The Bankers Know Where the Money Is
As we move away from hypothetical lawyer-client letters, sometimes it’s helpful to see what other interested parties have to say about the corporate legal market.
One such person is Dan DiPietro, chairman of The Law Firm Group at Citi Private Bank. He recently gave a wide-ranging interview to Bloomberg Law’s Lee Pacchia (which is embedded below). This interview coincided with the release of the group’s most recent industry report.
Three items really caught my eye; I am paraphrasing the video and providing the rough locations if you want to find certain remarks fast:
1. Work moving in-house (4:00): Mr. Pietro sees more transactional work moving in-house. Not necessarily the entire deal, but parts of it, as GCs get more comfortable “compartmentalizing and dis-aggregating” work. Certain work can go to a low-cost provider (i.e. the in-house staff); other “Rocket Science” work would still be placed with their “go-to firm.” The issue is law firms have built their leverage model based upon doing all the work, and if this trend continues, firms will have to look at their leverage models.
WGC comment: This trend isn’t just continuing, it’s accelerating. And LPOs may even be lower-cost providers than in-house staff for some transactional work, as they take litigation project management experience and map it over to deals.
2. Excess capacity drives bad pricing decisions (5:15): An example is one Am Law 50 firm talked about litigation work that was quoted for $350,000 per matter (heavily negotiated, thin profit margin), and finding out that the same client received a quote from another Am Law 50 firm for $75,000 for the same work. The relationship partner at the first firm wanted to match the lower bid to keep the business; the head of litigation and the firm managing partner decided against it under the logic that it would “send a message that we have been overcharging the client for the last 18 months.”
WGC comment: The client already figured this out. Maybe the competitor is putting excess capacity to use and grabbing this work as a loss leader to make inroads with a new client. Or the nightmare scenario: maybe the other firm has figured out how to do the same work at cost or (gasp) at a slight profit.
3. What productivity means for law firms (8:30): A primary financial metric that Mr. Pietro uses for law firms is “productivity.” This is “average hours per equity partner.” If below industry norms, that’s a red flag as a lender.
WGC comment: Aha! If this is how law firms also measure “productivity” then it is a red flag for clients.
Most GCs I know work for companies facing withering global competition. If they are a supplier (business-to-business) rather than a end producer (business to consumer), they are in a similar position to law firms, trying to balance efficiency with profitability.
The fact that one of the leading bankers to the legal industry is talking publicly about how leverage models and lawyer capacity is meshing with market demand is striking. Note the title that ace Bloomberg writers gave to this YouTube video:
BigLaw’s Banker: I’ve Got a “Robust” List of Firms That May Fail.