Managing Legal
The Point
Demand for large law firm services, after recovery from 2020’s Covid-induced setbacks to the economy, led to eye-popping rate rises in 2021, and record revenues for the firms.
Whatever market forces caused those rate increases and record revenues, they look like they may well be on the wane in Q42022. Large law firms’ recent, verifiable behavior reflects this.
Client companies should not hesitate to negotiate robustly with their law firms on rates. Beyond that, they should negotiate alternative fee arrangements based on mutually agreed value determined in advance of the work performed — not based on attorneys’ hours.
This Matters to Your Business
“Demand for large law firm services” is not a readily accessible number. In fact, it’s not a number at all. (Sources like Georgetown/Thomson Reuters report annually on total gross hours billed as a very poor proxy of economic demand for what attorneys provide to their client companies. Firms vary in workflow efficiency, individual lawyers work at different speeds, and billing quotas and other incentives to maximize hours billed distort those gross hourly totals).
In determining demand for large law firm services, there is no objective counterpart to the fed funds rate or CPI. And there are distinct hierarchies among large law firms that affect price. Finally, within any one firm, rates vary starkly between practice areas: E.g., securities (higher) vs. employment (lower).
Subject to these caveats, anecdotal evidence indicates that 2022 seems to present a considerably less robust demand environment for large law firms than 2021 presented:
- Preliminary August 2022 data from the U.S. Bureau of Labor Statistics shows that the legal services sector (lawyers, paralegals, and other legal sector professionals) lost 8,900 jobs, which surprised observers following 5 consecutive months of increases.
- “Hiring Freezes And Stealth Layoffs Hit Top 50 Biglaw Firms”, September 8, 2022, AbovetheLaw.com.
- Gunderson Dettmer, a law firm in Silicon Valley with 400 lawyers and 11 offices around the world, announced it will be deferring start dates of its new associate (employee) lawyers from October, 2022 to January 2023, “because demand has slowed significantly”.
- Dennis Kennedy, legal tech expert and law professor, put it this way: “How many data points does it take to make a trend? Add this to what I heard yesterday about firms asking for 15% rate increases, culling “unproductive lawyers” stories, and maybe it adds up to something starting to happen.”
- Anusia Gillespie, U.S. Director of Innovation at Global Top 20 law firm, Eversheds Sutherland, observed: “I’m seeing work being insourced [i.e., not sending the legal work to outside firms] across industry and size. Seems like firms are now feeling the impact…I’d lean towards trend, not blip.“
Because …
Q42022 is a time for C-suite executives and business owners to make all of their lawyers — general counsel in-house and outside counsel alike — accountable for cost efficiencies. To date, the business community’s use of its purchasing power to get client company-friendly pricing and favorable terms of engagement with their law firms remains “the road not taken”.
Whether in boom times, or in recession, the business cycle shapes the context for negotiation between client companies and their law firms. So C-suite executives and business owners should be as pragmatic in dealing with their law firm counterparts now, as those law firms were with them last year.