The Sky is Falling for Law Firms (or Not)

Confirmation bias is a source of comfort. Faced with the choice between changing one's mind and proving there's no need to do so, most of us get busy on the proof. If you have an opinion whether the market for legal services is changing, or not, you can find plenty of ammunition from recent studies, surveys, and headlines.

If you expect that tomorrow will look very much like today, you seem rather safe in betting on the resiliency of the status quo:
Don't Worry, Law Firms, Your Clients Still Want You
The 2015 Am Law 100: Revenues Rising, Profits Popping
Legal Spend Trends: Big Law Billing Rates Rising
Legal Revenue Grows as Elite Law Firms Set the Pace
If you are of the mindset that when an irresistible force meets an immovable object, the irresistible force wins everytime--by eroding the object, at which point its immovability is moot--you can certainly find evidence that the irresistible forces of change continue to assault the immovable legal market:
Wake Up Call: Citi Report Finds Revenue Slowdown
Survey Finds Corporations Looking to Reduce Outside Legal Spending
In-House Lawyers are Reining in Law Firm Spend
Corporate legal departments to give law firms less work in 2016
Spending in Law Departments is Rising, But the Money Isn’t Going to Law Firms
As Part of ‘Pervasive Trend,’ Companies Still Moving Legal Work In-House 
Citi survey finds declining law firm leader confidence 
Firms not responding to digital age, annual snapshot shows
If you dig into these reports, you can come away with any conclusion that fits your priors. If your aim is to reconcile the reports, you face a bit more of a challenge. To me, attitudes seem to have moved a bit more than reality. But the reality has shifted. Law departments are redirecting spend towards internal headcount, technology, and alternative service providers. The incomparable Ken Grady estimates that, in the last three years, companies have pulled over $8 billion of work away from large law firms. That is not an immediate existential threat to a $100+ billion industry. But it is enough to sting, especially if the trend continues its upward trajectory.

Every industry has a KAP Gap--i.e., the gulf between Knowledge, Attitude, and Practice. It is unsurprising that it takes time for shifting attitudes to manifest in practice.

Alternative fee arrangements are an example of a KAP gap in the legal market. The hilarious David Cambria of Archers Daniels Midland compares AFA's to teenage sex--more people are talking about it than doing it, many of those doing it are not doing it well, and the consequences for making a mistake while doing it can be catastrophic. In 2009, 77% of CLO's reported that they used AFA's to control costs. In 2015, that number was down but was still at 60%. Yet, the most recent data I could find puts AFA's at just 7% of total corporate legal spend. The talk around AFA's outstrips the reality of their usage. I don't know what the real figure is, but this comports with David's observation. Toby, likewise, will tell you that corporate clients are forever asking for alternative pricing and then opt for the billable hour with a discount. None of that is a knock on AFA's. Rather, it is an illustration of a KAP gap.

Still, attitudes have shifted. Of the above reports, I will focus primarily on the great surveys from Altman Weil. The Altman Weil surveys are excellent, publicly available, and have been consistent over an extended period of time. First, the Altman Weil Chief Legal Officer survey. In 2005, only 20% of law departments intended to decrease their spending with law firms. In 2010, still in the aftermath of the Great Recession, 30% of law departments intended to decrease their spending with law firms. In 2015, the number had returned to its Great Recession peak of 40% despite the economic recovery. I charted the shift using over a decade of Altman Weil data:

That appears to be more than just a Recession-caused spike. At the same time, even the worst surveys suggest that, at a given point in time, 60% of law departments do not intend to decrease their spend with external counsel. Combine that with the KAP gap, and we are not exactly in the midst of massive disruption.

Still, law departments believe that they are putting a fair amount of pressure on law firms to change:

But law departments don't believe that law firms are actually serious about change:

So why aren't law firms more serious about changing? Fortunately, Altman Weil asked that very question in the 2015 edition of their annual Law Firms in Transition survey. The managing partners responded that clients aren't asking for it:

This finding prompted the redoubtable Bruce McEwan to respond "the rational mind reels. At the very least, one must step back to their very own answers." Bruce was remarking on the fact that the law firm managing partners are, in many ways, more aware of the pressure to change than their law department peers. The managing partners seem to believe that many aspects of the New Normal are here to stay:

And they are more convinced than ever that the pace of change will accelerate:

But--and this is an important but--they believe that they are almost as serious about change as their clients. The biggest gap in comparing the managing partner survey with the CLO survey is the perception as to how serious law firms are about changing. The MP's and CLO's have almost the same view of how serious clients are about change. But MP's are considerably more sanguine about how serious firms are about responding to the challenge of change. That is, there is not much a difference between the client/firm perception of client pressure and the firm perception of their seriousness about responding to the client pressure.

Moreover, the MP's are even more bullish on the adaptability of their partners. Though the below does not exactly scream flexibility, it does suggest that MP's see their partners' adaptability as being in line with the level of client pressure:

Given my priors (having actually worked in a large law firm), I have to agree with Bruce that the rational mind reels. Still, I think you can probably read the data any way you want and then find additional data that supports your position. I hope to offer a slightly different take. I think we remain locked into an uncomfortable equilibrium, in part, because law departments and law firms are having the wrong conversation. I'll explain in my next post.

Casey Flaherty is the founder of Procertas. He is a lawyer, consultant, writer, and speaker focused on achieving the right business outcomes with the right people doing the right work the right way at the right price. Casey created the Service Delivery Review (f.k.a., the Legal Tech Audit), a strategic-sourcing tool that drives deeper supplier relationships by facilitating structured dialogue between law firms and clients. The SDR is premised on rigorous collaboration and the fact that law departments and law firms are not playing a zero sum game--i.e., there is more than enough slack in the legal market for clients to get higher quality work at lower cost while law firms increase profits via improved realizations.
The premise of the Service Delivery Review is that with people and pricing in place, process offers the real levers to drive continuous improvement. Proper collaboration means involving nontraditional stakeholders. A prime example is addressing the need for more training on existing technology. One obstacle is that traditional technology training methods are terribleCompetence-based assessments paired with synchronous, active learning offer a better path forward. Following these principles, Casey created the Legal Technology Assessment platform to reduce total training time, enhance training effectiveness, and deliver benchmarked results.
Connect with Casey on LinkedIn or follow him Twitter (@DCaseyF).

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John Gear said...

So something on the order of 100% of Americans intend to lose weight when surveyed in January each year. Surveys about anything but especially about intentions may reveal as much about what the respondent thinks is the "right" answer as anything else, particularly when there is no consequence for having a gross disparity between the expressed answer and the hidden intention.

The hidden caveat in all questions about the future is "unless I'm forced to do otherwise." Rising spending is not inconsistent with expressed intention to reduce spending; indeed, every year spending increases may produce a greater fraction of those with intent to reduce spending the following year. "Lord, make me chaste, but not yet" goes the joke.

Maybe the better tactic is to identify and survey only those firms who seem to have figured something out -- say

a) firms that have been able to reduce legal spending while maintaining or growing gross revenues; or

b) firms whose legal spending rose but it happened during litigation that threatened the company's existence; or

c) firms whose legal spending rose but whose overall operating margins improved.

Those are the folks likeliest to be onto something.

Maybe there are a bunch of firms that should be spending MORE on legal help. The amount spent and intentions to make that number go up or down really do very little to increase anyone's understanding.

Susan Hackett said...

You've captured a lot of what folks are thinking about separately in one place here - so thanks for that. I think what sums it up for me is something that my Dad used to say to me when I got stubborn, or entrenched in one way of thinking or approaching a problem: I'll share it here.

Water moves around stones.

I spend so much time working with lawyers and legal service providers in firms of all kinds - traditional law firms, legal departments, legal service providers, tech start-ups you name it - and they're not waiting for the rules to change authorizing new forms of practice, or for clients to better articulate what they need, or for some kind of silver bullet or burning bush that will suddenly make the path they need to take clear: they make the path by walking. It's a lot more fun, as well as a lot more rewarding, to travel with those folks than to hang with the crowd that's holding on by their fingertips, still hoping that what they used to do 10 years ago will once again become the norm if they can just figure out how to market it better.



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