Why Managing Partners are reaching for their contingency plans
In my role in academia and consulting I get to work with law firm partners from around the world, and to meet and talk to their clients. Seeing the contrast in challenges is startling – and has brought me to the conclusion that law firms need to address some strategic issues now or face some pretty big risks over the coming years. It may not be a perfect storm coming our way, but I believe it will be a market changing one. It is thrown into sharp focus when I talk to Managing Partners who are reporting their most profitable year ever; and contrast that with their clients who are suffering job cuts in the thousands as they struggle to cope with decreasing margins. Should the coronavirus or anything else cause a drop in demand for legal services, law firms need to plan for how they would react – and that needs some strategic decisions right now.
I spend a considerable proportion of my time running workshops around the world with groups of partners who need help in working out pricing with their clients. Partners often face a well-trained adversary (and it has become adversary in some sectors) where clients are using Procurement, or the remarkably similar Legal Operations Professionals, to drive down prices. While a minority of law firms have developed professional pricing support, that is still the exception rather than the rule, and I often see partners going into battle wholly unprepared. And not just unprepared in skills terms, but actually unprepared. The time pressures on partners are already so intense that I often see partners heading to review meetings having spent less than an hour in preparation. Yet they will face a client team that has spent several weeks on preparation and market analysis before meeting them. Taking a knife into a gun fight does not do justice to what typically follows. That is most often the case when we are dealing with the unholy trinity of clients – banks, insurance and pharma. For these clients, legal spend forms such a material amount in terms of their overheads that they have had to become extremely professional in managing spend. Fortunately for them, they faced law firms who were not anything like as good as them at this process.
Let me give just one example. Over a beer one Procurement Director shared this story. Before going to see a law firm he would go to see the GC / Legal Director or equivalent and ask him this question, “What else could this law firm give you, other than financial discounts or rebates and the like?” He explained to me that in any negotiation there would be sticking points and then he wanted to have some extras that he could ask for in place of the requested concession. For example, he might be trying to get an extra 10% off the partner rate, but found that the partner would say he could give no more than an extra 5%. In that case our Procurement Director would say OK, I could agree to 5% but only if you could give us “X”. And “X” was something from his list. A secondee; an agreement to give the first 15 minutes of any advice free; access to the law firm’s precedents; free use of their meeting rooms; and so on. He would put in at least an hour’s time with the GC and his team to create this list. They would typically come up with between 10 and 15 items that they could use as barrier breaking swaps. Well, he told me, the problem is this. With every single law firm that he had negotiated with, he had run out of things to ask for – because the law firm just said yes to everything! He was feeling both incredulous and frustrated. “why do you guys never say no?”
Why partners cannot negotiate like clients
What the Procurement Director hadn’t realised was this. He was negotiating with facts and figures but, for the individual partner he is facing, that is largely irrelevant. Partners have many other factors to take into account rather than just the rates or terms of this negotiation. I was recently involved in working with a Banking Team who were dealing with a major retender. This was a substantial client of the firm and many years of combat had left the team demoralised and simply working longer and longer hours to make the account profitable. Almost amusingly, the client had then signed up to an industrywide initiative to support mental health! We will brush over that. Here was the Partner’s dilemma. She had more than 30 lawyers working for this client, many of whom she had recruited and nurtured herself. She was really well liked by her team. The loss of this client would mean many redundancies apart from the likely termination of her own career. Do you think she would argue over another 5% discount?
Literally we are not talking the same language, do not share the same aims and our interests are not aligned. The client actually needs to save money, the partner needs to return the client to profit. Without any profit, what is the point of all that hard work by the partner and the team in delivering great legal services?
Meanwhile inside the client
I recently had the good fortune to sit next to the Head of Legal Operations for a global bank at a dinner. We can spend time talking about value and innovation but let’s be clear – success for him includes reducing the amount of external legal spend and his current target is 15%. I can’t see someone surviving in his, very senior, role when spend is increasing year on year. I asked him “Whatever happened to boom and bust? In the old days, a few years after a crash, everything got back to normal, the focus was on new business and there would be no problem over rates. But here we are, more than 10 years after the GFC, and still big clients are cutting cost.” So, he explained it like this – that pre-crash the Bank had big margins, although with the benefit of hindsight, high risk. Now, the Bank was working on tiny margins – the only route to profit was to come down hard on overheads. That explains why they had just announced several thousand more job cuts and why he was determined to cut legal spend. Moreover, firms differed very greatly in their response to this and the Bank did not want to work with firms who weren’t cooperative. Interestingly, he added that firms who brought their pricing team to the meetings did better – opening up more alternatives, changing scope to reduce cost and the like. He described this as substantially relationship enhancing.
A tale of two cities
Around the same time, I had managed to get a meeting with another huge client in terms of global legal spend. I wanted to meet their GC, because when I had been a law firm partner, they had been my worst client. They had negotiated low rates, ran competitive tenders, took multiple secondees (hostages, we called them) and insisted on rate freezes year after year. Now I had a chance to tell them what it was really like to work for them! I even arranged to visit two of their current panel firms to make sure I was up to date on current practice. Firm A confirmed my own experience, doubted whether it was worth hanging onto this client and were building up the nerve to fire them. Firm B was a big surprise however, describing them as “Probably our best and most profitable client! We would love to get more work from them.” This didn’t make sense to me, so I asked to dig deeper.
It turned out that while the client paid both firms exactly the same fees, Firm B had completed changed the way that they handled the work. More than 90% of the work had been moved out of London into a distant regional office. They had worked hard with the client to standardise and then computerise as much of the process as they could. The Managing Partner said to me, “Here was a client who wanted an EasyJet budget airline service. We could either provide that at a substantial loss from our London Office, or we could handle it profitably from a region. Of course, none of the London Partners doing the work wanted this to happen! So, I worked with the client and told them quite openly that they needed to send us more, higher quality, work for these London Partners and in return we would get them a great deal on their current work. A win:win that dealt with the invested partner roadblock.
This also confirmed my long-term experience in these tough situations – the law firm that first starts to change and innovate is in pole position to change the rules and make sure that they work for both the client and for the law firm. Other firms, later to the party, often had many fewer options.
There are a number of factors in play that say that many clients are looking to save money. They may use words like “alternative billing” or “innovation”, but what they are asking for is to spend less. Any economic shock, from coronavirus or otherwise, is only going to increase the impact and speed of this. For the biggest of these clients, they are looking for firms that are prepared to change the way they work to meet these needs. I believe that now is the time for law firms to answer the question – are you content to lose this segment of work to other firms? If you are, great, focus on what you are best at, and understand that may carry some relationship risk to the rest of the work. Alternatively, if you want to work with clients and save them money, you need a plan. From experience a good plan covers:
- Winning the buy in of partners and the whole team who would be adversely impacted by a change in practice, such as relocating the work or using technology to radically alter how it is delivered. How would any changes impact these colleagues, and what are you going to do to support them, for example by giving them other work or clients (even over a medium-term timescale)?
- Join in the client from the off, co-create solutions with them so that they are sure to use them, and be clear on the changes that they have to make and the differences in the service they will receive. Where we are dropping from Business Class to Economy, point this out and test what is acceptable in this drive to save money.
- Support these changes by bringing in your pricing, project management and technology teams, or if you don’t have those in house, recruit process change experts to support your legal team.
What I am proposing here can involve quite radical change and is a strategic decision – but I would say that doing nothing in the face of these client demands is also a strategic decision, which you may be making without realising it.
Kevin Doolan is a Partner at the Møller Institute, Cambridge and Guest Faculty at Harvard Law School Executive Education where he teaches pricing and business development. He is the author of The Financial Times Guide to Mastering Services Pricing, published by Pearson.