5.8.20: 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.

ALSP Incorporation into Traditional Law Firm Culture and Work

The Internal perception of ALSPs at law firms is often different between firm management and partners; management sees them as a useful tool, partners often have an impression of inferior skills and capabilities, which is not actually reflective of today’s talent pool. The perceived inferiority of ALSP professionals sometimes creates brand concerns internally among partners who cling to the idea that all legal work is sophisticated and requires a certain profile of individual to perform it.

Some clients have expressed the impression that firms are “hiding” these resources so they can charge more for traditional timekeepers. However, the reality is that many senior partners’ inaccurate impression of the capabilities of non-partner track lawyers, combined with their frequent unfamiliarity that such resources are accessible to them or how and when to utilize them is what is creating the majority of the issue. Beyond these nuances, change is fundamentally hard in the first place. Firms could often do a better job of promoting these resources internally and educating partners on their skills, capabilities and benefits. Until these hurdles are overcome progress may be slow. As in many cases, while not the ideal or intuitive solution, clients asking for these resources will help accelerate partners’ adoption cycle.

Firm leadership’s continued focus on cost cutting – rather than innovation – is part of the problem as well, particularly in the context of the crisis. Firms with progress to be made in formalizing and scaling alternative resource usage will need to shift some focus to educating and incentivizing their integration into legacy workflow models.

The Discount Demand/Imperfect Communication Pattern Continues

The group is continuing to see rigid demands for aggressive discounts, which continues to be symptomatic of more unilateral procurement-driven actions. As these communications often go directly to partners, there is a recognized priority on ensuring that partners are engaging the appropriate firm resources in developing a response and counter-proposal strategy. If the issue isn’t escalated to the proper client contacts who can engage in a discussion of options beyond the demanded discount, there is little opportunity to minimize the damage. There was consensus that while short-term irrational demands will persist, long-term structural evolution needs to take place.

To help mitigate these risks, the Luminaries shared ideas they have been implementing to closely monitor COVID-related fee reductions to help identify issues and target efforts to mitigate irrational—or at least sub-optimal—decisions. One Luminary is proactively approaching partners and encouraging them to include them in the discussions with clients during this time so they can contribute ideas responding to client issues. Analysis of client sector data would likely be informative of problem areas and illustrate opportunities to help.

These unique times and challenges really benefit from the creativity, objectivity and analytical capabilities that mature pricing and innovation teams can bring to the table, but in many cases pricing, business development and innovation teams aren’t brought into the conversation. Some partners are even deliberately going around the pricing function and going straight to the billing department to implement COVID rate reductions, despite firmwide policies against such actions.

Finally, clients that prioritize diversity should realize that unilateral demands for low rates can negatively impact it, because it can inhibit promotion of diverse attorneys, or incentivize firms to staff them on other matters where the financial impact to the firm and professional development opportunities for the lawyers will be more advantageous.

Productization and Traction for Service Delivery Transformation

One Luminary received word from their Chairman/CEO level that there was an intent to invest in new ways of doing work via technology and expanding non-partner track resources. COVID has, in some cases, been an adrenaline shot to get to market quickly on taking a solution-oriented approach and productization of services. Having a unified integrated strategy is often challenging in a decentralized environment, so having leadership support and enforcement around the opportunities for client service and leveraging the narrative around being cost conscious in innovative ways is crucial to adoption.

That led to a question: is adoption more likely where the innovation, pricing and LPM functions are integrated under the same department? Many firms have them centralized, but not all have them incorporated with each other. The consensus was that the more of these functions that live under one roof, the more effective they are likely to be.

Still, some firms experience challenges due to somewhat blurry lines between these functions. One issue that arises is these separate functions sometimes identify and pursue the same efficiency/process opportunities simultaneously and in an uncoordinated ways. Further complicating the issue, often partners who are approached with the same concept or idea from different teams don’t connect the dots, duplicating efforts of both teams and compounding time partners are spending on working through the details. This underscores internal confusion over these new functions. Synthesizing them helps make sure no time is wasted and provides a clear idea of what can be done, but that often requires formal communication and orientation of partners. Fortunately there is a heightened interest in creativity and solution-orientation right now, so the stage is often set for progress.

One Luminary has an innovation committee of lawyers which can help channel energy; another has similar group that is a cross-functional roundtable which brings lawyers, tech, and pricing so necessary stakeholders are involved. The biggest question related to effectiveness, however, may be the ability of both firm leadership and the teams themselves to convince the firm’s own attorneys to consider innovative delivery models.

Disconnects Based on Asymmetric Understanding of Relevant Economic Principles

The group reacted to some comments from the Client Side Luminaries about the disconnect between messaging about cost reductions in light of the strong numbers posted in the AmLaw 100 report. On the surface these seems to be a contradiction between the messaging around Am Law firm profitability/revenue survey data and what they are being told about efficiencies and cost containment. Clients are trying to reconcile why firms can have record financial performance and still have to work on being innovative and efficient. They need to take the full economic picture into consideration. A substantial level of misunderstanding on professional services economics underlies much of this hostile perspective, but that’s understandable given the opposing perspectives. Legal departments support their organization’s business; lawyers at law firms ARE their organization’s, business, so they must be regarded by clients the same way they regard their companies’ products or services. The dynamics created by accrual vs. cash basis businesses also underlie differences between how law firms and companies structure their enterprises and operations. None of the nuances of these dynamics are intuitive, but they are important to achieving understanding.

It is also instructive to look inward, too. Until March, the US economy had been booming for several years, meaning their companies also had banner financial results, and yet they are now working hard to cut costs, as are firms, to be sustainable. The AmLaw report doesn’t include any of the crisis-related interruptions in the market, either, despite being released during it, so that is an important filter to consider.

The Luminaries expressed dismay that the client perspective seems to be that firms should have to pay a penance for prospering in good financial times, that they “make too much money.” This underscores a curious resentment toward firms that is not normally present in other customer/supplier dynamics. “Clients have begun to talk about legal services as if it’s health care, where there’s some moral obligation toward affordability. But we are under no obligation to provide services at any price we did not set.”

We cannot ignore principles of efficient markets in a capitalist system. Market pricing is often abstract on the client side when it comes to pricing/rate dynamics—like firms, they have inward-facing benchmarks through which they filter and derive outward-facing assumptions. Sometimes these benchmarks are formulated as a function of their budgets, which are developed as an internal exercise and projected onto the market. Other times benchmarks are created using numbers from differently-situated providers that are not indicative of true substitutes. Firms are not required to sell services for under market value simply to help clients meet their budgets—or to help in-house counsel or legal ops meet their KPIs. The market for talent means a client may not be able to have the timekeepers it wants if other clients are willing to pay more for them. Firm opportunity cost plays a factor.

Opportunity cost and selling at market price are principles that client companies all exploit as well—they won’t sell goods or services to one party if all others will pay more for them, but this is often forgotten by the “law firms make too much money” crowd.

A more productive conversation should be had around how can clients reward firms for delivering the results they want as opposed to simply dissecting individual billing rates—which are just unit costs. Trying to simply drive down billing rates one-by-one to the lowest possible number without regard to which units you need the most, how many units of each kind you really need, and what kind of units will be available at that price is an unsophisticated approach to a complex problem. It is incredibly time-consuming and costly for both parties to engage in this obsession on the minutia when a more strategic vision and conversation would better align goals and incentives and illuminate a more productive path to achieving them.

Legal departments are measured on spend—and discount is easiest lever. Legal departments sometimes overlook the fact that the singular focus on lowering the cost of legal services introduces risk to the enterprise that is indeed quite expensive by comparison. The old phrase “If you think it’s expensive to hire a professional for the job, wait until you hire an amateur” (or something to that effect) is a relevant consideration.

Elevating the Conversation

It seems most GCs are more concerned about selecting the best firm for each job than they are about the costs associated with it. There’s not much actual incentive to choose a lower tier firm. It fails a risk vs. reward analysis. The trick is making the optimal selection of those providers within the constraints of the allocated budget.

Enlightenment and education is what’s needed, but we often can’t get structural change progress without the GC being involved, so we may need more engagement in these discussions at that level. The GC’s hand in defining what is valuable (and what is not) to the business could make a big difference and eliminate many frictions, but there are too many disconnects plaguing most departments, especially considering that GCs are often very separated from implementation of finances and operations. Of course, firms suffer from similar coordination issues as well, so it’s no doubt the path to nirvana is a bumpy one.

The decentralization of decisions within enterprises is also the cause of some of the frustrations, compounded by the disconnect between rational vs. irrational decision-making, especially considering that “rationality” has a specific meaning in economics. In law departments, the coordination challenges arise between the GC, procurement, operations and service providers. In firms these challenges materialize between management, partners, business professionals and clients. We should all keep this in mind when in the moments when frustration eclipses objectivity.

There is an inverse rationale that has developed in legal services that dictates that the buyer sets the price, which is not how markets work—the seller sets the price and it’s the buyers’s decision to buy at the seller’s price or not. Change the context and the logic is clear: Samsung has no obligation to sell a $500 TV to a buyer who only has $100 to spend no matter how bad that buyer may want it, or how much they don’t like that it costs $500. Samsung has a market for TVs at $500 that allows them to stay in business and compensate their investors, so that is what they do.