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.
Latest Thoughts on Pricing Impact
Remote work has created some new opportunities to globally integrate around working more seamlessly between places; it no longer matters much where your collaborators are. This could impact pricing arrangements to make them less regionally specific.
Partners are providing less resistance to the pricing team in terms of AFA recommendations or fee relief. There is now much more openness and willingness to rely on pricing teams. This reinforces the progress pricing teams have made since the last economic downturn as pricing/LPM teams are now more frequently regarded by partners as trusted advisors
In some situations, there is a tendency to be more conservative in pricing exercises and less aggressive in negotiations right now due to the overall market influence of the COVID crisis and resulting economic pressures, but as many clients not in hard-hit industries pointed out, they feel their standing fee agreement terms are their obligation to honor, so pricing executives engaged in negotiations now may want to keep that in mind if they feel compelled to give unnecessarily aggressive concessions. Sometimes this is done with the intention of expediting the process of reaching agreement and to hopefully result in undisturbed cash flow, but as has been the theme of most conversations, take an objective and practical approach to the unique dynamics of each situation.
Conversations around value are better if the GC is at the table and can talk about what’s really going on with the company and the firm’s work for it; we can negotiate a give-and-take more effectively in that context. This is different from when procurement departments send out blanket requests in hopes of harvesting savings from the wary and panicked firms who are willing to accept these terms without negotiating—which typically happens when a partner receives these requests and replies unilaterally, without engaging pricing.
Anticipating Potential Client Actions Around Budget Season
Many law departments don’t do their annual budgets until around August, so we may begin learning more about what impact the crisis is going to have over the next year or so in Q3 as that process ramps up. It may be more difficult to get dollars in the door once these projections are updated and business units at corporations are given their directives on spend. This could result in a second wave of negotiations and discount requests once law departments get their guidance and projections for next year.
Some legal budgets are based on with overall company revenue projections, so if those projections go down, the law department automatically knows that it needs to cut its budget proportionally to be sure that overall legal spend remains at a certain percentage of corporate revenue. Many public companies take this approach as they are tasked with meeting Wall Street guidance on earnings. Sometimes this is a rational and pragmatic approach, but be sure to carefully analyze what is high risk/priority work and what is not, and ensure whatever cuts being made don’t expose the client to greater risk.
We may be in for a period of reduced demand as well as downward price shifts. It is important not to cut prices too dramatically if volume is decreasing dramatically as that has a compound effect on firm revenues, and firms will still need to cover their costs. Facing both at the same time is not sustainable for firms and threatens continuity. To keep tabs on demand and be on the lookout for areas where this can become a problem, firms can monitor the volume of new matters opened daily/weekly in comparison to other times, or also look at overall production. Understanding how these are trending will help provide insights on whether or not pricing concessions can be made.
Many expect M&A to pick up later this year, as equity will be at a discount and funds/companies have cash they’re sitting on.
AI Projects
The group was Interested in adoption of AI solutions and whether they spread internally at clients once adoption in one segment of the business proves to be useful; as in most organizations, someone has to try and succeed first.
A big question was how clients approach their firms. Are they mandating use of a solution or is the approach more like, “Here’s the fee I’ll pay, and using this tool may help?” The best approach is to come in and say “here’s our goal—let’s be collaborative in mapping out a process with internal and external resources” – holistically with all right people at the table and all the technologies that could help. Most often, however, clients don’t know where/how they can by introducing AI or other tools into the mix, and that makes the exercise more challenging.
Fostering Collaboration on Efficiency/Cost Saving Efforts
The group understands that clients are interested in new types of solutions, but that really needs to be built through collaborative sessions with key stakeholders and not just a unilateral ask. Ideally a client would provide context to these conversations by leveraging data from their supplier network and sharing best practices. This could especially be valuable on portfolios of matters where there’s higher volume and consistency. It’s easier to scale what is already working than it is to have to reinvent the wheel determining what works and then build and scale it.
All of the Luminaries agreed that having the right stakeholders at the table is crucial to developing new processes and implementing new tools, but it can be hard to drive the “ideal” stakeholder mapping sessions to happen. Hurdles to getting these meetings to happen tends to be time required and influence on spend decisions. Of course, it’s likely to be even more difficult now.
The Luminaries noted that client engagement in innovation initiatives following RFPs is very uncommon. “They ask if we can do all this ‘innovation’ stuff, then never engage with us to execute on it.” Some speculated that it could be because a consulting firm is running the RFP, but neither that firm nor the client knows how to implement. Both buyers and sellers can be unsophisticated, and all it takes is for one side to fall on the low end of the sophistication scale for the potential to be compromised. Both sides also fairly consistently think the other is more capable; both are incorrect. There is great opportunity to drive change through the innovation topics focused on in RFPs, but there needs to be a more coordinated process in mobilizing around it, and people who are accountable for driving it.
Recent RFP/Panel Renewal Observations
RFP volume seems to be lighter overall, with some clients trying to revisit finished RFPs and circling back with responding firms to ask if they’d like to revise their proposals, which firms should consider carefully before agreeing to. Re-scoping, insourcing and re-pricing requests may, however, provide a good opportunity to counter with an AFA.
One Luminary is seeing a strange upward blip in patent litigation. Others are seeing flatness or a slight uptick in individual matter RFPs (where aggressive pricing is expected) but fewer panel RFPs. “That may be because as expiration of panel agreements approaches, they want to sit on old numbers until there is more clarity.”
ALSP Usage
Nobody has seen client demand for ALSP collaboration increase yet, but they expect to soon, possibly as law departments reduce budgets and staff, and often that talent is picked up by third parties, so there are continuity benefits to hiring that ALSP in addition to the savings benefits.
Captive ALSPs (run by law firms as practice groups or affiliated entities) could be a good bridge, but as previously discussed, it can be difficult to do that effectively and responsibly without damaging brand. It can also be difficult for a firm to build a new service offering in this environment.