The Goldilocks Quest for a Law Firm

Monday, November 17, 2014 - 13:50

A search for better value in M&A

Since mergers and acquisitions are a focal point for this issue of The Metropolitan Corporate Counsel, I immediately thought of our most recent Enterprise Legal Management Trends Report.

For context, you should know we publish a Trends Report twice each year to deliver an analysis of anonymized legal department data that gets processed through the LexisNexis® CounselLink® solution. We look at billions of dollars in legal spending, millions of invoices, and almost a half-million matters to gain a better sense of what’s occurring in the marketplace with partner rates, AFAs, law firm consolidations, matter costs and more.

Part of the “more” in the 2013 year-end edition of the Trends Report involved three interesting facts about M&A activities that surfaced when we analyzed all the data:

  1. One of the first things that jumped out is that M&A legal fees billed to CounselLink customers jumped significantly from 2012 to 2013, almost doubling the percentage of billings. The data supported reports in the market of increased M&A activity. Evidence of such a significant change encouraged us to look deeper into M&A billings.
  2. That deeper dive led to a second insight. Historically, the very largest firms – those with more than 750 lawyers – dominate the M&A market. In fact, for 2011, that group generated 50 percent of the M&A billings. However, a changeover occurred in 2012 when the next tier of firms – 501-750 lawyers – took the top spot in M&A fees, and that tier increased their share even further in 2013.
  3. Knowing that all M&A deals and work effort aren’t equal, we also decided to look closely at high-value M&A activities – defined by CounselLink data where outside counsel billings exceed $1 million – and saw that the market share gap for this slice of data was even more striking. In other words, the second-largest tier of firms was taking important work away from the very largest firms. For 2013, that second tier handled more of the high-value M&A work (51.9 percent of the billings) than all other tiers combined. The very largest firms had only 29 percent. 

Where there’s a clear trend, there is always a story. What’s driving the shift of work from the top-tier firms downstream to another group?  With corporate counsel continuing to operate under budget pressures, a driver must be cost savings. Industry studies, as well as our own Trends Report, support the fact that generally, the larger the firm, the higher the fees.

Looking for value beyond M&A deals

Our very first Trends Report, released six months earlier, identified a related trend to what we found within M&A data. While analyzing data for that report, we looked at total legal fees billed to CounselLink customers for all matters by law firms of different sizes over a four-year span. Here’s what we found:

  • In the 12 months ending June 30, 2010, the very largest law firms grabbed 26 percent of the legal fees paid by corporate clients. That percentage dropped to 20 percent for the 12-month period ending June 30, 2013.
  • During the same four-year period, firms with 201-500 lawyers grew their share of legal fees from 18 percent to 22 percent, bypassing the largest 50 firms.
  • Taking another look at the data using a sharper focus – litigation matters generating outside legal fees of $1 million or more showed dramatic results. These are cases that all firms with significant litigation practices are hungry to have, and what we saw was that the very largest firms moved from a 32 percent share of this work in 2010 down to 19 percent in 2013. Alternatively, firms with 201-500 lawyers almost doubled their share of high-fee litigation work, growing from 22 percent to 41 percent in the same time span. 

So we’ve seen both high-value M&A deals and high-value litigation cases being entrusted to relatively smaller law firms to handle. The data is more compelling that this trend is significant. As yet another indicator that managing costs is a likely catalyst driving the trend, the first Trends Report also highlighted a noteworthy Alternative Fee Arrangement statistic. The group of firms that’s gaining share of high-value litigation work (201-500 lawyers) managed to bill nearly twice as much work under AFAs than the top tier (750-plus lawyers) during the 12 months that ended June 30, 2013.

Defining the Goldilocks firm

The beauty of data analytics is its usefulness in proving (or sometimes disproving) industry anecdotes. We’ve all heard of the budget pressure on corporate legal departments – now we see evidence that such pressure is compelling corporate clients to evaluate alternatives to traditional solutions for handling important legal issues.

Essentially, legal departments are being driven to behave a bit like Goldilocks – to find law firms not too big, not too small, but just right. It makes good economic sense. With the high-fee/high-profile M&A and litigation matters already discussed, corporate clients are proving they can get favorable outcomes at lower price points, which translates to greater value. Those kinds of results are on every corporate legal department’s list of key objectives.

Realistically, Goldilocks firms are not defined solely by size, although that’s an important characteristic and reasonable starting point when exploring alternatives. To discover a firm that’s “just right” for handling important legal work, size can be an indicator of many characteristics. Rather than looking for the largest firm, it could be financially beneficial to find firms that are:

  • Large enough to provide full-service capabilities
  • Large enough to cover multiple practice areas (especially with expertise in specific practices)
  • Large enough to have adequate capacity (staff and resources to handle your complex matters and/or high-volume, repetitive work)
  • Large enough to cover geographic locations that facilitate collaboration, efficient workflows and the matters being handled

More than size matters

For a general counsel whose law firm panel has multiple firms, chances are good that a couple could be viable Goldilocks candidates. They’re large enough to have the infrastructure and resources required and may operate with lower rates than the largest firms. Starting with firms where an existing relationship is in place is usually desirable when looking to execute on a convergence strategy.

However, these are decisions to be made carefully, applying a high level of due diligence. There are a host of attributes to consider about potential firms. By using a combination of data from internal enterprise legal management systems, subjective assessments from corporate counsel, and consulting outside sources of law firm and industry statistics, a comprehensive analysis should consider data points such as:

  •  Historic track records and outcomes
  •  Communication effectiveness
  •  Hourly billing rates for partners, associates and other timekeepers
  •  Matter lifecycle costs and timelines from start to finish

Better yet, compiling a formal scorecard rating of all the firms on the Goldilocks shortlist would be the ultimate decision-guiding tool. There are outside experts, including the CounselLink Strategic Consulting team, who can guide legal departments through the entire activity from start to finish.

With a reasonable amount of upfront work selecting the metrics to evaluate – and the weighting importance assigned to each metric – a relatively objective process can be created to find the Goldilocks firms. For example, a law firm scorecard could evaluate, assess and rank firms based on:

  •  Overall satisfaction rating of the existing relationship
  •  Proven results for different matter categories
  •  Responsiveness and accessibility of key partners at the firm
  •  Efficiency in handling routing activities
  •  Flexibility on pricing and willingness to use AFAs
  •  Budget accuracy and transparency
  •  Invoice accuracy and promptness
  •  Use of technology for tangible advantages

There should be a Goldilocks firm in your future

Getting better value from outside counsel is always a worthwhile goal, and assigning the right kind of firm to the right kind of work is a reasonable approach to use.

We know there are “bet the farm” cases where it makes no sense to take the Goldilocks approach. Where the situation demands having the greatest amount of established expertise and horsepower, general counsel need to turn to firms that are proven winners, and these are often the largest firms.

But for the rest of the legal work most corporations face, biggest is not proven to always be best. It’s worth considering a limited trial run to test new alternatives (both law firms and pricing arrangements) on selected matters. Favorable results could point the way to a long-term solution where “just right” firms with lower rates stretch your legal budget and help the department deliver better business value.

 

Kris Satkunas leads a group effort advising corporate legal departments on improving operations and outcomes with data-driven decisions. As a top data-mining and business of law expert – and principal author on the company’s Enterprise Legal Management Trends Reports – Kris has noteworthy credentials in the areas of matter pricing and staffing, partner compensation, practice area metrics and scorecards.  Kris is a featured monitor at the upcoming webinar, Pulse-Check Survey of Legal Department Operations (LDO): Inside Counsel Perspectives and Priorities. For more information and to register for the event, please visit http://www.metrocorpcounsel.com/event/30861/hows-business-pulse-check-survey-legal-department-operations-ldo-inside-counsel-perspect.

 

 

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