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As we reported last month, the Citi Private Bank Law Watch Third Quarter 2010 results indicate that firms continue to experience flat revenue growth. The current state of the legal industry has been aptly described by a number of managing partners we’ve talked to as: “a smaller market with more competitors.” These factors, together with an increasing willingness on the part of general counsel to branch out beyond their traditional law firms, are forcing many law firms to compete on price, and others to innovate in order to be profitable and sustainable in this changed market.

Citi Private Bank provides financial services to more than 600 U.S. and U.K. law firms and over 35,000 individual lawyers. Each quarter, the Law Firm Group confidentially surveys firms in The Am Law 100 and Second Hundred, along with smaller firms. In addition, we conduct a more detailed annual survey. These reports, together with extensive discussions with law firm management conducted on an ongoing basis, provide a comprehensive overview of financial trends in the industry and insight into where it is headed. Over the past three months, having travelled throughout the U.S. and London conducting roundtables with managing partners of over 150 firms, meeting with individual law firms, and learning how firms are responding to this flat market, we heard two themes. The first relates to the constant pricing pressures firms face, and how they are responding to these pressures. The second relates to how firms are seeking to differentiate themselves in ways other than just price. New low cost competitors. We hear continually from law firms about the unrelenting pricing pressures from clients. As a cost center, the corporate law department faces pressure internally to reduce its outside legal costs. General counsel have been open to other options given the availability of off-shore legal service providers, and Am Law Second Hundred firms prepared to offer services at a lower cost than the traditional law firms. Am Law 100 firms have commented to us about the increased competition from these alternative providers, as well as from smaller firms who are able to provide legal services at significantly lower rates because of lower cost structures. Alternative fee arrangements-pricing and project management. In addition to simply discounting fees, we see an increased focus on alternative fee arrangements (AFAs) As we wrote in “Trench Warfare” in September, we see this as a direct reaction to the war on pricing. While we are not predicting the end of the billable hour, we are seeing firms turn their attention to alternative fee structures, not only as a defensive strategy, but also as a means of strategically shifting their business model.

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