The Great Divide

Last week Eversheds sponsored a conference in New York, primarily targeted at senior inhouse counsel, to discuss the current and future state of relations between law firms and inhouse departments.  It was not pretty.

About 90% of the attendees were the chief legal officer of their companies or just a rung or two below, representing companies such as GE, Cisco, Tyco, Schering Plough, FMC, and other major companies you've heard of.  Jeffrey Carr, GC of FMC, delivered the keynote:  The first half was a thought experiment imagining the law department of 2020 where all the information he needed about case loads, new developments, assignments, deadlines,  etc., was delivered by an artificial intelligence engine with a voice mildly reminiscent of an English butler.  The second half was Jeff delivering a stemwinder about the out of control  costs of outside counsel, the relentless 6 to 10% annual growth in legal fees, the incongruity of those increases in the cost-constrained corporate world, the insanity of first year associate starting salaries, and the menace of $1,000/hour rates.

The conference  featured instant wireless audience "voting" devices, and a couple of dozen questions were scattered through the morning session, the responses  to which the event's organizer has been kind enough to provide me with. 

This was one of the initial questions asked, I might note, before Jeff's keynote:

What single factor has the biggest impact on your company’s legal function right now?
                - the economic downturn
                - involvement of procurement / purchasing function
                - the pace/scope of global growth in your business
                - recent corporate crisis or regulatory issue we had
                - rising costs of outside counsel

And here are the responses:

After the keynote, Peter Kalis, Chairman of K&L/Gates, the only law firm managing partner in the audience to my knowledge, posed the first question to Mr. Carr [paraphrasing]:  "How do you square  your emphasis on costs with the response to that question, which indicates that 4 out of 5 people here do not consider outside counsel cost their largest challenge?  In particular, about twice as many rank the complexities of global growth their key concern."

Another question dealt with the degree to which law firms understand the clients' key concerns [1= poorly, 5 = very well]:

Not an impressive grading, overall.  Yet the next question indicates the inhouse counsel believe they're  doing a fairly cogent job of explaining the "business  and constraints" of matters to their outside counsel:

It strikes me that these two responses are, shall we say, lacking alignment. 

A subsequent question recurred to globalization [1= not very; 5 = highly]:

Not to dwell on Pete Kalis' point, but with 90% of respondents rating their companies as quite global—and half selecting the strongest option available on that score—I would submit that their need for law firms with comparable global capability has never been greater.

Next came the related issues of project management and knowledge management, which many observers of this scene, myself most violently included, believe could do  more to rationalize how outside and inside lawyers handle litigations and transactions, than any other readily available tools.

Ready for our next disconnect?

So 60 out of 62 agree with me.

Yet they don't believe  their law firms are doing a remotely decent job on this score:

Yet when asked, by implication, whether their departments would be willing to collaborate with outside firms to improve knowledge sharing, about 3 out of 5 don't want to make the investment:

If the question is not mutually supportive investments (we'd prefer not to) but rather cost sharing for budget overruns, we  get a drastically different  story:

Predictably, law firms were also charged with being insufficiently concerned with costs—a charge evidently given heat and force by the pressure inside counsel feel on precisely that score.  Yet firms, in their defense, noted that:

• In this economic environment, they have never been more concerned with costs, especially as top-line growth is challenged; and more importantly:
• The three  primary costs for firms (in order) are:
  • Lawyers;
  • Rent and occupancy; and
  • Insurance.
• Essentially none of these three are negotiable or discretionary in the least. Firms cannot scrimp on talent (nor, I imagine, would their clients want them to), cannot move their offices to Jersey City, and in the insurance market are pure price-takers, not price-makers. All other costs amount, economically, to nickels and dimes.

As noted, one particular element in the bill of particulars indicting law firms' practices was the high level  of associate salaries.  Not only were they obnoxious, unjustified, and objectionable per se, but they forced inhouse departments to pay extravagant amounts to recruit their own staff attorneys. 

By now you perhaps won't be surprised to discover that this particular count of the indictment is not widely supported when push comes  to shove:

Of the following, what is the most challenging issue for your legal department in responding to global demands?

• finding and keeping in-house lawyers with skills for cross-border work
• managing the complexity and diversity of global demands
• dealing with regulatory compliance as we grow globally
• dealing with risks and disputes as we grow globally

In other words, only about 6% of respondents actually name "finding and keeping in-house lawyers with skills" their key concern.

Let me conclude with—I believe—one of the most illuminating results  of all.

We know that towering above all other objections to how law firms do business is resentment of the almighty billable hour.  So yes, yours truly suggested the following question to the organizer:

The billable hour will disappear during my career:

• Yes, because it’s a preposterous measure of “value.”
• Yes, because it sets up an inherent conflict between the law firm’s and the client’s best interests.
• No, because it’s simply too ingrained.
• No, because law firms would be tempted to overcharge.
• We already use “alternative billing” for the majority of our work.

And the results?

My reading? "Alternative billing" has an embarrassingly small "market share," and for all the bemoaning everything that's wrong with the billable hour, the vast majority are resigned to its continued reign. 

I won't go so far as to characterize these findings as a counsel of despair, but I was taken aback—briefly, shocked—by the apparent absence of engaged, constructive, creative, imaginative dialogue between firms  and senior inhouse counsel.  The complaints are  familiar—perhaps too familiar, as if we've become  exhausted by this conversation.  And yet the gulf shows  no signs  of narrowing, or (imagine!) being bridged.

David Wilkins of  Harvard Law School has described the evolution of corporate/law firm relations metaphorically as  moving from that of  a marriage to that of serial dating to that—he hopes—of joint venturing.  Joint venture partners each bring indispensable  capabilities to the mutual enterprise, both understand they can't achieve  their goals without the other, and both  show sincere deference to and interest in their  partner's economic and professional viability.   Is that too much to expect?

On the current evidence, it may well be.

Update (Sunday 22 June, 5:00 pm)

Jeff Carr of FMC writes:

Bruce -- the Eversheds conference was an eye-opener for me not because of the depth of despair, but rather for the simple reason that a major international law firm hosted the event.  At least personally, I've grown tired of speaking about the problem -- because the true problem is on our side of the table -- that is in-side counsel.  Firms are indeed acting quite rationally and we are acting as if this is a highly inelastic market.  Indeed it is not -- we simply choose to believe it is. 

One of the slides I used at the conference compares our "depth of despair" to the coping cycle of a cancer patient -- you know, denial, anger, despair, acceptance, healing.  Most of my brethren are firmly ensconced somewhere between denial or despair -- but we cannot rest there and the happy little band in which I travel (Dupont, Cisco, CP Chem, Tyco and others) seem to be joined by more and more fellow travelers.  I believe we are near a tipping point and it is time to engage our firms in meaningful dialogue about how to get back to value -- the new ACC [Association of Corporate Counsel] project Fred Krebs talked about at the conference hopefully provides a context for those discussions.  We need our law firm partner/providers to be successful and profitable -- they need to change their business model to focus on profits as opposed to top line revenue growth in a cost-plus world.
 
 
All the best,
 
Jeff

Others?  Time for you to weigh in. As painful as this dialogue me be (cancer death?!), it is shockingly overdue.

You know where to reach me.

Update:  25 June 2008.  E. Leigh Dance of ELD International, Inc. writes:

Dear Bruce,

You captured well what we saw and heard at the June 12 conference. As one of the conference “organizers” you mention in your June 21 posting, I have two observations:

In the last six to nine months I’m witnessing a leap in the global trends we’ve been seeing climb year to year. I’m about as internationally oriented as an American can get, and yet week to week I add to my list of fast-growth markets whose cities I can’t spell (without Google, how fast can you find Tallinn, Florianopolis or Chongqing ?) Every multinational corporate counsel I talk to these days is facing a huge increase of business investment and focus in emerging markets (read: higher complexity, risk and exposure), coupled with heavy pressure on legal costs in mature markets.

Generally these counsel just don’t see their law firms as allies to meet the challenge. The conference findings show clients don’t think many outside counsel really understand their issues or can organize themselves to help effectively. That’s not just a damn shame, it’s one very big opportunity. Lots of law firms are growing offices here and there and many are happy to grab high-margin multi-jurisdiction transactions, but precious few firms are offering clients deep, consistent and practical assistance to cope with this global tipping point.

It makes it easy for Eversheds (one of those few) to tell a good story, as it has done over the last year or two and did again in New York earlier this month.

Second observation: more than despair among these CLOs, you were seeing underlying anger. Some of their responses were unreasonable, and that’s a sign of their frustration. With global demands mushrooming, they see marginal help and rising costs from their law firms. Many in-house lawyers want to defend their outside advisers, but often they aren’t given much ammunition to fend off aggressive procurement functions. Meanwhile, the double-digit law firm profits that clients worldwide keep seeing in legal media have an effect similar to soaring gasoline prices. Market forces or not, it seems like others are getting fat off their backs, and it hurts. Law firms have been good at marketing expert advice—but advice is only a fraction of what companies need to successfully address their legal issues globally.

Best regards, Leigh

_____________________________________________

E. Leigh Dance, ELD International, Inc.

[Bruce again:]

Leigh makes some powerful points:  First of all, the disconnect is "not just a damn shame, it’s one very big opportunity."  BigLaw, take note.

Second, "more than despair among these CLOs, you were seeing underlying anger.  Some of their responses were unreasonable, and that’s a sign of their frustration." 

I would add only (as I've written before), that GC anger at starting associate salaries is profoundly irratiional, and I can only chalk it up to a toxic combination of envy and resentment.  Why is it irrational?  Because as a business person (or as an economist), you should care less about what your suppliers pay for each of their factors of production: You should care only about the final product or service delivered.   Perhaps an example disconnected from law-land will help.  We know that many parents (and students, with loans) bemoan the rising cost of Ivy League educations.  Fine, and GCs are entitled to bitch about law firm rates.  But the irrational component is to single out associate salaries for  invective.  People struggling under the weight of Ivy League tuitions don't frankly care whether the burden is attributable to professors' salaries, an "edifice complex" at the college, or the cost of cleaning dorm common areas of beer cans and peanuts Sunday mornings.

And as Leigh recognizes, when a reaction is irrational, it's really about something else.  People who aren't making sense are sending a signal that there's something else going on you're best advised to tune in to.