Big Clients and the Next Three Years

Author: Richard Stock - Lexpert (May 2007 at p. 107)

It has been more than 10 years since CP Rail relocated its head offices from Montréal to Calgary and outsourced much of its legal work. It's been a dozen years since DuPont requested proposals to dramatically reduce the number of its U.S. law firms.

What is commonplace today with corporate an dinstitutional purchasers of legal services was not long ago novel, shocking and “disloyal” for many in law firms.

Some Canadian companies, the insurance and finance industries and all levels of government have been re-examining their pattern of using legal services for some time.

Strategic procurement tools are gaining in sophistication. Corporate counsel are adopting new measures in the context of legal-business conflicts, robust activity levels for law firms, associate turnover, partner mobility and escalating hourly rates.

Clients want to discuss innovation in service delivery, cost management and client-firm alignment. The number of legal-business conflicts encountered by law firms has increased, and corporate legal budgets have flat-lined as the cost of external counsel increases by 7 percent annually.

In a survey undertaken by Catalyst Consulting in October, seven law firms were contacted and asked to focus on innovation for the future. Each of the firms had at least three offices covering two or more jurisdictions. All welcomed the opportunity to discuss the challenges and opportunities. Office managing partners, relationship partners and the firm’s COO/ CFO typically attended.

Asked about the extent of their own formal planning for the future, the firms differed widely in their formality and type of business planning to the end of the decade. Half had identified market sectors that interested them – cross-border clients, infrastructure projects or energy – but half did not. Those that did not gravitate toward a market sector-based plan seemed focused on keeping their partners and managing the associate workforce.

No law firm takes the volume of work from one client for granted, yet clients take expertise for granted from established firms. In fact, corporate and institutional clients rarely wish to look elsewhere once an expertise-based relationship is in place, even when service delivery is comparable to other firms and prices can be 20 percent higher. Few will trade “quality” for price. Innovation in service delivery and cost management is difficult to pinpoint in such “stable state” conditions. Add to that the fact there's usually little time available to establish new legal services relationships -- everyone's too busy.

According to our recent survey, there has been little progress in the use of case and matter budgeting by law firms and their clients. Few have the detailed project management skills with the time to apply them to complex or unique work. Files with more than 50 hours tend to require at least 10 percent more time to complete for want of such practices.

The figure is higher when the matter is co-counselled with another firm or with members of the corporate law department. Companies with decentralized legal departments, or with business units involved in instructing external counsel, struggle to apply project and cost management practices to legal work. Professionals prefer to do the legal work rather than to plan and manage it.

In my recent survey, significant differences were evident in the business plans and operating philosophies of multi-office firms. National clients such as financial institutions, insurance companies, telecoms and governments have long-established regional purchasing patterns for legal services.

These are difficult to change for political and service delivery reasons. Yet several dozen Canadian law firms now have offices in more than one province. All want clients who will retain them in more than one office -- it makes strategic business sense. But, my law firm interviews revealed that half of the firms had very little practical experience in fielding stable teams sourced from more than one office. Perhaps the client work was too episodic and the matters were too small, making it cost-effective to keep the work down the hall in the firm.

Large firms are expensive to operate. They are designed to attract and support the best talent that money can buy. This is an expensive proposition and it is reflected in the hourly rates. Our interview series revealed differences of 20 percent or more in the unit prices of firms. Similar differences were apparent in the cost of legal services between Toronto and Montréal. Although Calgary prices are quickly approaching Toronto prices, Vancouver, Ottawa and Atlantic Canada prices for 2007 are in much lower brackets. Few clients want to abandon their established firms to shop “offshore” based on price. Yet several of the firms interviewed have been able to field stable multi-office teams, with more junior lawyers coming from the less expensive quadrant of the firm’s platform. This requires the firm to spend more unbillable time getting to know its team and coordinating resources to remain cost-effective.

The effective rate is lower, but care is needed to ensure the hours on the file don't escalate because of distances between team members. A few firms are demonstrating success in managing workflow and cost-effectiveness across their offices and with their clients.

In other cases, corporate law departments have concluded that they cannot or will not provide the volumes of similar work to a limited number of firms to make the multi-office mode of service delivery cost-effective.

They must then resort to two tools to keep costs down: a disciplined use of case and matter budgeting (auditing legal bills does not control costs), or retaining the work in-house and growing the legal department. There is little experience and less appetite for moving away from the hourly-based business model to success-based approach.

Law firms have insufficient financial incentives to take big risks in service delivery and cost management when there is more work than ever and talent is more difficult to find and to keep. It is up to corporate and institutional clients to structure new models and to introduce these with the support of their preferred firms.

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