In its 2013 Legal Department Metrics Benchmarking Survey, Corporate Counsel magazine and ALM Legal Intelligence analyze trends in outside counsel management from the General Counsel perspective. A comparison of the results with two studies of the legal market from the law firm perspective is instructive and shows a possible disconnect. [1]
According to the Legal Department Metrics Benchmarking Survey, the trend toward internalizing legal work continues. At the same time, the tendency to use fewer law firms, and to favor efficient, cost effective law firms, is confirmed. According to the survey, 35% of companies have a law firm evaluation process. Most legal departments make broad use of hourly rate discounts, which are considered easier to manage than alternative fee arrangements (AFA). However, 82% of companies use alternative fee arrangements for at least some of their work, and those General Counsel who use AFA regularly report high satisfaction levels.
To what extent are law firms in sync with client demand for efficiency and cost effectiveness ?
According to the Hildebrandt Consulting / CITI 2014 Client Advisory the law firm leaders surveyed reported that almost 2/3 of their 2012 revenue was subject to either discounting or AFA. However, law firms are responding in a more sophisticated manner to client demands by analyzing the likely profitability of a matter before agreeing to a discount. This includes an in-depth analysis of staffing. Some firms have hired pricing directors in an attempt to reconcile firm profitability and client budgets. Another trend noted is the hiring of professional project managers, or at least providing lawyers with project management training to ensure that both margins and budgets are respected. Finally, law firms are shifting more work to lower cost lawyers : 82% of firms surveyed use temporary lawyers ; 70% employ permanent, non-partnership track lawyers. The financial performance pressure on partners and counsel continues to increase.
The Peer Monitor – Georgetown Law 2014 Report on the State of the Legal Market is more categorical in its conclusion : to respond to client demand for more efficient and cost-effective legal services, law firms must “rethink the basic organizational, pricing, and service delivery models that have dominated the market”. However, less than half of firms have made significant changes to their business models. When asked to list the most significant challenges their firms will face in the next two years, the top four responses were all internally focused on firm growth and profitability. “Adding value for clients” came in eighth out of twelve possible answers, and “improving efficiency in service delivery” was eleventh (citing the 2013 Law Firms in Transition Survey by Altman Weil).
The legal industry is on the brink of a major disruption. The firms that will thrive will be those that have the courage to consider a major revamping of their business model : away from growth at any price, and toward increased focus on providing clients with efficient and cost-effective services.
