And now, your legal services marketplace update:
- “First six months of 2008 has weakest revenue growth in this decade. Expense growth is significantly higher than revenue growth. … [D]emand is falling, gross hours are falling. The old cliche that law firms are recession-proof has been debunked.”
- “Spending on outside counsel by corporations has dropped to its lowest level in eight years.”
- “[C]orporate counsel … are taking bids, asking for discounts, shopping around for lower-cost options and doing more work themselves.”
- “Around 500 [UK law] firms have been referred to the so-called intensive care units (ICU) of their banks because they are facing financial difficulties.”
- “[Expect] the greatest year-to-year decline in law firm revenues that anyone practicing today has experienced in their lifetime.”
- “The financial crisis will exacerbate everybody’s pain point.”
- “The present economic crisis may lead many firms to re-think the fundamentals of how they do business and how they deliver value to their clients, and, at the end of the day, that may not be such a bad result.”
Got fear? Not everyone is ready to head for the fallout shelter just yet, and rightly so. But I think it’s fair to say that we’re not looking at just another slump here. We have an historic financial crisis (hopefully nearing its completion) likely portending a deep and prolonged recession, coming at a time when law firms’ business and service delivery models are already under unprecedented pressure. You don’t need to believe the apocalypse beckons to recognize that this is, at least, an extraordinary period of transition for lawyers and law firms.
If you want to get the best sense of where the legal industry is going, though, there’s really only one place to look: at clients. Never mind what they’re saying — they always say the same things — look at their circumstances and watch what they do. The extent to which clients’ needs are driving actual changes in their behaviour is the extent to which lawyers’ worlds will also change.
Let’s start with corporate clients, by looking at the annual ACC/Serengeti Managing Outside Counsel Survey and this Fulton County Daily Report article expanding on the survey’s findings. Taken together, they show a strong minority of in-house counsel (25% or so) moving from rhetoric to action, the Rubicon that many law firms assumed corporate counsel would never cross. Here’s a summary of actual steps recently taken by actual law departments, grouped by general subject matter.
1. Outside counsel cost identification
- Get budget and fee commitments for projects.
- Identify beforehand who (and whose rates) will do work.
- For “standard” work, monthly fixed fee: regulatory filings, basic corporate, tax and collection matters, local employment issues.
- For complex work, previously agreed and annually adjusted uniform blended hourly rate covering everyone on the file.
2. Outside counsel cost control
- Negotiate better rates.
- Request discounts for larger volumes of work.
- Cap fees at the start.
- Compare final bills with assignment, work actually completed, and budget.
- Renegotiate bloated bills.
- Do not accept rate increases.
3. Better alignment of task with provider
- Identify task’s position on complexity scale (from commodity to bet-the-company), then choose: high-end outside counsel, low-end outside counsel, or in-sourced provision.
- Match outside lawyer’s experience (and rate) with complexity of task.
- Insist on more work from senior partners: higher rates, but fewer hours and higher quality.
- Unbundle: use outside counsel for “armchair” rather than full engagement, or only for the most complex tasks.
4. Identify and use alternative providers
- Bring more work in-house (drafting, dispute resolution, dealing directly with complaints).
- Move work from higher-priced large firms to solo or small firm practitioners, or lower-priced boutiques with lower overhead.
- Hold beauty contests among outside counsel.
- Build resource library from past work (forms/procedures), CLE and other sources; use outside counsel only for updates, for specific questions, or to review in-house template.
- Implement e-billing with billing guidelines.
- Make firm share risk and reward in lawsuits.
- Create more contract templates for internal clients.
Again, I emphasize: this isn’t a consultant’s “you ought to do this” list — this is actually being done. Not by every corporate client, and not for every matter, but in enough circumstances and to a degree unfathomable a decade ago. It signals a determination to inject reliability, flexibility, and appropriateness into legal spending — in a word, control.
As for individual clients — well, we don’t need to think very hard about their circumstances, because they’re ours as well. As a general rule, they’re cutting back on expenses as they try to reverse their habit of accumulating negative savings. They’re sitting in houses whose value has, in almost every market, declined precipitiously — troublesome on its own, panic-inducing if they’ve been living off their houses’ expected equity appreciation. They’re facing layoffs at worst, salary freezes or incremental raises at best in what’s expected to be at least a year-long recession, if not longer. And whatever their investment portfolios, from pensions to RRSPs to mutual funds, their nest egg is considerably smaller now than it was six months ago.
Add all that up, and individual clients are under just as much pressure, if not more, as their corporate counterparts. They don’t have either the sophistication or the heft to apply the kinds of tactics corporate counsel are now using to keep legal costs down. But they’ll define “absolute legal necessities” as narrowly as possible, put off important yet not urgent tasks like making out wills (and don’t expect them to be buying and selling a house anytime soon either), and if they absolutely must engage the legal system, will do whatever they can to keep costs down, from mediation to self-representation.
It’s been said that recessions are self-fulfilling prophecies: if enough people hear enough talk that the economy is about to tank, they reduce their spending to a sufficient degree that they help accelerate or even bring about the slowdown itself. I think something similar is on the cusp of happening to legal consumers. In the end, it doesn’t really matter what lawyers say, think or do: clients are the engines of our practices, and if they start coughing, we have a problem.
At this point, the best thing you can do (maybe the only thing, in some respects) is to communicate with your client as often as possible without crossing the line into stalking. Talk to them, listen to them, and ask what you can do and how you can do it in a way that best meets their needs. Then go do it, and tell them about it in writing. Above all, understand this: a lot of your clients are seriously worried, and some are downright scared. Do whatever you can to make sure they see you as part of the relief, not part of the worry. I don’t think it’s too great an exaggeration to say your practice may depend on it.