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June 30, 2009 12:11 PM

Study: Law Firms Have "Little or No Interest in Change," CLOs Say

Posted by Brian Baxter

An annual survey of chief legal officers conducted by legal consultancy Altman Weil has found that law firms aren't exactly embracing the forces of change that many claim are sweeping the legal industry.

Altman Weil's 2009 Chief Legal Officer Survey received responses from 183 CLOs--about 15 percent of the 1,222 corporate law departments invited to participate. Sixty-two percent of respondents worked for companies with over $2 billion in revenues.

"This year, in the midst of an unprecedented financial shift, we wanted to learn if the talk about a changing model of legal service delivery--in terms of pricing, staffing, and law firm selection criteria--was being translated into action," said a statement by Altman Weil principal Daniel DiLucchio, Jr.

The study revealed that 25 percent of CLOs surveyed said they were putting a 'high' amount of pressure on their outside panel firms to change "the value proposition in legal service delivery," as opposed to simply cutting costs. Another 37 percent rated the pressure as medium, while 38 percent said there was a low degree of pressure on outside law firms to change.

When asked how serious firms are in changing their service models, only five percent of CLOs surveyed said firms are serious about changing their structure. Another 20 percent gave firms some credit for implementing efforts towards change, but an overwhelming 75 percent rated firms as having "little or no interest in change."

"This is a dramatic vote of no confidence from [CLOs]," said DiLucchio. "Either many law firms just don't understand that clients today expect greater value and predictability in staffing and pricing legal work, or firms are failing to adequately communicate their understanding and willingness to make real change. In either case, it's a big problem."

The survey also indicated that corporate legal departments expect to curtail their use of outside counsel in the next 12 months. Forty percent of respondents stated that less work would go to firms this year, up from 26 percent last year, and 27 percent of CLOs surveyed stated that they have reduced their in-house staff of attorneys so far in 2009.

Click here for more results from Altman Weil's CLO survey.

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CLO’s Are Not Serious About Change.

I was intrigued today to read the news release entitled CLO’s don’t think law firms are serious about change. With all due respect to friends at Altman, they can only report the answers that CLO’s believe they should provide to questions in surveys like this. And in this specific survey, what is being reported with respect to how serious CLO’s themselves are, about change, I believe to be absolute nonsense!

Fred Bartlit, founder of Bartlit Beck (American Lawyer Litigation Boutique of the Year), made a provocative statement on Legal OnRamp a few months back. He claimed: “I do not think most corporate law departments are serious about reducing costs.” Fred went on to cite a few examples where he had offered to help a client save money and found the client uninterested.

I was a little taken back by Fred’s assertion. From my past corporate experience I could not imagine how any company could not be genuinely interested in reducing costs, especially at a time of such economic despair.

Then I had an interesting experience in May. On behalf of an AmLaw listed, “Go-To” regional firm of over 500 attorneys, I spent two weeks initiating contact with the General Counsel of over thirty-five Fortune 500 Companies to explore their interest in investing one-hour to meet with 3 partners. The invitation was to discuss how this law firm could provide exceptional client service and deliver a potential savings of between 25 to 40 percent, or more. And that proposed savings was accompanied by specific details of guaranteed responsiveness, assured predictability, enhanced added-value and references from some top New York based Fortune 50 existing clients.

But . . . here’s the kicker.

To make my offer an absolute win-win proposition I offered each of the GC’s a personal guarantee. I personally guaranteed that if they agreed to meet with these partners and did not feel that they received value from that meeting in and of itself, then they were welcome to send me an invoice for one hour of their time and the name of the Charity that they would like me to send the check to, on their behalf. Dead serious!

So while I’m sitting at my desk reading the commentary of one Fortune 500 CEO talking to the financial press on May 23rd about how he was cutting 10% of the workforce, putting a freeze on merit bonuses, shrinking his capital spending outlay, renegotiating contracts on property leases and claims that his executives are “leaving no stone unturned in their search for savings as sales sputter,” I’m talking to the Company’s General Counsel asking for a meeting and being told that “he’s not interested.”

While Fred Bartlit may have been speculating about how serious most law departments are about reducing costs, I now have the proof, and can name names. So my respectful suggestion to these CLO’s is: quit suggesting that law firms aren’t serious about change and get your own house in order.

And if you are a General Counsel reading this and truly do want to save money, want to hear about a firm that can help you do that, and want to take me to task on what I’m claiming, please give me a call – I DARE you!

Patty, advertising disguised as dissertation is still advertising.

Mr. McKenna's post is at once astonishing and illustrative of why in house lawyers consistently are dissatisfied with their outside counsel and why we believe outside counsel simply don't understand their clients. First, I may not be a marketing genius but gimmicky ploys to get in the door of CLO's offices are not going to work. As a CLO I don't pick counsel out of the phone book or use up valuable time letting every firm that promises me they can add value to get in the door. How about first trying a reputation for excellent cost-effective work? To suggest that failure to let Mr. McKenna take up a few hours of my day means I am not commmitted to reducing cost just shows how clueless outside counsel are about life in-house. Marketing tip number two for Mr. McKenna: don't assert that the prospective clients are sheep in how they respond to surveys (believe it or not pretty much all my in-house colleagues agree with the survey results)or claim we are not truthful in stating that we are interested in cost. Reminds me of a consulting firm that made a pitch to me once about how they could install processes to reduce outside counsel expenses. They opened by asserting that all law departments were brain dead and had mismanaged outside counsel spending. It was a pretty short meeting. I would be happy to give Mr. McKenna their name so he could pick up some client development tips from them.
The bottom line is this: we struggle to provide the right balance of quality and cost. When business was booming law firms paid no heed to the cost side of their business---pay first year's outlandish salaries, re-decorate the offices, host a suite at the Super Bowl etc. Who cared--just raise rates 10% and over staff every matter---no reason why we all shouldn't earn what Wachtell and Cravath lawyers do. Those were golden days so it is no wonder that many firms don't want to give up that lifestyle. The ones that will succeed will be the ones who provide unique expertise (like a handful of major firms in particular substantive areas) and the ones that take the time to understand the value proposition that in house lawyers seek and deliver them.

The reason law firms haven't embraced change is because of the fundamental make up of the legal industry.

Remember that the big firm legal field is made up of over-achievers, most of whom have never failed at any serious endeavor. It has always taken the top one or two firms to raise pay before any other firm follows suit. Lawyers are often terrified of being inventive (in fact entrepreneurship is discouraged at most big firms despite what some firms may say), and taking risks for fear of failure. And nothing is more uncertain than eliminating the billable hour in favor of a fixed rate system. And for now, no legitimate firm has embraced the elimination of the billable hour.

In terms of hiring standards, the legal field exercises what I consider a "stockbroker" mentality. If anyone has worked in the field, this means that those people on top put in unbelievable hours and effort to get where they are. They expect their proteges to be just like them, and work just like them. In the legal industry, those on top are the academic elites who had no real-world experience in many cases as young associates, but whose grades were incredible. It became a matter of who looked the best on paper, rather than who can draw in the most business and manage the firm appropriately.

In a structure where those individuals advance by putting in time and effort, it is unlikely that the true change will come from them unless one of the top 5 firms is bold enough to change. Sadly, another few firms will likely face collapse (either now or next time we have a serious downturn) and it will be interesting to see if they learn their lesson then.

Lost in the important previous exchanges is a simple fact - a 15% return rate on such a survey is abysmal and not statistically significant.

It remains a snap shot, but one which at best is rather blurry.

John

I’m delighted to have provoked (and I’m sure you recognized that I was trying hard to be deliberately provocative here) some GREAT feedback on what I believe to be an important issue.

Is the BigLaw business model broken? Absolutely. I don’t think that we need spend further time reciting all of the reasons why. (and I agree completely with the comment "When business was booming law firms paid no heed to the cost side of their business") That’s a given. Are there some, in BigLaw, that believe that if and when the economy turns around everything will go back to normal? Again, absolutely! I’ve seen ample evidence of that mindset. But I must admit that I’ve also evidenced a good number of firms reaching out to embrace the ACC Challenge, experimenting with new approaches to add value (and attempt to abandon hourly billing), exploring how to deliver legal services far more effectively, and examining their business model for what changes are needed.

That said, my intent was clearly to provoke in-house counsel to also look in the mirror. As Pat Lamb from Valorem commented, “change is easy to talk about and easy to demand. It is, however, really hard to change yourself.”

One commentator here made an interesting assumption that perhaps my offer to “buy an hour of the General Counsel’s time” was some kind of sleazy marketing ploy. To the contrary the offer was conveyed as a sincere sign of respect for that individual CLO’s time. I know that CLO’s are extraordinarily busy, highly stressed from budgetary pressures, and likely getting calls from law firms all of the time. We believed in initiating this endeavor that if you are going to assert that you can 'truly deliver value' than you should prove it – minute one, hour one, into your very first meeting.

Now I’ve heard independently from a number of readers via e-mail correspondence. From Peter, the Senior Vice-President and Chief Legal Officer of a banking and financial services company, I was told: “Interesting comments you posted. I hope I am not invested in any of those company’s you could site.”

And I believe Peter’s comment goes to a very critical issue here.

As was the precise case with one company (and echoed by most) I contacted, if you are the CEO of a major Fortune 500 company and your sales have plummeted in the last quarter by 41.3 percent, your expectation of your fellow C-suite executives is to be doing everything they possibly can to weather the storm. If you were to learn (as I did) that your CLO simply negotiated a 15% reduction from their favored firm and was not bothering to explore every viable possibility, how much confidence would you have in his or her strategic judgment? Is this the kind of department leadership you want sitting around the corporate table? The point Peter was astutely making was that if you, as an investor, learned that a company that you held a significant portion of your investment portfolio in, was not exploring every option when under financial duress, is that a buy signal for you or a sell signal?

The excuse, raised by many for paying more than perhaps they should for legal services, is that “no one ever got fired for buying IBM“ (or whoever). That is a legitimate point and one I certainly cannot argue with . . . for about 5 to 15% of the bet-the-company legal work that needs that kind of risk management model applied to it. Beyond that, is it really a legitimate excuse?

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