The number one reason for this lack of ownership mentality is that “most lawyers aren’t raised to think of the practice of law as a business,” says Elaine Fitch, of Kalijarvi, Chuzi, Newman & Fitch. “They become lawyers because they want to be lawyers, not business owners.”

This in turn leads into the personality traits of the kind of people who select law as a career. Many lawyers become lawyers precisely because they do not see themselves as future business owners, but rather as practitioners of a craft. “Their personal commitment to their craft is what often allows them to be great at what they do,” notes Joshua Driskell of Lagerlof. “When stepping into an ownership role, they might often feel as though they have a less intimate connection to their practice.”

Another obstacle to developing an ownership mentality is lack of training. Most law schools do not include any education or training in the business of law, and that is unfortunate. “The consequences of the lack of this training often shows up down the road,” says Brian Temins of Minden Gross. “Making the transition to owner isn’t as easy as just changing a title — training and preparation need to go into it.”

Indeed, adds Bijal Vakil of Allen & Overy, having business acumen “is just as important for obtaining work and retaining it.”

“Most lawyers aren’t raised to think of the practice of law as a business. They become lawyers because they want to be lawyers, not business owners.”

Often firms are not intentional about exposing their lawyers to the business side of the firm. And this problem starts early because many law firms encourage young attorneys to focus on developing their legal skills, rather than on developing a book of business. As their practice builds, these lawyers tend to focus on getting their legal work done, and perhaps never develop and understanding of why they do what they do. Instruction on why the work matters to the client, and how lawyers’ time is billed and collected, as well as how new work comes to the firm, may broaden attorneys’ focus beyond the day-to-day legal work.

Another possibility to consider is that an attorney may, in fact, already have an ownership mentality, but the more senior attorneys are not allowing him or her to express that. If senior partners insist on doing things the way they have always been done, or are not welcoming toward new ideas, other partners will have little incentive or opportunity to demonstrate an ownership mentality.

What’s a firm to do?

Many law firm leaders that were interviewed emphasize “drawing back the curtain,” and involving more attorneys in the business of the firm. This approach requires transparency and education at all stages. Tom Segars of Ellis & Winters recommends starting early by “involving young lawyers at every step of the initial client intake and billing processes, including conflicts checking, initial consultations, discussing terms of engagement, preparing an engagement letter, and editing invoices.”

David Lackowitz of Moses Singer, agrees, saying that transparency means sharing information. “Just like in other industries, [the attorneys] should be provided with data about lawyer productivity, revenue, expenses, hiring and firing, strategy, goals, etc.,” says Lackowitz, adding that such information given to attorneys at the beginning of their careers is the first step in creating an ownership mentality.

Too often, however, firms keep financial information within a small, tight circle. In some larger firms, even seasoned partners may not have access to important financial information. Instead, firms should share as much information as possible to encourage ownership mentality among their lawyers. “When people understand the mechanics of the business and feel like they have skin in the game, they are more likely to work harder for [the firm] rather than just themselves,” observes Sean Dolan of Evans & Dixon. Information is power and can lead to open discussions and improvements to the overall firm.

Law firms should start this process early by involving associates in the client relationship. This simple commitment goes a long way towards instilling an ownership mentality. When associates see how clients use and value their work — including knowing that the client has paid the bill for the work — associates then feel a sense of ownership to the client relationship.

Involving associates in the entire project creates a sense of ownership, while simply assigning tasks insures they develop purely a task orientation, explains Mickey Maher of Hecht Solberg. “If a younger lawyer hasn’t experienced the opportunity to take ownership of matters or some piece of client relationships, the lawyer will be less likely to take ownership in the enterprise of the firm over the course of his or her career,” Maher adds.

Indeed, firms should take this one step further — let younger lawyers play significant roles in hearings, depositions, trials, and more, especially as they become more senior. Introduce them to clients and encourage clients to contact senior associates directly with questions.

Heather Linn Rosing of Klinedinst observes that “the things that law firms can do to instill an ownership mentality in those up for partnership are the same things that firms can do to promote retention.” These include fair compensation, wellness programming, a commitment to the community, and a mechanism for employees to express their opinions and participate in the betterment of the organization.

Many of the leaders interviewed also emphasized the importance of active mentorship by senior lawyers, as well as active sponsorship for attorneys, and especially for women and diverse attorneys.

Promoting teamwork

While it is often challenging to motivate lawyers to participate in activities beyond their normal billing hours, firm activities that promote bonding, teamwork, and cross-selling are valuable in reinforcing ownership mentality. Involving lawyers on firm committees, such as recruiting, can help to instill an ownership mentality within them, says Heidi Yernberg of Jayaram Law. This activity brings “[the] entire team into operational issues from the beginning, involving associates in a wide range of areas, from project management and workflow to reviewing bills and budgets, to fostering business development relationships, encouraging thought leadership and more,” Yernberg says, adding that group activities, no matter what they are, instill a connection and sense of responsibility to others in the firm.

Developing a strategic plan, with the input of all attorneys and staff, is a way to encourage involvement and ownership. The plan should be consulted and reviewed on a regular basis, so that all stakeholders can see how it is being utilized to determine the direction of the firm.

“When people understand the mechanics of the business and feel like they have skin in the game, they are more likely to work harder for [the firm] rather than just themselves.”

Indeed, Mary Vandenack of Vandenack Weaver encourages her lawyers to develop their own practice plan and “that plan should be incorporated into the firm plan.”

At Ellis & Winters, a North Carolina-based litigation and commercial real estate firm, they take it further by having their director of Client Services & Business Development work with each attorney to develop an individual plan for business development, focusing on the lawyer’s interests and strengths, while holding each lawyer accountable for implementation.

And finally, accountability is a large part of this process — and often, it is the hardest part of the equation as managing partners often have difficulty holding their partners accountable. “I would give them actual business responsibilities,” says Marco Antonio Gonçalves of Veirano Advogados in Brazil. “A make them accountable for [those] responsibilities, as well as for what is expected from them as a firm partner in the long run.”

To reinforce what it means to be a partner, Fairfax, Va.-based patent law firm Harrity & Harrity conducts partnership skills training that requires new partners to meet with the managing partner on a bi-weekly basis to review scenarios, such as hiring or firing an employee, or how to deal with a potential malpractice issue. When a partner has an ownership mentality, they hold themselves accountable because they want their firm to improve and succeed in every way possible.

Clearly, creating an ownership mentality among firm partners is not easy. Often, all a law firm can do is provide training, resources, opportunities, and support. It’s up to the individual lawyers and partners to fully embrace being a law firm owner and all that it encompasses.

Consequently, many corporate law departments (CLDs) will remember these past 12 months as the great pricing reset in which law firms required significantly higher hourly rate increases over and above anything the legal marketplace has seen in at least a decade.

The new year finds both the buyers and sellers of legal services having to grapple with the economic reality of high inflation, increasing labor and infrastructure costs, attrition, labor arbitrage, and major shifts in market demand — all of which will in some way or another impact the cost of legal services into 2023 and beyond.

Using cost control counter-measures

With this reality, many CLDs are not looking forward to a repeat of last year’s rate hikes; however, that is not necessarily a fait accompli for corporate clients. Yet, there are counter-measures that can be deployed to help them mitigate, control, and even create cost savings in the face of such pricing uncertainty.

There are many familiar options that CLDs have at their disposal — such as tiering, RFPs, volume discounts, panel convergence, budget structuring, and in-sourcing — although these approaches, while important considerations for every CLD looking to control their costs, may take time to mitigate the impact of proposed rate increases.

Instead, let’s focus on a few things that might help CLDs achieve tactical and immediate results.

Rebates

Similar to, but distinct from, volume discounts, most rebates exist with those law firms that enjoy large volumes of billing. Rebates are typically negotiated at the start of a calendar year and are contingent on a firm achieving a certain dollar threshold or tier of billings in that year.

Rebates are a good tool for CLDs to utilize during any rate negotiations and especially on large matters or a portfolio of work where a CLD is looking to reduce its legal spend, offset the cost of future work, or simply to mitigate the impact of future rate increases.

Value-added services

Not all clients have sufficient scale with a law firm to entitle them to ancillary benefits with the firm. However, value-added services — such as free legal advice, secondments, market research, access to proprietary technology, education, and training sessions — can be separately negotiated.

If a CLD must accept higher rates, then perhaps trying to negotiate or tie some level of complimentary ancillary services to those rates may help offset the CLD’s legal costs in other areas.

Rate management policy

While many CLDs have billing guidelines in place with their law firms, far fewer have any language in their guidelines that talks specifically about rate management and prescriptive requirements related to how a law firm is to address any proposed rate increases. Consequently, the process becomes much more ad hoc.

A proper rate management policy should address criteria such as when a firm can make a rate increase request, the frequency of a request (e.g., one increase per year rather than two incremental increases), permissible rate increase caps for specific professional groups, and the permissible criteria or reasons that qualify for a rate increase (e.g., merit vs. market pressures). All of these criteria are fundamental to managing expectations up front for both the firm and the CLD and for providing predictability and transparency around rate management.

ALSPs

ALSPs offer CLDs an opportunity to leverage less expensive providers than traditional bricks-and-mortar law firms. Tiering transactional matters or components of a matter away from expensive firms to ALSPs provides CLDs with cost saving and convergence opportunities.

Contingent worker ALSPs are a good example of legal work that typically has been sourced to traditional (and more expensive) law firms. Now, however, CLDs have the option to utilize virtual and less expensive service providers for components of legal matters or other resource needs.

Staffing ratios

As part of rate negotiations, CLDs should consider imposing staffing ratios on firms requiring them to assign a greater percentage of their work to lower cost mid-level associates, rather than expensive partners, thereby offering up potential cost savings for the CLD.

Disbursements & cost recovery

Legal e-billing systems are great for implementing quantifiable rules around non-reimbursable expenses on invoices. However, there are many charges or billing practices that cannot be quantified and corelated to an automated e-billing rule that rejects the proposed expense. Further, there are also other expenses that may be subjective in nature and require more powerful tools to review.

Diving into law firm disbursement data offers a CLD an opportunity to: i) find patterns of billing that are non-compliant with a CLDs billing guidelines; and ii) use the exercise to close any compliance gaps and save money; .

Quick-pay discounts

The importance of timely payment is not lost on a law firm’s management team as tracking outstanding accounts receivable balances is instrumental in measuring productivity and effectiveness of lawyers or identifying servicing issues.

A CLD can utilize quick-pay discounts as a solution to a firm’s balance challenges by providing an incentive for the law firm to lower its rates or offer a discount in exchange for the CLD’s commitment to paying the law firms invoices within a specific time frame.

Alternative fee arrangements (AFAs)

AFAs (e.g., fixed fees, flat fees, contingency, volume discounts, risk collars, etc.) are often touted as the great pricing panacea to hourly rates; however, before accepting any AFA proposal, CLDs should consider asking the law firm to provide quantifiable proof as to the value of the AFA and what if any determination was made to validate that the AFA is a better pricing option for the client. Without any such empirical validation, CLDs risk making costly assumptions around cost savings, when in fact the opposite may be true.

Getting ready to negotiate

Before engaging any law firms in discussions of the above strategies, CLDs need to address two key components that must underlie any of their efforts — billing data and communications.

Billing data — When leveraged correctly, CLD billing data offers a plethora of opportunities to save money in a runaway market that has pivoted in favor of legal service providers. By mining timekeeper data (e.g., rates, year of call, geographic locations), disbursement charges, invoice line item detail, time allocation, staffing ratios, and more, CLDs may uncover opportunities for savings when comparing billing data between multiple firms and ALSPs.

Communications — Having an open and honest dialogue with their law firms on budget constraints or their companies’ cost saving targets may allow CLDs to obtain voluntary law firm rate freezes or even rate reductions in the interest of building stronger and lasting relationships.

Indeed, holding these candid discussions at an opportune time when a lot of companies are facing financial challenges, may remind law firms that many CLDs are committed to growing lasting partnerships with those firms that understand the client’s budgetary pressures and are willing to help clients meet their cost-saving targets for the greater good of the relationship.

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The Great Recession and its fallout saw the introduction of two relatively new concepts into the legal marketplace: the alternative fee arrangement (AFA) and the rise of in-house legal operations and procurement. Prior to the recession, the typical pricing arrangement between a client and a law firm was a relatively simple matter of the firm setting a rate, billing the client, and the client then paying the bill.

As clients increasingly turned to their legal operations and procurement teams to help drive down their own legal costs, the billing arrangements between clients and law firms became more complicated. Enter the age of the AFA, a plethora of pricing options encompassing capped, collared, and fixed fees, rebates, volume discounts, and much more.

While some law firms have had at least some members of their professional staff focused on pricing since long before the Great Recession, for many more, the idea of a dedicated pricing team has grown in importance in recent years.

In a few short years, the use of AFAs grew to nearly 20% of the average law firm’s revenues, and with the rise in revenue, so grew the need for experienced professionals to help shepherd these arrangements into being and thus ensure their success. A key part of that role quickly became having these professionals involved in direct negotiations on rates with highly trained procurement professionals on the other side of the table. In addition, law firm pricing professionals soon were responsible for other matters, such as the strategic navigation of tools like reverse auctions, which clients sought to use aggressively to contain their legal spend.

While some law firms have had at least some members of their professional staff focused on pricing since long before the Great Recession, for many more, the idea of a dedicated pricing team has grown in importance in recent years.

For many firms, this has resulted in fierce competition for experienced legal pricing talent to lead these critical pricing functions. Compensation has followed demand across the industry, from lead roles down to junior analysts.

The True Value Partnering Institute, in collaboration with its partners, Rees Morrison at Savvy Surveys for Lawyers, and the Thomson Reuters Institute, have tracked the progress of these pricing professional for many years. To that end, the group has published its latest report, Compensation for law firm pricing professionals at the start of 2023. Launched originally in 2017, this survey has charted the growth of legal pricing professionals, not only in terms of compensation but also team composition, as well as examining where the team fits into current firm structure, and how the team spends its time.

According to the most recent findings, compensation across pricing roles has risen notably. For example, in the last iteration of this survey, chief-level pricing officers were nearing $500,000 in total compensation; the most recent results show nearly every chief-level pricing officer exceeding this threshold. Even at the director level, some highly compensated directors were earning as much annually as their counterparts with chief-level titles.

For a more complete examination of the current state of compensation and job roles for legal pricing professionals, you can access the new report, Compensation for law firm pricing professionals at the start of 2023 here.

The findings also caution against falling into the trap of assuming that salary is reflective of experience or expertise. Drawing an analogy to lawyers, one would be mistaken to assume that a higher-paid lawyer at a larger firm always provides higher quality representation than a peer at an Am Law Second Hundred or Midsize law firm — the same holds true for law firm pricing professionals. In both cases, the successful outcome of a pricing arrangement is much more closely tied to the skill of the individual, and many skilled pricing professionals can be found outside the echelon of the largest law firms.

In that same vein, the number of years a professional has been with their current law firm was not found to be indicative of compensation. Indeed, it was more common to find higher compensation among professionals with shorter tenures at their current firms. However, this is likely a reflection of the highly competitive market for these professionals. More than 50% of respondents indicated that they’ve been with their current firm for fewer than five years with near 25% reporting a tenure of less than a year-and-a-half.

The market for experienced law firm pricing talent is, indeed, competitive, and the result, predictably, appears to be high mobility and commensurately competitive salaries.

This process then kicked off a volley of communications — internal and external — and necessitated forwarding emails, PDF letters, and spreadsheets for analysis and follow-up. The legal operations team provided some central support, but this was often challenging because data limitations made it difficult to account for past rate increases and freezes across different firms. Overall, the efforts felt somewhat ad hoc and very time-consuming.

“It has always been important to us to get this right,” says Antony Klapper, Deputy General Counsel in Product Liability & Regulatory at VWGoA. “We want to be fair to our law firms, whom we view as trusted partners. At the same time, we must manage our company’s finances responsibly — and execute all of this efficiently with a leanly-staffed team.”

Trisha Fletcher, Legal Operations Specialist at VWGoA, emphasizes these points as well. “Collectively, our team had a strong desire to find a better way to do this.”

Taking a new approach

The VWGoA team launched a new initiative to process rate increase requests more effectively for 2022 and beyond — one that would ultimately win them an ACC Value Champion Award.

The first step, the team decided, was to establish a more centralized, uniform approach. This would be managed by legal operations with strategic guidance from legal leadership. Of course, there would still be coordination with in-house counsel, but in a more efficient way — built around a centralized process, featuring stronger use of data analytics, benchmarking, and core decision governance from leadership.

The next step then, was to improve the in-take process. Outside law firms were asked to submit their rate increases within a designated window of time and through a common portal. This allowed the team to consider them all together, performing side-by-side comparisons of similar firms to ensure more consistent treatment under then-current market conditions. This commonality also enabled the use of greater analytics capabilities to assess past rate increase history, as well as internal and external benchmarking comparisons.

Within this framework, the team also began examining firms’ compound annual growth rate (CAGR). A law firm’s billing rate CAGR shows a multi-year view of the firm’s rate increase history, accounting for past increases and rate freezes. Standardizing the figures this way enabled better side-by-side comparisons across the portfolio, and showed which law firms were high or low outliers based on their multi-year rate history.

The VWGoA team also found it very helpful to use data to model the dollar impact of the requested increases per timekeeper for the coming year. This was instrumental in identifying the most impactful requests in order to focus on managing costs.

Seeing the benefits

Through this new approach, VWGoA legal leadership and legal operations were able to implement more effective governance and decision logic to streamline the rate decisions in light of portfolio metrics and company financial considerations. By streamlining and consolidating the process, they freed up considerable hours that their staff had previously spent responding to rate increase requests as they came in, managing them all through one common workflow. They saved further time be setting auto-approval thresholds for certain rate increase increments.

In the end, the projected savings for the coming year were significant, with rate increases for various timekeepers, for example, trimmed to about one-half of the increment originally sought. The VWGoA team devoted particular attention to adjusting high outliers and managing the impact on budget in a sustainable way.

Beyond time and money savings, the team built a process that leveraged better data to drive better decisions. The result is a strong business case showing how those in legal can use technology and data more effectively to increase productivity and execute against business metrics.

From law firms’ perspective, understanding the data that informs a client’s financial position is a helpful way to focus their rate increase conversations onto a productive end for both sides.

“We recognize that, in this economy, many clients are facing challenging headwinds,” says Susan Vargas, Partner at King and Spalding. “As trusted partners, we are glad to talk about goals and metrics to strengthen our relationship in mutually beneficial ways — and we welcome informative data to help us do that.”

Just a few months later, this prognostication could be closer to reality than originally thought, given the rate at which law firms and professional services firms are fielding inquiries from existing and potential clients and having to add resources and personnel to handle it all.

For example, Eversheds Sutherland’s ESG practice went from a handful of lawyers to more than 200 attorneys in just two years, according to Herbert Short, co-lead of the firm’s global ESG team. “Our management saw ESG as a critical area for our clients and put a leadership team in place when we got serious two years ago,” Short says.

Since then, the firm has created a cross-regional team of 25 senior lawyers, including heads of sector groups and managing partners of geographic practices who are dedicated to assisting clients with ESG strategy. The team re-visits the practice group strategy regularly to remain in tune to clients’ needs across the globe, Short adds, and uses real-time client feedback to shape the practice area’s strategy going forward.

An expansion in the breadth of ESG

Interestingly, those law firms with existing expertise around clean energy, employment contracts, and board governance have elements of an ESG practice, even if those efforts aren’t overtly pitched as such. Within these areas, however, corporation clients — because of pressure from investors, shareholders, and regulators — are asking more detailed questions around emerging ESG-related operational and financial risks, explains Short.

Some areas of clients interest in ESG activities include:

Leadership and governance — Board compensation and composition as well as the scope and structure of the audit committee examining such issues as executive pay, are big areas of focus for many corporations that are seeking to improve their ESG bona fides. Similarly, designating a board member to oversee how ESG requirements and regulations are evolving is a necessity for boards’ governance activities, especially because of litigation risk.

Jessica Lu, a litigator at Brown Rudnick, says the primary driver of this new trend is the divergence between what a company signals its values to be and its implementation of those values. Too large of a gap in this area can carry a lot of risk, ranging from reputational harm to serious regulatory trouble. “We’re seeing corporate ESG disclosures giving rise to costly securities litigation with corporations being sued for securities fraud based on overstating or misstating their ESG commitments and shareholder litigation against officers and directors for failing to ensure diverse candidates for board seats,” Lu says.

Decarbonization — This area — which involves carbon offsetting and clean energy commitments such as in wind, solar, battery, and hydrogen sources of green energy — is quickly becoming a client focus. Many corporations are engaging in green-power purchase agreements, which grant clients’ access to renewable energy and minimize their carbon footprint for a fixed cost.

Another area of growth, according to Short, is carbon credits, in which companies purchase these credits as a mechanism to reduce their greenhouse gas emissions. Marketplaces exist to trade these credits, which are based on a value of carbon sequestration of forestry land and allow small and large landowners to monetize the carbon-capture of their land.

Supply chain management — In addition to demanding transparency into global corporations’ ESG activities, investors and regulators are seeking the same in corporations’ vendors and supply chain. Corporate clients need to be aware of this heightened scrutiny, says Honieh Udenka, at litigator at Brown Rudnick. “We advise clients to start thinking about investments and due diligence in supply chain monitoring and tracing to mitigate risks that can arise down the supply chain,” Udenka explains.

Protecting human rights among workers is a central social issue — the S in ESG — for companies that contract with suppliers based in other countries to produce their products and serve their customers. To that end, multinational companies need to update their vendor and supplier contracts with clauses to meet new data reporting and verification requirements around workers’ protections in order to better reduce reputational risk, says Short, adding that companies also need to utilize appropriate international arbitration clauses to resolve cross-border disputes involving labor.

Data protection — Cybersecurity, data privacy, and other data and information concerns are another ESG pillar that’s become top of mind for clients seeking legal guidance. In a recent survey, cybersecurity was ranked as the second most-cited ESG concern among investors. Complexity in managing the data privacy of consumer information and data governance issues for companies all fall within the G of ESG and continue being seen as an increased areas of risk.

Sustainable finance — Sustainable finance, which include lending, debt, capital markets, green bonds, social bonds, sustainability bonds, and sustainability-linked bonds, is a growth vector for many law firms. Disclosure of ESG-related financial and operational risks is another economic engine among firms’ ESG practices, especially because of the expected finalization of the Securities and Exchange Commission’s rules around Scope 1, 2, and 3 greenhouse gas emissions.

Congruence between talk and action

Corporate clients are demanding that their legal service providers act responsibly through the alignment between the ESG guidance they offer to clients and law firms’ own internal commitment to ESG. It takes proactive action to make this alignment work.

Eversheds Sutherland, for example, is accredited by the Good Business Charter in the UK and validates its own emissions-reduction targets through the science-based targets initiative. At Brown Rudnick, Mark Grider, chair of the firm’s Crisis Management Litigation & Government Response group leads many elements of the firm’s ESG practice and uses that role to center the firm’s values into the core of its business and culture. In fact, Grider’s first-step advice to clients often involves a re-evaluation of their current corporate policies, procedures, and practices through the lens of their values.

Within the firm, this values-derived perspective allows Grider to help mentor up-and-coming lawyers like Lu and Udenka to ensure he is leading with authenticity, forging genuine relationships with clients, and living the firm’s ESG commitment at the same time.

Walking the talk as a responsible business starts at the top. Managing partners of law firms and practice leaders are best positioned to ensure their law firms’ purpose, core values, and internal practices are aligned to their public declarations of ESG initiatives and responsible action.

Interestingly, however, while larger firms also are seeing greater weakness in non-transactional practices, midsize law firms are finding real strength, which suggests that clients might be shifting work based on cost.

And it is upon that suggestion which we offer the following.

Inflation takes its toll

As the US Federal Reserve tried to tackle inflation over the last several months by raising interest rates, the cost of doing transactional deals, such as mergers, debt refinancing, or real estate transactions, greatly increased. And the uncertainty of the impact of those interest rate increases, and the specter of additional increases really killed clients’ appetite for those types of transactions, which then hurt law firms as well.

So, it’s not surprising in this first graphic that Am Law 100 firms are struggling so much, simply because transactional practice work is such a big part of their overall practice mix.

A comparison of overall demand growth from Q3 2022 to the same period in the prior year shows that both the Am Law 100 and the Am Law Second Hundred law firm segments had negative growth of -2.9% and -0.6%, respectively, while the midsize law firm segment had 1% positive growth. While much of this is due in part to the transactional area’s weakness, this trend is also seen in individual non-transactional practices that shouldn’t be impacted by the same macro-economic factors. And that suggests something more must be at play, and the other part of the story involves the level of growth in worked rates and how (or whether) those rate increases are being felt by clients.

Where the work is getting done

Around midyear, a statistic from Thomson Reuters Market Insights began making the rounds that showed about half of legal clients had adjusted their law firm rosters within the past year. So, you don’t have to go too far out on a limb to suggest that clients, in this inflationary environment, may be gravitating to lower-cost law firms, especially as rates continue to rise even as demand falls.

In Q3, we saw that law firms, regardless of size, raised their rates an average of 4.8%, roughly keeping pace with the first two quarters of the year. However, when we looked at data from another independent source — Thomson Reuters Institute’s Legal Department Operations (LDO) Index Survey, published in October — we get a vastly different perspective.

The LDO Index, which surveys corporate law department leaders and relies on Legal Tracker’s data, shows that these clients were seeing substantially less rate increases across the board than the LFFI data suggests. In fact, far from seeing a 4.8% rate increase law firms are charging year-to-date, corporate clients regardless of size have reported that the real growth rate they had experienced was much less and even was negative in some cases

How could this be? For the answer, we need an example to illustrate the phenomenon.

In this hypothetical situation, we can see how corporate clients could be deciding from which segment of the legal industry they’re purchasing their legal services. To illustrate, let’s say you’re a large corporate client and you have three law firms on your roster: one from the Am Law 100, one from the Am Law Second Hundred, and a midsize law firm.

Each one increased the rates it charges you for legal work (using current market benchmarks), with the larger firm requesting a larger increase of 6.9%. The Second Hundred firm increased its rates by 4.6% and the midsize firm by 3.7%.

However, if you, as a legal client, begin to shift your work matters downstream even a bit — say by moving 5% of your work from the Am Law 100 firm and 5% of work from the Second Hundred firm to the midsize firm, which would see its allocation increase by 10 percentage points, you could see a substantial cost savings. Indeed, you would be allocating more work to the firm that charges $311 per hour, rather than the ones charging $523 and $748 per hour, respectively.

That means, you would see the actual rates you are paying for legal services fall by 0.8%, as the chart shows, rather than experience rate increases nearer the industry average of 5%.

This strategy — applied more frequently throughout 2022 — may begin to explain our industry wide data divergence, as clients reported smaller or negative growth in their rates compared to the average law firm’s worked rate growth of 4.8% recorded in the third quarter and YTD.

Given this — and taking into account the shift in demand by law firm size segment, plus the high portion of clients that said they were adjusting their law firm rosters — it all seems to provide strong evidence that clients have begun shifting their legal work to lower priced firms, such as midsize law firms, and are likely to continue doing so into the future as more and more corporate law departments look to do more with less.

Complicating matters, associates are learning, observing, and practicing their skills in remote, in-person, and hybrid workplaces, so more support than ever is needed. Leaving BD skills to organically develop or providing a few sessions to inspire BD, likely won’t be enough to effectively or fully tap the potential of your firm’s associates to build and sustain thriving practices.

For law firms that want to offer more than aspirational platitudes, here are three strategies firms can undertake to better set up their associates for BD success:

1. Revisit learning & development (L&D) programs

Business development skills are akin to training for a marathon — you don’t run 26 miles without training on shorter distances beforehand. Similarly, law firms should be offering stage-specific learning & development training in business development from day one that should include normalizing BD training as early as possible. Even if associates aren’t expected to generate clients until much later in their careers, gradual introduction of BD concepts, service skills, and communication& interpersonal skills will allow associates to learn, practice, and work on these skills internally before turning their attention outward.

Firms should also build BD elements into non-BD sessions, which helps draw connections to the business of the firm and allows more voices to be heard. During a training session on mergers & acquisitions, for example, the presenter should share specific examples of how these transactions come to the firm, the key relationship aspects, and what factors aside from the legal work are important to clients.

It’s important for firms to use examples and stories in this way to bring the nuances of BD to life, while ensuring diverse perspectives (because BD isn’t a one-size-fits-all approach). Encourage associates to be creative and connect in ways that are authentic to them.

Other L&D methods include:

• • • emphasizing the small, consistent, daily BD skills. One-off grandiose efforts rarely win the race.
    • dispelling the extroversion bias. BD isn’t solely the domain of extroverts — in fact, some would suggest that introverts are often more successful with BD.
    • discussing what BD success looks like in all work environments and recognizing that just because some activities benefit from in-person interaction, doesn’t mean ignoring how BD can be done remotely.

2. Invest in firm systems beyond L&D

L&D programs aren’t the only source of support firms can offer. By using existing mentorship and sponsorship programs, firms can empower mentors and sponsors to strategize with associates on BD skills, provide access to networks, and guidance on approaches. This will help decode the unwritten rules around BD efforts that are most valued by the firm, as well as how these efforts are to be undertaken.

Mentors and sponsors should discuss how to build visibility, credibility, brand, and relationships in both remote and in-person settings. Indeed, sharing, strategizing, and supporting BD skill development is not always achieved through formal programs, unfortunately, and rather is often passed through informal channels. Firms need to be alert to this reality and encourage partners to pay closer attention to who benefits from informal mentorships and sponsorships and who doesn’t.

Too often, affinity bias plays a role in sharing critical development feedback and BD advice. Firm leaders should encourage a broader culture of BD sharing by all partners, For example, the fimr should encourage lawyers to schedule five-minute BD chats after meetings to review the relationship and BD aspects or opportunities with associates.

Mentors and sponsors should also be alert to the BD value of all firm and client opportunities and help advocate for their mentees and protégés. Access is just as important as skill development.

3. Build BD into formal and informal performance and career development conversations

Firms need to be explicit with associates about the expectation to do great work and to develop the foundational BD skills starting now. And this should include nurturing relationships, seizing stretch opportunities, attending networking events, developing client service skills, and more.

Telling junior associates to focus only on doing great work may disproportionately disadvantage marginalized groups. Those with access to networks and mentors will be investing in their relationships and BD skills, and those who didn’t know the unwritten rules and took the firm at its word will look up years later only to discover they’re behind their peers.

Firms need to build BD conversations into all performance and career development conversations while providing transparency and clarity around expectations. Help associates think about their unique strengths and how those might serve BD purposes. Development conversations should focus on actionable advice and hold people accountable for following up.

Firms should remember that remote environments may require more intention and structure — such as regularly scheduled meetings, for example — because there may be less opportunity for serendipitous interactions and informal run-ins with higher-level colleagues.

BD skills for associates should be fostered, developed, and supported from day one. As the legal industry adjusts to remote and hybrid environments, it’s a perfect time for law firms to revisit their BD skills training as well as explore how other firm systems can support associates.

Early, frequent, and intentional BD support has the added benefit of helping associates feel connected to the interests and goals of the firm, which could have associates feeling the firm is more fully invested in them and is seeing them  for their strengths and skills — all of which results in a deeper sense of job satisfaction.

However, according to new figures from Thomson Reuters Market Insights, client service today may be less of a differentiator among firms and more table stakes to even get in the door. Additionally, with a probable recession on the horizon and an increasing portion of buyers anticipating a decrease in their external legal spend (17% through the first half of 2022, compared to 22% in Q3 2022), delivering value and efficiency will likely move up clients’ agendas. And that means law firms may need to automate some of their lower-value processes in order to deliver more of what clients really want.

When asked about why they would favor one firm over another, the percentage of corporate clients that pointed to overall service as the reason fell to 31.9% over the past year (October 2021 to September 2022), compared to 38.8% the year prior. Specifically, there were major drops in how many of the 5,000-plus in-house counsel surveyed actually viewed client service (from 16% to 6%) and speed (from 7% to 5%) as major law firm differentiators.

In the place of service, more clients pointed towards viewing expertise and business savvy as key differentiators among law firms. And while this doesn’t necessarily mean that service is less important, it shows rather that firms’ emphasis on service has led customers to expect it on every engagement, says Rachel Heathcote of Thomson Reuters Market Insights.

Service as an expectation

“What it shows to me is that everybody is doing service really well, so nobody is standing out for their service. It’s not a differentiator; it’s just table stakes,” Heathcote explains. “So what we have to be careful about if you’re a law firm is that if you are delivering poor service, then there’s a danger of losing out to competitors that are delivering high service.”

Heathcote also noted that one particular sub-category of service did see an increase in the percentage of clients citing it as a reason to choose a particular law firm: responsiveness rose to 15% from 12% over the same time frame. Coupled with expertise and business-savvy increasing as firm differentiators, this may indicate a client base that is increasingly asking for more active business value out of their engagements rather than simply a good client service relationship.

At the Thomson Reuters Institute’s Emerging Legal Technology Forum in Toronto in October, Fernando Garcia, general counsel at multiple small to midsize corporate law departments over his career, noted that just as law departments are clients of law firms, so too are internal business stakeholders the clients of these departments. And internally, a law department’s objectives are increasingly aligning with the larger business and chiefly focused on providing financial value.

When evaluating outside counsel, Garcia pointed to nine key points of value he wants to see in any relationship with a law firm, including:

1. 1. 1. Make my life easier;
      2. Make us look good as a law department;
      3. Give me the tools to achieve our goals;
      4. Don’t force me to chase you;
      5. Don’t work just to cover yourself, be part of the solution;
      6. Make it such that it’s practical, simple to understand, and we can deal with it;
      7. Quality support on a timely basis;
      8. Reduce a risk but never say no; and
      9. Help me never get caught off-guard.

While there are certainly service elements in play, it’s perhaps no surprise that each of those value points largely deals with business objectives rather than building relationships. “Whatever it is, you’re adding value by letting me add value to my stakeholders and our board,” Garcia adds.

Law firms, no matter the size, are beginning to hear this call loud and clear. The Thomson Reuters Institute’s 2022 Report on the State of US Small Law Firms released in November found that even among law firms with 30 attorneys or fewer, the largest challenge remained spending too much time on administrative tasks and not enough time practicing law. Indeed, 80% percent of small law firms surveyed pointed to time spent doing administrative work as a challenge, even more than acquiring new client business or any other challenge identified. Yet even so, 82% of those small firms said they did not feel they were addressing the time it takes for administrative tasks as well as they should.

This is where technology can play a role. By automating some parts of the administrative process, law firms can free up their most important asset — their people — to do what they do best: use their skills, expertise, and experience to add value to the client’s business. It’s no surprise then that while the report found most small law firm technology budgets are staying the same overall, the technologies seeing the largest increase in investment dollars mostly have to do with back office automation, such as billing & invoice software, timekeeping software, and customer relationship management software.

Now as we move into a post-pandemic yet economically unstable environment, it may be a good time for law firms to re-visit conversations with their clients about preferred methods of communication, where new technologies can fit into the process, and what the client ultimately values in their law firm engagement, adds Heathcote.

“People were working in a different way during the pandemic. It was crisis time, and everybody was working remotely,” she says. “But now, some people are in the office, some people are at home, and people’s situations have changed. So it’s a good conversation to re-visit, especially now that things have settled down.

“In fact, it’s a good conversation to re-visit at the outset of any matter, because those preferences could differ depending on what the matter is or what stage it’s in.”

You can learn how to stay on top of clients’ changing priorities by leveraging market trends and practical advice, here.

Not insignificantly, many law firms became entangled in an ongoing competition for top legal talent, adding to their overall costs; at the same time, many also began seeing early hints that legal demand was slowing in some practice areas.

Taking stock of all this, the newly published Law Firm Business Leaders Report attempts to gauge the mindset of US law firm business leaders — managing partners as well as those allied professionals who are responsible for running their firm’s business operations and may be the proverbial canaries in the coalmine in regard to future challenges to firms’ bottom lines. This annual report is published by the Thomson Reuters Institute, in partnership with the Center on Ethics and the Legal Profession at the Georgetown University Law Center and the True Value Partnering Institute.

The report shows that law firm business leaders see general economic worries ­— inflation, potential recession, ongoing war, supply line disruptions, and a charged political environment — as major threats to the continuing profitability of their firms.

Concerns over general economic pressures were cited as a high risk to law firm profitability by almost one-third of those surveyed, twice the level of those who thought this in last year’s report

Indeed, concerns over general economic pressures were cited as a high risk to their law firm’s profitability by almost one-third of those surveyed, twice the level of those who thought this in last year’s report. In fact, these worries moved to 2^nd place in the list of most-cited risk concerns in the survey, up from 9^th place last year.

It’s as if there’s been an outward shift in law firm business leaders’ gaze toward the uncertain world outside the office. Underscoring that, law firm business leaders identified fears of outside cyber-attacks by illicit actors as their number one most concerning threat, with 42% of those surveyed citing it as a high risk to firm profitability. These fears about security breaches, hacks, ransomware demands, and data loss, marked its first appearance as a survey option choice in this year’s survey.

Of course, the report reflect only dismal thinking. In a move toward the positive, most business leaders who were surveyed said they expect at least a medium level of growth across many of their firms’ practice areas, and even a high level of growth in practice areas such as intellectual property and mergers & acquisitions. And more than half (52%) said they expect one key financial metric, profits per lawyer, to grow moderately over the next three years.

Yet, even as law firm business leaders begin to map out their business strategy for the next few years by taking steps to improve their firms’ financial performance — raising rates, improving technology, supporting more remote work, and increasing cross-selling throughout the firm — many are keeping at least one wary eye outward, on the horizon, and wondering if those darkening clouds signify a more worrisome future.

You can download a copy of the Thomson Reuters Institute’s “Law Firm Business Leaders Report” by filling out the form below: