In the first part of this blog series, I discussed the mismatch between clients and their law firms in negotiations over pricing and deliver of legal services.
Meanwhile, Inside the Client
I recently had the good fortune to sit next to the head of legal operations for a global bank at a dinner, spending time talking about value and innovation. But let’s be clear — success for him includes reducing the amount of external legal spend — his current target is 15%.
I can’t blame him. Indeed, I can’t see someone surviving in his very senior role when spend is increasing year-on-year. I asked him, “Whatever happened to boom and bust? In the old days, a few years after a crash, everything got back to normal, the focus was on new business and there would be no problem over rates. But here we are, more than 10 years after the Great Financial Crisis, and still big clients are cutting costs.”
He then explained it like this: Pre-crash, his bank had big margins and —now with the benefit of hindsight — high risk. Now, the bank was working on tiny margins; and its only route to profit was to come down hard on overheads. That explains why the bank had just announced several thousand more job cuts and why he was determined to cut legal spend. Moreover, law firms differed very greatly in their response to the bank’s pressure on cost, and the bank simply did not want to work with firms who weren’t cooperative.
Interestingly, he admitted that the law firms that brought their pricing team to the meetings did better — opening up more alternatives, changing scope to reduce cost, and the like. He described this as substantially relationship enhancing.
A Tale of Two Cities
Around the same time, I managed to get a meeting with another huge client (in terms of global legal spend); and I wanted to meet their general counsel, because when I had been a law firm partner, it had been my worst client. They had negotiated low rates, ran competitive tenders, took multiple secondees (hostages, we called them), and insisted on rate freezes year after year. Now I had a chance to tell them what it was really like to work for them! I even arranged to visit two of their current panel firms to make sure I was up to date on current practice. Firm A confirmed my own experience, doubted whether it was worth hanging onto this client and were building up the nerve to fire them. Firm B was a big surprise however, describing the client as “Probably our best and most profitable client! We would love to get more work from them.” This didn’t make sense to me, so I asked to dig deeper.
The law firm that first starts to change and innovate is in the pole position to change the rules and make sure that they work for both the client and for the law firm.
It turned out that while the client paid both firms exactly the same fees, Firm B had completely changed the way that they handled the work. More than 90% of the work had been moved out of London into a distant regional office. The firm had worked hard with the client to standardize and then computerize as much of the process as they could.
The firm’s managing partner told me, “Here was a client who wanted an EasyJet budget with premium airline service. We could either provide that at a substantial loss from our London office, or we could handle it profitably from a different region.” Of course, none of the London partners doing the work wanted this to happen, the managing partner added. “So, I worked with the client and told them quite openly that they needed to send us more, higher quality, work for these London partners, and in return we would get them a great deal on their current work. A win-win that dealt with the invested partner roadblock.”
This also confirmed my long-term experience in these tough situations — the law firm that first starts to change and innovate is in the pole position to change the rules and make sure that they work for both the client and for the law firm. Other firms, later to the party, often had far fewer options.
Where to Next?
There are a number of factors in play that are pushing many clients to save money. Indeed, clients may use words like alternative billing or innovation, but what they are asking for is to spend less. Any economic shock, from coronavirus or otherwise, is only going to increase the impact and speed of this. For the biggest of these clients, they are looking for law firms that are prepared to change the way they work to better meet these needs.
I believe that now is the time for law firms to answer the question, “Are you content to lose this segment of work to other firms?” If you are, great — then just focus on what the firm does best and understand that the firm’s decision may carry some relationship risk to the rest of the work. Alternatively, if law firms want to work with clients and save them money, they need a plan. From experience, a good plan will include:
- Winning the buy-in of partners and the whole team that would be adversely impacted by a change in practice, such as relocating the work or using technology to radically alter how it’s delivered. How would any changes impact these colleagues? And what are you going to do to support them — for example, by giving them other work or clients (even over a medium-term timeframe)?
- Join in with clients from the beginning to co-create solutions so that they are sure to use them, and be clear on the changes that clients have to make and the differences in the service they will receive. When we are dropping from Business Class to Economy, point this out, and test what is acceptable in this drive to save money.
- Support these changes by bringing in your pricing, project management, and technology teams, or if you don’t have those in-house, recruit process-change experts to support your legal team.
What I am proposing here can involve quite a radical change for many law firms. Further, it is a strategic decision; but I would say that doing nothing in the face of these client demands is also a strategic decision — one which you may be making without realizing it.