In the February issue of Joyce Smiley’s excellent newsletter, Verbatim: What Clients Say, Joyce quotes a number of corporate GCs explaining that the name of the game now is legal service cost, and that their “main” firms’ inability or unwillingness to support cost efficiency is changing their economic relationships with those law firms.
Whether by bringing more work in-house, offshoring or moving a matter's heavy lifting to lower-priced firms, the GCs agreed that they’d be creating cost efficiencies by using external lawyers differently. One common theme was having the “critical $1000/hour strategic advice when you need it” while using less expensive lawyers for the bulk of the implementation hours.
“The way we’re doing that is to say: ‘Hey, big law firm, we want you to be lead counsel in this case, and we want you to provide strategic direction, but we may not need you to do all aspects of the case. And we’re going to figure out different providers that may complement what you’re doing.’ So, they’re not necessarily going to be providing a complete solution anymore.”
This message has been emerging since 2008, but have you noticed that, lately, it’s getting more direct and specific? Perhaps that’s because, as Joyce writes,
“But too many firms aren’t listening. William B. Sailer, senior vice president and legal counsel of QUALCOMM Incorporated, called developing a value billing process with his main law firm ‘a frustrating process,’ in another session at the Marketing Partner Forum.”
Let’s see, we tried to tell you what we need to remain successful together, but you resisted, forcing us to drag you, kicking and screaming, into our shared future. Now, we’ll do it a different way, with or without you.
If we project the trend portrayed far enough, everybody but the $1000/hour lawyers in BigLaw are hard-to-sell inventory that costs a lot for those firms to develop and maintain. So, when, not if, the $1000/hour-advice lawyers fully embrace the clients’ message, how long will it take them to walk away and start smaller firms, jettisoning all the overhead they carry for lawyers the client will no longer pay for, and partnering with lower-cost firms who will follow the client’s and their direction?
We know that the big-case, big-transaction stars, plus the big rainmakers, already command a disproportionate share of profits. How many are thinking,
“My big earnings are, at least partly, the product of the leverage model in which a dozen or so other lawyers bill hundreds of hours to the cases I lead. If my clients still want my advice and leadership at $1000/hour, but will no longer pay my current colleagues $500-$700/hour, it seems like my best bet may be to form a [litigation, transaction] boutique with a handful of other luminary lawyers and a few trusted ‘minders’ who keep things running smoothly, and partner with firms who’ll bill at the $300-$450/hour that the client will now pay. I can work a deal with them to pay us a marketing/management fee for bringing them the work and managing the case."
So, let’s review the two significant body blows to the BigLaw leveraged model:
- Clients will no longer accept outside firms billing them for 1st- or 2nd-year lawyers’ OJT, which means firms must now finance this or count on somehow being able to lure trained 3rd- or 4th-year lawyers from other firms
- Clients will no longer pay BigLaw rates for experienced associates and partners who do the bulk of the billing on major cases or transactions
It seems that firms will have to reduce their major internal costs enough to remain profitable at the clients’ new lower billing rates. Despite firms doing everything they could to cut their operating costs in 2008-2010, the most recent Citi Private Bank forecast for the legal business, expenses continue to rise much faster than demand and revenue. The only place firms can get the necessary cost reduction is lawyer salaries. If they do that, how many of those partners and associates will decide that, if they’re going to make appreciably less money, maybe they should try to reduce the amount of pressure and aggravation they have to live with by going to a smaller firm?
These drums have been beating for more than a few years now. Will this finally prove to be the motivator that gets firms to make meaningful change in a business model that, though a reliable wealth-producer for a long time, appears now to be played out?
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