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Legal Costs: Here Comes the Sun

2012 October 26
by John Wallbillich

How we got here can be debated; where we have to go is becoming clearer by the day.

The 3 Geeks and the Law blog has an ambitious and excellent series on “The Economics of Law and the Future of Legal KM.” Today is part 4, and it’s worth reading.

There’s one point about the genesis and urgency behind legal cost control that deserves comment. In talking about where we are and how we got there, the authors include this:

The other force was The Recession, beginning in 2008. This forced in-house counsel to increase rate pressure on firms. Leadership in client companies no longer accepted “I can’t” as an answer from the General Counsel (GC) when asked to lower legal costs. Previously the GCs would say they couldn’t predict litigation or deals and therefore could not control costs. The CEOs finally said “enough.” The amount of legal work was not the question. The cost of it was. So clients really turned up the pressure on firms on price, to the point of demanding rate freezes. The days of significant rate increases and high realization were over.

As I’ve said before, cost control initiatives predated the Great Recession; here’s something from early 2011. The context was law firm partners who thought moving out of a recession would bring back the “good times.” Not so fast:

Alas, they are mistaking correlation and causation.

The GC’s mandate from the CFO to lower legal costs was received before September 2008. It was sent by regular mail. The current mantra of legal cost control is repeated almost daily by the CEO, perhaps delivered with a Post-It note to the forehead.

Since cost structure drives a corporation’s competitive position in international markets, the pressure to reduce costs for GCs will likely increase as economic conditions improve. Re-read that last sentence a few times, since it will be a key driver for law firms that aspire to retain these GCs as clients.

I recall budgeting for litigation and deals all the way back to 1989, when I first entered the in-house arena. When I became a general counsel in 1994, I saw that it wasn’t sufficient to “budget enough” and come in under. The CFOs increasingly wanted forecasts: how you would spend, not just what you would spend in total at the end of a project. Well before 2000, you would have to show how you knew certain firms were fit for purpose, and demonstrate that their rates were priced fairly as well. Benchmarking was a CFO (and supply chain) concept long before it entered the GC lexicon.

Indeed, one of the main reasons for the explosive growth of the in-house departments between 1980-2000 was precisely because companies decided to make rather than buy legal services. Cost and certainty were big selling points GCs used to get authorization to add headcount.

One initial rationale behind bringing work in-house is that you take equity partner profits out of the equation. The challenge for some GCs now is whether some work that is being done in-house could be better done again outside. Increasingly, it may not be by law firms, and almost certainly not by law firms structured and operated traditionally.

The truth is that GCs, like many other actors on the corporate stage, are not a homogenous group. They come from different backgrounds, and enter companies that have unique CEO/CFO dynamics and face varying levels of competition in their core markets.

The difference now is that technology isn’t just helping law firms operate. Data gathered by new players in the legal market are helping general counsel manage costs and choose law firms (or other service providers) that do this better.

I look forward to the next installment by the 3 Geeks on how better use of Knowledge Management may impact law firm profitability. They are clearly ahead of the pack on this. I am also interested about how these tactics may affect service delivery and cost control.

Most law firms understand that they aren’t at the center of the corporate legal universe anymore. It took about 200 years for the new view of Nicolaus Copernicus to take hold in astronomy. Hopefully the legal industry can change just a bit faster than that.

The GC is the sun...

(Law firms are in blue; the version on the right shows the “good old days.” GCs may think they are in yellow on the left. Maybe, long-term, that’s really the client.)

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