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  Recalibrating for Business Now

Author: Richard Stock - Lexpert, Vol 11, No 8, July-August 2010

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I recently received the executive summary of an industry study prepared by the Canadian Association of Management Consultants. Professionals have a unique perspective on the relationship between companies and their service providers. Our firm, for instance, not only provides consulting services to legal departments around the world, but also works on behalf of these departments to retain law firms, litigation support specialists, legal recruiters and legal software vendors. Highlights from the survey provide a few interesting insights.

Consultants, for instance, reported a deep uncertainty across their industry in 2009: less than half of service providers (40 per cent) expected better results than in 2008; 35 per cent predicted no growth at all in their client base; and the remaining 25 per cent foresaw a year-over-year decline in revenue, due to weaker demand and tougher competition.

This unease was substantiated in the difficulties experienced last year, and clients who hire firms continue to be cautious about spending. Even today the work of legal service providers is being in-sourced and sometimes sent overseas, or it is being scaled back or postponed. Decisions to spend are taking longer, and the market for legal services continues to be depressed.

It could be some time before the market for legal services picks up again, and it is important that firms and departments recalibrate their business practices — not only in preparation of the challenges that await, but also to take advantage of opportunities that present themselves everyday.

Innovations to Fee Structure

There are interesting developments regarding fee alternatives, freelance and contract lawyers, and interesting new start-up law firms with non-hourly-based business models. For the time being, these fee arrangements are usually fixed or capped fees, but the demand for efficiency has led to creative solutions that are both cost-efficient and profitable for firms with disciplined project-management and cost-management capabilities.

A few Canadian firms, like McCarthy Tétrault LLP, are investing in new systems and training for partners and other professionals because they recognize a significant competitive advantage in doing so. Beyond merely accommodating change, these firms are encouraging their clients to become comfortable with this new way of doing business.

Despite the increased focus on value, success-based professional fees are still rare — a paradox due in part to general risk aversion in the legal services sector. It may be mid-2011 before chief legal officers agree to share the financial benefits of successful litigation, transactions and regulatory activity with service providers.

There also remain practical challenges in defining performance metrics. CLOs crave predictability in external fees and for their budgets. More effort is thus needed to define, measure and standardize successful outcomes — not that this is particularly difficult, but few legal service providers have the script, the mastery of the metrics, and the practice to conclude arrangements that reflect a new “value proposition.”

The Year Ahead

The outlook for the next 12 months should be of interest for CLOs, who start next year’s planning in September. It should also be of interest to law firms and other service providers. Emerging market trends range from industry restructuring and sustainability, to regulatory changes, new technologies, globalization and demographic shifts.

The past 18 months have seen an international expansion, as Canadian law firms have opened offices in Johannesburg, Paris, Singapore, Bahrain and Shanghai. Few predict less work in legal services over the next two years, with growth sectors including financial services, energy, resources and utilities.

On the demographic front, legal professionals (CLOs, corporate counsel, law-firm partners) are staying in the business longer than ever — perhaps due to economic necessity or perhaps because they are simply enjoying the ride. This poses a challenge to law firms and in particular to junior partners and senior associates. Premium client relationships, after all, are difficult to come by in a crowded market. At the other end of the professional spectrum, the gestation period for legal talent remains long and expensive with no guarantee of retention.

Procurement practices for legal services, meanwhile, continue to evolve. Demand forecasting, project and matter management and writing specifications for RFPs are more in evidence, but not yet common. There has, however, been a remarkable professionalization of procurement practices for legal services. This development was first seen in government departments, then made its way to institutional legal departments and lately has been seen in multinational corporate legal departments.

Why Rock the Boat?

While efficiency initiatives have already begun, corporate inertia can be hard to overcome. It is a notable exception when a company initiates a comprehensive and structured review of the way it works with external counsel, and especially with its primary firms. Most corporate counsel prefer to “hire the lawyer, not the firm,” one matter at a time. They do not have extensive written terms of engagement in place with their firms, and they tend to satisfy themselves with the usual discount, especially when service levels are very good. So why rock the boat?

There are many reasons for companies to take a look at their relationships with firms every three or four years. These include changes to and relationship partners, changes in the capabilities of primary firms in jurisdictions and countries where they are not yet being used, as well as the advantages of using still fewer firms to do the available work.

The changing demographics of law firms should also be considered. Costs per matter increase with the proportion of senior partners, and as associates gain experience, succession issues and delegation problems inevitably arise.

In any event, there is always room for innovation as a means to simplify work processes and pricing/billing/payment arrangements, as well as the suite of unbillable services to support the legal department. Many firms have become much more skilled at anticipating and exploiting these opportunities when they come up. Yet not everyone is a winner as more CLOs make longer-term commitments to fewer and fewer service providers.

Firms that stand still are being left behind by service providers who have recalibrated to deliver value for the coming years. CLOs should take note and harvest the benefits.

   
 
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