While it may change, at present, I believe that the legal services market does not offer a turn-to sector where optimal outsourced general counsel services are readily available to a business community increasingly scrutinizing their current law firm relationships and eyeing new ways in which their business’ legal needs can be met.
Summary of My Previous Lead-In Post
This piece is an extension of my stream of reasoning set forth in last month’s post “The Rise And Impact Of Empowered Chief Legal Officers.” In that piece, I laid out a major paradigm shift occurring in how businesses meet their legal needs as a result of an accelerating transformation of the seller-consumer relationship and dynamics between:
(a) On one hand, law firms, and
(b) On the other hand, businesses that have made the smart and forward-looking business decision of installing sophisticated and empowered in-house General Counsels/Chief Legal Officers and legal departments.
An Opportune Time for Offering the Legal Services Market a New Style of Outsourced General Counsel Services
A great opportunity exists for professional legal service providers with expertise of a general counsel and statesmanship to expand into, redefine, and deliver a new and innovative package of external general counsel legal services to all sizes of businesses. This fresh opportunity has arisen from the same pressures of change driving the rise of empowered in-house legal departments.
The opportunity centers around providing:
- Client-tailored menus of structured fees, for a
- Defined scope of work.
Such an external general counsel package of legal services is the best course of action when a company determines that such option is more cost effective and more prudent to meet the business’ ongoing legal service needs than (a) hiring a full-time general counsel or, alternatively, (b) continuing to rely exclusively on traditional law firms. While the “outsourced general counsel” concept is not entirely new, what is new in today’s rapidly evolving legal market is a thirst for the following:
(i) skilled “general counsel” types of the lawyer-business “ally” mindset, who are in step with the “trusted advisor” philosophy, going hand-in-hand with
(ii) alternative fee structure options.
The question thus becomes: is there a turn-to professional legal service business sector that offers the total package set forth above to chose from? My answer: not yet.
Message to Businesses: Some Law Firms “Get” What You Get, Most Don’t (…Yet)
In my opinion, Stephen Poor, the Managing Partner of Seyfarth Shaw, captured it perfectly in a New York Times “Deal Book” piece last year titled “Re-Engineering the Business of Law,” where Mr. Poor states that:
“True long-term success requires businesses to improve continually and re-imagine how they operate in the face of changing competition and market forces.”
Mr. Shaw hits business performance reality on the head with the above statement. However, Mr. Shaw then goes on to equally capture, in my opinion, how such business performance reality is still not in the vernacular of law firm economics as it is with other businesses when he states:
“Yet this innovative urge, which drives so much of the rest of the American economy, is largely absent from large law firms….
Instead, the measures become balancing rate growth versus discounted fees, lawyer productivity measured in tenths of hours, recruiting the partner with a book of business from one firm to another and similar yardsticks.”
Many of us have “been there, done that” and are no longer doing it for various reasons. But times are changing … some for the better, some by returning to old ways.
The Law Firm Rate Bubble – Is Recent History Repeating Itself In Lieu of Structural Change?
In my opinion, there was a billing rate “bubble” in the 2000’s that like most bubbles was the by-product of loose credit-activity, which outpaced economic fundamentals. Yet, billing rates have yet to properly adjust like a lot of the economy (in comparison, think of housing?). This is not an “anti-law firm” rant — I believe it is simple economics. But we are starting to see a billing rate uptick again in many legal sectors.
A year ago @lvanderpool Lisa van der Pool wrote a very telling article from an indicator standpoint titled “Lawyer Inflation: With Economy Mending, Many Firms Return To Raising Rates.” Ms. van der Pool wisely cited Mr. James Westra, who diagnosed the structural disease far too many law firms face:
“The fact is that a lot of firms masked static productivity with rate increases, which is how they kept increasing profits. That became much more difficult to do starting in 2008, …
Over the last year, as the economy has started to recover, the firms that felt they can do it, have started to raise rates pretty significantly…”
The above words should not be taken lightly as Mr. Westra’s vantage point speaks for itself:
- Foremost to the business crowd, he is currently managing director and Chief Legal Officer of the private equity firm Advent International Corp.;
- Foremost to the legal crowd, he is the former Managing Partner of Weil, Gotshal & Manges LLP’s Boston office.
Three Factors Creating the Opportunity
With all of the above in mind, I believe there are three primary factors that are driving the market opportunity to deliver a new style of outsourced general counsel professional services:
- Businesses Legal Budgets. Due to the challenging global economic climate over the past decade, many profitable small and medium sized businesses who have traditionally farmed out all of their professional legal service needs to outside law firms can no longer fit their legal needs into their legal budget.
- Internal Business Management Philosophies. At the same time, static-minded number crunchers often argue that businesses should not turn to hiring a full time in-house legal counsel (setting aside for now that today is exactly the right time to make such a hire). This is because such analysis is driven by those most comfortable with the “cost” side, which comes at the expense of the efficiency side of the question.
- Continued Predominance of the Old Way Law Firms Operate. In these changing economic times, unlike any other business that are subject to nearly everyday forces of supply-demand as stated by Mr. Westra above (or as I like to put it for attorneys, “cost-value” accountability), when it comes to the most sellers of professional legal services, they are lagging far behind in adjusting their business practices. While the old seller-consumer dynamics still predominately drive most major law firm business (i.e. compensation) models, and therefore business development efforts, I believe the clock is ticking on that approach. This is because such an approach is not a viable long-term business plan for keeping existing clients and gaining new clients. Unfortunately, addressing the paradigm shift is not a priority for most (but not all) law firms as it will require a significant internal culture transformation on many levels, a concept touched on by @Johngrimley in his piece “Why The Billable Hour Is Not The Issue.”
But the paradigm shift ultimately will become a focus for those law firms that have the long-term view for their firms.
My Recommendation– Take Steps to Avoid a “Hobson’s Choice”
Many businesses feel they face a truly “Hobson’s Choice” between (a) their ongoing need for consistent, high-level professional legal services, and (b) the financial reality that they can no longer internally justify the cost of their historical outside counsel’s hourly rates. While unfortunate in the short run, forward looking businesses without an in-house legal counsel should seek out legal professionals:
- With expertise and demeanor that an external general counsel should possess, which includes the mindset of being a “trusted advisor” (which may not always be legal professionals who have served in-house as a general counsel),
- Who can meet both of the elements of the “Hobson’s Choice” set forth above,
and do so through:
- Client-tailored menus of structured fees, for a
- Defined scope of work.