What set the first-ever Enterprise Legal Management Trends Report apart wasn’t just the conclusions, but the data set that produced those conclusions.
This study was not a survey but rather an analysis of invoices paid. In other words, we didn’t ask corporate counsel what they were doing, or even what they planned to do but rather, we looked at what they did.
The data overwhelmingly showed the Office of General Counsel is voting with its checkbook to consolidate the number of firms it does business with – and it’s consolidating with firms other than the “Mega Global Firms.” The underlying cause is economics.
While that much is clear in the data, it’s still important to listen to what the industry says, anecdotally or otherwise. To that end, here’s a roundup of reactions to the report across news and blog sources.
The Journal’s Jennifer Smith broke the story, which ran on the front page of print, digital and mobile editions of the publication. She did an amazing job in her reporting in securing several high profile general counsels to speak on the record:
“The larger the firm the higher the cost,” said Don H. Liu, general counsel for Xerox Corp. While he uses elite law firms for critical transactions, he helps keep the company’s legal bills in check by sending other work to smaller law firms in St. Louis and other low-cost locations. “Big law firms don’t have a monopoly on talent,” he says.
A partner who specializes in mergers and acquisitions might cost anywhere from $700 to $1,000 an hour in New York or London to “around $500 an hour” in the Midwest, according to Nick Sayeedi, the general counsel for Blockbuster LLC. “And many of these people have come from the big firms and have similar expertise.”He added that some in-house lawyers resent having big law firms continue to boost their hourly rates 5% to 10% at a time when some companies are struggling, with revenue growing at a slower rate.
But quality matters too. “This is an art, and you can’t just treat obtaining legal services like you’re going to the lowest common denominator,” said Brackett Denniston, general counsel at General Electric Co., which has long evaluated law firms by looking at both quality and price.
Ronald S. Milstein, general counsel for Lorillard Inc., LO -0.76% said the tobacco company uses Hughes Hubbard & Reed LLP, a well-known New York law firm, to handle corporate work and national product-liability litigation. But he hired a smaller regional firm, Adams & Reese LLP, to do extensive work on about 4,500 state and federal civil litigation cases pending in Florida and to work with the larger national firms that Lorillard also employs.”Not everything is a bet-your-company kind of case, and not every case warrants the big guns from New York,” Mr. Milstein said. “Smaller firms—they want you more, they value you more.”
In a blog post following her front page article, Jennifer Smith offers some analysis based on her own experience and reporting, as to why this is happening:
But what do the law firms vying for work think about the trend (documented in a new report out Tuesday)?Some have benefited from the migration of work from thousand-lawyer, $1,000-an-hour outfits to mid-size firms outside the coastal enclaves.Take Dykema Gossett PLLC, a Midwestern-based group with about 350 lawyers and offices in Chicago, Michigan, California, Washington D.C. and elsewhere. To lure sophisticated clients, the firm has moved more heavily into private equity and developed niche expertise in certain industries, such as automotive, energy and financial services, said partner Jeff Dalebroux, head of Dykema’s business services department.“We think that’s helped us try and attract work away from certain firms,” Mr. Dalebroux said.
Pepperdine University Law School Professor Paul L. Caron lays out the data from the report and then offers this commentary:
What is truly large enough? Large enough is being able to manage all of your offices without gutting one to support the other in growth. Large enough should embody hiring from your summer associates and growing and molding attorneys to your firm’s culture instead of cobbling a group of attorneys from other firms who cannot pull together as a team because they’re too busy trying to avoid conflicts with their rolodexes. Big enough is when you can bring in revenue to support a larger operation and take on a good amount of work without killing the staff in the process. Large enough is acknowledging and forwarding the mission of your firm to serve your clients well without gouging them with fees and expenses that tend to be the hallmark of a mega-firm.
Corporate Counsel’s Rebekah Mintzer, who frequently reports on industry studies, cites Chris Colvin, whose biography indicates he was once a partner at a top law firm and has since started his own firm:
Chris Colvin, founder and partner at intellectual property firm Colvin Hudnell and founder and CEO of In the House, a networking group for in-house attorneys, told CorpCounsel.com that he is “not surprised at all” by the findings of the CounselLink survey.
Colvin said that the major drivers behind the growing appeal of smaller firms are new and improved technologies like e-discovery and more efficient administrative tools, as well as the ability to move some of the more menial legal tasks outside of the firm. “I really see a convergence of new technology and new outside support services that are, in a way, combining to enable law firms to be far more efficient,” he explained. With this increased efficiency, smaller law firms can better leverage their more limited resources—and compete with the bigger fish in the outside counsel sea.
Erin E. Harrison’s subhead gets after one of the key findings, “Nearly 60 percent of companies have 10 or fewer firms accounting for at least 80 percent of outside legal fees.” Her story summarized comments from the Xerox general counsel:
The equation is usually “the larger the firm the higher the cost,” Don H. Liu, general counsel for Xerox Corp., told The Wall Street Journal. Liu reportedly uses marquee law firms for critical transactions, but keeps the company’s legal bills down by sending other work to smaller law firms in low-cost locations. “Big law firms don’t have a monopoly on talent,” he said.
Michael Nemeroff, president and CEO of Vedder Price, told LTN that his firm has benefited as a result of its financial flexibility. According to The NLJ 350, Vedder Price ranked 168th in attorney headcount with 249 full-time equivalent lawyers. Meanwhile, The American Lawyer reports that Vedder Price experienced a 9.9 percent increase in gross revenue in 2012 compared to the previous year. “What we’re experiencing is that clients want the same level of legal talent as they would get from the top firms, but for a better price,” said Nemeroff.In the last two or three years, Nemeroff said that he’s seen more clients rely on using electronic billing systems and analytics programs to set financial benchmarks for their outside legal fees. “We’ve seen more clients using technology to create efficiencies,” said Nemeroff. “Many are using electronic billing systems to compare us to other firms. We like being compared.”
This shows that BigLaw is responding to change. Whether it is starting a program like this, hiring contract lawyers, or partnering with a legal process outsourcing provider (LPO), many firms now find ways to reduce cost. What will happen to those large firms that neither have a clear competitive differentiation nor change with the times? Will they have a chair when the music stops? In sum, the bad news is that BigLaw faces profit pressure and some large firms may be at risk. The good news is that some (many?) firms are responding to market pressure.
The change that is being directed by the market is simple and clear. The market demands and will drive to achieve a better value proposition than what law firms have delivered in the past and are now failing to deliver in the present. The client message in this market is unmistakable: “If you cannot give me what I want, I will move my purchasing to someone who can and will give me what I want.” Just like every other service and product market. The article refers to several reports that demonstrate there is clear data that this dynamic has been underway for several years, and now is material both in size and scope.Firms that are able and willing to change their business models should retain the business. Those that cannot or will not won’t retain the business. No firm is immune from this pressure. Then, what happens to the firm that does not adapt? It isn’t a trick question. They will be changed, but they probably won’t be in command of the process. They may survive it, or they may not.
Northwestern University’s Steven J. Harper drew a parallel to another study published on the HBR blog: Why Law Firm Pedigree May be a Thing of the Past. Harper, who is also the author of the book The Lawyer Bubble: A Profession in Crisis and whose comments on the study were syndicated in The American Lawyer wrote:
How are the “Large Enough” firms doing it? Here’s a partial answer: “‘Large Enough’ firms billed nearly twice as much under alternative fee arrangements as did the ‘Largest 50′ firms over the trailing 12 months.”None of this should come as a surprise. For years, law firm management consultants have been saying that there are no economies of scale in the practice of law once a firm reaches about 100 attorneys. In fact, maintaining the infrastructure to support continuous expansion at the largest firms actually produces diseconomies.
* * *
Your turn, what thoughts, comments or reactions did you have to the study? Please feel free to share in the comments section.
If you enjoyed this post you might also like:
ELM Trends Report: Turning Information Into Action