The quarterly publication of the International Legal Technology Association
Issue link: https://epubs.iltanet.org/i/11430
Law firms are too profitable 58% Corporate Counsel 21% Private Practice Attorneys Source: LexisNexis State of the Legal Industry Survey gloss. Many law department lawyers and CLOs say that they are happy to see firms profit from their activities. But they want firms to maintain or increase profits through innovation and changing the value proposition for their services, not through regular price increases. This reality has prompted one leading law industry consultant, Hildebrandt Baker Robbins, to observe: The fact is that the extraordinary prosperity of the legal market in the 1998-2007 period was largely driven by one factor — the ability of firms to raise their rates 6-8 percent every year. If, as we believe, the era of such easy year-on-year rate increases is over, then the implications for the economics and structure of law firms are quite serious. (Source: 2010 Client Advisory) So, large and regular price increases may be a thing of the past. However, what may become the central impetus for a shake up in the legal industry is both deeper and broader than “mere” price resistance. There is now emerging a powerful formalization and organization (using “organize” in the sense it might be used by, say, a union) of the discontent now widespread among clients. That formal response is a collective and highly structured initiative called the Value Challenge, which is engendered by the Association of Corporate Counsel (ACC) — “the world’s largest organization serving the professional and business interests of attorneys who practice in the legal departments of corporations, associations and other private-sector organizations around the globe.” Firms Under the Microscope The ACC’s Value Challenge is founded on the premise that year after year of price increases with no increased innovation and efficiency has severed the connection between the value of legal services delivered by most law firms and the price of those services. The Value Challenge is an effort to restore balance between value and cost. As part of the initiative, the ACC has also kicked off a project of key performance measures. Its Value Index, launched in October 2009, endeavors to compare law firms based on simple post-work assessments by in-house counsel. Participants rate the firms from 1 to 5 — with 1 being poor and 5 being excellent — and then indicate whether they would use the firm again. There is a spot for comments, and respondents can choose whether to keep their name and information 46 www.iltanet.org Peer to Peer anonymous. By the end of 2009, the ACC had collected 1,800 evaluations of 600 different law firms. Consumer Reports for law firms has arrived. The Value Challenge initiative has been accompanied by a number of vocal pronouncements by leading CLOs concerning the need for law firms to change their ways.² These CLOs and others are also putting their money where their mouths are. Recent surveys have noted a significant uptick in the number of fee arrangements based on something other than the billable hour.³ And some companies have gone still further. For example, in late 2009, Levi Strauss & Co. allocated all of its legal work (except IP work) to a single firm for a flat monthly fee, and other companies are following suit by outsourcing entire legal functions to single firms. Both as a consequence of the Value Challenge and of the underlying dissatisfaction that necessitated it, the legal market has over the last year and a half seen a significant shift in buying habits. A number of surveys now show a sharp rise in demand for non-hours-based fee structures.4 A recent ACC survey reports that four out of five in-house lawyers expressed a desire to increase their spending on alternative fee arrangements (AFAs). Companies have also accelerated already-established trends toward reducing the number of law firms approved to provide services and toward introducing purchasing disciplines (such as RFPs) into the buying process. Law departments have also considerably elevated pressure on rates over the last year, with the result that rate increases have slowed considerably. Law firm responses to these signals of marketplace change have been very . . . um . . . newspaper-like. They include radical reductions in force at all levels within law firms as well as other aggressive cost-cutting measures. These bar charts from Hildebrandt Baker Robbins capturing metrics from over 100 leading law firms illustrate the extent of those cost-cutting efforts and, at least for the year 2009, the immediate beneficial impact of those cuts on profitability. What law firms have not done in response to the very clear messages emerging from their customer base is engage in widespread or radical innovation. There are pockets of innovation, and some new business models are emerging. Impact of Cost Reductions 10 5 0 -5 -10 Revenue 2009 2008 Expense Profit For Distribution Partner FTE PPP Source: Hildebrandt Peer Monitor % Change