New global study examines lawyer-to-lawyer referrals

A recent global study of lawyer-to-lawyer referrals reveals that referrals among law firms represent a significant percentage of annual revenues, yet the majority of firms polled have only basic tracking procedures, writes Bryn Hughes, if any at all. More than a quarter (26%) of those surveyed claim more than 20% of their annual revenue is derived from referrals. However, 27% of respondents claim their firm doesn't track referrals.

The study Lawyer-to-Lawyer Referrals: A Global Perspective commissioned by LexisNexis Martindale-Hubbell and conducted by independent strategic consultancy Fathom Consulting, examines a number of issues that affect the referral market, including: the proportion of annual turnover derived from referrals; referrals between regions; main types of work referred; key attributes for firms that service referrals; expected change in volume of referrals over the next 12 months; and strategic approaches to protect/increase the levels of referrals received. Building on themes identified in initial qualitative research, 734 legal professionals from medium and large law firms in Western and Eastern Europe, Asia, Latin America and the US participated in the survey during February and March 2010.

The key findings of the study are summarised below. To obtain a free copy of the summary or full research reports, Lawyer-to-Lawyer Referrals: A Global Perspective, click here.

Proportion of firm revenues derived from referrals
It is clear from the research that referral work constitutes a vitally important income stream for law firms. Nearly half (49%) of the overall sample claim to receive referral work totalling more than 10% of overall revenue; and for 26% of respondents, the value of referral work equates to more than 20% of overall firm revenues.

Given the importance of this revenue stream it is perhaps surprising that 27% of the overall sample do not track referrals. The US lags behind in this area with only 46% attempting to track referrals. In contrast, Latin American and Eastern European firms appear to be the most diligent when it comes to tracking referrals, with 90% having tracking mechanisms in place, compared with 80% in Western Europe and Asia.

Derek Benton, director of operations at LexisNexis Martindale-Hubbell, said: 'Based on our initial qualitative research with non-US firms, this is not surprising. The majority of firms have a fairly unsophisticated approach to tracking referral work and do not appear to formally track either the volume or value of the work referred.

'Any tracking tends to be via informal channels or non-structured discussions. However, larger firms, especially in Western Europe, wish to improve their tracking by better leveraging their existing CRM [customer relationship management] systems, capturing referral data in matter opening procedures or allocating individual partners to assume responsibility for specific regions or areas of practice.'

The flow of referrals between world regions
In total, some 65% of the overall sample said they received and gave referral work in equal measure. However, there were some significant differences between world regions – just 15% of US survey participants said they were primarily a recipient of referrals, compared with 38% of all non US firms.

In terms of where referrals come from, all world regions, with the exception of Eastern Europe, regard US firms as an important source of referral income, closely followed in many cases by domestic referrals. In the US, 89% of US respondents (excluding those that answered ‘don’t know’) receive their referrals from other US-based firms. Some 63% of Latin American firms rely heavily on referrals from the US. Where work is passed outside the US, Western Europe and Asia are the leading recipients.

For Europe-based firms, Western Europe is the most important source of referrals. The primary flow of referrals from Western European firms is to Western Europe and the US, with a reduced flow of referrals to Eastern Europe. That said, 66% of the referral work received by Eastern European respondents originates from Western Europe. There is, however, limited flow in the other direction (3%).

Type of work most frequently referred
Globally, the four most significant types of work to be referred between firms are: litigation/disputes (16%); general corporate (15%); mergers and acquisition (M&A) (12%); and intellectual property (10%). It is perhaps not surprising that litigation/disputes work is currently the most frequent type of work to be referred, given its highly jurisdiction-specific nature, and the current state of the global economy.

However, there are significant differences in referral practices between different world regions. In both Eastern and Western Europe, M&A work was the most popular type of work to be referred, at 14% and 28% respectively. In contrast, US respondents focused more on litigation and employment matters. In Latin America and Asia, general corporate work topped the referral schedule at 17% and 14% respectively.

Factors that influence the referral decision
When firms were asked why they refer work to specific referral partners, it is evident that quality and reputation were perceived to be of critical importance to all respondents. At a more granular level, it is worth noting that 93% of US respondents tended to also regard the reputation of an individual lawyer as either important or very important – more so than non US respondents, at 78%.

Less than a quarter (24%) of all respondents thought that reciprocity of referrals was an important referral consideration. Latin American firms were the least interested in getting something in return, whereas Western European respondents were most keen on reciprocity, which also influenced their choice of referral partner.

When selecting a referral partner, US respondents placed the least importance on existing mutual or exclusive relationships, closely followed by those from Western European firms. Overall, respondents in Eastern Europe, followed by Asia, place the highest importance on the existence of mutual or exclusive relationships.

With the exception of US respondents, all other world regions regarded international experience as the prime consideration when assessing whether or not to refer work to a particular firm. Here, the US appears to be unusual – possible because most US referrals are essentially made domestically.

Referral trend identification
Survey respondents were cautiously optimistic about future referral income. In total, some 94% believed the value of referral work would either remain constant or increase over the next 12-18 months. Indeed, about 50% said they expected to see revenue received from referral work increasing. However, when levels of optimism were compared between world regions, there were marked differences in the responses. Latin America was by far the most optimistic, while those in Western Europe were most pessimistic.

Where an increase in the value of referrals was expected, the principal reasons for expecting changes in the volume/value of referrals received revolved around the following five key themes: expectations of the economy’s improvement; increased marketing efforts by law firms (and potentially level of spend targeted specifically at obtaining referrals); more concerted effort being placed on obtaining referrals; firm/practice area expansion; and increased personal efforts to build a referral network.

Globally, only a small minority of respondents (6%) felt that there would be any form of decrease in referral income, while there were not any firms that expected a definite decrease in referrals.

Protecting the referral revenue stream
In terms of what steps firms are taking to protect their referral income, it is clear that survey participants were engaged in a significant breadth of activity.

In order of priority (based on those taking ‘significant action’), the top three activities that firms are planning to undertake to protect their referral income are: improving their service capability; developing or improving their website; and listing the firm in international directories.

Respondents in three world regions displayed the most determined efforts to take significant action to improve service capability (Latin America 70%, Asia 62%, and Eastern Europe 58%) – compared with 45% of respondents of Western European respondents and 32% in the U.S.

While 47% of the total sample said they would take significant action to improve their website to help protect referral income, 60% of Latin American responses are planning to take more definite action in this regard.

Eastern European and Latin American respondents were most likely to take significant action in relation to taking a listing in an international legal directory. In comparison, US mid-size law firms are planning to take the least action, as they indicated that they primarily make and receive referrals within the US. However, large law firms in the US show more interest in international directories, with 58% taking some or significant action, as presumably a larger portion of their referrals are international.

For all world regions, nearly 50% of respondents stated that their firm was considering some action around social media, with the aim of protecting/increasing referral revenue. The results also imply that US firms appear to be taking more significant action to leverage this new channel. Conversely, Western European (43%) and Latin American (36%) firms are taking the least action with regard to leveraging social media.

It is worth noting that three quarters of firms are also increasing the level of marketing spend to protect their referral revenue stream, with 56% taking ‘significant action’ in this regard. This is an interesting statistic given the current state of the global economy. In contrast, 24% of firms do not plan to increase their marketing spend to either protect or increase the volume of referral work received.

Further survey information
To obtain a free copy of the summary or full research reports: Lawyer-to-Lawyer Referrals: A Global Perspective, click here.