The influential and well-respected “2014 Report on the State of the Legal Market" issued by the Georgetown Law Center for the Study of the Legal Profession and Peer Monitor in January 2014 included a stern warning for large law firms that they need to abandon their strategies of “growth for growth’s sake” and carefully re-examine their traditional business models with an eye toward embracing changes in how legal services are delivered and adjusting to significant outside forces that are reordering the industry. According to the Report, 2013 was, by most indicators, another flat year for economic growth in large US law firms marked by continuing sluggish demand growth, persistent challenges of low productivity, ongoing client pushback on rate increases, and a continuing struggle to maintain discipline on expenses. The results were attributable to several fundamental changes in the nature of competition in the legal market that have been ongoing since 2008, including more intense competition caused, in part, by the supply of legal services significantly exceeding demand and a shift in the market for legal services from a sellers' to a buyers' market.
Gone are the days when law firms, and not their clients, made the fundamental decisions about how legal services were delivered, including decisions about how matters were organized, scheduled, and staffed; how strategies and tactics were implemented; and how lawyers charged for their services. Today clients are aggressively seeking enhanced “value” from the legal services they are purchasing and this means efficiency, predictability, and cost effectiveness in the delivery of legal services, quality being assumed. In a press release announcing publication of the Report, Mark Medice, a senior director of Peer Monitor, succinctly described the challenges for large law firms as follows: “Clients now have more diverse options available for handling legal matters, including shifting work to smaller firms, bringing work in-house, and using non-law-firm providers such as legal process outsourcing. In order to stay relevant and competitive in an increasingly fragmented market, it is incumbent upon firms to reshape themselves to be more responsive to the needs of clients, to deliver services in a more efficient and predictable manner, and to develop pricing models that reflect more accurately the value of the services being delivered.”
It is well publicized that clients are aggressively negotiating pricing with their outside law firms; however, clients are taking additional steps to gain better control over their own legal budgets. For example, many corporate law departments have decided that retaining more work in-house is the best way to obtain the desired efficiency and predictability and, at the same time, reduce their reliance on outside counsel. In addition, clients are no longer wedded to using “pedigreed firms” for all of their legal work and surveys show that the chief legal officers (“CLOs”) of major companies are more than willing to move high stakes, although not necessarily “bet the company” work, to non-pedigreed firms, assuming a 30% difference in overall cost. While one cannot tell for sure what direction all of this will take, it is not unreasonable to believe that a disruptive transformation of the legal market is well underway and that much of work traditionally done by large law firms, save for the occasional “bet-the-company” matters, is now in play and those firms are likely to lose business in the wake the trend toward disaggregation of services by in-house counsel and the emergence of new service delivery models and businesses.
The central theme of the Report was questioning the viability of growth strategies that large firms have continued to pursue even in the face of deteriorating performance. According to the Report, the focus on growth was justified by the desire to achieve "economies of scale", the necessity of creating an "ever expanding pie" to provide opportunities for younger lawyers and especially younger partners, the need to diversify to protect a firm against cyclical downturns in specific practices, and the requirements for a larger market footprint to better serve the needs of clients. However, while these goals do appear to make sense, the reality has been that pursuing them has often caused more problems than advantages. For example, economies of scale is based on the idea that producers can create efficiencies that allow them to lower their costs and achieve a competitive advantage; however, many wonder where how that lines up with the drive among law firms to add more lawyer and bill them out at continuously increasing hourly rates. In addition, many observers of the legal market have questioned whether there are any meaningful benefits of scale once a law firms grows beyond 100 lawyers and point out that when growth includes multiple offices the expense of managing and operating those offices offsets any advantages. Still another thing to consider is that advances in technology have lowered the barriers to entry for smaller firms and allowed them to take on complex matters with fewer people and less physical resources.
One of the most striking characteristics of the evolving legal market is the ability and willingness of the leaders of corporate law departments to implement changes in the way that they fulfill their duties to senior management and other business units within the company. Law firms need to understand that today’s CLO is under tremendous pressure to increase efficiencies and productivity and demonstrate the “value” they can contribute to the company. Managing relationships with outside law firms is certainly an important aspect of being a successful CLO; however, CLOs seeking better job security are spending a lot of their time on other initiatives, including working closely with other departments within the company to identify ways that the legal department can provide better support; identifying strategies, such as automation and outsourcing to non-law firms, to make the legal department more efficient; and proactively communicating value to senior management by demonstrating how the legal department can support overall company strategy and help manage and reduce the risks of new business initiatives.
Large law firms need to move away from their traditional preoccupation with their own business goals—increasing billing rates and hours billed—and begin to really appreciate what the CLO needs in order for him or her to be successful in their professional lives. Large law firms also need to come to grips with the realization that their corporate clients do have legitimate alternatives, including small- and mid-sized law firms that are offering high quality services, often from large law firm alumni who have moved on to find a different way of practicing law, and increasingly sophisticated non-law firm vendors eager and able to provide corporations with products and services previously procured from law firms without questions. On a practical level, all this means that the partner in charge of a particular client account needs to be discussing the following questions with the CLO of that client on a regular basis:
1. What is the law firm willing and able to do to reduce the client’s legal services costs and improve the delivery of legal services? Survey after survey shows that the most urgent requests of CLOs with respect to their outside law firms is finding ways to improve budget forecasting, reduce costs and manage projects more efficiently. CLOs are also pushing their law firms to stop just talking about, and start acting on, implementing non-hourly based pricing structures.
2. What can be done to create more transparency about what the client is getting for his or her dollar? Corporate clients are increasingly frustrated about a lack of information on the activities of their outside law firms and CLOs need to have a better idea of what is going on so that they can defend their budgets internally to senior management. Law firms must be willing to work with their clients to establish “dashboards” and other tools that a CLO can use to easily and continuous track work on various projects.
3. What should be the key performance indicators (“KPI”) for the law firm-client relationship and what tools should be adopted to measure the chosen indicators? Use of KPI is commonplace throughout the business world and can be seen whenever and wherever a supply chain arrangement exists. While law firms have traditionally thought of themselves, and the services they provide, as being “special”, the senior management of their clients do not see it that way and want law firm relationships to be based on objective measures that can be understood and which are tailored to the client’s specific needs and expectations.
4. Why should the client rely on the law firm for a particular service? The days when clients simply deferred to their outside law firms on what services were necessary are long gone and CLOs now insist on competition for every dollar they have in their budget. For certain cases and transactions, this means taking a hard look at boutique law firms with special expertise and a willingness to build their business by offering attractive and flexible pricing. CLOs also have the option of using their dollars to bring certain practice areas in-house, which also has the advantage of giving them more direct control over how projects are handled and prioritized.
5. How can the law firm help the CLO improve the internal perception of the law department’s value to the company? As mentioned above, the savvy CLO understands the need to collaborate proactively with other departments and his or her ability to do that depends a great deal on the knowledge and tools that can be brought to bear on a specific problem or issue. For example, if the CLO explains to the outside law firm that he or she wants to reduce employment law risks, and the money that has been spent in the past dealing with cases brought by former employees, the law firm needs to be ready to outline training programs that its attorneys can offer to members of the client human resources team and to other managers throughout the client’s organization. Another way that law firms can help the CLO is by preparing clear and concise reports on their activities that the CLO can use for presentations to senior management.
While client concerns, and the new strategies they are pursuing, would appear to be clear, it remains to be seen whether the leaders of large law firms understand the changes they need to make in their legal service deliver models. For their part, CLOs remain unconvinced that anything will change, other than begrudging reduction in billing rates, and surveys among large law firms regarding what they view as their biggest challenges over the next 24 months confirm that most of the firms remain preoccupied with internally-focused issues aim at protecting the status quo such as increasing revenues, developing new business, growth and profitability. Those firms were much less concerned with the issues that clients are focused on, such as adding value and improving the efficiency of services delivery.