Clients Focus on Process; Law Firms on Profits?
February 18, 2010 | Filed Under Cost Control, Offshore Services
The trajectories of large corporate clients and major law firms shows increasing divergence:
1. Large Corporate Client–Microsoft. News broke today that the software giant sealed an outsourcing deal wiith LPO firm CPA Global. Microsoft has been active in outsourcing legal work to India for some time. This follows on the actions of mining company Rio Tinto with CPA Global (the latter who this week hired Rio Tinto managing attorney Leah Cooper).
2. Major Law Firms–Take Your Pick. Just yesterday, the news started to break that a number of large law firms are reporting higher profits. Some show a growth in revenue, most cut headcount (including partners).
This pop in profits for many large law firms may not be indicative of long-term trends. Stock market fans might say we are seeing a secular uptick in what is a long-term bear market in legal work from major corporate clients.
Microsoft isn’t just converging work from 20 large law firms to two. As legal outsourcing work moves from process and discovery to product and transactions, it is gone forever. So as more of this happens in 2010, 2011 is looming as a real shakeout year, when increasing client cost control measures (in-source, out-source, and re-source) hits the mainstream.
(I follow only a handful of people on Twitter, Ron Friedmann and Jordan Furlong are in this group, and both have insightful things to say on this.)
By 2011, the Am Law 200 may more closely resemble America’s Top 40.
Legal Rate Increases: Bold or a Boomerang?
February 15, 2010 | Filed Under Cost Control, Law Firm Trends
Some large law firms are trying to navigate the murky waters of rate increases. Not easy to do in this market; some would suggest it may not be wise, either, as most large corporate clients are looking to lower costs on an absolute and unit basis.
One thing for certain–it’s a hard issue to explain to the press. A case in point, as reported in Crain’s Detroit Business (reg may be required, sadly):
Rex Schlaybaugh, chairman and CEO of Detroit-based Dykema Gossett P.L.L.C., said his law firm pursued cost efficiencies to improve the bottom line during last year, and was still holding discussions with individual clients about rate increases for this year.
He expected the firm would not finalize rates for a few more weeks, but has generally raised rates an average of 3 percent-5 percent in recent years to keep up with costs.
I am impressed by the candor, and know that the annual rate increases (up until about 2007 or so) were something that managing partners counted on and corporate clients (sort of) expected.
But in the last few years, it’s harder to fathom for clients who are cutting costs themselves and seeing withering international competition for their own products and services.
It appears that some firms are initially using cost efficiencies to bolster profits and moving somewhat more gingerly about translating those actions into lower costs or clearer value for clients.
Mr. Schlaybaugh went on to say that alternative fees are about 15 percent of firm revenue, with volume-based discounts and fixed project-based fees the two most common options.
Of course, any firm with a history of rate increases is really just giving part of those back to clients, not really providing net savings. And GCs need to be able to show that sort of cost improvement to CFOs with a long memory and a short fuse.
Getting more guaranteed work (aka “volume”) in this market is hard for any firm. Saying we will raise your rates unless you do is the sign of a great firm whose talented lawyers are in consistent demand.
But you better be right, or it may come back on you when you least expect it.
Good News for Law Firms?
February 2, 2010 | Filed Under In-House Trends, Cost Control
Upon first glance, this headline from a story in the Phoenix Business Journal would appear to give managing partners some reason for cheer:
A return to the Continental Bank strategy of the 1980’s?
Probably not. After a closer look, you see that what law departments are doing is to cut costs. To be fair, the author quotes a survey from last year that showed budget strategies included:
.. a reduction of noncore spending in areas such as travel, meetings and training. Legal staff compensation also has been impacted by salary freezes or minimal increases.
While those strategies included headcount reductions over the last 18 months, most companies are still focusing on finding cost cuts outside, especially with their external law firms. Richard Susskind noted last week that London-based companies are looking for substantial savings:
…many general counsel say that they are under pressure from their boards to cut legal budgets severely from between 20 to 40 per cent. Naturally, they are turning to their law firms to ask them to rethink their hourly rates and charging models.
It’s clear to anyone who has managed the budget of a law department that 20%+ percent cuts don’t come just from cutting back on travel and training. And beyond a certain point, cutting internal headcount garners only short-term savings, allowing some work to migrate back outside, and impacting risk control and compliance efforts.
So is there good news for law firms?
Yes, in the sense that most GCs are probably more open to new ways of doing things, at lower unit costs. This includes approaches from firms other than their current incumbents.
No, in the sense that “same wine, different bottle” probably won’t get past round one and onto the short list.
Legal Cost Savings: Through the Client’s Eyes
November 9, 2009 | Filed Under Cost Control
In August 2006, well before the current economic downturn, HP CEO Mark Hurd explained his philosophy on cost control to the New York Times:
”Costs and growth are different sides of the same coin,” he said. ”We will spend money to save money and save money to spend money. We will never be done looking at our cost structure.”
For strategically disciplined companies, cost control didn’t start this year and won’t end next year.
Contrast this viewpoint with a recent look at the state of law firm financial discipline from law.com. According to one industry advisor:
“Law firms were very effective at reducing expenses,” … “Now they are saying, ‘We’ve cut to the bone. We can’t cut expenses any more. Now we need to look at areas we can grow our revenues.’”
“…2010 could be a fairly good year. “Firms are much more efficient. They’re lean and mean and ready to profit.”
From a headcount perspective, some firms may have started to look at the problem. From rates and matter staffing, general overheads, and especially the use of technology, many firms haven’t even started. Their clients are years ahead of them and aren’t slowing down.
So I come out on the Mark Hurd side of the cost control coin: you are never done. Here’s one look at the client waters some large law firms may be sailing into:
Client Reality Checks Law Firm Growth
April 29, 2009 | Filed Under Cost Control, Law Firm Trends
The American Lawyer does a great job summarizing 2008 for the Am Law 100:
Nothing grows forever. For the first time since 1991, both average profits per partner and revenue per lawyer dipped last year among the Am Law 100 firms, the top-grossing firms in the nation. And, given the weakness in the market thus far in 2009, another decline seems likely this year.
What’s amazing is the run these firms have had; most other businesses suffered 3 or 4 earnings slides during that period. Hopefully the law firms retained some earnings during the last 18 years to see them through.
There’s also a report from the Financial Times ($), giving a slightly brighter picture, focusing on the interest of US and UK firms in the (theoretically) growing Middle East and Africa. You have to love the eternal optimism that is inherent in managing partner DNA:
While no one doubts that there are genuine commercial opportunities in these places, lawyers are equally sure that there will not be enough work to go round. Almost every senior partner seems to think there are too many law firms there and that somebody will suffer – although all are equally sure it will not be them.
This starts to hint at what is really going on. It’s not just the economy; clients are doing some things differently (beyond just asking for discounts), and won’t go back to the status quo when things turn up a bit. Most firms have to believe and convince key client partners that they will continue to win more work at the expense of others. I think the pie is being carved up, getting smaller, and being filled with mincemeat.
Sometimes you have to bite (gently) the hand that feeds, so the last words are for Aric Press and John O’Connor of TAL:
There will be blood — 2008 was not the bottom, just the beginning.
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