As its first topic of focus, the Council of Luminaries has decided to have regular meetings to discuss the effects of the COVID-19 pandemic on the legal industry as they materialize. The objective is to identify developments in the market, at their firms, and within their teams, and to explore potential solutions and make predictions on where things go from here. Key takeaways from each meeting will be published for the public following each discussion.
The below meeting was conducted primarily with the law firm leaders group.
This Week’s Temperatures
Each week we ask the Luminaries to answer these three questions, on a scale of 1-10 with 5 being what would have been their pre-COVID response.
The third temperature question led to a short discussion where it was pointed out that, according to years’ worth of industry surveys, firm leadership is often ahead of the rank-and-file partners and other senior lawyers on the advocacy around non-hourly pricing models. Also, it’s not just different models for the sake of being different, but ensuring that the proposed changes align with the nature and value of the work, and support the firm’s strengths, direction and strategy.
Some firms are more quickly evolving toward more profit/relationship health metrics in the current climate, acknowledging that leaning on traditional metrics like realization and discounts do not always grant the requisite level of visibility into the most influential drivers of performance. One participant also pointed out that it remains critical to protect premium brands and offerings as reducing price on best-in-class services, particularly ones that are experiencing demand and deliver high value to the client, can have a lasting negative effect on firm brand positioning. Not everything should get same type of treatment, and some services are even more valuable to the client than they were pre-COVID-19.
Enforcing Pricing Priorities
Addressing/enforcing pricing policies can be challenging now. One participant emphasized getting out ahead of things with clear, direct messaging on protocols and/or allowable thresholds before approvals are needed to head off bad behavior, which many firms represented by the Council have done in some capacity. Also, what clients ask for and what they really need may be different. In some cases, a cash crisis can drive requests for discounts which doesn’t necessarily address the short-term issue.
The group also discussed the question around to what extent we want partners to be more proactive in reaching out to clients, specifically as it relates to billing/cost related topics, as all agreed that firms should be concerned business partners to their clients in turbulent times. The sensitivity here is that the discussion could often shift quickly to discounts or write-offs, putting partners on the spot to field requests for financial concessions on their own. Some firm leaders have prescribed what they are and are not willing to do. However, it was noted that the effectiveness of these guidelines hinges on clear messaging, including potential consequences if the protocols are ignored, and a strong governance process on approvals is necessary. The tone of that message from the firm will impact to what extent partners “go rogue” when clients call, reverting to the old “ask forgiveness not permission” defense. Remember that partners are reacting with a lot of emotion, and understandably so. This creates opportunity for pricing, LPM and related disciplines within the firm to mediate and help come to sustainable agreement terms.
Communicating with Partners
A number of participants have sent emails to partners reminding them how their teams can help, and underscoring that many have experience dealing with these situations from the Great Recession. One participant described their email as:
Even if it hasn’t happened yet, clients will start coming to you
The pricing team is a resource—and some of us have been through downturns before
If you give relief, clearly state that it is temporary, specifying a date or triggering event that will revert to the standing institutional agreement terms
Some other suggestions for communicating with partners:
Clearly lay out approval process, and threshold of authority of what they can do themselves
Encourage proactivity for industries that you know are hard-hit, and avoid granting an across the board reduction level as it is likely to be abused
Take some time to evaluate the client’s industry and their individual strengths and weaknesses for weathering the storm, as giving concessions to a client that ends up in bankruptcy court has unnecessary negative consequences
Remind partners that we are a business and are going through a tough time too, so they need to think about that and articulate that to clients making aggressive demands that might compromise the firm’s long-term viability—firms can’t always provide 100% deference to client asks
Partners will sometimes deviate from defined protocol to get the answer they want, so be sure to confirm support from practice group/office leadership to plug that potential leak as much as possible
There is often comfort in being able to say that someone approved something, but the reality is that blessing a bad idea doesn’t make it a good one
Handling Large Clients with Big Discount Requests
All participants agreed that there are likely to be some delicate discussions around large institutional clients who enjoy very high fee reductions and other concessions as part of their standing engagement terms. In such situations, reducing fees for them via the common discount or writeoff can put the firm in financial risk. Rather than reverting to discounts in already slim margin, high volume scenarios, focus efforts on closely analyzing how restaffing may be a better option, especially if that client already receives significant discounts, as many large clients already do. Segment matters and target those in the portfolio with big discounts/write-downs as first priority targets for optimized staffing analysis and strategies, including exploration of how increased project management involvement may help. It may also make sense to talk with the client about scope, including whether or not the actual scope matches their perception of it, and revising the engagement’s scope and/or overarching strategy. For example, a client may now wish to settle a matter that it originally was determined to fight.
Profitability and Compensation
Discounts tend to have a direct impact on profitability, which does not necessarily trickle down to partner compensation. Most Luminaries’ firms do not tie compensation directly to individual profitability to a large degree, although there has been some overall movement in that area since 2015. A question is whether a protracted economic slowdown is an opportunity to change compensation incentives, or at least to accelerate the pace of evolution to focus more on margin? The consensus was that it’s difficult timing politically as people are already under a lot of pressure, so “moving the cheese” in such times could be risky. Also, such moves can’t be done at the flip of a switch—it’s probably a 5-year project or (much) more.
The misalignment of incentives and profits, combined with the pressure and people’s propensity to make irrational decisions when under pressure, means we may see some firm failures as a result of this crisis where leadership is not resolute in its dedication to, and application of, measures to weather the storm.
Comparisons to the 2008 Recession
The 2008 financial crisis initiated an unprecedented focus on trimming and streamlining of costs among all law firms, setting new standards for expense minimization and budgetary discipline. As such, those same tactics are not as widely available to use to great impact today—they’ve already been applied, maximized and their potential for benefit has been exhausted. Pulling those same levers hard now will put the firm at risk.
We have seen a massive increase in law department hiring over the past 30 years, but not in times of economic downturn. This could cause shift of demand and capacity to firms and other service providers (ALSPs, etc.) as legal departments historically downsize in financial hard times, but their demand doesn’t disappear in direct proportion. A related topic, Thomson Reuters reports from Axiom that number of weekly applications went from 200 to almost 400 last week; the question is: does this trend create more demand for ALSPs, firms, or both? And can firms take advantage by leveraging legal tech, etc., at a time when there could be great rewards for the firms who mobilize these resources and capabilities effectively to capture share?
One additional factor: the rise of legal ops. While the level of experience and sophistication of legal ops professionals varies, many have been through crises before and have experience working with firms and also finding other ways of getting legal work done. Conversely, as a substantial percentage of the profession’s growth has come in the years since the Great Recession, a good number of legal ops executives don’t have the experience of having navigated a tough recession, and therefore may seek to pull the same levers with their law firms that have already exhausted their potential now. It will be important to be able to understand where on the sophistication spectrum each party stands, and try to diplomatically bring symmetry of knowledge and information to the situation so that appropriate, sustainable solutions can be derived. This exercise can also establish trust and form meaningful bonds between law firm and client business professionals that will pay dividends for years to come.
Keep an eye on how fee issues being addressed now might impact PR later—especially as it relates to the timing or magnitude of rate increases. This could end up becoming a risk factor for the firm if the timing and tone of such conversations does not reflect the nature of the environment.