Backstory: GCs Take Matters Into Their Own Hands – Literally

Tuesday, July 5, 2016 - 12:15

Altman Weil, a management consultancy dedicated exclusively to the legal industry, kicked off its “Law Firms in Transition” survey on the heels of the Great Recession. Now in its eighth edition, the survey, released earlier this month, reveals a frightening gap between lawyers and clients.

The gap is so wide that it seems to be spurring corporate law departments to throw up their hands in a manner reminiscent of the famously obnoxious 1960s TV commercial for Anacin pain reliever. A hovering mother tries to help her harried grown daughter with her household chores. Pushed to the edge, the daughter finally erupts:

“Mother, please, I’d rather do it myself!”

That’s where many GCs seem to be. Indeed, Altman’s survey, which in March-April polled chairs and managing partners of 800 U.S. firms, 356 of which responded, including half of the 350 largest firms, suggests in-house departments are morphing into full-service law firms – formidable big-firm competitors – right before our eyes.

No, this is not a sudden development. But the responses to a question added this year by Altman casts an especially bright light on the trend. “Aside from your traditional law firm competitors,” they asked, “is your firm losing any business to other providers of legal services?”

For more than two in three firm leaders, the answer is, “Yes, our own clients are taking business from us now.” Another 24 percent, unwilling to go quite that far, identified client in-sourcing of work as a “potential threat.” No other response, including the threat from non-law firm providers of legal
and quasi-legal services, came close. 

“Mother, please!”

Those numbers – more than 9 in 10 law firm leaders freaking out about competition from their own clients – as eye-popping as they are, do not surprise Eric A. Seeger, who directs Altman’s market research department and consults with firms on strategy. Seeger says that although the question is new to the survey this year, the responses have been foreshadowed in prior surveys. He points to one question in particular that Altman has been asking both law firm leaders and chief legal officers for four years:

“How serious are law firms about changing their legal service delivery model to provide greater value to clients (as opposed to simply reducing rates)?”

Seeger points out that on a scale of 0 (not at all serious) to 10 (doing everything they can), firms consistently have rated themselves as more serious about change in areas such as pricing, staffing and efficiency than clients believe they are. They have been ships passing in the night. Now, however, those ships seem to be on a collision course, according to this year’s survey.

“This doesn’t surprise us because it’s consistent with what we’ve been seeing,” Seeger says. “There’s been no movement, so clients are taking matter into their own hands – literally.”

Why now?

“Clients are always making the buy vs. build calculation,” Seeger explains. “Over time, they find that they’re just not getting what they need in price and other factors from their firms, and they’ve been asking for years. The pace of progress has been too slow on the law firm side.”

Seeger, however, refuses to put the onus solely on the firms. Look at the numbers, he says. While firms rate themselves as no better than moderately serious about changing their model – a median of 5 on the 0-10 scale – GCs aren’t all that ebullient about their own performance, grading themselves harshly when asked how much pressure they’re actually putting on firms to change. The median on that question, for both GCs and law firm leaders, has hovered between 5 and 6 for years. Here firms and clients see eye to eye.

So why aren’t firms doing more? The answer from almost two of three firm leaders is that their partners are resistant to change. And more than half of those leaders say that their partners are clueless about what to do differently. At the same time, they add, the GCs simply aren’t asking.

That leaves plenty of blame to go around.

“General Counsel are not necessarily pushing as hard as they can,” says Seeger. “Knowing the answers is one thing, doing something about it is another.”

In an effort to dig even deeper into the issue, Altman threw in a
“bonus question.” It pits autonomy vs. compensation. Here is how
they put it:

“Two primary elements of law firm partnership that most partners value are the autonomy to manage their own practices and the compensation they receive. If they had to choose, do you think most of your partners would rather sacrifice some compensation to protect their current level of autonomy, or sacrifice some autonomy to protect their current level of compensation?”

Overall, two out of three leaders say their partners would sacrifice autonomy to protect comp, but the responses vary considerably by firm size. As you go up the tranches, from smaller firms (50-99 lawyers) to larger firms (500-999 lawyers), autonomy increasingly takes a back seat to compensation.

Given all of this, and the inexorable downward pressure on demand, it’s not all that surprising that the confidence of law firm leaders, generally an optimistic bunch, is sagging. In 2011, despite the lingering impact of the Great Recession, almost one in four firm leaders evinced a high level of confidence, another 70 percent said they were moderately confident, and only 8 percent said they were feeling low. Now, the high and low figures have flipped: 8 percent have high confidence and one in four are down on the future of the profession.

“We’re seeing that optimism has declined among managing partners in terms of the number expecting to fully keep pace with change in the market,” Seeger says. “It’s not a lack of knowledge or caring or will among law firms leaders. It’s just very difficult to move things forward.”

Scanning the survey and the lawyer-client landscape, Seeger offers one big takeaway: “Clients are still in the driver’s seat,” he says.

“There’s massive overcapacity in the profession, especially in the equity and non-equity ranks,” he says. “So there’s still plenty of opportunity for clients as far as costs go. Law firms need the work. They have created their own problems. These are good lawyers, they’re friends, they do good work, and clients like them. But having more people than work is not sustainable. They have to do something.”