g., costs related to real estate or salaries) (65%)
  4. Keeping up with competition from other firms in your practice area(s) (63%)
  5. Lack of internal efficiency (62%)

The majority of lawyers say that administrative tasks take up most of their day. According to the report, small law firms say they spend only 56% of their time practicing law, down slightly from two years ago.

Concerns about business development have decreased this year while cost control and expense growth jumped up the list of top priorities. However, it’s unclear whether the decline means small firm lawyers are getting better at business development, or if their level of concern has dropped as other challenge areas have arisen, according to the report.

Additionally, outside competition continues to threaten small law firms.

Other small law firms were the respondents’ biggest competitors, followed by significantly larger firms that compete for the same clients and do-it-yourself legal services websites.

For the latter two competitors, a year of stagnant growth for mid-to-large law firms and the rise of increasingly sophisticated DIY technologies has put more pressure on small firms to focus on competitive cost-effectiveness, efficiency, and client service, according to the report.

How to remain competitive

The most common change that small law firms have made in 2022 is increasing billing rates. Fifty-nine percent of firms raised their rates in 2022 compared to 48% in 2021.

The second most common change was adopting new technology, with case management software, billing/invoice software, and firm/practice management software being the top tech investments.

Respondents who reported that they adopted new technology in 2022 declined slightly. This decline likely occurred because the large number of small firms that reported adopting new technology in the previous two years now prioritize adopting and implementing that technology rather than purchasing new products, according to the report.

Other top changes law firms have made include cutting unprofitable services or clients, changing marketing strategy, and changing staffing ratios.

As the report acknowledges, small firms also function as small independent businesses, and these changes represent firm leaders striving to keep law and business in balance.

“There is emerging evidence that suggests small law firms are demonstrating their ability to rise to the challenge and address some of their most pressing needs,” the report said. “Continuing to strategically focus on their goals and the challenges that could stand in their way will enable them to fully capitalize on the growth opportunities that they are foreseeing.”

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