Consulting ServicesOverview:State of The Legal Industry

Steven P. Daitch, with Dave Cunningham

August 24, 2008

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2008 Legal Industry Executive BriefingPre-Briefing Survey Results

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Methodology

• 105 Managing partners and executive directors from the AmLaw 150, UK Magic Circle, Canadian LEXPERT Top 30 attended the third Legal Industry Executive Briefing in May.

• 50% of the attendees completed a pre- Briefing e-mail survey. Survey was designed to identify current issues for content presentations.

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2008 Outlook

Almost two-thirds of attendees expect their 2008 billings to increase compared to 2007

When compared to 2007, do you expect your firm's 2008 billings to…?

Drivers of Growth:

- Increase in rates (91%)

- Addition of attorneys/staff (74%)

- More billable hours (41%)

- Added practice groups/areas (27%)

- Added international offices (18%)

- Merger or partnership (9%)

100% -

75% -

50% -

25% -

0% -

15%

38%

5%

5% 6-10%

>10%

Stay theSame

29%

Decrease

6%Increase

65%

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2008 Outlook

Many attendees foresee an increase in year over year billings, but not as optimistic as last year

When compared to 2007, do you expect your firm's 2008 billings to…?

29%

6%

65%

100% -

80% -

60% -

40% -

20% -

0% -

2%2%

96%

Increase

Decrease

Stay the same

2007Survey Results

2008Survey Results

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2008 Outlook - Opportunities

• The most commonly mentioned opportunities for law firms include:– Expansion of existing or new practice areas (16 mentions)

• Litigation activity commonly mentioned– Improve overall performance/efficiency/matter management

(12 mentions)– Increase productivity/utilization/billable hours (11 mentions)– Expansion into new geographies/markets (9 mentions)– Expansion with existing clients/cross selling (8 mentions)– Cost reduction/manage expenses and hiring (5 mentions)– Strengthen current relationships during time of economic

pressure (4 mentions)

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2008 Outlook - Risks

• The most commonly mentioned risks for law firms include:– Economic conditions/recession (45 mentions)– Slowdown in business (10 mentions)– Rate pressures (5 mentions)– Associate retention/utilization (5 mentions)– Higher expenses (2 mentions)– Lack of focus (2 mentions)– Not enough attorneys (2 mentions)

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Practice Area Growth or Decline

96% Almost two-thirds of attendees expect litigation volume to increase over the next 12 months

On the flip side, 60% of attendees expect the volume of corporate/ transactional work to decrease

What do you expect will happen to the overall volume of litigation or corporate/transactional work at your firm over the next 12 months?

60%6%

35%33%

6%62%

0% 25% 50% 75%

Litigation Corporate/trans

Increase

Stay the same

Decrease To what degree do youexpect it to fall?

1-4%

5-10%

>10%

To what degree do youexpect it to rise?

1-4%>10%

5-10%

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Estimations for litigation volume has declined from a year ago but it is still expected to grow

Corporate/transactional estimates is substantially different from last year

What do you expect will happen to the overall volume of litigation or corporate/transactional work at your firm over the next 12 months?

Practice Area Growthor Decline

100% -

75% -

50% -

25% -

0% -

6%

33%

62%

2008Survey Results

11%7%

85%

2007Survey Results

Litigation

Increase Stay the same Decrease

100% -

75% -

50% -

25% -

0% -

60%

35%

6%

2008Survey Results

0%7%

93%

2007Survey Results

Corporate/Transactional

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Practice Area Growthor Decline

Litigation Growth (n=36) Corp/Trans Decline (n=38)

IP (8 mentions) Construction (2 mentions) Mergers & acquisitions (8 mentions)

Bankruptcy/ restructuring (5 mentions)

White collar (4 mentions) Private equity (4 mentions)

Securities (4 mentions)Banking & Finance (3 mentions)

Real estate/ real estate financing (4 mention)

Product liability/torts (4 mentions)

Structured finance (2 mentions)

Litigation decline received one mention: Tort, general business

Litigation practice areas receiving one mention: Commercial, General Litigation, Employment, Health care, Consumer, International Trade, Regulatory, Antitrust, International Arbitration, Business Tort, Complex Litigation, Class Actions, Accountants Liability, Corporate Investing

Corporate/transactional practice areas receiving one mention: Bankruptcy, Capital Markets, Securities, Securitization

Which practice area(s) at your firm do you expect to see the greatest growth/fall?

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Practice Area Growthor Decline

Don’t know

31%

No

15%

Yes

54%

Over half of the attendees have a suite of applications to help manage litigation

Most firms have a combination of home grown and purchased applications

Do you use a suite of applications to help manage litigation ?

75% -

50% -

25% -

0% - 0%0%

21%

36%43%

Combination of home

grown and purchased

Multiple providers

Don’t know

Home grown

Single provider

Providers mentioned:

Microsoft, Concordance, Interwoven, Introspect, Elite

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Key Mid-Year Metrics

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PPEP – Middle TierPPEP – Top Tier

12.6%

CAGR

6.2%

CAGR

3.2%

CAGR

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2000 2001 2002 2003 2004 2005 2006

Superior

Average

Under

$0

$200

$400

$600

$800

$1,000

$1,200

2000 2001 2002 2003 2004 2005 2006

Superior

Average

Under

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2000 2001 2002 2003 2004 2005 2006

Superior

Average

Under 13.5%

CAGR

7.0%

CAGR

4.3%

CAGR

13.6%

CAGR

8.5%

CAGR

4.2%

CAGR

PPEP – Bottom Tier

• Database includes 133 firms broadly representative of the legal industry in the United States

• Firms divided into 3 tiers based on PPEP (top, middle, bottom)

THE WIDENING PROFITABILITY GAP

Substantial and widening differences in PPEP within each tier of profitability occurred during 2000-2006 and will likely intensify in 2008

• Each tier divided into 3 segments based on PPEP growth (2000-2006)

– Superior Performers – Average Performers – Under Performers

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PROFIT PER EQUITY PARTNER

The downturn in the economy in 2001 and upward pressure on expenses in the years leading up to 2001 caused profits to be flat and this is likely to recur – and worsen – in 2008

Profit per Equity Partner Yearly Growth

PPEP Growth

3-Year CAGR = 10.3%

6-Year CAGR = 9.3%

0.2%

14.8%

10.4%11.2%

9.0%9.3%10.2%

2001 2002 2003 2004 2005 2006 2007

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Revenue Growth

Expense Growth

Revenue Growth

3-Year CAGR = 10.3%

6-Year CAGR = 9.8%

Revenue and ExpenseYearly Growth

REVENUE AND EXPENSE GROWTH

2007 saw margin compression for the first time since 2001 – a dynamic that will worsen in 2008

Expense Growth

3-Year CAGR = 9.2%

6-Year CAGR = 8.5%

9.0%

10.4% 10.9%10.3%

9.6%

11.2%12.2%

8.8%

13.2%

9.2%8.9%9.5%

8.8%

3.3%

2001 2002 2003 2004 2005 2006 2007

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Additional Observations

Expected Primary Drivers of Net Income

• 72% of respondents see demand increases as a primary driver of income growth

• 55% of respondents see increases to their stated rates as a primary driver of income growth

• 18% of respondents think discounting pressure will strongly impact profit growth

PROFIT EXPECTATION

Profit growth expectations continue to wane as the majority of MPs expect growth to lag that of the last 7-8 years

Level of Projected Growth

1%4%

8%

15%

63%

13%8%

47%

31%

10%

35%

9%

32%

8%

17%

Decrease Unchanged < 5% 5% - 10% > 10%

100% -

90% -

80% -

70% -

60% -

50% -

40% -

30% -

20% -

10% -

0% -

3rd Quarter 2007

4th Quarter 2007

1st Quarter 2008

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Global Presence

AmLaw Designation

Regional View

Preliminary 1Q08

REVENUE AND EXPENSE

While firms across all segments continue to experience margin compression in 1Q08, the AmLaw 100 has been harder hit

Revenue (% change) vs. Expenses (% change)

5.1%

0.3%

5.8%5.0%5.4%

12.8%12.0%

9.9%

AmLaw 100 AmLaw 200 Other All Firms

Revenue

Expenses

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CASH CYCLE

Most firms improved their cash conversion cycle through 2006 but saw the cycle lengthen in 2007, a sign that it may prove difficult to shorten the cycle in 2008

Net Cash Conversion Cycle (Number of Days)

111106

115

50

60

70

80

90

100

110

120

130

2000 2006 2007 Flash

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Global Presence Growth Rates 2007 over 2006 Flash Results

THE IMPORTANCE OF FOOTPRINT

International firms experienced double digit PPEP growth in 2007 while regional firms outperformed national firms

Net Income (% change)

14.2%15.6%

5.9%

8.4%

10.8%

Global International National Regional All Firms

Equity Partner FTE (% change)

4.9%

2.5%

0.8% 1.1%1.7%

Global International National Regional All Firms

Profit per Equity Partner (% change)

8.9%

12.8%

5.0%

7.2%

9.0%

Global International National Regional All Firms

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Key Trends in Litigation

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“It’ll rise, if not significantly. As long as the economy is in decline it will continue to rise. Companies are faltering, or at least defaulting

on loans, contracts etc.”

“The litigation market will remain choppy this year . . . In securities we will see work when deals blow apart.”

“When business opportunities are lost, all [companies] have left are claims, and they pursue them.”

“Work is up from last year, which was a kick-ass year”

Practitioners’ Perceptions

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Practitioners’ Perceptions

“Not generally affected in litigation by a downturn in the economy. Not quite counter-cyclical.”

“There is usually a spike in recessionary times, but I am not sure we’ll see it this time because litigation is now so

expensive”

“In a downturn clients are less likely to litigate and open the spigot”

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Clients’ Perceptions

“Whenever we do something new, boom, there comes the law firm suing us”

“Class Action du jour”

Litigation follows inexplicable cycles, with waves followed by wonderful, brief periods of calm”

“We get sued when we don’t do what we saying we’re going to do . . . [and] there are a huge number of lawsuits where we didn’t do

anything wrong but we get sued because we’re huge and someone got mad”

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Corporate Legal Spend ($bn)$31bn Litigation or related

$31B circa 8% growth

Exp

en

ditu

re (

$,B

illio

n)

Corporate Legal Spend (2006-08)

$0

$10

$20

$30

$40

$50

$60

$70

2006 2007 2008 (projection)

Bet the Company Litigation

Class Action

Investigations

IP Litigation

Regulatory

General Litigation

Rest of Market

Source: BTI Survey of Corporate Counsel

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Growth in Corporate Legal Spend ($bn)~60% Litigation or related

Breakdown of Growth in Corporate Legal Spend ($,Billion)

$0.90

$0.58

$0.31$0.09$0.23

$0.16

$1.57

General Litigation

Regulatory

IP Litigation

Investigations

Class Action

Bet the Company Litigation

Rest of Market

Source: BTI Survey of Corporate Counsel

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Messages for Managing Partners

• Litigation is not homogeneous

• Work-types and business sectors can move independently of the economy and each other

• Some firms are booming, while others are not

• If your litigators are struggling is it the overall market, a sector issue, or that they are failing to compete effectively?

• Plaintiff firms are diversifying

• Likely to appear in new areas of work

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Messages for Managing Partners

• Clients seem to prefer the courts to arbitration

• International arbitration and mediation remain popular

• Costs are a truly important issue

• Perceived efficiency in staffing and project management are key competitive strengths

• E-Discovery is a major burden for clients

• But this presents opportunities for firms to manage the process well

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Focus: Litigation Consulting Services

John Sweeney, PresidentLitigation Consulting Services, a Thomson Reuters Company

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Focus: Strategic Technology Assessment

David B. Cunningham, Managing DirectorBaker Robbins & Company

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Law Firm Technology Scorecard

• Developed with a consortium of law firms to provide more integrity and depth than industry surveys and anecdotal observations.

• Established a standardized approach and industry database for costs, staffing and process maturity.

• Establishes a 360 degree view of technology effectiveness to provide context for the benchmarks.

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IT Maturity Model

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IT Maturity Model, continued

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Rebalancing the Valueof the IT Department

IT Operations(Infrastructure, PCs,

Support, Facilities, etc.)

IT Operations(Infrastructure, PCs,

Support, Facilities, etc.)

• Costs• Risks• Staffing

IT Internal Consulting(Business Analysis,

Application Management, Practice Liaisons, etc.)

IT Internal Consulting(Business Analysis,

Application Management, Practice Liaisons, etc.)

• Usability and Lawyer Effectiveness

• Business Process Improvement

• Information Integrity

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IT Process Maturity (1 of 4)

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$14,067

$11,413

$6,302Level 1

IT Maturity/Risk

Co

sts

pe

r E

mp

loy

ee

Level 2 Level 3

Comparison of IT Maturity and Cost- 40 Technology Scorecard Firms 2006-2008

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Consulting ServicesRESPONDING TO LEGAL INDUSTRY CHALLENGES

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Market Consolidation,

Segmentation, and Global Expansion

Increasing Need for

Cost Control

Increasing Competition

for Talent

Intensifying Competition for Clients

Growth in Costs of Litigation

• Strategy• M&A Advice/Counsel• Compensation and

Performance Management

• Firm Management

• Strategic Business Development

• Business Development & Marketing Dept Analysis

• Pricing Strategy• Client Feedback• Existing Client and Market

Share Intelligence Analysis

• SAM-Legal [Strategic Account Management]

• Rainmaking Advantage• Client Retention

Strategies Through Business Intelligence

• Insightful Client Relationship Development

• Procurement and Records Management Services

• Strategic Technology Services

• Managed Technology Services

• Financial Systems Implementation

• Records, Risk Management & Compliance

• Practice Group Automation

• Intellectual Property Practice Management

• Web Portal Design• Merger Technology &

Process Integration

• Leadership • Talent Management• Organization

Development• Talent Integration• Practice Management

• Corporate Litigation Readiness

• Litigation Support Services

• Project Management Services

LitigationReadiness &

Support

Law FirmStrategy

Infrastructure& Cost Control

Leadership Development &

Talent Management

Client Developmentand Growth

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Law Firm Advisory Services Overview

Brad Robbins John SweeneyBrad Hildebrandt

Strategic Technology Planning/Facilities

-----------------------Dave Cunningham

Steve Falkin -----------------------

CTO

Financial Systems(Assess &

Implementation) -----------------------

Nathan Bowie Barbara Schane

Jackson (HI)

-----------------------ED | CFO | CIO

Client Development

& Growth-----------------------

Silvia Coulter -----------------------MP | CMO | HR

Knowledge Management/Information

Access -----------------------

Peter Buck-----------------------

CIO | CKO

Infrastructure (Buying Services)

-----------------------Nick Quil

-----------------------ED | CFO

Law Firm Strategy

-----------------------Lisa Smith

-----------------------MP | ED | COC

Leadership Development

& Talent Management-----------------------

Larry Richard-----------------------

MP | HR

ManagedServices

-----------------------Jamie Berry

-----------------------MP | LM | CIO | CTO

E-Discovery Services

-----------------------John Sweeney

-----------------------MP | LM | CIO | CTO

Litigation Readiness

-----------------------Pam Downs

David Rohde -----------------------

MP | LM | CIO | CTO

LitigationServices

-----------------------Jim Mittenthal

-----------------------MP | LM | CIO | CTO

ComputerForensics

-----------------------Eric Mazur

Jamie Berry -----------------------

MP | LM | CIO | CTO

BusinessIntelligence

-----------------------Don Gibson

-----------------------CMO | CBD

RiskManagement/Compliance

-----------------------Meg Block

-----------------------MP | ED | CFO | GC

Client Relationship Management-----------------------Alan Nathanson-----------------------

CMO

Market Consolidation, Segmentation, and Global Expansion

Increasing Need forCost Control

Increasing Competition for Talent

Intensifying Competition for Clients

Growth in Costs of Litigation