We participated as panel speaker at a conference for general counsel organized by Laurence Simons and Nixon Peabody in Paris. The central theme of the conference focused on innovative solutions around corporate legal spending. The panel was also attended by eminent speakers from Pfizer, General Electric, Atos and Nixon Peabody.
As one could expect, one of the key topics discussed was the current pressure on law firms to cut their rates and accept alternative billing arrangements. However, the panel arrived at a few very interesting conclusions in this context which we want to share with you.
First, it was felt that this pressure on fee rates and accepting alternative billing arrangements will be very beneficial in the short term. It will force law firms to improve efficiency. Indeed many of the attendants felt that a number of law firms have become a bit relaxed, simply charging to their clients yearly increasing hourly rates multiplied by hours recorded. This needs to change and the pressure will help achieving that. It will in a nutshell, happen in two distinct ways. First, law firms will manage their knowledge much better and share it more efficiently so that they need less time to do more. This will make them a better buy for their clients. The second route will be the fixed fee budgets. This will push senior lawyers in law firms to work with their best lawyers on the job. Rather than accumulating hours and billing them, they will now want to accumulate less hours performed by better lawyers, so that the “cost of production” to the law firm becomes lower allowing them to realize a higher profit margin on the fixed fees. The latter can generate a substantial win-win situation for the corporate client and the law firms willing to move along this path of efficiency and performance.
While these efficiency trends will no doubt make the “value for money” dimension of the legal counsel – law firm relationship better, it also has its limits. Indeed, if pushed over the limit it will force law firms to potentially take shortcuts or lower their standards, leading to suboptimal results. This is where we felt that solving the budget pressure beyond the efficiency improvement levels as outlined above, may sometimes harm both legal counsel and law firms in the medium to longer term.
Hence our idea to seek further win-win approaches for both law firms and general counsel.
Let’s consider the following reflection in this context.
Once the efficiency progress has been achieved – and there is still some way to go for many law firms -, we recommend that law firms decide to focus on what they should be best at. If you ask general counsel what this should be, they will still mention in many instances : top quality advice and timely delivery in complicated matters.
This would mean that a vast area of legal work that is more commoditized or less specialized is probably no longer core business for many law firms. These are services that general counsel will want to outsource, increasingly to more cost efficient providers of these services such as LPO providers or contract lawyers.
We think this more commoditized part of legal services may account for up to 30 to 50 % of what general counsel currently outsource to law firms. By outsourcing less of it to law firms, but more to those alternative providers, general counsel could be in a position to realize cost savings between 15 to 20 % compared to their current budgets, and this without taking additional personnel on their payroll.
This saving will come in addition to the 10 to 15 % that can be realized through the increased efficiency pressure on the law firms. Combined this can result in realistic cost savings between 20 to 30 % without affecting the quality of what legal departments get provided.
For law firms that have managed the efficiency hurdle and that have reviewed their business model to better respond to their client needs it may mean less volume being sent to them in global, but most likely not to law firms individually. That is how the reduction in volume will most likely be absorbed. The law firms that have transformed their business model – the successful ones – will be able to maintain or even grow their business while maintaining a very healthy margin.
The lower value added work will be pushed to alternative legal service providers. These will be dynamized through, amongst others, the Legal Services Act in the UK. The latter will allow capital investment and professional management for those providers. They will choose operating models different from the current partnerships at law firms. While capable of achieving margins of up to 30 %, they will allow for a cost of service to their clients of 25 to 35 % below that of law firms. No doubt the alternative legal service providers are already today one of the fastest growing players in the legal services market.
In conclusion, we feel that the budget constraints may lead to a healthier relationship between general counsel and efficient law firms, allowing the latter to remain very specialized and as good and focused as general counsel really want them to be. In return, we will not see the long term budget savings exclusively realized on their back. While the overall volume of business available to law firms will shrink, they will be able to maintain roughly their profit margin assuming that they become more efficient. The growing trend and longer term further budget savings to general counsel will come from the alternative service providers who can offer the less premium legal services at a substantially lower cost compered to law firms and generate room for substantial savings. In this way the trend may ultimately be win-win for all involved. It will only require general counsel to source slightly differently, law firms to be open to changing their business model, while the alternative providers of legal services will need to find ways of really breaking through across all borders.