Looking Ahead to 2008 and Beyond: Unsure Economic Times

Author: Richard Stock - Lexpert (January 2008 at p. 123)

No lawyer in private practice is ever sure there will be enough interesting work to sustain an interest and the economics essential for the art and business of law. While there has never been certainty in the past, now corporate and institutional clients want more for less. More service with faster access and turnaround - and this without year over year rate increases.

There are few large sources of sustainable work for firms. Those streams of legal work which are relationship dependent quickly evaporate when a partner retires or is lured to another firm, or when a client representative moves on.

Expertise and service delivery count for a great deal. But those clients in corporations and in government are being pushed to demonstrate that the legal services they purchase are cost-effective. Internal audit standards and procurement protocols are calling for more rigour in the processes used to retain and manage the use of legal services. Law departments are being asked to go to the market to secure the very best prices, to stabilize arrangements with preferred providers, and to ensure that costs are well managed by the department and by the firm at the matter level.

What 10 years ago was viewed as an isolated event in the legal services firmament, today is much more common with requests for proposals for legal services and risk-reward pricing innovations tied to both efficiency and effectiveness of the legal services. Canadian Pacific Railway, Petro-Canada, Scotiabank and the DuPonts of the world have been tweaking arrangements for legal services for more than 10 years. They have moved far beyond converging the number of firms and negotiating favorable discount arrangements. Many have worked carefully with law firms to develop ways to reduce workloads to mitigate the costs of individual files and have codified best practices to avoid re-inventing the wheel when someone new joins the law department or the law firm.

But not everything is rosy on the 2008 economic front. Miguel R. Rivera, Wal-Mart’s associate general counsel responsible for outside counsel management, recently announced a moratorium on across-the-board rate increases. He went on to say that Wal-Mart will only consider individual increases for those lawyers “who are performing at an exceptional level and whose experience and knowledge is adding substantial value toward meeting Wal-Mart’s legal objectives.” Rivera’s long letter to his outside counsel network shows a real appreciation of the challenges faced by law firms in trying to contain associate rates in the face of escalating salaries. He invites firms to offer their suggestions for rate control. But he also asks them for detailed billing rate information for all associates for the last four years. The letter concludes by leaving no doubt that Wal-Mart will only retain those firms prepared to introduce measurable cost-improvement initiatives.

The Wal-Mart approach is very “clinical” – almost a sledge hammer. Will other large and multi-national consumers of legal services take a similar tact? Most will be reluctant to follow suit preferring instead to negotiate an accommodation with their preferred firms. Few partners in large firms still have the freedom to set their own rates or to negotiate discounts and alternative fee arrangements outside a pre-set range. The economics of the firm and their “most-favored nation” pricing commitments as well as their compensation systems have locked most firms into an economic treadmill. Law firms will respond to requests for better economic conditions from their clients, but few will initiate conversation to change their delicate economic balance.

The next two to three years will continue to see growth in demand for lawyers by law departments and for associates by law firms across the country. Workloads and demand for legal services are growing for law departments and insourcing is one cost-effective response. Turnover and rates continue unabated for law firms. Combined with the appetite to recruit lateral partners that have unconflicted books of business, little is likely to change in the short term. The past is not a predictor of the future when it comes to the sustainability of annual rate increases. Market forces are in play and will continue to create more pressure on inside counsel to insource work, to shift work to less expensive geographic centers, and to rely on competitive procurement initiatives that may allocate large blocks of legal work to competitors of their traditional firms.

It will be another 3 to 5 years before a systemic change is apparent in legal economics. This will be a time when those companies and the law departments that are early adopters begin to work with a different paradigm. Canadian Pacific Railway, DuPont, Petro-Canada, Bell Canada and Royal Bank of Canada were re-defined more than 10 years ago. Many others followed and added their variations. Law firms would do well to anticipate and embrace alternative arrangements that will grow market share and provide greater economic security for the members of the firm.

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