Category: Legal Operations

The changing business model of law has focused attention on certain key metrics that capture the economic pressures that legal providers face. Now, we turn our attention to a metric — discounts on law firm rates — that is misleading as a signal of legal department efficiency.

Prior to the rise of legal spend analytics, corporate clients often relied on “discounts” from their law firms to prove to business leaders that they were getting “value” from their firms. Today, however, non-legal business units are relying extensively on analytics to show value. Consequently, legal departments are under increasing pressure to show real value with data analytics, rather than merely stating that their law firm gave them a “discount.”

Indeed, savvy in-house counsel and legal operations professionals know all too well that all law firms give corporate clients “discounts.” For example, The Wall Street Journal reported that large firms typically discount their rates by 17%, with “sophisticated” law firms using annual rate increases to make up for such discounts. As the WSJ reported, the aggregate discount increased from 8% a decade ago. Similarly, the ubiquity of law firm discounts was covered by the Economist, which noted that law firm discounts are now common even among the most prestigious of law firms. Many law firms have stayed ahead of this discounting by raising their general rate card at a higher rate than the discounts.

Thus, savvy in-house counsel and legal operations professionals are asking: if everyone is getting a “discount,” isn’t my discount illusory?

Additionally, savvy in-house counsel and legal operations professionals have realized that law firms who provide “discounts” often make up the lost profits in other ways. For example, many law firms who discount their rates will staff additional timekeepers on a matter to the point that the additional hours have erased any “discount” that the client negotiated.

Likewise, many law firms who provide discounts may work less efficiently to the point that the same work may be handled less cost-effectively. Indeed, clients who use data analytics often find that there are systematic differences in how law firms and individual partners handle legal matters.

As a result, many savvy legal departments and CFOs have concluded that while discounts are helpful, they are hardly an indication that a law firm is truly providing value.

In speaking to legal departments, a common theme is fear of falling behind as innovators in legal department management — from General Electric to Google to the legal operations innovators at CLOC — come up with creative approaches to demonstrate data-driven approaches to legal spend. 

Specifically, the features of the new legal landscape pressuring legal departments are:

1. Data is Redefining Legal Management: Leading legal departments are breaking old norms of managing legal work — where few constraints were imposed on outside counsel — with creative approaches using data and other tools to get the most for their money while also increasing the quality of the legal services provided
   to them.
2. As a Result, There is a Widening Gap in Performance Between Leaders and Laggards: A big gulf in results is beginning to separate these modern legal departments who use data and legal operations tools with those doing it the old way.

A forthcoming paper in the Fordham Law Review by Professor Morris Ratner discusses this widening gap in the litigation market.  

Data-Driven Management Example: Breaking Litigation Into Phases

Ratner highlights how data is allowing clients to break up single matters into manageable phases with tools including data and procurement principles.
Instead of looking at litigations as a whole, clients are attaching different fee structures to different phases –whether motion practice, discovery, trial preposition, or other elements of litigation.

This approach can save a legal department millions of dollars a year by removing unfettered discretion from counsel in smart strategic ways.
Professor Ratner says:

“Clients looking to control legal spend, supported by changes in information and project management technologies and competition among law firms, are unbundling legal work to assign tasks rather than cases to individual lawyers or firms, applying procurement principles to source legal projects to the most cost efficient providers.

These same forces have increased the prevalence and commitment to litigation budgets and have pushed flat and other “value-based” pricing into a variety of litigation settings.

Both mechanisms better align the financial interests of lawyers and clients and facilitate client input into the tasks undertaken to achieve litigation aims.”

By breaking up the matter, clients can successfully focus their counsel on tasks that create value by aligning economic incentives and move away from the traditional approach where the client handed over the keys on how a legal matter was handled and awaited a final bill.

Consequence: Legal Departments Falling Behind

Professor Ratner worries that many clients are falling behind and consequently achieving worse results in cost and quality from their legal providers.

He says that currently, only sophisticated clients have the tools, knowledge, and manpower to use such techniques currently. He notes that it is imperative that all clients benefit from such techniques:

What we need to cultivate is a shift in legal ethics that requires all lawyers to pay as much attention to value as sophisticated clients demand.

Indeed, we hear from GCs that they are increasingly being asked by their colleagues on how they are implementing “value-based” systems. Consequently, GCs are doing what they can to catch up.
In a forthcoming post, we will explain how the approach of breaking matters into phases extends well beyond litigation using examples from Bodhala’s work.

“It was a growth story in the 1990s, but since 2008, it’s a more competitive world where there is less growth,” Jeffrey Hammes, Kirkland & Ellis

“Law firms today must make a persuasive case for their retention. [The] new reality is marked by hypercompetition and bears little resemblance to the world even five to 10 years ago, and virtually no resemblance to the legal industry 20 years ago.”  Brad Karp, Paul Weiss

“For every mandate, you have to prove your talents.  Our clients have the right to kick the tires.”  William Voge, Latham & Watkins.

Last week, the New York Times published a revealing piece about the business model pressures faced today by even the most elite corporate law firms.

While it may be common knowledge that there is general softness in the market, Elizabeth Olson’s story demonstrates how the pressures affect even the small corner of the practice occupied by the elite of elite law firms — that where elite clients call on elite relationship firms for work that was once thought to be absolutely price-insensitive.

Two fundamental economic trends are clashing.  

Trend 1: There is more pressure on firms and their leadership to BOOST profits per partner every year. This is due to:

• Increased competition for rainmakers between the top law firms.
• Greater stratification of pay and status among partners within individual firms eroding firm loyalty.
• Consequently, rainmakers receive and will leave for better offers at higher rates than ever before.

Trend 2: There is a secular trend DEPRESSING profits per partner. This is due to:

• Increased willingness of the top clients to make relationships firms compete for work rather than reflexively going back to relationship firms.
• Less consistency within firms of lawyering as partners jump around further eroding loyalty to firms by clients.

In other words, at the same time that clients are demanding to pay less for their legal services, firms need to find ways to pay rainmakers more to keep or poach them through a combination of boosting overall profits per partner of the firm and increasing partner inequality.

We discuss these trends every day with our clients. Understanding the change in business pressures among law firms is essential to being a smart consumer of legal services as they affect how work is performed including through how staffing is managed.  

Indeed, the most telling part of the New York Times article is the striking commentary, quoted above, by the chairs of three of the top global law firms confirming the realities of this new world — one where the most sophisticated clients expect their legal providers to compete as never before.

To put it simply, GCs and legal departments that just assume costs and prices of legal services “work out” because of relationships in the absence of competitive pressure and analytics are quickly becoming the exception and are not getting value (in price and quality) out of their legal dollars.