General Counsel Pressuring Firms Amid Recession

By: Brett Tarr, eMag Solutions

Times are tough for everyone. The economy continues to falter, and both corporate legal departments and outside counsel are facing unprecedented pressures. Law firms are downsizing, and corporate legal department budgets are being slashed. In the midst of this economic crunch, general counsel have increased pressure on their outside law firms, demanding slashed fees, predictable bills and improved service. At the same time, general counsel are wondering what law firm cost cutting measures will mean to corporate clients in terms of quality of service and how much in the way of cost-savings will be passed on to them.

Of the numerous budget issues facing general counsel, the spiraling cost of outside counsel fees and their lack of predictability are the two biggest worries. According to a survey that Altman Weil conducted in November 2008 amongst 115 general counsel, almost three-quarters of those polled reported that they are implementing 2009 budget cuts ranging anywhere from 6 percent up to 35 percent. How then, do law departments manage growing legal and E-Discovery issues with a shrinking budget and uncertain outside legal costs?

Corporate law departments can make superficial in-house staff cuts, but in truth, these departments will not come close to 35% budget cuts without digging deeper, and this will necessarily mean digging into outside counsel. In fact, the Altman Weil study reported that the No. 1 target for general counsel spending cuts is outside counsel. More than half intend to decrease the use of outside lawyers in 2009.

The cutting is already here. One general counsel of a large company recently achieved huge savings nearly overnight by firing its large national law firms and switching to smaller regional firms, she said. “The change provided the company with top-rate lawyers at a lower cost structure. The company replaced $700-an-hour lawyers with $325- to $450-per-hour counsel, she said.

Some law firms are responding by trying to keep pace with smaller firms. One large law firm pledged to a corporate client that it would match any discounted hourly fees that a competing firm might propose. Companies are demanding ever more discounted hourly rates.

Firms that want to continue representing large companies are expected to make concessions. These corporations expect more value, better representation, and better performance in terms of success.”

Recession Offers Law Firms a Chance to Refocus on Client Needs
There has been plenty of cost cutting at law firms of late, and, not surprisingly, in-house lawyers are asking where the savings will go. General Counsel are hoping that firms are scaling back in intelligent ways that will allow these firms to be more competitive. In-house lawyers are certainly expecting that some of the cost savings will filter down to corporate clients and not just into the pockets of firm partners.

Many corporate players believe that the legal services market is overdue for a shake-up, and the current recession should hopefully provide the impetus for law firms to re-dedicate themselves to addressing the needs of clients.

It only makes sense that law firm priorities will need to re-focus on client satisfaction, as the legal market has become increasingly competitive in the past decade. It is no longer an accepted fact that legal fees are in direct proportion to value for the money.

Law firms are finding themselves stuck in a strange, new competitive world. Law firms face hard times not only because of slashed fee demands but also because new competition is depressing prices. Overseas firms are trying to pick off corporate clients, offering hourly rates 30 percent to 40 percent cheaper than what large U.S. firms charge. Additionally, corporations are sophisticated about procurement, but not in the area of legal services. That is changing, and the law firms that can go with that change will succeed.

Law firms that think they are accommodating the market’s changes merely by discounting hourly rates may be missing the point, though. Ultimately, the issue is not one of price, but rather one of offering value.

Similarly, some general counsel think that asking for a discount is all they need to do to manage their legal expenses. But, in truth, a lawyer’s hourly rate is an artificial number that serves as a jumping off point to negotiate service levels and timelines. In reality, offering an hourly discount does not control hours or expenditures. Ultimately, there is no control to prevent the final bill from coming out the same or even larger, even after rate reductions.

Law firm downsizing represents a critical decision point, and may lead to increasing automation or even outsourcing of processes to control costs and maximize efficiencies. Law firms have traditionally been run by lawyers, and in the current economy, it becomes increasingly clear that the competitive business of law needs to be run with a business-centric focus.

Traditionally, as demand for US law firms? services increased, so did their average profitability. Those days are gone. Economic crisis is forcing law firms, few of which are built on a true business model, to become market-driven.

Corporate clients are expecting increased communication from outside law firms, and many organizations are starting to develop sophisticated matrices that measure service along a range of values, including communication, after-hours availability, frequency of reporting, and other less traditional measures of legal value. In a world where law firm life often starts at 10am, it is becoming increasingly common for corporate clients to expect daily 9am conference calls with members of the team providing detailed updates.

In many cases, firms are used to the same-old way of doing business, and most do not even realize how expensive they are in relation to their competitors. By giving these firms an insight into that, and suddenly it becomes easier to have difficult conversations down the line.