I hate it when people talk about dysfunctional families. That suggests there are functional ones, but I sure haven’t seen one yet.

Smokeball, a cloud-based legal practice management software provider, today released its 2024 State of the Law Report. It reveals some pretty scary findings about smaller law firms and their lack of knowledge of fundamental business principles. The Report also shows a certain lack of consistency between what these firms believe is happening in the market and what they are doing about it. The Smokeball study suggests that many legal professionals in smaller firms are not rushing to adopt technologies, like Generative AI that could help them better serve their clients and be more profitable.

Smokeball surveyed some 775 legal professionals worldwide. The Survey was designed to get a handle on industry shifts and emerging trends impacting firms of less than 30 employees. It’s basically a survey of small firms and solo lawyers. That’s important since most lawyers in the US are in small law firms or practice solo, according to recent statistics.

Business Acumen

The Study reveals a startling lack of business sense:

• A full 50% of those surveyed have no clue whether their billings declined or grew last year. 

• Only 30% of the firms think their highest priority for the future is growing and maintaining their client base. 

• 30% have no clue what drives their growth. 

• A full quarter of the firms have no marketing plan to achieve that growth. 

• And despite not knowing what drives growth, 52% somehow believe their profits will increase.

Focusing on growth is a hedge against future risk

Think about those stats. Half of the firms don’t know if they lost business last year. A third think growth is the highest priority for the future. The next highest concern for the future? Managing inflation. However, those firms that are not focusing on growth are asking the wrong question. For most businesses, including law firms (yes, they are businesses!), it is not what do we do about inflation. The better question is what we can do to protect against fluctuations in costs, supply, and demand. Focusing on growth is a hedge against future risk. But only ¼ of the firms have any plan to achieve growth. 

Another concerning fact: 40% of the larger firms think they can achieve growth by merely hiring more people. But you can’t hire more people unless you have more work to do. For the third of the firms that have no understanding of what drives growth and for the 25% of firms that have no growth plan, the chances of new business magically walking in the door are pretty slim.

Many firms fail to appreciate today’s labor dynamics

And even if hiring more people was a good strategy for growing, many firms fail to appreciate today’s labor dynamics. Simply put, as the Smokeball report discusses, there is more demand for workers right now and in the future, than there is worker supply. Even though firms have to compete for what talent there is, many of the firms surveyed by Smokeball insist on working conditions many find unacceptable. 2 in 3 firms surveyed will not consider hiring remote workers. 70% of firms of more than three people demand workers be in the office full time.

But what most workers—workers that are in short supply–want is flexibility and the ability to work remotely. How are you going to attract workers in a tight supply market if you are tone-deaf to their desires?

The bottom line for many small firms: 

• You don’t know if you lost business last year, you don’t understand growth, and you have no plan. 

• The plans you centers on hiring people but you demand conditions that are unacceptable to most workers. 

• You don’t know what drives business, but you have a pollyannish few that things will just get better.

What line of business has such a lack of understanding of basic economics?

What About AI and Tech?

We see this same poor fit between reality and expectations when it comes to AI and technology. Granted, most of those surveyed by Smokeball have heard of generative AI, for example. Over half of those surveyed say AI will, in fact, transform the practice of law. But despite that belief, 80% have ethical concerns about using. 83% are uneasy about using AI for legal research or contract analysis. (Never mind that AI has been used for this for some time already. I think the unease is with the use of Gen AI programs. The responses reflect a critical lack of understanding of the difference between Gen AI and plain old AI. We have seen the same confusion, by the way, with some judges who want the use of any AI in any filing revealed).

Over-focusing on ethical concerns and reluctance to use the tools suggest plain old foot-dragging. Ir reflects the unwillingness to do what is necessary to understand AI tools in general and generative AI in particular. What many of the firms seem to be saying is that there is a tool that will probably change our world, but let’s look for ways not to use it.

What many of the firms seem to be saying is that there is a tool that will probably change our world, but let’s look for ways not to use it.

Another finding that demonstrates the lack of understanding of what AI can do: partners were more than twice as likely as paralegals to perceive AI as a potential threat to their jobs. But AI, in fact, can free up more experienced lawyers to do what they do best and which is most valuable. Things like strategy and advice that clients value the most. These are the exact things that AI can’t do. 

The Survey responses about the general use of technology also show this same lack of understanding and planning. For example, more than eight different kinds of software are being used in firms of less than two people. As the Report puts it, “staff becomes the manual messenger between the systems, which means tech isn’t making your life much easier.”

The Survey reveals that most of those responding believe ease of use is the most important factor in tech decisions made by most firms. Factors further down the list cited by the respondents were features, the ability to scale with the firm, and the ability to integrate with other software.

Certainly, ease of use for busy lawyers is important. Yet it is the features, and the ability to scale and integrate with the firm that determine ease of use. All too often, software looks easy to use until you try to integrate and use it in your firm. Focusing just on ease of use is myopic and will lead to failure and frustration.

A Potential Dismal Bottom Line

All in all, the Survey paints a dismal picture of small firms and the business of law. Yes, there are outliers. And yes, fortunately, there are solutions to many of the concerns raised in the Survey, including technology and tools offered by Smokeball and other vendors.

But the future poses increased threats, particularly to those without a clear view of the challenges and opportunities. And for those without a plan and understanding of the threats, it could spell disaster.