The Change Agenda: Looking Ahead
The Future: Value billing is on the horizon according to almost nine out of ten lawyers surveyed.
The American Lawyer
By Rees W. Morrison and Aric Press
December 01, 2008
For most of the year, we’ve heard talk about impending change in the world of big law firms. Long before economic calamity gripped the world’s markets, it was hard to miss the conferences, and their attendant speeches, articles, blog posts and commentary, that predicted that we were approaching a new world order. Now that economic calamity has arrived, the talk has only grown.
The exact outline of the change was and remains uncertain. It was to be the product of a confluence of forces that we all could see looming. They are: the change in English law that permits outside investors to enter the legal market place; the rise of rebellious clients who were finally prepared to do more than complain; the advent of a new generation of young lawyers who didn’t want any part of the back-breaking life of Am Law 100 partners; and the expectation--call it faith--that out of the murk and muck of Web 2.0 and the ethos of Silicon Valley, a technological change would appear that would rearrange the law firm landscape.
Naturally, this talk appealed to us. We profit from change. Rees is a professional change agent; consultants won’t protect the status quo unless you insist. Aric is a professional editor; change promotes anxiety about, among other things, keeping current, which is essentially what he sells. And yet, despite our pecuniary interests, we were skeptical. Perhaps we had sat through one conference too many.
As one way of testing whether the chatter had a basis in reality, we decided to survey in-house lawyers. Because we were short on time and resources--and just perhaps because we were looking for a set of answers that might bolster the trends--we chose to post the survey on Legal OnRamp, a professional networking site which we assumed would be home to a group of lawyers well beyond the embryonic stage of change promotion. With the help of LOR’s founder, Paul Lippe, we posted our 35-question, non-scientific survey. Over three weeks in September we received 143 responses. (The complete survey results can be found at surveymonkey.com).
We focus on the 84 respondents who work at companies that have revenues of at least $1 billion. Given the opportunity, they express a great deal of dissatisfaction with their law firms. They want them to be faster, cheaper, clearer, more understanding, more creative, more responsive, more, well, like them. The in-house lawyers repeatedly ask that their firms learn more about the business that their clients do and the pressures with which they deal. At the same time, 82 percent report that the service they get from their law firms is equal to or better than what their companies get from other professional service providers. Not that their firms would know: hardly any bother to conduct surveys of their customers, a foolish policy that is hard to countenance in 2008.
The communication between buyer and seller is not good. Even in the throes of the economic crisis, little change was reported--not in service, methods of payment, or a willingness to try new things. There was one notable trend: of the handful of lawyers who said that their firms had "offered different approaches," the vast majority--14--pointed to flat fee arrangements as the example.
This, then, is a variegated marketplace. There is reason to doubt that broad change is just around the corner. But there is ample evidence that many clients are ready to make important shifts in their legal spending habits. This won’t be dramatic and it won’t be universal but it will be real. It will be, to vary the famous expression of John Lindsay, the former Mayor of New York, "a slow-motion riot."
Here is an analysis of some of the survey results:
Hiring new law firms and firing incumbent firms.
Sixty-three respondents, of the group of companies with $1 billion or more of revenue, estimated the number of new law firms their departments had retained for the first time in 2008. The median was three new law firms while the average was 4.5 new firms. In other words, the smallest companies in that group, those with $1 billion, probably spent something around $3 million to $4 million on outside counsel, and yet they turned to new firms only occasionally. This isn’t the behavior of ruthless transactional dealers who switch firms without compunction.
As to turnover, how many law firms did this group dismiss? They dismissed on average 1.8 law firms (median 1). One company drove up that average with its 20 dismissals; setting it aside, the average was 1.5 firms. Among companies of the size of these, in a given year they might retain 50-100+ law firms. Hence the dismissal level is barely a ripple. Again, there is no evidence of wholesale turnover, of trigger-happy general counsel eager to fire firms.
Instead, these two findings suggest caution in both hiring new firms and firing old firms--the devil you know is by far the best devil.
(A note about the charts below: The first column lists responses, the second column indicates the number of respondents, the third column is the percentage of respondents.)
By 2013, the total number of outside law firms our department uses will
|
Be reduced by 1-20% |
25 |
0.367647% |
|
Be reduced by more than 20% |
14 |
0.205882% |
|
Increase by 1-20% |
8 |
0.117647% |
|
Increase by more than 20% |
1 |
0.014706% |
|
Stay the same |
20 |
0.294118% |
The reduction in the number of law firms used by the largest law departments is projected to continue. Convergence, as it is referred to, of 1-20% got the most votes, at 37%. A smaller percentage (21%) anticipates even more drastic convergence. Mind you, the paring is expected over five years, which could mean a modest cut each year. Note that 30% of these big-company departments forecast that the total number of outside law firms their department uses will stay the same. This survey gives little sense of movement in the rosters--lots of allegiance, in fact--each year (See above). To complete the point, 12% of the respondents foresee the number of firms they use increasing.
The more fundamental point looks at fees paid per firm. If we assume that these big companies prosper, their total legal spending will rise--including the amounts paid to outside counsel. So the five-year future scenario looks to be about the same number of firm, but they will on average get more money.
By 2013, 20% or more of the legal knowledge or advice our law firms currently charge for will be available for free.
|
Don't Care |
1 |
|
|
Don't Know |
30 |
0.434783% |
|
No |
15 |
0.217391% |
|
Yes |
23 |
0.333333% |
|
Grand Total |
69 |
|
Some people foresee increasing amounts of law-related information available for free online, This respondent group, which is technologically savvy enough to belong to a professional social network (Legal OnRamp) wasn’t nearly as enthusiastic about the prospect as one might have thought. A third of them thought that in five years they would be getting 20% or more of what they now pay for online and for free. Doubting Thomases were 21%. But the largest group didn’t know (43%).
This prognostication spells significant revenue declines for law firms. If anything like 20% of their revenue might drop to zero within five years, the outlook is grim.
Between 2008 and 2013, ___% of our law department's spending on outside counsel will shift from hourly (whether flat or discounted) fees to some form of "value" billing
|
>10% of total spending |
28 |
0.41791% |
|
1-6% of total spending |
8 |
0.119403% |
|
6-10% of total spending |
20 |
0.298507% |
|
No change |
11 |
0.164179% |
These senior in-house counsel look forward to a significant shift toward some form of "value" billing; 42% of them anticipate more than a ten percent move in that direction. Another three out of ten of them foresee a shift of 6-10 percent toward non-hourly billing.
As with convergence, however, these changes are expected to take place over a five-year stretch, so each year the shift will be modest--but shift it is forecasted to be.
Between 2008 and 2013, an additional ___% of our law department's total spending on outside counsel will be decided based in part or whole on some form of open competitive bidding, whether formal or informal.
|
> additional 10% of total spending |
22 |
0.328358% |
|
additional 1-5% of total spending |
5 |
0.074627% |
|
additional 5-10% of total spending |
16 |
0.238806% |
|
Decrease, we are moving more to fixed relationships |
4 |
0.059701% |
|
No change |
20 |
0.298507% |
During the next five years, competition between law firms for work will become more common. One third of the respondents look ahead to 2013 and foresee that 10% or more of their spending than today will be awarded after a competitive process. A quarter of the respondents foresee spending in the range of 5 to 10% more than now will be awarded competitively.
But lest you bet on a sea change, bear in mind that 30% expect no change at all in the percentage of outside counsel spending governed by competitive bidding.
Between 2008 and 2013, an additional ___% of our law department's total spending on outside counsel will be spent with the largest 100 worldwide law firms.
|
>10% of total budget |
16 |
24.2% |
|
1-6% of total budget |
6 |
9.1% |
|
6-10% of total budget |
8 |
12.1% |
|
Decrease, we expect broader distribution of law firms |
8 |
12.1% |
|
No change |
28 |
42.4% |
Many people predict that the largest firms in the world will continue to expand, swallowing up smaller firms, driving out of business other firms, and come to dominate the market. But that is not what the respondents to this survey see ahead. Sixty-six of the respondents from the big company group (revenue in excess of $1 billion) offered their views, and 42% of them see no change in the percentage they spend on the largest 100 worldwide firms. About one out of five selected one to ten percent increase in their budget going to the biggest behemoths, but 12% see the proportion declining. One quarter support the views of prognosticators.
Between 2008 and 2013, ___% of our law department's spending will move to lower cost offshore service providers, whether directly or as a subcontractor to our in country law firms.
|
>10% of total spending |
10 |
0.151515% |
|
1-6% of total spending |
11 |
0.166667% |
|
6-10% of total spending |
11 |
0.166667% |
|
Decrease, we are moving more onshore |
2 |
0.030303% |
|
No change |
32 |
0.484848% |
For the past few years, offshoring to legal process outsourcers (LPOs) has been much bruited. Five years from now, equal percentages of the respondents--16%--foresee 1-6% of total spending being off shored, 6-10% being off shored, and more than 10% being off shored. Status quo looks to be the five-year forecast for almost half of the respondents.
Based on this data, the offshore wave is ebbing out to sea.
The following % of our internal headcount will be located in lower cost geographies, e.g. India
|
>10% of total headcount |
9 |
13.4% |
|
1-5% of total headcount |
11 |
16.4% |
|
6-10% of total headcount |
3 |
4.5% |
|
Decrease, we want to consolidate in our home market |
1 |
1.5% |
|
No change |
43 |
64.2% |
If respondents took this to mean percentages of the legal department that would be located in lower cost geographies, this is a non-trend. Two thirds feel there will be no change at all, and another 16% think that 1-5% of the total legal headcount will be there. But that may be because lawyers are based near clients, not because of a cost advantage. In other words, in future a large department may have lawyers based in India or China because that is where its clients and operations are.
By 2013, do you expect your department to have more lawyers working outside the U.S?
21 No
45 Yes
Part of this response relates to the modest estimates of growth described in the previous question. Part of this response comes from the fact that US companies can do more business outside the US but not add international staff. Part of the reason for this answer is that quite a few of the respondents may be at law departments of companies that are not based in the United States.
Our department will increase spending on legal automation (software and process)
|
0-50% increase relative to today |
41 |
0.602941 |
|
51-100% increase relative to today |
10 |
0.147059 |
|
More than 100% increase relative to today |
9 |
0.132353 |
|
No increase |
8 |
0.117647 |
If technology spending matched the Consumer Price Index, we would expect law departments in 2013 to spend something like 20-30% more in nominal terms. So the fact that 60% of the respondents foresee spending from 0 to 50% more on legal automation (software and processes) than today means that technology spending has no great allure.
Only 15% foresee technology spending to enjoy a 51-100% increase relative to today’s spending and 13% see more than a doubling of today’s spending. And, bear in mind, these respondents belong to a leading application of technology, a social networking site.
With various changes we expect, e-discovery spending will
|
Decrease by 1-50% |
5 |
7.6% |
|
Increase by 1-50% |
37 |
56.1% |
|
Increase by more than 50% |
13 |
19.7% |
|
stay the same |
11 |
16.7% |
|
Grand Total |
66 |
|
By far the largest portion of the respondents (56%) anticipate that they will spend more five years from now on e-discovery, but with a band as wide as 1-50%, it is hard to read budget-quaking fear into it. In inflation-adjusted dollars, an increase of this size is actually not all that dramatic. Furthermore, slightly more than one out of five think discovery-related spending will either decrease or stay the same. The same percentage foresees a jump in spending on e-discovery of more than 50%.
By 2013, telecommuting in our department will be at a greater/equal/lesser level relative to today.
|
Don't Care |
2 |
2.9% |
|
Don't Know |
8 |
11.6% |
|
Equal |
16 |
23.2% |
|
Greater |
41 |
59.4% |
|
Lesser |
2 |
2.9% |
|
(blank) |
|
|
|
Grand Total |
69 |
|
Of all the questions asked, the scenario embraced by the highest percentage of respondents — from large companies, at least — is that telecommuting will be more common by 2013. What is somewhat surprising is that a quarter of the respondents feel that five years from now the level will be the same as now, which probably means it is highly unusual. It is hard to square the modest forecast of technology spending with the anticipated frequency of telecommuting, since people need more technology to work outside the office.
Social Networking/Online Collaboration (e.g., peer reference, law firm partner free content, evidence of connections) will be one of the 2 or 3 most useful and important mechanisms for selecting and communicating with outside lawyers and law firms.
|
Don't Know |
17 |
0.246377% |
|
No |
22 |
0.318841% |
|
Yes |
30 |
0.434783% |
Not a hopeful prognostication for professional social networks if 55% either don’t know or think not, and the standard was even to get into the top 2-3! References by conversation or phone call will always be number one.
By 2013, the number of lawyers in your department will:
|
Have grown more than 20% |
15 |
0.220588% |
|
Have grown 10-20% |
17 |
0.25% |
|
Have grown less than 10% |
13 |
0.191176% |
|
Be about the same |
18 |
0.264706% |
|
Have shrunk by less than 10% |
2 |
0.029412% |
|
Have shrunk by 10-20% |
2 |
0.029412% |
|
Have shrunk by more than 20% |
1 |
0.014706% |
On these percentages, if a ten-lawyer department were the prototype, it would either not change in number of lawyers or add one lawyer at 45% of the respondents. A quarter foresees adding to their lawyer staff 10-20% more (1-2 lawyers on our example) and almost as many foresaw expansion of more than 20%. Almost no respondents forecast shrinkage (a total of about 8 percent.). So, although company revenue will likely rise during the five years, legal staff growth will not match it.
Rees Morrison specializes in consulting with legal departments. He can be reached at rees@reesmorrison.com. Aric Press is the editor in chief of The American Lawyer. He can be reached at aric.press@incisivemedia.com
