Staying Ahead of the Talent Curve —part 1: Talent Challenges Facing Colorado Law Firms
| Jurisdiction | Colorado,United States |
| Citation | Vol. 52 No. 2 Pg. 06 |
| Pages | 06 |
| Publication year | 2023 |
LAW PRACTICE MANAGEMENT
Staying Ahead of the Talent Curve—Part 1
Talent Challenges Facing Colorado Law Firms
BY GENE COMMANDER
A new era of uncertainty has dawned in the legal profession, and it could represent a tipping point for business operations and profitability in law firms of all sizes as the demand for legal services fluctuates.[1] The pandemic accelerated several trends that had been reshaping the legal industry since the Great Recession, including increasing rates of attorney attrition, shrinking law school enrollment, and growing reliance on advanced technologies, such as those that enable remote work. As the pandemic eased, law firms faced a record level of legal demand, yet found themselves without the productive talent needed to meet the demand. To make matters worse, a nationwide price war for talent began to hobble many firms. Looking ahead to the next three to five years, even when the economy recovers and demand for services stabilizes, law firms will likely continue to face a challenging labor market due in large part to generational shifts, law school enrollment trends, and increasing workforce mobility.
Talent supply difficulties across the legal market are endangering law firm profitability, according to the Thomson Reuters Institute,[2]the nation's leading experts on the business of law. Productive employees—including partners, shareholders, associates, and also business management staff like paralegals, firm administrators, and legal assistants—are the most valuable assets of every law firm. Yet the risk of being unable to hire and retain quality talent has never been greater. And without the bench strength necessary to satisfy client expectations while grinding out sufficient billable hours, law firm profitability can collapse with little or no warning. Law firms that choose not to tackle these challenges now with future-focused strategies will do so at their own peril.
This article will help current and future law firm business leaders understand the state of the labor market for Colorado firms by explaining the economic, demographic, and professional trends that are contributing to the shortage of affordable and productive talent. Part 1 also outlines why traditional business models are proving inadequate to manage the impending talent crisis. Part 2 will introduce sustainable business growth strategies to help Colorado law firm leaders navigate the mounting talent challenges.
Emerging Economic Trends
During the exceptional decade-long economic growth cycle that predated COVID-19, US law firms' investments in human capital and commercial office space—historically their two largest business expenses—rose to new highs in most major metropolitan areas, including Denver. Law firms took advantage of historically low interest rates and dormant inflationary forces to grow their businesses but ignored the legal industry's growing dependency on a dwindling supply of affordable talent.
Then, seemingly overnight, came COVID-19 and the near collapse of the US economy. But the pandemic proved a boon to the business of law. Firms enj oyed revenue windfalls in 2020 and 2021 courtesy of the federal Paycheck Protection Program and state and local stimulus programs. Firms also reaped extraordinary rewards from the governmental lockdowns. Remote and hybrid workplace accommodations eliminated traditional work-life boundaries and enabled talent to serve their clients' needs 24/7/365 from their work-from-home billing stations. This allowed law firms to slash operating expenses while enjoying a dramatic increase in billable hours and cash receipts.
But in 2022, law firms saw their profitability level off or decline, partly due to mounting overhead expenses.[3] For instance, business travel and marketing costs reentered the picture. Office rental rates remain in flux, as many businesses have realized they can downsize their footprint to adjust their expenses. Perhaps not coincidentally, since 2021 at least nine of the largest Denver law firms have signed new leases for smaller office spaces.[4]
Furthermore, law firm business leaders increasingly see big-picture economic con-cerns—spiking inflation and interest rates, Russia's war in Ukraine, chaos in supply chains and energy markets, and Wall Street's paranoia, to name a few—as a threat to their profitability.[5]Indeed, the US stock market recently closed its worst year since 2008.[6]
The Rocky Mountain region and Colorado's Front Range may be better positioned than other areas of the country to withstand an economic downturn, but a recession would be a major drag on the state's robust economy. The demand for legal services is not inelastic, so clients who critically evaluate their legal spend may scale back their legal representation or choose less expensive alternatives if times get tough.
Colorado law firms, then, are in a tenuous economic position as they confront serious talent shortages.
Shifting demographic forces and the eroding allure of a lifelong career in private legal practice have resulted in an inadequate pipeline of affordable and productive talent in the associate and midlevel talent ranks of Colorado law firms.
Shrinking Talent Pool
Supply-chain problems are not limited to manufacturing companies.[7] And a new brand of supply-chain disruption is rippling through law firms—large and small—across the country. Shifting demographic forces and the eroding allure of a lifelong career in private legal practice have resulted in an inadequate pipeline of affordable and productive talent in the associate and midlevel talent ranks of Colorado law firms.
The lack of human capital with proven legal skills and strong entrepreneurial instincts threatens to upend Colorado law firms' financial sustainability. And as shown below, this dilemma will not simply vanish when inflation rates, ; interest rates, and the stock market stabilize—it is here to stay unless firm leaders pursue new solutions.
Generational Shifts
Senior talent ("baby boomers," ages 59 to 77) continues to depart the profession upon retirement, disability, and death. Law firms are rapidly losing the economic value senior attorneys have consistently produced through their personal cash receipts and business origination. In addition to these direct financial consequences, the baby boomer exit is draining invaluable experience, wisdom, and insight from the profession. These senior attorneys have been the glue that held small and midsize law firms together. This inevitable generational change is also depleting the ranks of productive paralegals, firm administrators, and legal assistants as younger generations pass over these once-prized career opportunities for attractive jobs in other industries.
Attorneys at the tail end of the baby boomer cycle, who have less than 10 years of active practice ahead of them, may hesitate to embrace major law firm changes that impact the twilight years of their careers. Either way, their roles will need to be backfilled with capable talent who are prepared to carry on their legacy. And the sustainability of the law firms the boomers helped build will be in jeopardy if firm leaders fail to prepare for the boomers' departure from the profession.
The next generation of talent in line to serve as law firm leaders ("Gen X," ages 43 to 58) is about half the size of the baby boomer t generation. The raw numbers alone signal that I there simply is not enough talent in Gen X to i fill the revenue generation, leadership, and ownership roles that will be vacated as boomers ; step aside. Law firms should both empower their : Gen X talent to fill the essential roles held by f the departing boomers and plan for longer-term : human capital solutions.
. The crop of talent coming up next ("millennials," ages 27 to 42) is the US labor force's largest generation.[8] Millennials' values and perspectives often differ from those of their older colleagues[9]—with flexibility, transparency, collaboration, and personal meaning as chief drivers—so successfully integrating this generation into firms will require strategic shifts in firm management, compensation, and culture. Law firm leaders should be prepared to rapidly develop their millennials to fill the revenue generation, leadership, and ownership roles that will soon be open to them—or be willing to look outside the firm and pay a premium to fill talent gaps.
Then comes the talent born since 1997 ("Gen Z," ages 26 and under)—the most diverse generation in US history[10]—who will become a vital part of the legal workforce in coming years. The Gen Zers' viewpoints in many cases diverge markedly from the ethos of current law firm leaders. Further, the use of advanced technology is second nature to them, and their focus on state-of-the-art business solutions will only increase the demand for savvy investments by their law firms. The comparatively small size of Gen Z compared to the millennial generation—a gap that is particularly wide in the Denver metro population—is likely to exacerbate the talent shortage in the long term.[11]
Educational Trends
In addition to the challenges posed by generational shifts, educational trends signal that the cost of talent will continue to climb. After plummeting from 2010 to 2017, enrollment rose at law schools accredited by the American Bar Association (ABA) from 2018 to 2021.[12] Yet enrollment was far lower in 2021 (117,305) than at its peak in 2010 (147,525).[13] And the number of law school applicants seeking to enroll in 2022 decreased by 11.7% compared to 2021, according to the Law School Admission Council.[14] Many college graduates may find law school unappealing given the prospect of paying off undergraduate debt, which...
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