As general counsel, the buyers of legal services, continue to face increasing cost pressures, they are flexing their considerable muscle to fundamentally alter their relationships with these providers to extract greater value for each dollar spent.
For a handful of the most successful traditional law firms, this environment brings an opportunity to adapt, differentiate and garner the premium price-insensitive bet-the-company work that will drive growth in profits per equity partner. For most others, it will mean a new era of competition, both with other traditional firms and with a new category of firms that enter the market in response to the needs of corporate buyers. This evolution in the ecosystem of legal providers ultimately will align the industry more efficiently and more effectively with clients’ businesses and goals.
GCs face a significant challenge in today’s business environment. Their budgets are showing little or no growth as corporations manage their cost lines tightly. Meanwhile, law firm rates have been rising by an average of 5 percent to 6 percent a year. See Larry Bodine, “It’s Safe to Raise Rates by 5 percent to 6 percent for Corporate Clients,” LawMarketing Portal, Nov. 18, 2007.
A recent study by RSG Consulting found that rising fees and the cost of buying legal advice are the key concerns among clients, with more than half believing that the current growth is not sustainable. See Eversheds press release, “Top firms and clients deliver verdict on future of legal profession,” Feb. 19, 2008 (citing “Law Firm of the 21st Century” study carried out by RSG Consulting on behalf of Eversheds).
In response, relationships with outside counsel are starting to change. Corporations’ loyalty to their former “go-to” firms is waning. Today, corporate procurement departments, which typically don’t have long-term relationships with outside counsel, are increasingly involved in the selection of outside counsel. More work is being kept in-house, particularly transactions and regulatory work that require a high level of integration and alignment with the company’s business objectives, and only the most specialized or expert work is being sent to traditional firms.
Clients increasingly are realizing that work previously considered to be highly complex is becoming routine and can be handled more cost-effectively through use of internal resources, smaller firms or new-model firms that have entered the market. Companies will pay premiums only for the highest-risk, bet-the-company matters and are scrutinizing exactly what qualifies as that work. This shift in turn is creating greater demand for counsel who focus on “run the company” matters such as commercial contracts, licensing, U.S. Securities and Exchange Commission compliance, employment counseling, leases and even small mergers and acquisitions (M&A).
For this kind of work, which in the long run typically represents substantially more hours of legal work than the bet-the-company matters, GCs have a variety of options. The choice among hiring in-house, using smaller or regional firms, or utilizing new-model firms involves a weighing of factors beyond just cost: How important is integration with the business? How much does flexibility matter? How does the ability to add capacity quickly play a role?