The corporate client disconnect

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I’m coming to think that many corporate clients get the outside counsel fees and service they deserve. After reading this LegalWeek article about in-house lawyers’ predictions for 2009, I had to note the ongoing disconnect between what corporate law departments say is important to them and what they actually do. The article speaks with some GCs noted for their innovation and asks them what the future will bring. One says: “Some firms are still operating with the view that people will pay their rates for quality alone, but GCs will begin to question their value.” Begin to? Another says: “We will be having discussions with our legal service providers in Europe in an effort to sharpen up the management of costs. One way of doing this is by asking advisers for a quote rather than just waiting for a bill — that will save money.” You think?

I don’t mean to be snarky, but we’re well into the worst-recession-since-they-started-calling-these-things-recessions, and we still seem to be mired in the Platitude phase of the long-vaunted overhaul of corporate legal services purchasing.  Companies have been  talking tough about reining in legal spend for years, but where are the deliverables? The recent mass lawyer firings have nothing to do with how firms sell services to clients; the fundamentals of the inside-outside counsel dynamic haven’t shifted. Since it’s the rare law firm that will open any conversation likely to lead towards either less revenue or a business model restructuring, clients are the only ones with both motive and opportunity to pull the trigger. Yet even with disaster looming, hesitancy appears to rule the day.

So why does corporate legal spend still resist most attempts to apply the kind of rational discipline painfully familiar to other commercial suppliers? Why does the other shoe continue to hover in the air?  Here are three possible explanations, though I can’t say whether or to what extent any are definitive; I’d welcome input from any current or former in-house lawyers.

1. In-house lawyers are insufficiently motivated to change. I raised this in a conversation at Legal OnRamp a few weeks ago. The upshot of my contribution was that that GCs don’t pay serious attention to costs because CEOs haven’t made them. We keep hearing that in-house counsel are under tremendous pressure to reduce costs, rationalize outside counsel spend, even turn themselves into profit centers, and that the GCs thus pressured will lead the way to innovation in outside legal services provision. But how many GCs have been fired for failing to keep costs down? How many Boards of Directors have decided that among all the things on fire in their companies, legal spend is anywhere near the top two or three? I’m not saying companies don’t care about the rising costs of legal — they do — but they’re either unable or disinclined to super-prioritize that issue, especially now with an economic crisis foisting many more urgent matters upon them. GCs will act when their own clients -– bosses and boards -– force them to act. From what I can tell, that hasn’t happened and shows few signs of imminent occurrence; so why would we expect corporate counsel to behave otherwise?

2. Corporate bosses are doing more harm than good. Let’s assume that a number of GCs and in-house lawyers are ready to push for a whole new system for buying legal services. This includes not just the price of those services but, as Ron Friedmann has pointed out, the means by which those services are created and delivered. But here’s the problem: in-house lawyers are swamped with work, principally in compliance. The number of laws, regulations and edicts with which companies must now comply, and the severity of the penalties for failure to do so, are growing and will grow faster during the imminent worldwide regulatory overreaction to fiscal recklessness. How are CEOs responding? In the best Dilbertesque tradition, a lot of them are cutting or freezing Legal’s resources and headcount, ordering GCs to do more with less without much direction or assistance. Legal departments need to invest now (technology, offshoring, in-house growth, etc.) in order to save and get more efficient later. That message is either not being sent by GCs or not being heard by CEOs, or both.

3. No one seem to really know how to go about it. I actually think the first two reasons account for most of the problem: GCs are under-incentivized and overburdened by distracted bosses. But even if and when those issues get resolved, we have a third obstacle: in practical terms, how do you rationally reconfigure the legal services supply chain without destroying it in the process? Where do we find a set of common standards or best practices to start with? The ACC Value Challenge is all well and good, but as Rees Morrison points out, even that conversation gets awfully slippery when you try to nail down precise meanings. In practical terms, how does a firm actually restructure its production and billing system? As The New Yorker explained in an excellent piece on health-care reform, you can’t simply shut down a massive system for months on end while re-engineering it; successful change has to be operational, piecemeal, and based on existing systems and processes. We’ve barely begun to have that conversation in legal services.

The combination of these and other factors has bred an over-abundance of caution. At a time when bold and decisive moves are called for, many corporate clients appear to be treading water. My suggestion would be to adopt the kind of approach laid out by John F. Brown Jr. in a law.com article about risk-sharing fee arrangements published last New Year’s Eve.  He identifies the continuing problem of the client disconnect between wishing and acting:

[O]ver 80 percent of senior in-house counsel attendees said they believed law firms should share the risk of budget overruns, yet inexplicably, less than 5 percent had put into effect alternative billing arrangements to create risk sharing.  …  Despite years of respected industry surveys citing legal costs as a chief concern, the July 2008 Inside Counsel “19th Annual Survey of General Counsel” reported only 11.6 percent of in-house counsel believed law firms were actively seeking ways to reduce the cost of legal services. If corporate counsel want budgets met and costs controlled, they cannot continue to demand one thing from their legal service providers and incentivize something entirely else by pure hourly rate engagements.

He then urges corporate clients to mandate that whatever billing system their outside firms come up with, it must involve an element of risk-sharing between the firm and the client. Not asking nicely, not considering it as an alternative — directing it.

If history is a guide, law firm leaders will not embrace the idea of risk-sharing unless it is made mandatory. Risk-taking represents a greater threat to profits per partner than an opportunity for the firm to make a statement about its confidence in its abilities. Mandating risk-sharing fee agreements would encourage a culture more beneficial in the long run to corporate consumers of legal services. …

In short, senior corporate counsel cannot expect to receive the opposite of what they currently incentivize. Pure hourly rate engagements and a rainmaker culture have stagnated cost control efforts and law firm innovation. If inside counsel truly want to meet the challenges presented by the current business climate, then cost control has to mean risk-sharing.

It takes decisiveness and determination to tell outside counsel, “We’re setting the new rules of the lawyer-client relationship.” It also takes the sure knowledge that your coporate boss has your back and will support you in that effort. So I think it ultimately comes down to the CEO and the board. Unless corporate clients give their in-house lawyers the attention, mandate and means to achieve change for the better, progress very likely will continue to be halting and unsatisfactory.

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4 Responses to “The corporate client disconnect”

  1. Doug Cornelius

    Jordan –

    I always chuckle when I hear the term “alternative billing.” Maybe someday hourly billing will be the “alternative” instead of the “normal?”

  2. Timothy B. Corcoran

    Your assessment is dead on, and the issue of corporate counsel inaction has been noticed before. Until corporate counsel take proactice steps, whether on their own or at the direction of business management, then we’ll continue to hear noise (absolutely appropriate noise, mind you) about law firm billing and pricing but true innovation will wait. Related thoughts here: http://tiny.cc/CdP21 and here: http://tiny.cc/APkCZ.

  3. Bob Tarantino

    “we still seem to be mired in the Platitude phase of the long-vaunted overhaul of corporate legal services purchasing … Why does the other shoe continue to hover in the air?”

    Here’s one possibility (not one which I’m yet willing to go to the wall for, not without thinking about it much more, but perhaps worth considering): It’s entirely possible that there simply is no “other shoe”, and that there is nothing beyond “the Platitude phase”.

    The analysis of what I’ll call the “Susskind School” is predicated on the assumption that there’s going to be some kind of radical change in the delivery of legal services – without ever identifying quite what that radical change will look like. It’s an analysis which gathers up a bunch of phenomena, puts them in a group, plops that group next to “the law”, and then confidently predicts “this bunch of stuff is going to change that thing over there, all irrevocable-like”. It’s imposing a teleology on the legal industry without much of an articulation about what that teleology *actually looks like*.

    I was taken by this statement of Susskind’s: “All that can be discerned in relation to the long term is a common assumption — whether on the part of scholars, professional bodies, government agencies or leading law firms — that legal service of tomorrow will be quite similar to that of today; perhaps more efficient and more business-like but not fundamentally different in nature.” Susskind evidently thinks that that “common assumption” is fundamentally, irrevocably *wrong*. But having read the book, I’m still stuck for an explanation of quite *why* it is so apparently incorrect.

    In short, it’s at least *possible* that beyond the Platitude phase there only *is* marginal improvements in efficiency. There won’t be a moment of revolution, but only incremental changes which, perhaps decades from now, perhaps only on even longer-term scales, will only in hindsight be revealed as fundamental alterations – and perhaps not even that.

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