You’re not selling what we’re buying

Demand is flat or falling at large law firms, says the newest Wells Fargo survey released yesterday. Revenue is now being driven solely by hourly rate increases, the last remaining income enhancement button that law firms can press and one they will presumably continue to press until it no longer responds. This is not an especially new development: as has been the case every year since 2011, the 2015 Altman Weil survey of Chief Legal Officers found that more law departments decreased their spend on outside law firms than increased it.

But shrinking demand at law firms is not the same thing as shrinking demand among clients. The need for legal services — in the absence of war, famine, or some other Horseman of the Apocalypse — has never decreased year-over-year at any time, anywhere in the world. Populations increase, businesses expand, regulations multiply, opportunities arise, crises metastasize — life continuously grows more complex, and legal needs grow along with that complexity.

Just because law firms aren’t getting as much work as they used to, that doesn’t mean there’s less work to be gotten. Corporate clients are actually spending more money; they’re just not spending it on law firms.

Consider that HBR Consulting reported a 1% rise in legal spend among 275 surveyed law departments earlier this month. But the same survey showed that corporate spending on outside counsel actually decreased by 2% in the same period. Litigation work at 151 large law firms firms dropped 1.1% in the first half of 2016, according to the latest Thomson Reuters’ Peer Monitor survey, and has now fallen for 15 consecutive quarters. But this is not because corporate clients have fewer lawsuits: according to the most recent Norton Rose Fulbright survey of more than 600 companies, lawsuits and proceedings commenced against these companies rose in the last year.

Add to that a study by Huron Consulting published in February that surveyed 700 general and senior in-house counsel: it found that while overall legal spending rose 2.2% in the 2013-14 period, that slowed to 1.7% in 2014-15. “Whether that goes down to a zero percent or it goes down to a decreasing percent, the trend is to go down,” said Bret Baccus, managing director of Consilio, which conducted the survey. But here again, the cause is not a reduction in clients’ legal needs, but that “there are now more programs in place within corporate law departments to help manage budgets and reduce legal spend.”

So if law departments do have money and they’re not giving it to law firms, where is it going? What has become increasingly clear throughout 2016 is that corporate clients are chanelling their legal spend in multiple non-firm directions.

  • Insourcing continues to be the most common alternative destination for law department spending. Fully 68 percent of managing partners and chairs told the 2015 Altman Weil survey that they’ve already lost business to corporate law departments insourcing legal work. Confirmation comes from the 76% of law departments reporting reductions in outside law firm spend that said they’ll re-allocate this work to their own in-house legal staff.
  • Mitratech reports that corporate law departments now spend about $1.5 billion annually in legal software, a figure it expects to swell as high as $6 billion. The fastest-growing corporate legal technology areas, according to the survey, are “knowledge management, legal analytics, legal project management, contracts management, and governance and compliance software.” (And note that many law departments have yet to board the technology train.)
  • The power of procurement professionals within corporate legal departments continues to grow. Eighty-six percent of procurement personnel reported in a Buying Legal Council survey in March that they exercise influence on spending decisions for commodity-type legal work — and incredibly, 45% also influence premium work such as high-stakes litigation and complex/high-level matters.
  • Royal Dutch Shell might be forging an entirely new path for non-traditional corporate legal spend, judging from a May report in Legal Business that the company was preparing to open its own offshore legal centre to service its global operations: “A mixture of non-qualified and qualified lawyers will be doing more high-end work as well as the traditional back office work which is more typically suited to offshore centres.”
  • And the money that corporate clients do spend on law firms now comes with conditions. The HBR survey also found that 85% of law departments now use alternative fee arrangements, and 80% plan to increase their use of AFAs next year. This isn’t the old “discounted hourly rate” dodge, either: fixed fees per matter and flat fees for all matters in a field of work were the two most commonly cited AFAs. BASF’s legal department even requires firms to present AFA options for every engagement.

The buying patterns of corporate legal clients have changed. Clients are buying less of some things (the efforts of lawyers billed hourly) and more of other things (the efforts of lawyers priced flat, software and AI, process improvements, legal analytics, offshore talent, and more). This isn’t a future trend: it’s an entrenched reality, right now and for the next few years at least.

So how should law firms respond? The Wells Fargo report recommends, as does virtually every other consulting report issued in the past two years, that law firms better align their workforce with their workload — that is to say, reduce their headcount by de-equitizing “under-performing” partners. No doubt, there are more than a few firms whose equity partner ranks could use some culling, but I really don’t think that’s the problem (and I don’t think that cutting loose every partner who falls below this year’s arbitrarily drawn “under-performance” line is the solution).

The problem is much simpler than that, and it looks like this: Clients are buying things that law firms don’t sell.

The great majority of law firms sell exactly one thing: the hourly billed efforts of their lawyers. It’s not that clients aren’t interested in buying that commodity — they are, and will continue to be, for a range of matters. But they’re just as interested, maybe more so, in buying other things, such as technology, analytics, and lawyers on a fixed-fee basis. But most law firms aren’t selling any of those things. So clients buy these things from legal tech startups and legal outsourcing providers, or they create these things by hiring in-house lawyers and legal operations experts. That’s where their money is going.

The real reason why demand is falling at law firms is that clients have diversified their purchases, but law firms haven’t diversified their offerings. Law firms are steakhouses. Clients are looking for restaurants.

If law firms want their clients to spend more money with them, they need to start stocking their shelves with all the other things clients now want to buy. They need to purchase legal technology startups and sell their products or services under the firm’s name. They need to acquire or rapidly build an analytics functionality and provide clients with its insights. They need to radically rethink the purpose and nature of lawyer secondments, maybe creating a “permanently seconded” lawyer trained and paid by the firm but embedded in the law department. They need to start offering fixed-fee “packages” of legal services in every industry group.

This time last year, LexisNexis bought litigation analytics pioneer Lex Machina. The purchase price was not disclosed, but the company was reportedly seeking a buyout in the $30-$35 million range. An AmLaw firm with an average PPP of $1 million and, say, 600 partners could have made a 5% one-time reduction of each partner’s annual draw and bought Lex Machina outright. Think of the massive volume of competitive market intelligence that firm would have acquired. Think of all the analytics services it could have sold to every corporate law department every year thereafter, paying back the partners’ investment many times over. What a missed opportunity.

Law firms can’t afford to miss any more of those opportunities. They need to recognize that an enterprise that sells only one commodity, no matter how excellent its quality, is deeply vulnerable to any reduction in market demand for that commodity. Diversify your firm’s offerings. Find out where your clients are spending money other than traditional law firms and what they’re buying there, and figure out whether and how you might offer that as well.

You might not think of analytics providers and outsourcing platforms and IT solutions and all these other new service providers as competition, because they don’t sell the same kinds of legal services that you do. But that’s not the point. They’re not competing against your services. They’re competing for your clients’ legal spend. And so long as law firms continue to offer one and only one thing for clients to buy, it will be literally no competition at all.


blawg_100_2016I was surprised and honoured to find that Law21 was included in the ABA Journal‘s 2016 Blawg 100 list, my first appearance on the list in two years and my seventh overall. My sincere gratitude to the editors and the selection committee.


  1. Jonathan Marashlian

    Jordan, great article, great insight, as usual. One observation, however. Would a giant corporation entrust a “new or different” law firm with the sensitive company information that would be captured in a “Lex Machina”-type of software? Would that corporation’s existing outside counsel allow their client to entrust a new/different law firm with their sensitive info, even if firewalls are erected? I understand the need to diversity and expand what we offer clients — and at our firm, we’ve been tapping into this demand for quite a while, through the affiliation with our compliance consulting arm — but many companies simply do not “trust a competitor” with their sensitive info, and I see this as a barrier to law firms entering into the “software space,” not unless they do so as an independent and structurally separate enterprise.

  2. Donna Kent

    Jordan. You have nailed it. This is exactly why we created NewLAWu.s.. I will gladly share your insights here as you underscore the business problems we are solving. Please feel free to reach out if you would enjoy an update on our progress. We recently spun out the technology we designed for the firm in a sister company for broader distribution

  3. Gary Luftspring

    Jordan I must be getting old but with respect to the growth of in house departments we have seen that picture show before. For a while that works but they soon just become difficult to manage firms with bad demographics. So if they are simply growing that is not necessarily progressive. If they are spending big money on systems to do things better that is interesting and I know some are and some are not. The rest of your observations are spot on.

  4. Jordan Furlong

    Jonathan, thanks for your comment! That’s a reasonable concern, although perhaps the anonymization of the collected data could go some distance towards reassuring nervous related parties. But I agree that setting it up as a wholly owned separate enterprise would be a good solution. I think the challenge is that we’ve never seen a major law firm take a serious stab at owning and operating a non-firm legal entity, so we don’t know what the pros and cons will be in practice until someone tries it. (The UK’s Berwin Leighton Paisner did this with Lawyers On Demand, but then spun it out as an independent firm. Dentons’ Nextlaw Labs initiative is also a promising step in this direction.)

    Donna, congratulations on your success with NewLAWu.s. and your spinoff! It should be very interesting to see that technology company develop in the coming years.

    Gary, I agree entirely that there is a ceiling to in-house headcount growth: at a certain point, if you keep hiring lawyers into your law department, you wind up basically re-creating many of the hierarchical, middle-management inefficiencies that plague law firms. The key will be to insource the *work* rather than the individual lawyer– or even better, to insource the responsibility both to perform legal work *and* to prevent legal problems from developing . Preventive law infrastructure within law departments will be the latest Next Big Thing.

  5. Dan Panitz

    This is right in line with legal spend analytics trend observations, as well as what I see as a LPO service provider and shuttle diplomat between my corporate clients and their outside counsel.

  6. Tristan Forrester

    Great article synthesising the challenge law firms are facing. I love the punchline: you’re not selling what we are buying!

    A couple of thoughts:
    1) if firms get serious about selling multiple service lines, particularly tech or consulting services – who will do that selling? Partners or will we see the rise of true account management professionals?
    2) I think you’re selling Seyfarth Lean a little short – it’s a pretty good example of a successful (maybe too successful?) non-firm legal entity no?
    3) raising rates isn’t the _only_ way to grow revenue in a declining market. Winning more work against competitors is surely another option, and worked for the Big4. In fact, expanding service offerings plus continually investing in growing strategic accounts has been core to their growth for the last decade.

  7. Jordan Furlong

    Tristan, thanks for your great comments! I think that if firms do start setting up non-law service lines, I’d be quite surprised to see lawyers spearheading the sales effort, at least on a routine basis. There may be some individual lawyers who have a knack for selling beyond the traditional scope of law firm services, but they would be the exception. The “heavy lifting” of the sales effort would be done by both dedicated sales professionals as well as the persuasive and confidence-building value of the firm’s brand itself. Agreed on your other two points.

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