This article is reprinted with permission from the February 4 issue of The Recorder © 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
Today's market for legal services is more competitive than ever and clients are demanding more value from their outside legal advisers. Law firms can no longer rely on their name and impressive track records to retain clients, nor can they rely on annual rate increases for budget planning. In addition, to win new business, firms often find themselves having to submit a competitive bid against many others, and if they win the work, must adhere to strict budgets with fee caps.
According to an article in Recorder sibling publication The American Lawyer discussing why clients fire law firms, 30 percent of in-house counsel fired at least one law firm in 2011, and 21 percent of the time, it was because the firm was too expensive.
The bottom line is that clients need to see value, but given the number of large firms that have shut their doors in the past few years, how do law firms show they are serious about providing value and still maintain profitability levels to retain their best talent?
How should we define "value"? While there are many ways to do this, for clients to perceive that a law firm has added value, the result, quality of work and cost must have matched their expectations.
No lawyer thinks that they provide low value, but many lawyers frequently fail on the first thing that affects a client's perception of the result and quality: communication.
What outcome does the client want? Who is working on the matter? What level of review does the client expect?
Too often, lawyers work hard at meeting a client's demands, only to find out after the fact that the client wanted something other than what was delivered. Clients are, therefore, trying to force more transparency and communication by using fee arrangements other than traditional hourly billing (such as fixed fees with built-in incentives/disincentives) to align the billing attorney's interests with their own.
To make fee arrangements sustainable in the long-term, however, smart firms realize that lowering rates to win more business cannot be the only lever they pull. They must also think about their overhead costs and find ways to increase their overall efficiency.
More than four years after the financial meltdown, law firms have already cut their expenses to support the ongoing reality of client pressure on billing rates. For long-term prosperity, firms now need to increase their efficiency. One way to do that is by disaggregating the work so that each task is done by the most effective and least expensive resource available.
For example, firms can hire "career associates" or staff attorneys who might be looking for a limited role compared to a typical partner-tracked associate or are seeking better work-life balance. The attorneys are more efficient because they become "specialists" in their defined task and the firm can pay these attorneys at salary levels that reflect their limited range of responsibilities. This can translate into higher-quality work, fewer billed hours and lower billing rates for the clients.
The challenge is that the overhead costs can still be quite high because the attorneys still work in the law firm's office, utilize its infrastructure and need access to its resources. There is also a danger that these attorneys and their work quality can be unfairly perceived as "lower" than traditional associates.
AN ALTERNATIVE APPROACH
Rather than integrating a new "tier" of lawyers within the existing law firm structure, law firms should also consider building a business that operates in conjunction with, but outside of, the law firm structure. A few firms have taken this approach — for example, Bingham McCutchen's Bingham Consulting service, and this approach can also work in the staffing context, as evidenced by the FLEX by Fenwick services offered by Fenwick & West and the "Lawyers on Demand" services offered by U.K.-headquartered firm Berwin Leighton Paisner.
The staffing model would recruit attorneys who work with the firm's clients outside of the firm's walls on an as-needed basis. These "flex-time" attorneys could access some firm resources, but should have enough professional experience to work independently and not require the firm's infrastructure to do their work in order to keep overhead costs low.
Because these flex-time attorneys would not have the same infrastructure support as a typical partner or associate, these attorneys would be best-suited for defined tasks like negotiating high volumes of routine commercial transactions, such as sales deals or inbound technology negotiations. Not surprisingly, it is the "routine" work where clients feel that large law firms provide less value.
Contrast this to high-stakes, episodic or "foundational" work, such as large litigation matters, patent filings for core technology or strategic M&A transactions, where the infrastructure needs are greater, and a client's expectation regarding the thoroughness of review and the overall cost are different.
Assuming that the cost of a law firm's alternative model is competitive with the cost of a "fully-loaded" in-house attorney, firms that provide an alternative resource to their clients show their commitment to adding value and meeting client needs.
- Most growth-companies will eventually find a non-law firm resource to do "routine" work because they cannot justify the cost of a traditional law firm.
- Even clients with in-house legal departments will have part-time resource needs during leaves of absence, or will have full-time resource needs because they lack budget for additional head count.
If a client's law firm is not providing an alternative, the client will turn to another resource — namely solo practitioners, boutique or smaller regional firms, temp agencies and other large law firms that are providing other options.
By proactively providing an alternative, law firms can leverage their existing relationships and stay in touch with the client's business as it changes and grows. Many lawyers have worked with clients who contact them after years of silence and expect the lawyer to know and understand the business. The client then becomes frustrated when it is explained how much time and money is required to diligence the company because too much time has passed.
In that instance, implementing an alternative staffing model is ultimately beneficial for everyone — clients get access to high-quality attorneys that are carefully vetted by the firm and who have access to the client-specific law firm knowledge. The firm stays in touch with the client as the business grows and keeps work that would otherwise have gone elsewhere (albeit at lower margins). The attorneys get the benefits of working as part of an in-house team and a law firm.
CHALLENGES TO IMPLEMENTATION
While attorney supply and client demand exist, as with any business, that sounds simple; it can be harder to get all the pieces in place than may first be imagined.
Particularly challenging is winning the support of law firm management — partners may fear losing this "routine" work, especially if it is currently still bringing in significant revenue, or may worry about the potential "hit" to the firm's brand if they offer alternative legal resources. What is critical to understand is that clients will eventually take the work elsewhere — it's just a matter of timing.
In addition, if the business is to operate as a true alternative, it will require dedicated resources such as a business development and recruiting team that are separate from the partners and associates, which may cause the partners to also fear losing control over communications with their clients. Furthermore, the business will also need to draw upon the firm's internal functions such as HR, finance and marketing to develop new policies, procedures and branding that complements the firm.
Finally, it can be difficult for the firm to resist suppressing the team's entrepreneurial spirit as they begin to change the law firm's standard operating procedures.
Today, legal expertise and past relationships aren't enough to retain clients. Firms that make investments in efficiency initiatives will have a competitive advantage over those who try to maintain the status quo. Although difficult to implement, efficiency initiatives such as alternative staffing demonstrates a commitment to providing value to clients across the spectrum of legal work.
Alex Smith is senior director, products and services development, at Fenwick & West. In this capacity, she has implemented two alternative staffing models for Fenwick, and is currently managing operations for FLEX by Fenwick - a service that provides experienced in-house counsel to clients to solve their legal staffing challenges.