By Stephen Poor, Chairman, Seyfarth Shaw LLP*
Altman Weil’s recent survey of CLOs found that 40 percent of law departments plan to decrease the spend on outside counsel over the next 12 months. This is hardly startling news. It simply continues the pattern we have seen in the industry for a number of years.
What is interesting about the survey, however, is not the professed desire to reduce outside legal spend. What is interesting is the way in which law departments are working toward that goal. Certainly, price negotiations and basic cost controls remain a core part of this effort.
Embedded throughout the Altman Weil survey, however, is a strategic restructuring of the legal buy. Nearly half of the CLOs planning to reduce spend are going beyond the redistribution of spend. They are rethinking their organization’s needs at a more fundamental level:
Some of the decreases will come from work that the Chief Legal Officers have decided is simply no longer necessary. This more aggressive rebalancing of cost and risk is an important evolution in strategic thinking for many CLOs.
Given this dynamic, Citi’s Q3 report on law firm performance released earlier this month should come as no surprise. Stagnation is the headline: Citi reports a 0.6 percent demand growth in the first nine months of the year.
This anemic performance lags even the 0.9 percent growth rate we saw in the first half of 2014. As has been the pattern for the past few years, this result is not uniform across subparts of the industry. None of this is particularly intriguing. The market has been largely flat for the past few years, and performance dispersion has increased steadily in step with the continuing segmentation of the legal services market.
Rather, it is the juxtaposition of the two reports that is suggestive.
Despite all the talk of “new normal,” “disruption” and the like, a lot of lawyers and firms secretly hold on to the hope that the industry as a whole will return to a sustained period of demand growth. The relative strength with which the industry closed out 2014 fueled that false hope.
Flat Demand for Legal Services
While perhaps not exactly robust, the US economy has been in a fairly sustained period of rebound and recovery. Similarly, overall legal spend by corporations continues to climb. Yet, we see the Citi results indicating essentially flat demand for legal services.
Why? It is for precisely the reasons articulated in the Altman Weil survey: we are seeing structural, rather than cyclical, change in corporate legal buy.
This structural change means something fundamental for Big Law. The essentially flat market continues to drive fierce competition for market share: firms look for opportunities for takeaways while aggressively defending the market share they currently have. Charting a viable pathway to growth in this environment requires each firm to reimagine its role in a changing ecosystem and to focus more intently than ever on the value provided to clients.
Amidst all these pressures, firms will need to challenge and test the validity of conventional wisdom governing the business of law.
Turning to Mergers
Merger activity is one such example. In the absence of organic growth, firms have increasingly turned to mergers in hopes that rubbing two coins together might create a third. I suspect, however, that the changing face of the corporate buy will mean that tie-ups will face an increasingly high bar for value creation. Citi’s Q3 report notes the impact of currency fluctuations on global firm performance.
If the Fed stays hawkish on the US economy by following through with the long-discussed interest rate hike, forex volatility could potentially intensify further. Steering a bigger boat, then, has its own challenges.
Such challenges may, in turn, prompt firms to reexamine how global expansion creates value, either for the firm or for the client. While Dentons continues to grow through cross-border mergers, Foley & Lardner recently eschewed a tie-up with Eversheds.
On the domestic front, some firms are still charging down the merger path. Others, like Pillsbury and Chadbourne, choose a different direction. Now, I have no particular insight into any of those decisions. From experience, I know that they are undoubtedly the result of both strategic analysis and other, more idiosyncratic, causes.
Nevertheless, differentiation in both financial performance and the industry’s structural approach only continues to broaden, suggesting that each firm must find its own path to success. In the face of ever-increasing complexity, there is no one-size-fits approach.
All of us, however, can benefit from one shared mandate: to understand the evolving needs of our clients and how that leads to a strategic repositioning of corporate legal buy.
Stephen Poor is Chairman of Seyfarth Shaw and has written on law firm management issues. For more essays from Stephen Poor (@stephen_poor) and Seyfarth on change in the legal industry, visit Rethink the Practice.