Outside Counsel Cost Management and a Transforming Attorney Client Relationship
Virtually any attorney who has practiced law for more than 15 or 20 years, particularly in large national or multi-national law firms, will confirm that the legal industry does not remotely resemble its former stature. Demand for legal services is shrinking amidst a glut of attorneys and disruptive technologies and alternative service offerings are making the legal industry’s landscape more competitive than ever. For an industry that historically has enjoyed price inelasticity, the cost of legal services has migrated to the forefront of attorney-client relationship.
As the industry continues to be reshaped, the individual relationship between a client and outside counsel is likewise transforming. With increasingly frequency, outside counsel is losing the status of an irreplaceable, cost-insensitive and indispensable advisor. Clients are comparison shopping to ensure that outside counsel is competently delivering optimal value for each hour billed at competitive market rates. In an evolving relationship where the market influence of each party is becoming more balanced, unspoken protocols, the rules of engagement and even the fundamental underpinnings of the attorney-client relationship which once were inviolable are now points of discussion and negotiation between a client and outside counsel. In the redefined relationship with outside counsel, every value conscious client should assess the factors driving the transformed relationship with outside counsel. By doing so, a client can make great strides towards ensuring that optimal value is delivered by outside counsel for each hour billed at market rates.
The attorney-client relationship is based on trust, confidence, competence and positive co- dependency and bears many of the same attributes as a marriage or other close interpersonal relationship. Analogizing the attorney-client relationship to a close interpersonal relationship offers a surprisingly instructive analytic construct by which a client can gauge the redefined relationship with outside counsel. As discussed below, the greatest strains and challenges in a personal relationship now exist with increasing prevalence in the attorney-client relationship.
Few things influence a close interpersonal relationship more powerfully than money. In the attorney-client relationship context, the influence of economics can be felt with exponentially greater force particularly in today’s environment where monetary issues between a client and outside counsel usually are a zero-sum game. On outside counsel’s side of the equation are the challenges of increased competition, decreased demand and profitability. On the client’s side of the equation are budget constraints, expense cutting technologies and professional fee management services. Together,these factors are forcing outside counsel to compromise on rates and compete on pricing more now than ever. In today’s legal environment, outside counsel cost control and management is a strategic objective of many in-house legal departments and expected as a discussion point by outside counsel at every step in the relationship from budgeting throughout matter management and until final budget reconciliation and payment.
Attraction tends to be greatest during courtship and is susceptible to fizzle over time. Engaging a well-regarded and prestigious law firm has reflected favorably on a client, but the tide is slowly turning. When Wachtell Lipton, Cravath, Sullivan & Cromwell, Simpson Thatcher or another elite firm is engaged, their glowing reputations surely continue to shine brightly on their clients. After progressing beyond the dozen or so “elite” law firms, law firms in the next tiers tend to be not-so-distinguishable from each other. The luster of less prestigious law firms has dulled as a result of hyper-growth without quality control, law firm mergers and transient lateral partners. As a result, a law firm’s historic ability to validate a client and favorably influence its business and business contacts has diminished.
One of the greatest threats to the stability of any relationship, especially the attorney-client relationship, is ineffective communication. Clients routinely tell outside counsel that their legal department is operating within severe budget constraints. Clients are begging for efficient service from outside counsel within an established and predictable budget at competitive hourly rates or under an alternative fee arrangement. After nodding with apparent agreement and acquiescence to client billing demands, it is not unusual for outside counsel’s invoices often eclipse budget by a fair measure. When the initial communication breaks down in this manner, it is fair to have open and honest communication with outside counsel as to why a bill exceeds budget.
Admittedly, this factor does not lend itself to a precise analog. Nevertheless, perks offered by outside counsel to clients offer at least some rational basis for comparison (albeit in a purely analytic context) of relationship challenges. Due to decreased business levels and profitability challenges at many law firms, spending has been slashed by outside counsel on purportedly “discretionary” expenses — sales, promotional and marketing initiatives. Luxury suites, expensive closing dinners, golf outings and even free CLE luncheon presentations by law firms have yielded to the quest to maximize profits per partner numbers for annual law firm economic surveys. Any client that continues to maintain a relationship with outside closing with the hope of luxury suite tickets on the 50 yard line for an NFL game should cling to those memories because it is far from guaranteed that it will happen with such frequency ever again.
Extended families, in-laws and exes.
In-laws, siblings, former spouses and children from prior marriages can be immeasurable blessings. At times, they can also sully the waters if they fail to offer positive support for a relationship. In the context of a client’s relationship with outside counsel, the closest analogs are service partners, associates, paralegals and other legal support personnel who support an engagement partner’s efforts to service a client’s matters. Mega-firms with hundreds or even thousands of attorneys now are commonplace. Maintaining consistent service quality and cost-effective, cutting-edge advice is a daily challenge as the talent pool becomes diluted and can vary from practice group to practice group within a single mega- firm. Indeed, legal professionals within a single firm often have differing and competing interests and varying commitment levels for a particular client. Lateral partner mobility and the inclination of law firms to grow for growth’s sake have exacerbated the challenges and complexities in the law firm service delivery model. In today’s marketplace, it is becoming more difficult, if not impossible, for a client to select a single law firm that offers predictable, consistent and competent levels of service throughout the legal personnel ranks. As a result of the variability in the extended ranks of legal personnel within a mega-law firm, prudent general counsel see the wisdom in hiring lawyers, not law firms, as bigger is not necessarily better for law firm selection. Where the extended ranks of legal professional do not deliver the requisite value at a fair price, clients now seem less inclined to overpaying for underperforming, non-core legal personnel.
Different view of commitment.
At bottom, marriage or another serious relationship is binary and involves two individuals who are committed to advancing their relationship for the long haul. When goals or commitment levels diverge, interpersonal relationshipsrun off the rails. Historically, a client’s relationship with a law firm has had a similarly binary and long-term character. Even though clients regularly engage multiple law firms and law firms represent multiple clients, the core relationship and fundamental level of trust between a client and outside counsel was grounded in long term commitment and mutual benefits. For a variety of reasons, the paradigm has shifted and a client’s relationship with its outside law firm seems more fleeting than ever. In past years, a client’s fiercest competitor was viewed also as an enemy of the law firm. In today’s era, a client’s competitor can quickly convert into outside counsel’s ally if the competitor is likely to drive more revenue to the law firm than the long-time client. Loyalty and a pre-disposition towards long-term commitment used to be a cornerstone of the client-outside counsel relationship. Today, long-term commitment takes less precedence.
Infidelity usually occurs when someone in a committed relationship seeks a new experience that fulfills an unmet need or desire. New-fangled technologies and innovative service offerings, like e-Discovery tools, legal process outsourcing firms and online legal resources like LegalZoom, that are disruptive to the traditional legal service delivery model are altering the marketplace. Yet, many law firms largely remain stuck in a rut, delivering legal services the “old fashion” way. The disruptors offer very appealing value propositions to clients offering greater efficiency, accuracy, value or cost savings and they continue to gain market acceptance and market share. As law firms continue to fail in adapting their service delivery model, clients are likely to feel entirely justified in exploring new relationships to satisfy unmet needs.
Becoming lost in the roles.
As couples transition into a more mature relationship, many couples “forget” their interaction during courtship and when children added to the mix, parents can soon forget that they are a couple. The same thing can happen in a client’s relationship without side counsel. Immediately after engagement, outside counsel treats a client like the only and most important client. As outside counsel becomes more entrenched and develops institutional knowledge of a client’s business, matter or case, outside counsel may believe that switching costs are high for the client and take the relationship for granted delivering service with a lesser degree of timeliness, care and thoughtfulness. Given lower demand for legal services and excess capacity at many firms in today’s legal environment, switching costs poses a less complicated issue as new counsel will often bear the cost of getting up to speed after a switch. If outside counsel forgets its primary role as a provider of a service, the service will be sought and provided elsewhere.
No relationship is all sunshine, but once each partner learns how to play in inclement weather, the secret to surviving the passing storm together is discovered. As we move into the next era of the legal industry, the primary area where clients are looking to outside counsel for accommodation and compromise is in the way outside counsel handles matter management, fee arrangements, matter staffing and billing. For years, clients accepted annual rate hikes with little push back. Clients are now clearly conveying the message that unbounded hourly billing is not working and have been asking for alternative fee arrangements, fixed billing and other value based billing policies. With a few forward thinking exceptions, many law firms have largely failed to compromise by adapting to market demands.
What the Attorney Client Relationship Means in a Transforming Legal Industry.
The upshot of this metaphor is not meant to be a referendum on outside counsel. By no means should a reader conclude that outside counsel offers only marginal value or that clients cannot realize positive, meaningful benefits from developing and maintaining a long term relationship with outside counsel.
Instead, the metaphor should be viewed as an acknowledgement of the realities of today’s legal industry environment. All relationships evolve – both interpersonal relationships and business relationships – due to external factors. In the same way that the legal industry is transforming, the relationship between a client and outside counsel and the rules governing the relationship are likewise transforming.
Given the shifting landscape, value conscious clients can finally view the attorney client relationship as a business relationship. For every lawyer who has maintained a positive long term relationship with a client, there are innumerable contenders nipping at the incumbent law firm’s heels willing to develop as strong of a relationship on more favorable business terms. Cost-effective service alternatives mean that clients should view the attorney-client relationship as a business relationship where maximum value should be demanded for each dollar expended and where maximum value is not delivered, the relationship merits justifiable re-evaluation.
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