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LEVICK

June 08, 2016

What’s Next?: Buying Legal

“What’s Next?” is pleased to interview Dr. Silvia Hodges Silverstein, executive director of the Buying Legal Council.  Dr. Silverstein helps companies and institutions procure appropriate legal counsel. She also teaches courses in law firm management and law firm marketing as a Lecturer in Law at Columbia Law School, as well as serving as an Adjunct Professor at Fordham Law School.

When more and more institutions are seeking immediate and/or supplemental legal assistance, what does it mean for the economy?  

Clients today have become very deliberate about which firms they select for which types of matters. They want the right firm for the right price at the right time. When clients analyze their legal spend, they look for price drivers. They might detect that firm size and location influences the hourly rate of a lawyer. The client will have to decide whether she indeed needs a “Big Law” attorney based in Midtown Manhattan, or if the work would be done just as well by a lawyer from a smaller firm or based in another, less expensive, city.

In a further step, the client might evaluate if she, in fact, needs a law firm to handle the job or if an alternative legal services provider or a legal process outsourcing company would be able to handle her work.

In the last few years, a lot more work has also been brought in-house, which certainly influences the demand for legal services. The growth of in-house legal departments has resulted in a decrease in corporate reliance on outside counsel. Clients are simply looking for sensible alternatives.

According to Thomson Reuters’ Peer Monitor, since 2009, when demand for legal services went down by 5.1 percent, demand for legal services has remained essentially flat to slightly negative. However, I expect demand for alternative providers to continue to grow. Demand in some areas of the law will shift to them.

What are the biggest trends in the marketplace right now?

For the past decade or so, clients changed how they buy legal services. As I mentioned, the growth of legal departments means that in-house lawyers handle an increasing volume of work. So instead of buying, clients “make” the service themselves, bypassing the need for law firms.

There has also been a lot of change in the number of law firms clients regularly work with. For a long time, clients used one or two law firms, their “trusted advisors” for all or most of their legal work. Then, there was a period where everyone in the company was able to hire law firms, which resulted in large companies working with hundreds of law firms. This was hard to manage and gave the client no purchasing power. The convergence trend, kicked off by DuPont with their “Legal Model” in 1992 started to change this. Clients have since been on a campaign to again reduce the number of firms they regularly work with. It is common now to have panels of “preferred provider” firms.

In the last decade, and in particular since the economic crisis of 2008/2009, many clients started to introduce cost control measures and legal spend management. They brought in Legal Procurement to assist legal departments to carefully scrutinize law firms, how much and how they charge. Clients demanded non-hourly, “alternative” fee arrangements and increasingly relied on technology to modernize their approaches. They became more and more unwilling to pay for work they deem inefficient and unnecessary, such as overly long legal documents prepared by inexperienced associates.

In brief, the demand for legal services has been flat, but there is a lot going on. We haven’t seen the end of this development.

How has the law firm-client relationship changed in the last few years?

General counsel and legal departments are no longer the only buyers of corporate legal services. Legal Procurement, the department or corporate function responsible for acquiring goods and services, is quickly gaining importance in the United States as well as in Europe.

Companies with significant legal spend were among the first to embrace Legal Procurement, in particular in highly regulated industries such as pharmaceutical companies and financial services institutions as well as energy companies and utilities. These companies started to involve Procurement in the evaluation and selection of legal services providers in the early/mid-2000s, with the earliest Legal Procurement activities dating back to the mid/late-1990s.

It is typically the CEO or CFO who brings in Procurement. Top management looks at legal spend and tells their general counsel to work with Procurement, as Procurement can help her get a grip on her budget.

Firms should rethink how they deliver and manage legal services and how they market themselves. Procurement professionals demand predictability, project and budget management even more than most general counsels. Understanding which metrics Procurement uses when evaluating law firms, is essential. Procurement believes that if you know your business, you should know how long it takes to deliver your services and how much something should cost. Not all firms have a good understanding of this.

Why have companies changed their buying behavior?

In many corporations legal services used to be more or less exempt from the cost scrutiny other business units and functions have been facing for years. The recent financial crisis acted as a catalyst and sped up the process for the adoption of Legal Procurement. At the root of this seismic shift are: Publicity about billing practices, big ticket spending, increased transparency, and profit pressure.

What are the risks of cost cutting for clients?

Poorly done, cost-cutting often means demanding discounts. When Procurement forces outside counsel to cut their rates, in-house counsel worry that the quality will suffer. Moreover, firms’ invoices are typically a function of rates times hours. Reducing the rate gives the client no information about how the firm intends to staff the matter (how many people, what level) and how efficient they will be nor how the firm will manage the matter. In addition, it will tell you nothing about how much the bill will be. In order to be worthwhile, Legal Procurement needs to be done in a more sophisticated way that looks at total cost of ownership.

Yes, Procurement does care about cost. It is expected to achieve savings for its employer. But this can be done in a number of different ways, not (just) by insisting on sizable discounts and paying less. Other ways are using less of the service, finding alternatively sources to get the same results or even eliminate the need to buy outside legal services. In the industry, a call for preventative work (“less for less”) is starting to replace the former battle cry of “more for less”. Such an approach should reduce the risk associated with cost-cutting. It’s a Brave New World for Legal. Only the firms with courage, conviction, and process insight will continue to prosper.

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