Clients voting with their feet? What does this have to do with employment law?
Well, now for something completely different – an article not devoted to employment discrimination. But still close to my heart.
It’s been a year now since I went “over the wall” and left Big Law behind. And I want to thank the hundreds of readers who sent their one-year congrats to me on LinkedIn – I really do appreciate it! My reading of recent reports on the legal market indicates to me that my timing seems to have been good.
Clients are “voting with their feet,” concludes the “2016 Report on the State of the Legal Market” put out by The Center for the Study of the Legal Profession at Georgetown Law. This blockbuster report provides tons of analytical and statistical support for a recent article entitled “Are You There Biglaw? It’s Me, The Client: Why GCs Are Pulling Even More Business From Firms,” published by the blog “Above The Law.”
Both of these sources explain why clients are leaving Big Law, and why Big Law is not responding – and both emphatically reaffirm that my decision to leave Big Law was a good one – for both my clients and me.
“Above The Law” provides a good lead-in to the situation:
“It’s not exactly news that general counsel are growing increasingly impatient with a law firm business model they see as inefficient and costly. … they no longer see the value of paying for ‘brand name’ firms when it comes to most legal problems. Yet the firms have lurched forward much as they have the preceding decades. … It’s like Biglaw just can’t help but ignore the winds of a changing market where e-discovery firms have absconded with the document review fees and technology has flattened the resource advantages of a major player versus a small firm or in-house counsel.”
But the Georgetown Report, with its numerous charts statistics, and in-depth analysis of the legal market, should really shake the foundations of Big Law.
The Legal Market Has Changed Irrevocably
The Georgetown Report states that:
“History, of course, has many examples of well-established companies being blindsided by technological developments that oust them from their positions of market leadership. … Since 2008, the market for law firm services has changed in significant and permanent ways. … Increasingly, clients are demanding more ‘value’ in return for their legal spend, and by value they mean greater efficiency, predictability, and cost effectiveness in the delivery of legal services. What once was a seller’s market has now clearly become a buyer’s market, and the ramifications of that change are significant.”
Big Law Has No Answer But To Raise Rates
Are traditional law firms – i.e., Big Law, responding to clients who are demanding cost-cutting and rate –cutting, in short, “a new model?”
Not much. As clients flee, Big Law is forced to raise its rates so as to keep the dreaded “realization rate” from dropping.
The Georgetown Reports commented that Big Law is “locked in a kind of denial driven inertia,” and that:
“Law firms have responded to these changed market conditions in largely passive and reactive ways. … very few firms have been willing to engage proactively in the consideration or implementation of the kinds of operational changes that would be required to respond effectively to the changed expectations of their clients. .. [M]any law firm partners believe they have an economic model that has served them very well over the years and that continues to produce good results today. They are consequently reluctant to adopt any changes that could put that traditional business model at risk.”
Moreover, one additional approach which Big Law employs is what a partner of mine calls the “squeeze-out”: “billables” are either pushed up to inefficient, higher billing partners who don’t want to lose their bloated distributions, or down to contract attorneys, or to 1st and 2nd year associates while squeezing out the most productive and efficient lawyers – the 5th to 15th year attorneys who were the ones doing the lion share of the quality, efficient work. This allows the higher-ups to meet their billable requirements and to increase their leverage by using lower-level, cheaper support. But, as with other approaches, the client suffers from a quality and efficiency standpoint.
So has Big Law done anything to accommodate clients? Why, they have raised their rates!
“[D]espite sluggish demand growth and falling realization rates, law firms have been able to maintain their profitability levels over the past few years by their annual rate increases, even despite growing client resistance.”
This may appear counter-intuitive until you understand the dreaded but all important “realization rate” that is the real driver behind everything that that Big Law does financially. “Plummeting realization rates” has resulted from clients “voting with their feet,” as the Georgetown Report puts it. So the only way to keep profits up is to raise rates and continue to flog associates to bill more.
The Georgetown Report continues:
“[A]t least since the onset of the recession in 2008, law firm clients have increasingly demanded more efficiency, predictability, and cost effectiveness in the delivery of the legal services they purchase. In the main, however, law firms have been slow to respond to these demands, often addressing specific problems when raised by their clients but failing to become proactive in implementing the changes needed to genuinely meet their clients’ overall concerns. As a result, increasingly clients have chosen to ‘vote with their feet’ by reducing the volume of work referred to outside counsel and by finding other more efficient and cost effective ways of meeting their legal needs.”
What Is A Poor General Counsel To Do?
It is the client, of course, who must pay the unreasonable bill as a result of the “realization rate” obsession. Already-inflated hourly rates are jacked up even higher to pay for the marble lobbies, the mahogany office furniture, and the salaries of inexperienced associates.
The “Above The Law” article asks “What will it take to snap firms into the 21st century … if you can’t get over yourselves and start bowing to what clients are willing to pay, the walls are going to keep closing in.”
And the Georgetown Report responds that “firms that are proactive in pursuing new strategies to meet the concerns and expectations of their clients are more likely to achieve stronger financial results than those firms that merely react to specific client demands. That is, of course, not surprising.”
That leads me back to my belief that my decision to escape from Big Law has helped me and my clients. I went “over the wall” and found an alternative to exorbitant client fees, without the personal bondage associated with Big Law. I joined a national “cloud firm” whose model aligns clients’ interests with mine by eliminating the inefficiencies of the Big Law firm cost structure. No more realization rate nonsense or, upon pain of death, billable hour requirements. I have been able to reduce my hourly rate significantly and to provide better service to my clients, while enjoying practicing law and living a freer lifestyle.
As one of my partners has said, “As long as expensive overhead weighs on the legal model, alternative fee arrangements will not help. Our message to GCs is that slashing those fees (sometimes in half) is a realistic option.”