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2.15.22: Council of Luminaries Joint Meeting

The month’s Council of Luminaries Joint meeting started around rising costs that both in-house and law firms are facing. It led to a discussion about enunciating value to clients. Client Luminary 1 –We continually hear about the in-house frustrations with rising legal costs, but there never seems to be an acknowledgement that law firms have rising costs as well. At what point do clients push back on cost cutting internally?

Law Firm Luminary 1 – We have a client that is doing extremely well financially but froze their legal budget. What does that mean? You’re not going support new deals, etc? The GC used to work at big law firms. Lawyers at big firms have a hard time talking about the value of legal services. So, GCs struggle to define value to their leadership, and budgets get cut.

Client Luminary 1 – Oftentimes the CFO and GC have a conversation. That directive gets sent down to legal ops – then gets sent to the firm. By the time it gets to us, that ship has already sailed.

Client Luminary 2 – I fight this every year. But the good news is we’ve brought our CEO around. We’ve told him to stop listening to consultants and procurement. Our GC just has to show a list of the last 6 extraordinary items that no one saw coming. We are big so we basically have a target on our logo. Where they do put pressure on us, is we are in a fiscal prudence mode throughout the company. They mean well, we do have to be prudent and looking to be cost efficient.

We’ve had discussions with firms in response to their increases. We ask them to be more efficient. Do you need a big office downtown?

We are not going to give away the candy store. But we are looking to be reasonable.

Client Luminary 1 – I agree law firm partners are bad at enunciating value to clients. Management consultants are great at articulating the value. McKinsey, etc., are great at this. Is there training for partners? Are there workshops?

Law Firm Luminary 1 – We are the front line of that train. All the demands in outside counsel guidelines are value adds. We don’t enunciate that. Getting good training for my leadership. I have people running a $300 million business with no experience running a business.

But there’s no billable credit in training on enunciating value. Still, we should be doing it.

Client Luminary 1 – How do rate increase requests come? Do they come with any value articulation?

Client Luminary 3 – Usually we get an email with no insight, no background.

We try to ask – how do we get from point A to point B? Why should we? We are the ones who have to help our GCs enunciate value. We have 3 questions all law firms should be able to answer:

1. What’s happening in this segment of work that justifies marginal increases?

2. Where have/will our services get better?

3. Is there anything that’s changed in the way you compete for work? Have you moved up-market in your competitive set in this area? They say there are other firms that are more expensive. Sometimes small firms compare their rates to AmLaw 5 firms.

All 3 give us a sense of what our law firms are facing, what extra value they are providing and competition. Those that are raising their rates, some firms are starting to price their firms out of the market.

Client Luminary 1 – If I were to summarize, two things:

1. Firms aren’t proactive in communicating the reason for the request

2. Some firms don’t understand that a part of their value prop is that they are lower cost.

Client Luminary 3 – If I ask firms “what is your bread and butter,” they really can’t answer. Maybe only 5 of our firms could give a direct answer.

Law Firm Luminary 2 – There’s a flip argument. A lot of clients’ default is “well there’s somebody cheaper.” But is it an equal substitute?

Also, the CFO cuts the budget, and instead of building a case against it, the GC is ok with it. Then the GC tells the line lawyers, go tell your law firms. Those line lawyers go tell the firms they are not accepting increases, and the partners don’t push back either.

We need some sort of value document. Don’t give a price without a scope; don’t give a scope without a price.

Law Firm Luminary 3 - There are 2 things I see bubbling here.

1. Poor communication – a lot of tone deafness

2. The market has changed significantly in the last 1.5 years, which exacerbates #1

The email that we read at the beginning, it’s tone deaf. There’s no empathy. We all have stakeholders. So how do we articulate with what the firm are trying to articulate?

I’d be frustrated too if someone sent me new rates, I had to explain, and there’s no conversation being offered.

Client Luminary 4 – We seem to conflate discussions around value and market economics.

Law Firm Luminary 2 – Law firms have been shoved around by clients with rate freezes and rebates and the like for a decade, but right now the dynamics have shifted. You don’t always want the cheapest law firms, and I feel like now clients are being exposed a little bit in that the threat that “I can get this done cheaper by someone else” isn’t really happening. At the end of the day they don’t usually want someone else to do it.

Client Luminary 2 – This is the first time that tier one firms have said to me – and we give them millions in work – they tell us it’s not viable to do our work.

I had to say to my boss that there’s been a tectonic shift and that we are no longer driving the bus.

But some firms have shown us where they’ve actually saved us money. And my teams can do the analysis and show what happens if the work stays the same – we can share that with CEO. Typically, they agree. They can be made to understand the value.

Client Luminary 1 – The pendulum has been on the side of the clients for years. But now the pendulum has shifted, it’s at least in the middle now. Partners at firms are realizing they have more power, but client-side folks are not yet realizing they don’t have as much power.

Client Luminary 2 – You’re gonna get what you pay for. If you hire a shit firm, you’re gonna get shit work. We were in a difficult position. We knew that these tier 1 firms saved our butts. We want those firms in our corner; we’re not going to compromise. When it comes to the bigger stuff, I want the LeBron James of tax litigation. And our CEO is lucky if we only pay 11% more. On the routine stuff, we go back and forth a lot. We are driving to the basement – you don’t even need a law firm for some of it.

Client Luminary 1 - In the past say 5 years, firms would give you the “Lebron James of Tax” at the lower price to keep you happy, but that’s shifted.

Client Luminary 2 - And that’s the economic reality we are in today.

But what’s going to happen going forward. Will clients be driving the bus again? I now see second year associates billing $500/hr. They are not adding a lot of value. Partner increases have been reasonable, but the associates and paralegals have gone up much more.

But it does seem everything’s changed. All the rules out the window.

Law Firm Luminary 2 – There was no balance before, this won’t be a long-term equilibrium either. Associate salaries are really high. But we need them so they can grow into the 4th and 5th year associates that do add measurable value. You have to get a scarce resource early on. But not every 1st year is worth what they are getting paid. We’ll see more people on a non-partner track. You’ll have a smaller segment of traditional partner-track associates. So the bill is lower and the rates are fairer, because we don’t need to feed the same size pipeline.

Client Luminary 2 – We’ve said to our firms that they cannot bill time for first and second years. “If you want to have an internal apprentice program, go for it.” Some firms agree. We are ok with them on our file, but not paying for them.

Client Luminary 1 – But isn’t there a value add for young associates: they are being trained on your work?

Law Firm Luminary 2 - That’s the approach we’ve taken. But clients are saying, we don’t want them appearing on our matters at all.

Law Firm Luminary 2 – Incentives drive behavior. We have a client that won’t pay for first years, and will only pay a nominal amount for seconds. So those hours go to third and fourth years that we can bill fully, and they are more expensive. For every action there’s an equal and opposite reaction. Sometimes there’s work that these young associates can do (and sometimes a first year might have 7 years experience in government) and the client is hurting itself with these strict rules.

Law Firm Luminary 3 – When it’s a one-sided conversation it’s bad. But both sides are angry right now. But maybe there’s a credit system or something that’s better, maybe we can come up with something together.

Client Luminary 1 – When you hire a firm, you see the partners. Do we think that firms can do a better job of promoting the work that their associates are adding? Partners are reluctant to give up the spotlight. Why pay for associates you never see? They may as well be ‘back office’.

The value proposition enunciated by firms needs to include technology tools and business professional contributions that increase value of services and avail resources to clients to clients.

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