D. Casey Flaherty.
Corporate clients are displeased with their law firms. And the displeasure is not confined to opinion surveys. A decades-long decline (PDF) in realizations has been paired with flattening of demand for external law firms. Overall demand remains on upward trajectory, but law departments are insourcing and sending increasingly more work to alternative service providers. It is abundantly clear that corporate clients are not satisfied with the status quo and that law firms will need to change to meet evolving client expectations.
But is it really that clear? Apparently not. Every year, Altman Weil (PDF) asks managing partners why they are not doing more to change the way that legal services are delivered. Every year, the managing partners’ primary response is that “clients aren’t asking for it.” On first glance, it beggars belief that anyone could look at the data and reach the conclusion that clients are satisfied with their outside counsel. Except that isn’t what the managing partners are saying—other survey questions reveal that they are quite cognizant of client discontent. Rather, as a husband I can attest that it is all too common to be fully aware that someone special is upset with you without having the faintest idea why, let alone having any clue as to what, if anything, can be done to remedy the situation.
When we unpack the opinion surveys of corporate counsel, it turns out that they retain their respect for the legal acumen of their outside counsel. Judgment underpinned by domain expertise remains the threshold consideration, and on that score law firms still acquit themselves well. But most abstract legal insights need to be converted into some form of concrete deliverable such as a contract, motion, memo, or policy document. The conversion process can be labor-intensive and therefore cost-intensive. It is these low-value-added but necessary activities that are the source of clients’ dissatisfaction.
Clients complain that law firms are not cost-conscious or innovative. Clients believe that law firms are not doing enough to complement legal expertise with business processes and technology. In the traditional law firm model, there are literally (PDF), “no economies of scale.” So clients bring expertise in house, invest in technology, and unbundle legal services so the labor- and process-intensive activities can be sent to service providers deliberately designed to take advantage of economies of scale.
Yet, the market signal of taking work elsewhere is not nearly as strong as it might seem. The managing partners’ second-most common response as to why their law firms aren’t changing is that they aren’t yet feeling sufficient pain. Profits remain robust and have been on an upward trajectory for almost a decade. Because they are still catching some of the uptick in overall demand, law firms don’t always recognize that work is being sent elsewhere. Even when existing work is taken from them, they rarely know why. That the new in-house counsel prefers a golfing buddy from their former firm has more than adequate explanatory power.
And calls for “efficiency,” “cost-effectiveness,” and “innovation” are maddeningly vague. Beyond the serious few, clients have previously proven quite unreliable in following through on decades of strong public statements on more tangible initiatives like alternative fees and diversity.
In private, many partners wonder whether most clients would know efficiency if they saw it. These partners consider insourcing and alternative service providers to be pure labor and real-estate arbitrage. Almost every abstract discussion the partners have with a client about efficiency devolves into a concrete discussion about discounts. The discount discussion occurs with every firm and seems completely unmoored from how legal services are actually being delivered. Firms wonder what, if any, innovations clients will actually reward. It seems that no matter what firms do, clients are going to ask for the same discounts and writedowns. Why invest in innovation if clients don’t actually care—i.e., if clients aren’t asking for it?
Clients do care. But caring does not automatically engender an ability to engage with law firms in structured dialogue about legal service delivery. We keep having the discount discussion because it is familiar. Lawyers are notorious for being reluctant to leave their comfort zone. Many law departments and their primary law firms therefore avoid the types of conversations that are common in long-term supplier relationships. They focus on individual matters instead of relationships, portfolios, and systems. The failure to communicate has been to the detriment of both parties.
This dynamic may finally be changing. As I will discuss in the next post, the rise of legal operations and procurement could have a profound impact on the every aspect of the legal market, including the nature of the relationship between inside and outside counsel.
D. Casey Flaherty is the founder of the legal tech consultancy Procertas, provider of the Legal Tech Assessment. He was a 2013 ABA Legal Rebel. He also serves on the board of advisors of NextLaw Labs.
Editor’s note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, Patrick Lamb, founding member of Valorem Law Group and their guests. New Normal contributors spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. You’re invited to join their discussion.