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4.24.20: COVID-19 Crisis Series LAW FIRM

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.

Reactions to This Week’s Client-Side Call

Following the first Client-Side Council of Luminaries call, additional thoughts from the discussion that were not part of the summary were discussed on this law firm Luminaries call, which were shared by two Luminaries who sat in on the client call.

The Luminaries were pleased to learn that those on the client side—mostly legal ops and procurement professionals—are not looking to be opportunistic simply to get huge discounts. Clients are, in fact, empathetic towards the position they are forced to put their firms in and are concerned about those firms’ business continuity. Other highlights discussed from this week’s LVN Luminary Client-Side call include:

  • Clients are surprised more firms haven’t reached out proactively

  • There’s wide interest in AFAs now – and also, existing AFA agreements have not been subject to reconsideration or additional scrutiny in the interest of reducing fees.·

  • They want to collaborate on less expensive/more effective delivery ideas now—and won’t penalize firms for bringing ideas for efficiencies now that they possibly could have brought previously.

  • Clients are concerned about potential staff cuts at firms, especially LPM team members and diverse team members. They are watching firms’ decisions, and will be critical of those who reduce headcount in these valuable categories of workers.

  • Many suggested that firms should not assume clients are experiencing financial hardship, and in fact, some are actually trying to find the best way to assign high risk/high value work, or trying to re-sort the work across the department and provider base. This could create an opportunity.

  • Multi-year agreement terms are being regarded as a commitment that they feel they are obligated (or at least want) to honor now.

  • They are watching how firms treat people in terms of equity in changes and cost saving measures.

Responding to Client’s Pay Cuts and Proper Conceptualization of Value

Some clients have taken to pointing out to law firms that they and their staff have taken pay cuts and expect their firms to share the pain. Specifically, some are asking if partners have cut their pay, usually in the context of conversations regarding billing rates as the implication is that hourly rates are the equivalent of salaries and individual compensation. This is a difficult question to handle, as it is often an emotionally-charged issue, but one that must be met with a rationally-based response.

Facing this issue, it may be worthwhile to point out that partners are at risk in ways that GCs are not; as owners of their business, at the end of the day partners will be forced to make personal capital contributions to the business if breakeven revenues are not maintained in order to keep the firm solvent and operational. Plus, in many cases law firm partners already have, in fact, reduced their draws, and often quite significantly. While reduced compensation certainly creates difficulty and anxiety for legal department staff and executives, they aren’t personally responsible for financing their company’s operations if sales erode. It is a delicate conversation, but one which can come to a positive resolution if viewed analytically and objectively.

One aspect of the situation that is relevant to the conversation is the fact that many clients have frozen, or significantly scaled back on, normal work that was in process prior to the crisis. This means that there are less hours being worked and generating revenues, which puts a firm at risk of not being able to cover costs. Further significant decreases to the prices being charged for the remaining productivity that is still generating revenue and helping keep the firm afloat would compound the revenue shortfall and further jeopardize the firm’s ability to maintain operations.

It is also worthwhile to try to not conflate the issue of partner compensation with the price or value of services. The value of representation has not decreased due to macro-economic forces—in fact, given the sensitivity of legal risks right now, the value of providing guidance on how to successfully navigate the crisis may have increased the value of expert counsel.

One effective analogy that was shared by one Luminary who engaged in just this discussion recently was to ask the client if they had reduced the prices of their products or services in response to the current economic conditions. This argument is a way of highlighting that companies’ products and services haven’t lost value to their customers in the recession, and likely their company has not decreased prices of their wares as a result. If they have, it is likely in smaller proportion than internal cost reductions, which is the case for the same reason as law firms—the volume of units sold has decreased, so the costs basis must be minimized to absorb the revenue shortfall as a result of lower sales (not lower prices).

Part of the issue here is that many law firm partners have done a good job over the years of creating relationships with clients that feel very much like they are part of the client’s internal team, which leads those clients to expect these “team members” to share their pain. Regardless, it can be critical to help teach partners to navigate this territory, perhaps even preparing them for proactively on how to confront this conversation with empathy and poise.

New Model and Fee Ideas

While clients may be receptive to new legal service delivery models, there are challenges.

All this must be done keeping the firm’s strategy and brand in mind. For a firm that wants to be known for high-end work, building a low-cost solution to lower end problems can be counterproductive, unless it can lead to higher-end work. All ancillary services should be strategically structured to provide supplemental value to the firm’s core value drivers and brand positioning. Pursuing standalone commodity work dilutes the brand of a firm with core competencies in more sophisticated work. As such, these offerings should only be complements to the complex work at the center of the firm’s brand, rather than being the target work being pursued.

An important distinction was made by one of the Luminaries in how to conceptualize the question of “who do you want to be?”, which effectively is the question that must be answered when considering devoting resources to serving lower-end work. Firms must have discipline and make the distinction between finding ways to more efficiently do commoditized categories of work that support their core work, and chasing growth through commoditized standalone work. This is an important question all firms should ask—not COULD we find ways to do this work, but SHOULD we. It is important to acknowledge that many ALSPs and other providers are custom built for this work, and that is a good thing for firms who don’t want to risk their brand trying to compete head-to-head with niche specialists.

One way to mitigate this risk and protect the brand might be to create a separate brand for commoditized work, although that depends on the philosophy of the firm. It can also be hard to make the connection to the sub-brand.

Developing Approaches for Promoting Efficiency In Lieu of Fee Relief

Again, while clients might be receptive, modified delivery models must be built and partners must be convinced before the effort can be presented to the client. This involves carefully identifying where efforts to re-engineer service delivery methods have the great potential for success.

The first question might be: What work are you already doing for clients that can or should be moved to service centers/captive ALSPs, etc.? Now might be the time to make that switch. The perception of value/complexity of work internally is important to leverage that opportunity.

Initiate the process by getting partner buy-in. Start by targeting appropriate work and appropriate clients. For example, categories of work that historically experience the highest write-offs and write-downs are probably a good place to start evaluating how to provide an alternative solution. A simple value vs. complexity quadrant can help simplify the exercise of identifying promising targets.

It can also be helpful to begin by prioritizing clients in the hardest-hit industry sectors as they have both the greatest need, and will also benefit the most from any degree of additional efficiencies and cost savings that can be achieved.

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