A Big Decision on Strategy that Law Firms Need to Make Now (Part 1)

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In my role in academia and consulting, I get to work with law firm partners from around the world and to meet and talk to their clients. Seeing the contrast in these challenges is startling — and has brought me to the conclusion that law firms need to address some strategic issues now or face some pretty big risks over the coming years.

It may not be a perfect storm coming our way, but I believe it will be a market-changing one. It is thrown into sharp focus when I talk to Managing Partners who are reporting their most profitable year ever; and contrast that with clients who are suffering job cuts in the thousands as they struggle with decreasing margins.

Should the COVID-19 pandemic or anything else cause a steep drop in demand for legal services, law firms need to plan for how they would react — and that needs some strategic decisions to be made right now.

Why Managing Partners are Reaching for Contingency Plans

I spend a considerable portion of my time running workshops around the world with groups of partners who need help in working out pricing with their clients. Partners often face a well-trained adversary (and it has become adversary in some sectors) where clients are using their own Procurement or Legal Operations Professionals to drive down prices.

While a minority of law firms have developed professional pricing support, that is still the exception rather than the rule; and I often see partners going into battle wholly unprepared. And not just unprepared in skills terms, but actually unprepared. The time pressures on partners are already so intense that I often see partners heading to review meetings having spent less than an hour in preparation. Yet they will face a client team that has spent several weeks on preparation and market analysis before meeting with them. The cliché of “taking a knife ito a gun fight” does not do justice to what typically follows. That is most often the case when we are dealing with the unholy trinity of clients — banks, insurance firms, and pharmaceutical companies. For these clients, legal spend comprises such a material amount in terms of their respective overheads that they have had to become extremely professional in managing spend. Fortunately for them, they often face law firms that are not anywhere near as good as them at this process.

Let me give just one example. Over a beer, one corporate procurement director shared this story: Before going to see a law firm, he would go to see the company’s general counsel or legal director and ask this question, “What else could this law firm give you, other than financial discounts or rebates and the like?”

While a minority of law firms have developed professional pricing support, that is still the exception rather than the rule; and I often see partners going into battle wholly unprepared.

The procurement director explained to me that in any negotiation there would be sticking points, and he wanted to have some extras that he could ask for in place of the requested concession. For example, he might be trying to get an extra 10% off the partner rate but found that the partner would say he could give no more than an extra 5%. In that case, our procurement director would then say, “Okay, I could agree to 5% but only if you could give us X.” This X was something from his list, and included such valuable concessions as supplying a secondee; an agreement to give the first 15 minutes of any advice for free; supplying access to the law firm’s precedents; or even free use of the firm’s meeting rooms… and so on. The procurement director told me he would put in at least an hour’s time with the GC and his team to create this list, typically coming up with between 10 and 15 items they could use as barrier-breaking swaps.

More interesting, he told me that he still had a problem with this. With every single law firm that he had negotiated with, he had run out of things to ask for — because the law firm just said yes to everything! He told me he was feeling both incredulous and frustrated. “Why do you guys never say no?”

Why Partners Cannot Negotiate like Clients

What the procurement director hadn’t realized was this: He was negotiating with facts and figures but, for the individual partner he is facing, that is largely irrelevant. Partners have many other factors to take into account rather than just the rates or terms of this negotiation.

I was recently involved in working with a banking team that was dealing with a major retender. This was a substantial client of the firm and many years of combat had left the banking team demoralized and simply working longer and longer hours to make the account profitable.
The partner’s dilemma was that she had more than 30 lawyers working for this client, many of whom she had recruited and nurtured herself. She was really well-liked by her team, and the loss of this client would mean many layoffs and the likely termination of her own career. Do you think she would argue over another 5% discount?

Literally, law firms and clients often are not talking the same language, do not share the same aims, and do not have aligned interests. The client actually needs to save money, while the partner needs to have the client account turn a profit. Without any profit, what is the point of all that hard work by the partner and the team in delivering great legal services?

In the second part of the blog series, I delve into what is happening with the clients themselves and how their changing fortunes will impact their law firms.