The latest ACC Census Report is out and it confirms what many have realized: there has been a marked shift in bargaining leverage from law firms to in-house counsel. The recession, technology, and the rise of legal process outsourcing (LPO) providers have all combined to create excess capacity at law firms. Whether this shift spells the end of large law firms, of course, remains to be seen. Let me add my own two cents to the useful and robust discussion underway with contributions from Ron Friedmann, Patrick Lamb, Paul Lippe, and others.
As a long-term practitioner and observer of negotiation processes, when someone tells me they have gained new bargaining power, at least two questions come to mind: is the shift permanent? And whether it is or not, how should you use that new leverage?
If the shift is not permanent – and evidence suggests that law firms have been doing some of what they need to do to reduce their excess capacity and adapt to new patterns of consumption of legal services – then in-house counsel have to ask themselves what is the best use of a temporary shift in bargaining power? What gains can they achieve that will have any lasting impact, and for which they won’t have to “pay for” when the leverage shifts again? One answer seems obvious: any gains made in the form of hourly rate discounts are ephemeral at best. Discounts are not only of limited value, but they also have a deleterious effect on the relationship, and increase the likelihood that counsel will be looking for “payback” when the shoe is on the other foot.
Whether the shift is permanent – and an argument could be made that if in-house counsel continue the trend to consolidate their spend with fewer firms, build more in-house capabilities, and make greater use of LPO providers they retain directly, the bargaining leverage will remain at least neutral if not tipped in their favor – or not, there is still the question of how to make the best use of it. And by best use, I mean how can in-house counsel assure themselves of the best value for money? The best “fit for purpose” match of resources to problems? The best client service? In my view, in-house counsel can make the best use of their current leverage by trying to build a relationship with outside counsel that is constructive and collaborative, and which explicitly puts on the table, for joint problem-solving, the questions of efficiency, predictability, and value. Whether you have treated outside counsel as a friend, or as an arms-length provider of a basic corporate service, you have to think about how the changing market dynamics allow you to develop a handful of truly strategic relationships.
What does that mean, exactly? It means that in-house counsel have to manage their relationships with law firms much more like one of their peers in another corporate function would manage a relationship with a key strategic provider. Such relationships recognize that strategic providers often perform a range of services – not everything is “bet the company” stakes – and that value, as well as effectiveness, matter. Those relationships also recognize that the provider is in business, and has interests in its margins, its brand, its future revenues, and the development of its staff. Managing strategic relationships takes time and attention – that’s why you can only treat a few of your providers as truly “strategic.” To be successful, strategic relationships with a provider require the client to invest time in planning with the provider, in some cases on a project by project basis, but also at the overall relationship level. They require that the parties articulate general goals and talk about specific deliverables, and what it takes from both sides to achieve them efficiently and effectively.
For in-house counsel this means having real conversations, supported by data, about what you want from outside counsel and how they can help you serve the business better. It means talking about annual budgets and plans as well as matter-level conversations about outcomes, staffing, management, as well as on what basis fees will be determined. It means articulating your expectations, and also listening to what counsel expects and needs from you in order to be able to deliver efficiently and effectively. It means being a part of the process of exploring alternatives such as outsourcing and a part of making sure what gets unbundled gets reintegrated.
I’m suggesting nothing revolutionary here. Many in-house counsel have developed these kinds of relationships with their preferred outside counsel and are managing them effectively. What the current shift in bargaining leverage has done, however, is provided a window of opportunity for others to do the same. Because many law firms are more worried than they used to be about having enough, and sufficiently profitable, work to retain their partners and sustain their profits, they are more likely to be willing to make the investments required to be a good strategic provider. They are more likely to be flexible about staffing, outsourcing, project management, and billing arrangements. They are more likely to be willing to invest the time and attention required to manage their side of the relationship, even if it means getting better at budgeting and spending more time working side-by-side with their clients to make the necessary trade-offs as a case or transaction evolves. That’s the kind of fundamental change in how law firms and clients work, which if made now, can pay dividends forever, regardless of where the bargaining leverage may lie in the future.