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November 30, 2009 5:58 AM

The Change Agenda: Can You Hear the Ice Melting?

Posted by Aric Press

A year ago we began tracking the advent of fundamental change in the large law firm world. As is our habit, we rather grandly labeled it The Change Agenda--a combination of vectors that in our view had the prospect of forcing a conservative, risk-averse community to move out of its comfort zone. Where are we today? The outside investors bearing sacks of subversive cash haven't arrived yet; they must be caught in traffic trying to get to Bear Stearns. And the transformational technology remains a slow-gestating messiah, though a fixture on the talk show circuit. But the other two change vectors, significant shifts in the attitudes and habits of clients and in the law firm talent model--now, make that models--seem clearly upon us and, even when the supply and demand curve shifts, likely irreversible.

There are plenty of disparate events that support the observation that this change business is more than just a sideshow. On the customer front, two examples: Half of The American Lawyer's 20 A-List firms are on record this year as starting alternative fee arrangements with important clients such as Pfizer and Citibank. And, if Microsoft could chop K&L Gates and Sullivan & Cromwell from its preferred provider list, what client-firm relationship is inviolate? On the talent models, we all know the litany of layoffs, deferrals, partner departures, and embraces of so-called competency models. Add to that the fact that outsourcing now has its own initials--LPO (Legal Process Outsourcing, for those few of you who haven't been in the conversation)--and law firm HR just got harder and global.

For the really astute, this year it became clear that LPO is really about the "P." It's not whether the work is done in Bangalore or Bangor or on Broad Street; it's how the work is done. "Work on process improvement," says Microsoft general counsel Brad Smith, "that's the holy grail for us." Think of it this way: Why is it that law firms are the only businesses in which increasing productivity is a measure of how many more hours a lawyer bills rather than how more efficient she has become?

Anecdotes will only take us so far. To get past the tedium of all the chatter, this fall we sought some concrete measures. We used our annual survey of the heads of The Am Law 200 to ask questions about the changes they're seeing; 142 responded. And we ran a joint survey with the Association of Corporate Counsel, asking 7,000 ACC members about changes in their behavior; we received 587 answers. We found action as well as words. More than half the law firm heads report seeing a "fundamental shift" in the legal marketplace; only a quarter said they didn't. Four-fifths used flat fees; three-quarters had at least one incentive or success fee; one-quarter outsourced work to third-party hired lawyers--LPOs. For the clients, more than two-fifths reported that 6 percent or more of their work was on an alternative fee basis; roughly the same number said they'd increase the use of alternative fees this year. Also, they confessed to sharpening their axes. Half had dropped at least one law firm; 13.5 percent chucked four or more.

There's much more in our Change Agenda package. Click here for our annual Law Firm Leaders survey (the feature and survey results are available by subscription only). See the ACC/TAL survey results below.

Those who embrace the changing circumstances stand to live long and prosper. Those who resist might want to reach for a couple of aspirin before turning to our report on Pfizer’s latest prescription.


THE CLIENT'S VIEW: In September The American Lawyer and the Association of Corporate Counsel (ACC) jointly surveyed 587 ACC members who have the title "chief legal officer" or "general counsel." In that group, 149 head departments at companies with annual revenues of $1 billion or more. Here are the survey results (Note: Click on the images below for a larger view) :

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(Note: For a larger view of the charts, click on the images.)

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I think Aric is dead on: some folks are still discussing whether the law firm/client business model is changing or whether we'll all go back to business as usual (pre-crash) now that the markets are rebounding. The time for talk is passing. The numbers and change represented in this survey are still modest, but the key question is, where's the trendline going? ACC's motto for the ACC Value Challenge as always been "revolutionary change in an evolutionary manner" - so watch the trendline inching forward as repeats of this "baseline" survey are conducted over the course of 2010. (And you can dig deeper into inside-outside survey info on both the AmLaw and ACC sites - such as the ACC/Serengeti survey.)


While Aric must refrain from predictions (he's the objective reporter in his role), I'm not so shy. I predict that the numbers indicating that the value-based relationship is here to stay will grow throughout the course of 2010. If 2009 was the year of clients performing "give-me-a-discount!" triage, 2010 will be the year of clients driving even more value-based relationships, representing as much as a quarter of all client spend and firm matters overall.

ACC will be highlighting the firms and clients who are committing to even more progressive growth of the value-based service model.

-Susan

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