Today we have an extremely unusual–for Adam Smith, Esq.–guest column. Indeed, if memory serves, this is only the third column in the history of this site (5 years, nearly 1,000 columns) not written by me.
Leigh Dance is today’s author, and I will extend to her the courtesy every writer most devoutly wishes to receive from their editor and publisher, which is, without further ado, to get out of the way.
From my patio in Rome’s centro storico, I read Bruce MacEwen’s excellent GM-RIP piece
and reflected that Rome didn’t fall in a day either. A particular part of
that post that resonated for me was Don Sull’s comment that “Organisations
often succumb to active inertia – they respond to disruptive changes
in the environment by accelerating activities that worked in the past.”
But the Rome analogy stopped there. Instead I pictured scores of squirrels
furiously grabbing all the walnuts they could find–gorging themselves and
squirreling hundreds more away for the hard winter. It’s a vivid image, and
immediately brings to mind the behavior of Big Law over the last six months.
Active inertia abounds, with talk squarely focused on the navel: projecting
when deal flow may change, coping with fee income reductions and practice
shifts, fewer associates, lower partner leverage, cutting travel and marketing
costs, questioning international investments. Even talk of alternative fees
is focused inwards: how can we make it work within the firm’s billing system?
Forgive me for sounding harsh, but I have grown impatient with this ultra
short-term thinking. When I ask corporate clients if their lawyers are visiting
them, the tales are more bitter than sweet. A global General Counsel told
me about a recent lunch with the lead partner of his biggest law firm provider.
No interest in what was going down at the company. “I think I’ll be able to
build my deal base back up, don’t you think?” the partner asked his client,
and went on to talk about his book of business. The GC described the encounter,
shaking his head. “Hello?!? Could he have asked me 1 question about what
I’m dealing with in my shop?” I guess that partner just wanted more
walnuts to squirrel away. He didn’t leave lunch with any, that’s for sure.
Stories like this are far too common.
Deep Freeze in Big Law
Summer begins any day, yet fear and loathing still has Big Law in a deep
freeze. At GM it was a “cumulative and collective denial of reality” to change
the organization and culture. We know why lawyers today feel paralyzed: there’s
still lots of pressure to produce; lawyers are accustomed to success; they
built solid practices around businesses expected to grow forever; they adopted
expensive lifestyles requiring ever greater income; they’ve lost valued colleagues;
they don’t know what’s coming next.
Consultants make sweeping predictions that traditional law firm business
models are dead. Wall Street rainmakers and their spouses reconsider the
St. Bart’s vacation as their environment changes. Revered investment banker
and private equity friends are sliding down the food chain, and the New York/London
social pecking order is in disarray.
At the coalface, private practice lawyers seem to be passing through a form
of Elizabeth Kubler-Ross’ stages of grief: 1) shock and denial, 2) anger
and hostility, 3) bargaining and reorganizing, 4) depression, reflection and
feelings of loneliness; and (we’re not there yet) 5) acceptance.
Lawyers’ identities are wounded– many have or will face the possibility
of losing their jobs. I’m no psychologist (as a law firm consultant it might
be helpful), but I have surfed the web and learned that resentment and jealousy
causes volatile and helpless feelings, plus serious distraction. According
to grief experts, one of the effects is like a stun gun– the person withdraws,
anesthetized.
Sounds like Big Law to me. Adam Smith, Esq. has been raising the challenges
up to leadership. I was happy to see Dan DiPietro, in his May American
Lawyer article, voice frustration with lack of action among AmLaw 100
firms. Minutes after a conversation I had in Toronto where the Deputy GC
of Bank of Nova Scotia marvelled to the Citigroup Canada GC that his bank
was now larger in market cap than Citigroup worldwide, I received an email
from Altman Weil summarizing their latest survey of major law firms. The
big news: no news. No dramatic changes.
I’m impatient because the stagnancy among law firms is a whale of a lost
opportunity. The biggest danger is the amount of legal work that seems to
be migrating away from law firms. While it’s happening, many talented law
firm professionals are not responding, much less preparing for the future.
In-house Counsel are Changing Like Gangbusters
While all is quiet on the law firm front, chief legal officers and their top
teams within corporate law departments are changing like gangbusters. It’s
the opposite of active inertia. In-house counsel around the globe
are fired up from long days working in crisis mode, big budget cuts and an
impending avalanche of new regulation.
Corporate legal budgets for internal and/or external spending have been
cut from 15 to 40% on both sides of the Atlantic (slightly less in Asia).
Though many in-house functions have escaped staffing cuts, they must find
cheaper ways to support their companies’ global growth. General Counsels
recognize that the world is full of legal landmines. They know they must
increase productivity, reduce demand, and in every way possible lower the
cost to buy and make legal services.
In-house counsel matter: they are the providers of work to many law firms,
now more than ever. Rather than ‘accelerate activities that worked in the
past,’ I believe they are in the process of changing the game.
Buon giorno, this is your wake up call.
My discussions with dozens of senior international corporate counsel (US,
Europe, Middle East and Asia) over the last six months reveal a remarkable,
disturbing and nearly unanimous view:
- they don’t think law firms really understand or ‘feel their pain’;
- they say that their outside lawyers are not taking action to help, or
even discuss their situation; - corporate counsel are addressing these challenges on their own, having
decided that their provider firms generally can’t help because lawyers are
pressured by the firms’ conflicting objectives;
In most cases they say they haven’t even talked to their law firm
providers about their specific budget cuts and constraints.
In-house counsel in the US, the UK and with global corporations everywhere
aren’t whining about fees anymore. As I write, they are implementing various
forms of outsourcing, shifting work to non-legal providers, automating certain
functions. In a business climate where much is beyond their control, they
relish their options in a buyer’s legal market. The danger is that much of
the work that is leaving big law firms may never come back.
Many have alternative fee arrangements and demand that law firms make costs
more transparent and predictable. Some in-house teams systematically scope
projects and then set fixed fees or caps for various predictable stages (in
the UK referred to as “slice and price”).
Unfortunately, the tendency for most in-house lawyers who’ve been told to
‘cut costs or be shown the door’ is to seek alternatives to outsourcing.
When they need to go outside, they get competitive bids from known providers
and take the biggest discount.
Few in-house legal functions have the management expertise, technology or
time to implement metrics and processes for a higher functioning, leaner corporate
legal function to better serve their global operations (and precious few law
firms are helping; a major lost opportunity). So they opt for discounts,
which scores quick points. Once discounting starts, it’s hard for your firm
to propose smarter approaches.
A moment for the discounting topic, which merits attention.
Corporate counsel are amazed by the deep discounts they are getting on competitive
bids. It’s now typical for European corporate counsel to bid out a transaction
to a few global and domestic firms thought to have the requisite expertise.
Usually inside counsel will determine what the combined costs may be for the
firm to make a small profit. Proposals from many firms, including the Magic
Circle, are coming in at discounts far greater than 50% of the cost of such
transactions 18 months ago. Often corporate counsel choose the firm they
prefer on the condition it meets the lowest cost bid.
Discounting is a short-term tactic. In-house, it can’t reduce a legal function’s
outside legal spend by more than 15 or 20% over time, and the inevitable reduction
in quality and service creates new and potentially costly risks. For law
firms, much of the pricing resulting from pressure to discount is unsustainable.
Law firms must change the client dialog from discounts to helping clients
build a better legal function for today’s corporate demands. Partners should
be trained and authorized to talk specifically about alternative staffing
and fee approaches. It’s particularly complex for multi-jurisdiction work,
and surprisingly few firms do it well.
A relationship of trust with your client is among your greatest assets today.
In-house lawyers want a reason to be loyal. They highly value expert advice
and a trusted-advisor connection. They regret the inevitable loss of loyalty
caused by cost pressures.
Lawyers must get out and reconnect with their clients, giving them big figurative
bear hugs. Don’t stay away for fear clients will tell you they’re cutting
back, and don’t just go out and ask for more business. The only way you’ll
really reconnect is to dig in and understand their issues. Then come back
to them with viable approaches and structured options.
Law firms generally know how to use information technology far better than
corporate legal departments (among the exceptions, Cisco soars). Take steps
to share that expertise for the client’s advantage. In the last few years
law firms have become highly skilled at cost control and (for their own benefit)
resource management. Your clients would really value having your firm’s experience
and skill to help improve the productivity and profitability of their in-house
functions. Figure out how to make it work.
Play the Global Card
Now, for the holy grail of opportunities today: global reach. From my
vantage point, the biggest opportunity you have to out-compete other law firms
is to deliver your clients a combination of your legal skill, your IT expertise,
your cost control sophistication and your global reach. Every day, I see
global law firms miss a chance to win by playing the global card.
Most corporate legal functions don’t come close to matching the international
breadth and depth of most global firms, yet their companies are truly global.
A year ago I was amazed to hear more than three quarters of a group of 100
large global in-house counsel say their corporate legal function is not sufficiently
global. Far from it, they say. In-house lawyers are very nervous about meeting
the demand. Many don’t have the coverage or the international skill, and
sourcing the right expertise is difficult and time consuming, not to mention
expensive.
Global law firms can help in concrete ways. Connect the clients’ situation
from one jurisdiction to another and demonstrate your value by spotting key
issues which help them avoid costly, distracting problems. Unfortunately,
most global firms are not in the equation because they haven’t connected their
offering effectively to the client’s global needs. When global law departments
look for international legal services coverage, they seems to have a fundamental
lack of confidence in the law firm’s ability to help them build a better,
more efficient global legal mousetrap.
Internationally-positioned law firms will come out far ahead if they can
manage to effectively offer clear and compelling global legal service. They
will win by showing clients what they can do that matters to the client in
the short- and mid-term.
The environment has changed and the heat is on. No time for inertia. It’s
time to get out there. If you have it, play the global card.
Buon giorno, this is your wake up call. Would you like another call in
ten minutes?
I am compelled to add that Leigh is the editor of the very recently
released book Bright
Ideas: Insights from Legal Luminaries Worldwide, which Ralph
Baxter describes as follows:
“This
collection of 26 impressive essays, skillfully edited by Leigh Dance,
creates a superb textbook for leaders as they consider current and future
strategies, whether as global law firms or corporate law departments.
A unique compendium of global perspectives and ideas, it makes very useful
reading for all who are working to chart a course in these unprecedented
times.”
Some of the 26 authors, drawn from law firms, major inhouse departments,
and the consulting world, are:
- Peter Beshar, EVP & GC, Marsh & McLennan
- Jeffrey Carr, GC, FMC Technologies
- Bruno Cova, Paul Hastings (Milan)
- Fadi Hammadeh, GC, Dubai Properties Group
- Alan Jenkins, Chairman, Eversheds
- Pete Kalis, Chairman and Global Managing Partner, K&L/Gates
- Despina Kartson, CMO, Latham
- [yours truly]
- Jolene Overbeck, CMO, DLA
- Thomas Sabatino, EVP & GC, Schering-Plough
Profits from sales of the book will be donated to Advocates
for International Development.
I recommend you take a look.
