Between December 2008 – February 2009,the Coraggio Group conducted a study to understand how corporate clients in the Pacific Northwest view their attorneys. In particular, Coraggio was interested in discovering what traits, skills or behaviors encouraged companies to hire law firms and which actions drove the opposite result.

The firm conducted interviews with VPs, General Counsel, and senior attorneys in 20 leading organizations in the Pacific Northwest. Their companies represent a cross section of industries in both the private and public
sector. All interviewees were responsible for hiring and managing counsel.

1. Continued Growth of Internal Legal Departments with Excellent Legal Talent

The decision-makers we interviewed agreed that they are working to reduce their dependence on external law firms. In-house departments have gradually built organizations that can handle very sophisticated legal work. Moreover, they intend to keep strengthening their capabilities.

The information gathered during the interviews confirmed four trends which, if not heeded, will leave law firms vulnerable to losing work. These are:

  1. Continued growth of internal legal departments with excellent legal talent
  2. A shift from valuing the firm to valuing individual attorneys or specific expertise
  3. An increased willingness to bear greater risk rather than absorbing legal costs
  4. A disconnect between fee levels/pricing structure and perceived value

In-house counsel now believe their departments are more effective than counsel hired from the outside. Simply put, lawyers who work inside a company have a better understanding of the business and have better access to key personnel.

“It’s hard to find lawyers with a good business sense. Bad advice ripples throughout. They can provide advice on memos, but not counsel. By being in-house you have that broader perspective. Any business person knows this.”

Finally, the individuals we interviewed realize that perhaps their greatest value is in anticipating potential legal
problems and working to avoid them. This is not a role that an attorney in an outside firm can ably perform. Companies are recognizing that the real value of the in-house equation is that they spend their time working on prophylactic measures to reduce the exposure of their respective company. By addressing problems at an early stage versus letting things develop until there is a blowup, or a lawsuit or a dispute, companies reduce the need to send work to outside lawyers.

“The way I handle the legal department now, I am starting to prevent things from happening, from getting out of my hands, and that goes along with more training with management, getting on top of the changes before anything wrong happens, and I think that is the way things are going to stay. I have talked to other in-house attorneys and that is what they are trying—preventative things and when you do that there is no need to go to litigation.”

Given this trend, it is imperative that firms learn how to become valued business advisors—not just legal consultants. Serving on a company’s board or if done well, placing one of the firm’s attorneys inside the organization might be ways to begin to address this.

2. A Shift from Valuing the Firm to Valuing Individual Attorneys or Specific Expertise

“You hire lawyers, not a firm. When I say [the name of the firm we use], I am thinking of people I know from prior experiences who have gotten us good results at a reasonable price. The caveat is that I am not loyal to a firm name but loyal to the people working for the firm.”

Because internal legal departments are capable of doing most or all of the routine legal work, they plan primarily to use outside firms for specialty work. With this being the case, companies are looking for attorneys who they have seen perform the type of work in question. This means not only is there little tolerance for working with associates who are novices, there is a decreasing desire to work with more senior generalists merely because they are affiliated with a premier firm.

“We are doing in-house what we used to send out. When we do go to outside counsel it’s on highly specialized areas and we want real expertise. If they are not super experts in that area then we go elsewhere…”

The proactive approach therefore is to build a model that will produce experts without passing all the cost on to the client. If done right, loaning senior level attorneys full time to clients and sharing the salary and benefits might be a step in the right direction. This would allow a firm to receive expert guidance at a reduced cost. It benefits the firm because the client will remain connected to the firm for at least the life of the arrangement.

3. An Increased Willingness to Bear Greater Risk Rather Than Absorbing Legal Costs

“Everyone is going through a budget crisis which results in everyone adopting a higher risk model. One of the equations in that higher risk model is that [if I] have to spend up to 10K on external advice for an issue, I might instead apply what I know and take the risk that I am wrong because I am not steeped in that area.”

In the past, outside counsel were hired to analyze and/or  mitigate risk. This took one of two forms. Counsel were asked either to do legal research and offer an opinion before a company acted or to handle matters where in-house counsel had limited experience and/or expertise. This role is becoming less necessary today. One of the reasons for the shift is a change in the way companies view litigation. Now many companies are convinced that they would settle disputes rather than litigate them.

“What has become very clear is that litigation is stupid as well as expensive. You will hear most in-house counsel
complain that litigation is a settlement piece, not a fault determination piece. It is a nuisance, so it causes us to determine internal processes that make us less likely targets for litigation.”
“What’s [new] is the notion of not using outside counsel since you’re not going to litigate with speculative dollars.”
If companies are willing to settle more matters, then they can bear increased risk. Greater risk tolerance reduces the need for law firm involvement. Attorneys need to find a way to be relevant in the changing marketplace. Again, the dynamic here points to the need to become a true business advisor—not merely legal counsel.

4. The Disconnect Between Pricing and Perceived Value

There is a growing willingness to acknowledge that with the exception of super-specialized services, legal work
is becoming more and more of a commodity product. That is why there is such dissatisfaction with the billable hour model.

“It’s a dirty little profession secret, which lawyers talk about
amongst themselves, that the big firm model really is broken. It’s a bad economic model especially for businesses and
organizations that need to be lean and nimble.”
“They [firms] have these big offices, these big downtown office towers that are very expensive. That gets built into
your $400 per hour fee.”

Conversations about the problems with the billable hour model are not new. What is new, however, is the number of attorneys who are available to offer competent services at reduced rates.

In fact, the current law firm structure is in large part creating its own competition. To be more specific, every
year firms shed qualified mid-level to senior-level attorneys because they are not offered partnership. These
individuals leave and join in-house ranks, start new firms or join with the competition.

In addition, legal technology has made it easy for small firms to compete where in the past they lacked manpower to handle large or complex matters.

Call to Action

In early attempts to set themselves apart, law firms have paid much lip service to offering great customer service to
clients. But giving out home phone numbers or promising a return email within a few hours is not a comprehensive
solution. Law firms that wish to differentiate themselves need to realize that they must fundamentally change their operating model. The most realistic next step involves becoming valued business partners as defined by the client. This
will allow lawyers to compete as innovators and partners in order to provide truly exceptional customer service. Valued partnership means learning how clients make their products, understanding the business challenges and opportunities due to market forces and competitive pressures, and having in-depth knowledge of where their pain points and vulnerabilities are.

There is no one “right answer” or best practice model. The design is likely different for each industry segment. What is crucial is that attorneys begin meaningful conversations with their partners and their clients with the commitment
to make “deep change.”

Once attorneys and clients have a mutual understanding of the business needs and an aligned relationship, a fair and appropriate working model will be easier to achieve. To ensure long-term viability, the time to make change is now.

 

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