Business of Law

Study of chief legal officers finds more bad news for law firms

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Ever since the Great Recession, law firms have seen both the supply of available legal work and the demand for their services dwindle.

According to Altman Weil’s 2014 Chief Legal Officer Survey (PDF), those trends are continuing and show no signs of abatement. The study revealed that in-house legal departments are keeping more legal matters for themselves and are demanding heavy discounts for the work they give to outside counsel.

Of the 186 CLO’s to respond to Altman Weil’s survey, 40 percent of them had shifted work during the past year away from outside counsel in favor of keeping the matters in-house. Meanwhile, more than a quarter of responding law departments said they would decrease their use of outside counsel in 2015, compared to only 14 percent that are planning an increase.

“This continues a seven-year survey trend in which decreases in the use of outside counsel have been reported at about twice the rate of increases,” the report states.

The results actually represent an improvement from 2009, when nearly 40 percent said they would reduce the amount of work they sent to outside lawyers compared to approximately 13 percent that would increase such work.

Meanwhile, when in-house lawyers call on their outside counsel, they are successfully demanding fee discounts. According to the survey, half of the responding departments had successfully negotiated a 6-10 percent discount on hourly rates, while more than one-third of respondents reported they’ve managed to cut more than 10 percent off their fees. “One of the most surprising things in the survey was that there are still about 10 percent of legal departments that said they weren’t getting discounts,” Altman Weil principal Dan DiLucchio said with a laugh.

DiLucchio says discounts on hourly rates remain the predominant form of alternative fee arrangement among in-house lawyers.

“It’s the traditional way that everyone has worked,” he says, pointing out that most in-house counsel have worked at a law firm at some point. “It’s also easier for in-house counsel to show that they’ve gotten a good result by saying ‘we bought 1,000 hours of work and we got a 15 percent discount.’ It’s overly simplistic, though.”

DiLucchio says he has seen some headway in terms of in-house lawyers embracing nonhourly arrangements, but concedes they won’t replace the billable hour anytime soon. “Neither firms nor corporate law departments have enough trust in the other party, and not enough transparency in way work is done to engage in true alternative fee arrangements,” DiLucchio notes. “Law departments don’t think firms are particularly efficient in doing the work, and that’s the tension at play because there’s an incentive for law firms to drag things out so that they can make more money.”

In order to accommodate the extra work staying inside their doors, in-house legal departments are planning to increase their labor force in the next 12 months. The survey found that 42.6 percent of respondents intend to hire more in-house lawyers, while nearly 15 percent want to hire more contract attorneys. Additionally, 31.6 percent of respondents are planning to hire more paralegals and 21.4 percent wish to add more support staffers.

Ron Friedmann, a consultant with Fireman & Company, cautioned against seeing this as a long-term trend.

“I’ve been in legal market for a long time, and I’ve seen big swings where in-house lawyers hire a lot of people and then the corporation decides there’s too much overhead,” Friedmann says. “It could happen again.”

In fact, Friedmann points out that law firms are continuing to add headcount at a rate that outstrips the demand for legal services. Pointing to an Oct. 30 study from Thomson Reuters, which found that headcount growth rate at law firms is the highest it’s been in two years, Friedmann notes there could another market correction on the horizon.

“No wonder Altman Weil found discounting law firm rates rampant,” he said on his blog.

Updated at 1:50 p.m. to clarify that the Thomson Reuters report referred to headcount growth rate at law firms.

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