A couple of weeks ago the always perspicacious and often contrarian Alex Novarese of LegalWeek used the occasion of his regular column to opine “Not so demanding–clients aren’t pushing the legal industry forward.”
This was swiftly followed by Patrick McKenna writing in LegalOnRamp, “The demand side of the market is not demanding.” (Registration may be required for the latter; if so, I apologize. Please direct your emails to the powers that be at LegalOnRamp.)
If you read no further than the headlines you would correctly intuit that these two columns are talking about the same thing, which is challenging the received wisdom that clients are leading change. As Alex puts it (emphasis supplied):
Read the average commentary on the profession, at least those not written by practising lawyers, and an unmistakable theme emerges: the legal market is set for sweeping, disruptive change and it will be clients that will drag grudging service providers to this promised land.
Yet the harder I look at the profession the more convinced I become that clients – the demand side of the equation – are not only generally failing to enforce change, they are, if anything, more conservative than the law firms, which is saying something.
The last 15 years of the commercial legal market has been notable for clients promising much in terms of change, only to largely disappoint. What evidence is there that all but a few brave pioneers have even tried to make good on that vision?
And this is the case despite the financial crisis. Alex argues that it has been this way for a long time and that law firms are actually more actively focused on trying to change the “supply” side of the equation (from the law firm’s perspective, that is), which is the talent/labor market.
Most of the innovations seen in recent years have been about firms trying to get an edge on rivals and have often been largely driven by the internal economics of law firms. Outsourcing, offshoring and attempts to unbundle legal service provision – experiments in these areas are being pushed more by managing partners than pulled by clients.
Patrick McKenna’s follow-on piece gives full and ample credit to Alex, but otherwise, alas, presents no truly novel arguments; he agrees with Alex.
Noteworthy are some of the comments. I’ve tried to cull some of the more insightful while, of course, sparing you from the inevitable ranters and hobbyhorse riders (emphasis supplied, comments interpolated):
[Reflecting my experience pretty fairly] You’re taking a position that counters so much of the current press coverage on the issue, but I couldn’t agree with you more! We’ve offered clients fixed fees and other alternative billing arrangements, as well as technological solutions that offer superior transaction management/tracking and document automation—clearly better, faster, cheaper than traditional ways of working—and have had frustratingly little interest from the market generally (though the clients who have worked with us are delighted). For all the talk about cut-throat competition, it still really comes down to relationships—in-house counsel are very protective of their current relationships, even if those attorneys are not innovating or really doing much to knock the client’s socks off.
[This commenter asks hard questions.] It’s not unreasonable to wait for [these new business models] to prove themselves. There are some tough questions that need answers:1. How do you drive out unnecessary costs without sacrificing quality?
2. How do you scale without trapping yourself in overhead and excess capacity?
3. How do you model fixed fees and other billing arrangements to maximize value?[From someone who sounds as though he’s been around the block and has no illusions.] This is not unlike the strength and weakness of democracy….the electorate gets the type of political representation that it deserves. Thus, so do clients get the type of legal representation they deserve….they get exactly what they ask for. If there is no change, or less change than what some observe is warranted, then the answer can only be that the “want” has not risen to a level where it has ripened to “ask”.
Does anybody actually believe that a law firm is not going to do absolutely everything in its power and ability to satisfy a “power” client? That a wide array of custom service, pricing and billing platforms are not already part of the regimen of most law firms with respect to their biggest and most powerful clients? And that in fact entire practice areas, some of them formerly high profile “engines” of profit that defined the identity of firms have evolved into lower cost and lower profit practices that those firms struggle to cope with? (Labor, government contracts, environmental, and components of real estate/health care/patent work to name only a few).
[…] Respectfully, and this should not be a surprise, because reducing to certainty in dollars the pricing for tasks applied to finding solutions to problems that we do not know the answers to is a frightening proposition to both vender and buyer. This is NOT a service that is replicable at all levels to widget manufacturing. Yes, of course there is a lot that is already or soon will be reduced to “commodity” service status, as it should be. But not everything. A tour through the case book library with all the appellate decisions should help with accepting that. Or the constantly evolving arenas of law. There are plenty of areas or cases/transactions where it is just gonna cost what it is gonna cost….and the client if fine with that, and should be as long as it is competently and efficiently pursued.
Let me shift gears here into the reaction of law firms to the Great Reset and the financial meltdown.
Recall that Lehman Brothers collapsed in September 2008. These events, among others, also occurred in the span of 19 days in that storied month:
- The FDIC took over WaMu, merely the largest bank takeover in US history;
- Goldman Sachs and Morgan Stanley formally ceased being investment banks, ending the world as we had known it;
- Bank of America took over Merrill Lynch;
- A prominent money market fund “broke the buck;”
- AIG got an $85-billion bailout/investment from the federal government;
- Fannie Mae and Freddie Mac were taken over.
Any single one of these headlines would have been enough to make your head spin, but they piled up on top of each other in the space of less than three weeks.
What has this to do with law firms?
- Law firm layoffs began in October 2008 (I’m putting aside the famous Cadwalader layoffs, in January 2008, which were attributable to the cratering of the securitization practice and not widely perceived as a precursor of a wider bust);
- Layoffs peaked in March 2009;
- Nearly two-thirds of all law firm layoffs in 2009 took place in the first quarter of the year.
In other words, law firms reacted with tremendous alacrity to the meltdown. The same, I’m confident to say, was not true of inhouse departments. The diligent Law Shucks has tried to track inhouse layoffs, but even their best efforts have produced information that it would be charitable at best to call anecdotal.
Indeed, has anyone even bothered to track inhouse layoffs? I’m not sure there have been any on a material scale or, if there have been, it’s safe to say corporate land is far far more opaque than law firm land in disclosing its internal operations. Who is more progressive, then, on that score? Just a thought.
Let’s not underemphasize the complexity of this, nor the mutual commitment it takes on behalf of both client and firm to make it work, in an enduring way. The risk in many alternative fee arrangements is that a firm may do it to accomodate a client’s demands only to realize at the conclusion of the engagement that the client wanted it two ways: To pay the lower of the alternative fee or the billable hour rate. One astute commenter puts this in larger perspective:
Attempting to understand the client’s perspective, what we as outside counsel are really selling is peace of mind. People have a perception that when something costs more, it must be better (even if the work is being passed down to a new attorney who still has a high billing rate). Furthermore, our clients can only be promised our best advice and best efforts, not specific results. If results are not as the client hoped, general counsels need to be able to defend their choice of outside counsel to their superiors. Therefore, the most defensible choice, providing the most peace of mind, might not be the least expensive. (I would certainly like to hear from inside counsel if their perspective is different or if there are additional factors.)
Flat fee arrangements can work well if both clients and law firms understand that, on some projects the cost will be more than under a billable hour system, and on some projects the cost will be less. From a client’s perspective, flat fees will not always decrease costs, and might actually increase them. In setting the fee, the law firm has to take into account not only what they know about a project, but what they might not know. From a law firm perspective, partners and associates working on flat fee matters will be evaluated under the billable hour system, which may lower their realization rates on matters which would cost more if all their time was billed to the client. This places these lawyers in a dilemma when a matter requires more time, but they know that spending this time will hurt them in their evaluations. A truly successful alternative fee arrangement therefore requires an environment wherein the arrangement will truly be backed by all decision makers within the organization.
But finally, back to how law firms are reacting to the “new normal” vs. how clients are reacting.
Do I endorse the fundamental premise of these pieces, and the commenters’ observations, that clients have not been “demanding?” Even though law firms have been willing to innovate and accomodate clients’ demands?
Absolutely.
Why, then, is that?
If you’re asking yourself that question, as you should be, I have two words for you:
Incentives matter.
GC’s are fundamentally dealing with other people’s money: The shareholders’, first of all.
Managing partners are dealing with their partners’ money (not to mention their own).
Are you still surprised that managing partners might be more attuned to the economic environment? It’s not just their paycheck, but their partners’ paychecks. And of course it’s really far more than the money: Never forget the social/psychological pressure applied by walking the halls every day.
Incentives matter.
Until that changes, I dare to predict that law firms will be nimbler on their feet than inhouse departments. So sue me.
