Lawyers In Turmoil

It had to come. Most of the traditional professions are facing radical change; recent press confirms that the legal profession is not immune.

Lawyers have become critical to so many aspects of human and corporate interaction. They have been able to exploit that position through a steady growth in their number, as well as in their fees and salaries. In some respects, the global networked economy sustained their role and status – international business is complex and risky and demands legal advice. But perhaps those costs became too much and drove many to ask questions. Why do legal bills need to be so high?

Attacked On Two Fronts: The Law Firm

The onslaught on traditional law firms began a few years ago, with push-back on hourly rates and billing methods. It resulted in some innovation in service delivery and the recognition by top law firms that they must manage knowledge more efficiently. They also became more creative in marketing. Some started to use low-cost sources of supply, such as India, for a range of core services.

Wharton Business School featured this topic in a recent article, which has been summarized by IACCM analyst Ram Paravasthu:

“With most organizations under financial pressure, a Wharton research article finds several enterprises beginning to pay more attention to the value they receive from their lawyers. According to Susan Hackett from the Association of Corporate Counsels, a new approach to value is necessary because law firms had become so expensive that their fees often outstripped the value of the problem they were brought in to resolve. She observes “You can have many lawyers and paralegals all billing on a matter worth $50,000 of exposure adding up to a grand total of $250,000. That’s crazy.”

In the United States, the Association of Corporate Counsels (ACC), which represents in-house lawyers who typically hire outside law firms for specialty work, has introduced a new set of guidelines for law firms and corporate counsels. The guidelines are designed to make both sides work to keep costs in line with the value of the legal services provided, while assuring a fair return to law firms. The arrangement is similar to the types of agreements made famous by Japanese automakers and their suppliers that create value throughout the supply chain. The suppliers, in this case law firms, agree to provide their services at a fair cost, though perhaps not necessarily the lowest cost, and client companies agree to provide a steady stream of business.

The ACC also has drafted a sample covenant for companies to share with their legal providers that outlines specific steps the two sides could agree to take. For example, the covenant calls for clients to define objectives in the engagement, pay bills promptly and understand that budgets may need to be revised for unforeseen events. Law firms would agree to learn the client’s business and strategic objectives, give honest feedback on whether the client’s objectives in a matter are realistic and attainable, and use appropriate staffing to pursue a case.”

(Read the full Wharton article here: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2231)

Attacked On Two Fronts: The In-House Lawyer

A Conference Board article suggests that in-house counsel are also vulnerable.  With other corporate staffs facing cut-backs in numbers, costs or both, lawyers cannot be immune. Yet lawyers face increased workload because of governance issues, heightened business risks, extensive contract renegotiation etc. So they have to become more efficient; working practices must change. However, according to the Conference Board, cut-backs are counter-productive – they do not lead to efficiency, they lead instead to greater use of external law firms!

I turned to David Perla at Pangea3 (a leader in outsourced legal services) to ask his opinion:

“The article has a degree of accuracy, but misses the point.  The point really is that in-house departments, at whatever size, continue to be over-reliant on law firms.  As a result, those departments find it difficult to cut law firm spend and therefore end up cutting head count.  In-house departments should focus on doing more sophisticated work in-house (much of which even today is still sent to law firms), and using alternative providers for all of the day-to-day operationalized work, such as repeat, high-volume contracts, contract management and CM software implementation and data migration, legal and business research, corporate secretarial work and the like.  Pangea3 provides these services, as do many of the alternative providers mentioned in the article.  But in-house legal departments need to look at alternatives when times are good, and wean themselves off going to law firms for the tricky/complex work – which should be handled in-house.  We did just this at Monster.com, hiring non-lawyers for day-to-day contracts (such as sales agreements, co-branding agreements, nda’s, etc.) and for things like cease & desist letters.  We even used those people for due diligence on pending acquisitions.  That free up the lawyers (including me) to do work that previously went to our law firms, such as M & A drafting and negotiation, complex contract negotiation, litigation strategy and securities work.  Our law firms got less of not only the day-to-day stuff, but also of the complex stuff.  So it is not a question of whether in-house lawyers are cheaper than contractors (of course they are), it’s a question of law firm use.  Most interestingly, Counsel on Call and Kelly are simply contractors, and part of the problem, not the solution.  LRN and Axiom are alternatives, using a totally different (read – alternative) model to free up in-house resources to handle more sophisticated work.”

Conclusion

The continuing pressure for change will drive radical change in the profession. Efficiencies will come, especially through the use of automation and improved knowledge management. But impatience may grow, partly due to the innate nature of the law, but also due to the complexity created by the lack of international standards. Many leawyers understand and respect the need for change; but can they respond with sufficient speed and creativity to satisfy the corporate budget owners?