BigLaw New Normal May Accelerate Changes in How Firms Support Lawyers
Recent evidence suggest that the new normal for large law firms will differ from the pre-crash legal market. Two weeks ago Hildebrandt Baker Robbins released its Peer Monitor Economic Index (PMI) for Q1 2010, which is flat - at the same level as 2009 Q4. PMI is a function of demand (billable hours), productivity (hours per lawyer), rates, direct expenses, and overhead expenses. Three components were down; the two that were up do not signal an upturn. Rates were up but reflect only a change in mix, meaning lawyers with higher rates did more of the work. Productivity was also up but reflects fewer lawyers doing what work is available. Hildebrandt concludes:
“It is increasingly apparent that the fundamental economics of legal practice are undergoing a significant and permanent shift…. With slow revenue growth, firms will continue to focus on cost‐cutting to bolster profitability, and consequently aggressive cost controls are now the norm, no longer simply a short‐term response to weak demand and pricing….. The strategic emphasis is shifting toward a different imperative: the need for greater efficiency in the delivery of legal services.”
Other signals also point to a new normal. For example, Alternative Billing Arrangements Putting Down Deep Roots General Counsel Say (National Law Journal, 17 May 2010), reports that “costs to U.S. companies have risen 20 percent over the past decade. During the same time period, however, legal costs have risen 75 percent.” In reaction to ever-increasing costs, GCs increasingly use alternatives to the billable hour. “[M]any companies and law firms now report that as much as 40 percent of their work is billed on alternate billing arrangements that include flat fees, phased billing and contingencies.”
The need to control cost, increase efficiency, and improve the value of legal services is turning new attention to law firm costs for lawyer support. With AmLaw 200 median lawyer support cost at $170,000 in 2007, there is room for savings. (See my personal post, Cost Control as Part of AmLaw 200 Turnaround Strategies, for how I estimated this. For 2008, the latest year available, the same assumptions and method yielded median overhead of $180,000.)
Two recent announcements will likely catch the attention of many law firm managers as a way to control and decrease this very high overhead. As I discussed in my recent post here, WilmerHale Reduces its Middle Office Costs, US-based WilmerHale announced at the end of April that it will soon move about 200 staff positions to a low cost operations center near Dayton. This move is initially only for staff support but will include a more cost-effective approach to high volume, routine legal support: WilmerHale moving support staff to Ohio in the Washington Post (3 May 2010) reports that the “business center will develop the resources to provide on-site document review as well.”
On Friday, UK-based Cameron McKenna announced a major middle outsourcing deal with Integreon. The Integreon press release explains that the firm has signed a 10-year agreement with the company for outsourced Middle Office services, including portions of accounting and finance, HR and training, marketing and communications, learning and development, library and information services, research, information technology, and facilities. The deal value is £583 million. “By outsourcing non-billable tasks to Integreon, CMS Cameron McKenna can focus on its core competency – providing high-end legal and tax services. CMS Cameron McKenna’s decision to outsource its Middle Office is part of its ambitious and progressive strategy to create a new model for law firms.”
Like WilmerHale, this deal does not initially include legal process outsourcing (LPO) services but a Legal Week article, Camerons set to outsource entire back office with Integreon deal (14 May 2010) , notes “Camerons will also review future legal process outsourcing opportunities with Integreon, but no legal services have been included in the initial deal.”
I was surprised that WilmerHale’s announcement garnered little legal media or blog attention. My recent Google search “WilmerHale dayton ‘business services’ ” yielded only three dozen hits, few of which comment on the firm’s move. That’s not much discussion about what strikes me as a momentous decision. If Hildebrandt is right about the new normal, more firms should consider this type of move. It will be interesting to see if the CMS Cameron McKenna announcement generates more coverage and discussion in the coming weeks.
I wonder how many more quarters of bad index readings will it take before we see more such announcements? WilmerHale illustrates the ‘captive’ route to reducing middle office costs and CMS Cameron McKenna illustrates the outsourced approach. Firms that figure out how to support lawyers at lower cost and let lawyers focus on practicing law and client service will have an advantage in the new normal.
[This post is an extension of my May 10th personal post, BigLaw New Normal Looks Bad - More ‘WilmerHale Moves’ Coming?)