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.

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.”

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.

However, in uncertain and hectic times – like now – only so much time and resources can be used to take measurements and assess results.

With budgets under rigorous scrutiny, a dearth of affordable talent and cost containment becoming a mantra, it’s important for law departments to determine what data matters most. First, department leaders must make the time to identify and measure the most impactful information.

Simply put, measuring what matters most is intended to prove your department’s value to the business. Most other divisions of any company analyze revenue, profits and their spend in a variety of categories, as well as new business, lost business, the cost and retention of talent, and diversity inclusion. The law department needs to be part of this effort, speak the same language, and prove that it is tracking according to clear, measurable targets of the same type. The general counsel who measure and prove that they are meeting defined numeric targets, and speaking the language of the business and business leaders, are the general counsel who become integral to leadership.

Additionally, measuring a few key things can really boost morale of your teams. People who understand their goals and the goals of the department are more open and productive. They suggest improvements or new approaches in order to reach a collective goal. They feel that they are working toward something specific, rather than just working. And communicating and striving for transparent, measurable goals enhances respect for the leaders pursuing such goals.

The fact is that metrics prove where we are and whether we are improving. For instance, if a company has a goal of increasing diversity by 5%, the law department should measure its diversity and work to also increase it by 5%. If the general counsel is tasked with reducing spend, a measurable goal will be assigned – it could be a spending reduction of a certain percentage or a set amount of money, but it is undoubtedly a measurable number. Understanding this aids in attaining measurable adjustments.

People who understand their goals and the goals of the department are more open and productive. They suggest improvements or new approaches in order to reach a collective goal.

How can you identify the most important metrics? Match your metrics to those of the company itself and of the C-suite. If the company wants to grow sales, the law department should prove that it shortens the time to sign sales contracts. If the company wants to improve diversity, the law department should prove that it has increased its diversity hiring, leadership, opportunities, and pipeline. If the company wants to reduce head count, the law department should assess its own headcount, its organizational structure, and the internal resources it uses. Then the law department should study a restructuring of roles and responsibilities, or determine how to rearrange work so that less full-time employees in the law department are needed. Align what you measure with the most important objectives of the company to prove that you are a key contributor.

Some of the most important measurable goals of today’s business world are geared toward talent retention, enhancing productivity, hiring for the right roles, measuring the legal team’s performance improvements via 360-degree input from the in-house clients, cost reduction, and outside counsel reviews and measuring the legal team’s performance improvements via 360-degree input from the in-house clients. Imagine if a GC was able to show the corporate board the law department’s legal spend has decreased by 10%; or its retention of diverse employees has been 100%; or it was able to reduce other vendor costs by 5%. Those statistics are powerful in proving the law department is valuable to the overall business.

Fortunately, these measurements aren’t that hard to accumulate. For example, the amount spent on legal fees is already known. Most GCs probably even know what is spent on legal fees per business line or per types of matters. Because that information is easily available, it is also easy to discuss with the department’s outside law firms in order to negotiate for cost reductions. Most law firms would be happy to keep your fees flat for a year rather than lose all your business, and keeping fees flat saves a calculable amount of money. Or, ask firms how they think the law department could be better structured in order to reduce fees.

For example, one of my clients and its firm realized, upon investigation, that time and expense could be reduced by training an expert in the company’s IT department to handle discovery responses, rather than randomly asking anyone in IT to handle these requests.

Another example is a law department I advised that educated a particular HR employee on how to search for lawyers, achieving quicker and better hires and reducing search firm fees, rather than simply assuming that anyone in the recruiting department could do excellent legal searches. The department was able to record and communicate how much money it saved on recruiting fees by investing in that particular HR colleague.

These success stories, fortunately, are not rare – they just take some initiative and collaboration.

Additionally, when a department has the ability to make a new hire, they should be sure to hire for the right roles. Just because a senior contract lawyer just left doesn’t necessarily mean there is an immediate need to hire another senior contract lawyer. Perhaps a mid-level contract lawyer can take on more responsibility, undoubtedly at a lower cost than going to market for a senior person. This is the kind of measurement that is sure to please – it saves thousands of dollars and allows a junior lawyer to develop vital skills.

If a law department doesn’t have the time or resources to embark on these types of key measurements, then it should hire a consultant for help. Believe me, the cost of hiring an expert to prove your worth and meet measurable goals is tiny compared to the progress that will be achieved and the savings that will be realized.

The bottom line is this: Data analytics is just another way of saying you can measure where you are and therefore track your improvement. Almost anything can be measured – all you need to do is figure out whether the law department and the overall company will benefit by improving these metrics. Then, it’s just a relatively simple matter of looking for easy-to-find numbers, working with your teams and figuring out ways to improve.

And most importantly, GCs should be sure to use the measurements and improvements that are achieved to make the case for their departments’ value to their corporate boards.

I then read the words on the page, purely for the utility, and my professor bluntly made sure my entire class knew it. What I took away lacked any substance. Simply, I had missed the point.

The way that we understand literature should be the same way that we understand how teams across law firms and corporate law departments add value. They help tell the story.

When price is not pricing

For any engagement, when a client asks about price, it is very easy for our focus to stay there. Price is about money, which is tangible and quantifiable, which seems straightforward. It is consistent, which makes it a utility. Yet, this is where pricing misses the mark. When we start to define the prices of legal services as a utility, the teams that manage prices will start to be defined the same way.

Pricing teams within law firms, all too often, are held to discrete tasks like rate setting, flat fee pricing, and efficiency, with one mission in mind: boosting profitability. This is a worthy endeavor, of course, as firms see a clear cause and effect that ends in a much larger pile of cash at the end of the day, which partnerships love.

However, any price for law firm services represents what that firm is today and how that firm will deliver value to clients. That said, then the role of the team that sets and manages price has to be deeply ingrained in how the law firm competes and executes its strategy on a day-to-day basis. More importantly, the role of a pricing team has to start with clients in mind.

Pricing is strategy

The law firm of the future will (and should) launch every team and every project by asking the question “How does this help our clients?” This means that empowering a pricing team requires a law firm culture that does not define them as a utility or function, but as a differentiator to advance a firm’s strategy.

How law firms ensure that their pricing professionals become integral to strategy development at the firm, especially at the client and matter level? They should consider three approaches:

1. Empower them — If pricing is purely considered to be a function, then it will be viewed as administrative and, consequently, either as an afterthought or operational task. If instead, pricing professionals are empowered by firm leadership to evaluate, recommend, and implement pricing arrangements then they will be better equipped to determine how pricing scenarios can be aligned with the broader client or matter strategy.

2. Involve them — Including pricing team leaders in firm discussions related to growth opportunities, areas of focus, client relationships, lateral hires, and strategic planning sessions goes a long way to ensuring their involvement. Even if price isn’t a leading consideration at the particular time of these meetings, pricing professionals will be better positioned to provide recommendations when appropriate, as they will understand the bigger picture and their input will be informed through broader considerations.

3. Educate others — Consider all of the business professionals that directly support the practices as an extension of the firm’s pricing team. Familiarize those individuals with how price is a critical part of firm strategy and how it functions as an enabler of business growth.

The goal of these education efforts is to have business professionals consulting the pricing team on a variety of practice efforts, including such areas as:

• • • new business pursuits (business development);
    • market positioning and brand building or awareness activities (marketing);
    • lateral hiring (attorney recruitment);
    • business planning (practice group professionals); and
    • legal project management, knowledge management, and the implementation of new practice technologies that enable the attorneys to practice more efficiently and increase value for clients.

Business professionals from these particular areas within the firm are well positioned to bring in pricing professionals, promote their capabilities, and recommend attorneys to discuss strategy with them. Additionally, as business professionals often lead initiatives that are aligned with the firm’s strategic plan, they must have a deeper understanding of how price is interwoven in all aspects of client strategy.

Consider this: If price is a part of a firm’s brand, shouldn’t that require pricing professionals be included in firm brand strategy discussions and go-to-market plans?

My Kinsman, Major Impact

The law firm of the future will allow all of their teams, not just pricing, to be a critical part of their strategy. This is not just a view that puts clients first, but one that will demonstrate how a law firm delivers value for years to come. This should challenge how we think about our pricing teams.

That day, a university literature professor gave me a masterclass that focusing on the pure utility of words on a page; yet, the lesson led to something simple and fleeting. When I took a step back and observed how all of the pieces fit together, I saw a work of art. The law firm of tomorrow will be doing just that.

Thomson Reuters’ Market Insights survey of legal clients helps shed light on these important budgetary questions. For example, spend optimism — the net difference between those clients that say their legal spend will increase and those that say it will decrease — has been rising since the start of the pandemic in Q2 2020. At that time, more clients were planning on decreasing their legal spend than increasing it, because many weren’t sure what the full impact of the pandemic would be on business operations.

Since that time, however, we’ve seen solid growth in spend optimism. In Q2 2021, just one year later after the start of the pandemic, legal spend optimism saw its strongest period of predicted growth in quite some time. Subsequently, we’ve seen continued spend optimism through this most recent quarter.

On the surface, total legal spend optimism stayed strong throughout the first half of 2022. In Q2 2022, twice as many clients (44%) said they expect to increase their legal spending rather than decrease (17%). And that optimistic percentage was the highest since Q2 2021, and the second-highest since mid-2019, before the pandemic.

However, this trend is not consistent across all buyer segments. Both large and midsize companies are beginning to rein in their legal spend amid predictions of an unstable economy. Indeed, this tempering of legal spend expectations often is an indicator of a shift in buyer sentiment.

Sector segments also reveal meaningful differences. While spend optimism is spread relatively evenly across all industries, companies in the technology, media & telecoms (TMT) sector are showing lower optimism in the first half of this year. About 30% of TMT companies said they expect to increase their legal spending, while 25% say they expect to decrease it, resulting in the narrowest margin of difference among the business sector segments. One possible reason is that TMT companies may have invested quite a bit in the early part of the pandemic, and now they’re starting to scale back compared to before.

While a full look at the data indicates continued optimism, there are hints across segments that may be signaling a shift. Historically, there have been delays between when a true recession hits and when the impact is felt on a company’s legal spend. And that means that clients’ budgets have yet to feel the full pressure of reduced optimism on spending.

There’s also an alternative explanation, offered by the history of the 2008 financial crisis that many in-house law department leaders experienced first-hand. That explanation holds that because of the difficulty department leaders had in getting their budgets back up to pre-crisis levels once those budgets were cut, many leaders now may be more willing to do everything they can to hold on to their budgets in the coming months.

Yet, for the time being, law firms can use these optimistic numbers on client spending projections to make their own operational plans and determine where their resources are best positioned.

The data can also provide lawyers with information on which clients might be good targets for additional outreach, based on their demographics and their needs. Certainly, it’s helpful to reach out to clients that are projecting increased spending in order to capture a portion of that work, but it’s equally important to set up conversations with those clients that are anticipating less of a spend increase or even a decrease. Clients in these straits may need help prioritizing their legal work and developing a work plan that ensures efficiency and value for their money.

By reaching out to all levels of clients with these kinds of suggestions and a demonstrated understanding of their position in the market, law firms can become a valued partner to corporate law department leaders and their legal teams.

Learn how to utilize data & market research to better understand your clients’ needs and how they’re changing

Not surprisingly, this pressure is pushed down throughout the corporate infrastructure, and many corporate law departments are feeling the squeeze like never before, being mandated to cut costs and carefully evaluate any spending. How, then, can legal departments do more with less while continuing to handle an increasingly complex legal and compliance workload?

Indeed, in the Thomson Reuters Institute’s 2022 State of Corporate Law Departments Report, half of the senior in-house counsel surveyed cited “conducting operations in the most efficient way possible as a top priority for their law department, even more than safeguarding the business, which is arguably the main purpose of an organization’s legal function.”

Efficiency seems to be top-of-mind for many in-house lawyers. In the same survey, they named cost pressures and doing more for less as their biggest efficiency challenges. Other challenges, such as managing the organization’s digitalization and technology initiatives and improving operational efficiency and streamlining work processes were also cited.

Yet, what specific steps can corporate law departments actually take to help them do more with less? Here are several ways company chief legal officers can be thoughtful about their overall legal spend:

1. Shifting work to lower cost legal providers

This one might seem obvious, but the way to find lower cost legal providers. Corporate law departments that see a lot of litigation, employment issues, intellectual property (IP) matters, or merger and acquisition (M&A) situations might consider hiring external law firms outside the legal hot spots of New York City, Los Angeles, or London. Instead, much of the work can be done — without significant change in the quality of the work — by lower cost regional law firms in less expensive parts of the United States, such as Kansas City, Mo., Nashville, Tenn., or Denver.

Often these smaller regional powerhouses can offer expertise in litigation, M&A, employment, or IP that matches (or comes close to) the work done by big city firms at a much lower cost. Additionally, sending certain work, such as M&A or due diligence, to a smaller regional firm will likely allow the corporate law department some latitude in seeking caps on fees for larger projects or finding other alternative fee arrangements that may not always be available at bigger less-flexible law firms.

2. Offshoring legal talent

Take advantage of the rise in remote work and tap the pool of talent available globally.

This strategy could mean bringing on legal talent in other countries, such as India, where employees or contractors can do the more routine type of legal work, such as reviewing contracts and non-disclosure agreements (NDAs), conducting due diligence in M&A transactions, or other high-volume, lower risk tasks.

Moving this work to offshored legal talent doubles the benefits: It not only allows your law department to complete this work more affordably; it also frees up your higher paid legal talent to tackle more productive and valuable work for the organization. In fact, if your company already has an offshore office, then building up the legal talent there could enable your team to offer more “real-time” advice to employees in global offices and cover more time zones to support the business.

3. Leveraging new and existing talent who can flex

Many law department leaders are reevaluating their talent needs to ensure all resources are being efficiently optimized. Focus hiring on more senior talent who can flex their legal skills beyond their area of expertise, making them more useful as utility players that can help the department meet all its needs.

Many departments are seeing the value in hiring more versatile lawyers who can advise the company on multiple areas of the law, while bringing flexibility to the department and giving legal teams the depth to react dynamically to changing circumstances.

Many departments are seeing the value in hiring more versatile lawyers who can advise the company on multiple areas of the law, while bringing flexibility to the department and giving legal teams the depth to react dynamically to changing circumstances.

This strategy can go beyond new hires as many department leaders are asking their existing lawyers to stretch beyond their core areas of the law to meet new mandates or demands from corporate leadership or other areas of the company.

4. Utilizing the budgets of other business units

When working with other business units within the organization — whether it’s finance, human resources, information technology, or the tax department — corporate law departments should not necessarily pick up the tab for all the collaborative work being done.

In fact, when teams from other business units ask for legal resources or for the law department to take on a large outside project, ask those departments to pick up all or a portion of the cost. Teams can also share the costs for hired personnel required to perform functions for two or more teams, such as equity administrators, international corporate secretaries, and the like.

5. Hiring a legal operations professional to better leverage technology

Many GCs are hiring legal operation professionals as one of their first and most important hires, giving these professionals the mandate to improve department efficiency, provide metrics to benchmark productivity, and allow visibility into contract cycles to better streamline the work process.

As the 2022 State of Corporate Law Departments Report showed, there are a number of legal technologies that many law departments currently use, and that number has grown over the past several years. For example, almost two-thirds of departments now say they use e-signature technology regularly and more than half use legal research and contract management technologies in their day-to-day operations.

Legal operations professionals can add tremendous value by optimizing technology use and providing metrics that can measure performance and improvement. This then allows legal department leaders to speak in the language of data and numbers — one that is understood by other business units — which can help them provide visibility to other business units and the board of directors about the legal team’s performance and can help chief legal officers make their case for more resources if and when needed.

Keep improving with your eye on the bottom line

Beyond these five steps, there are other ways that corporate law departments can satisfy the mandate to do more with less. As efficiency remains a crucial goal for many in-house law departments, related factors such as improving talent and resourcing strategies, as well as pursuing needed technology initiatives, will become added benefits for those departments looking to right-size their needs with the resources they have available.

This article was produced in collaboration between the Thomson Reuters Institute and the Association of Corporate Counsel’s Docket magazine

But law firm profitability does not end with that portion of the analysis. Of equal importance, of course, are the concepts of client expectations, data and metric capture and analysis, and ultimately, the positive outcomes that law firms can experience by meaningfully examining the full spectrum of their profitability.

Client expectations

A lawyer has clients, and not customers, and for very good reasons. There should be nothing more important to a lawyer than the tasks that their clients have given them. Lawyers owe a fiduciary duty to their clients; however, this duty often has been distorted to justify the pricing of legal services. And while clients cannot always be right in the attorney-client relationship, the relationship has been far too one-sided — the lawyer is not always right, especially when it comes to pricing and methods.

Legal practitioners tend to overlook another key variable that drives profit in nearly all other businesses — customer expectation and satisfaction.

A persistent myth regarding the practice of law holds that lawyers cannot manage these outcomes because the results are simply the results: clients will go to jail, get divorced, pay money damages, not receive enough damages, or feel they paid too much for a transaction.

In reality, the intangibles of client satisfaction, regardless of matter outcome, are key to finding more profit. For example, satisfied clients are more likely to pay the bill, return for more services, refer a friend, and even promote “their lawyer” in casual conversation. Most lawyers consider customer satisfaction anecdotally, i.e., sometimes former clients refer new clients. However, client referrals and the business they generate can be more than just an unintended happenstance. Just as with the other key areas of law firm profitability — costs, pricing, and revenue — customer care must be systematically measured with an eye toward intentional improvement.

How to capture the variables of profitability

While law is a mental exercise, how the practice manifests and grows (or not) can be measured by data, such as client demographics, net promoter scores, client satisfaction scores, conversion rates, return rates, billing & collection rates, in-depth time analysis (not the billable hour), and analysis of fixed and variable costs.

How to gather and measure this data seems like an impossible task to most lawyers, especially those in smaller firms or solo practices. And to be frankly honest, most lawyers do not have the aptitude. They went to law school to help people or because they were fascinated by the operation of law and politics, but not data and economics. The old attorney adage has been said often: “If I was good at math, I wouldn’t have gone to law school.” Yet, it is also true that one of the clearest paths to higher profitability is found by collecting and analyzing that data, then acting on the findings, no matter how small the law firm.

For lawyers pressed by time and budget constraints — in other words, everyone in the legal profession — the only solution is collaboration with technology, even if the lawyer is a proud Luddite. The investment of time and money into technology may be a barrier for some smaller outfits; however, the return on those investments can be seen throughout the legal industry.

Fortunately, technology on the whole is getting cheaper. The right investment in the right technology will quickly recoup the cost. And yes, there is risk in choosing the right technology, but not making a choice is guaranteed to put the technology-inept lawyer behind as more lawyers shift to these more innovative methods.

Profitability analysis is good for lawyers, clients & the profession

Merely raising hourly rates, as has been done for decades, is generally good for no one other than the lawyer, assuming the lawyer or the firm can collect.

Yet, after taking a long hard look at the firm’s profitability — and possibly taking steps towards improvement based on this analysis — who might benefit then?

• • • The client might get a lower bill, resulting in a higher likelihood of paying promptly and being a happier customer. And even on a lower bill, the lawyer’s profit and margin could ultimately be higher.
    • After a critical evaluation of the inputs, the bill could be higher but still be paid by a happy client because now the client better understands the value of the work.
    • Through management of firm costs, a higher bill may result in even higher profit and margin due to the firm’s efforts at budgeting and improving efficiency.
    • Work performed more quickly and efficiently frees up time for more lifestyle choices for lawyers, and whether they choose to find and do more work or head home to family and hobbies, there is a clear benefit to lawyers’ well-being.
    • The firm can produce better work product because the work is created with efficiency and therefore more uniformity. Plus, legal malpractice risks are reduced.
    • Finally, lower bills and a better presentation of value encourages more lawyer engagement, which in turn allows for more lawyer availability to protect the fundamental rights of clients.

If your law firm is not engaged in profitability analysis, you’re falling behind. It does not all need to be done at once, and nearly any effort should move the needle in the right direction. And once that momentum begins, the positive results will be obvious.

In the end, however, it is a change in mindset that is more important — lawyers must be taught to seek profitability, not billable hours.

Thomson Reuters Institute: We increasingly hear about clients being in the driver’s seat these days, holding the power to make demands and elicit concessions from their law firms, especially in areas of pricing. Do you think that is true, and more importantly, does process improvement offer law firms a tool to combat this?

Fred Esposito: Clients are in the driver seat, and law firms need to have a better handle on what clients value as well as the economics of their own firms as well. Most firms do not have a clear grasp about how much it costs to perform and deliver their legal work.

With the rise of procurement and legal operations professionals in client companies as well as pricing and knowledge management professionals in law firms, the days of producing an approximate value of a matter based solely on experience are long gone. The focus is no longer on what rates to charge, but how much is it costing the firm to produce the requested legal services. This question opens the door to many components and related processes which may or may not be contributing to an efficient work product.

Firms should be looking at all critical legal and business processes, which means starting with a way to surface, select, prioritize, and resource process improvement projects that are related to pricing.

In fact, you often can see the economic perception of some law firms and their lack of understanding of their own cost process on display. During speaking engagements, for example, I will often ask a room full of legal executives, if they know how much it costs their lawyers to produce one billable hour. Do they know that cost per hour by practice area or task? Regrettably, few hands go up — sometimes just three to five hands in a room of 100 executives. Consequently, many firms have dipped their toes into the fee arrangement pool and for lack of better terms, drowned in the process.

The good news, however, is that law firms are learning from the mistakes of the past, listening to clients, feeling some positive peer pressure, and paying closer attention to the numbers. A significant benefit of this is that process changes will be accepted.

Thomson Reuters Institute: Is this a problem that solely comes from the law firm side?

Fred Esposito: No, because in all fairness, some clients may be unreasonable in their requests for specific fee arrangements; but there are one of two ways to manage those situations. One, the firm can turn the existing or potential client away because the firm will not or cannot be that flexible; or, two, the firm can rely on its economics and produce various pricing scenarios that might fit better with the client. This would be the desired course of action.

Unfortunately, many law firms do not take the time to understand how and why their pricing works the way it does or does not. Firms should be looking at all critical legal and business processes, which means starting with a way to surface, select, prioritize, and resource process improvement projects that are related to pricing.

One easy thing to do to is to review operations and productivity data to see where the law firm can improve in pricing. For example, see where there are write-offs and write-downs, or simply ask employees and clients about pain points and improvement opportunities.

The result will be a streamlined and efficient process that will reduce and/or make more predictable the costs to produce legal services while generating profit. Thus, all this allows the firm more flexibility in their proposed fee arrangements.

Thomson Reuters Institute: How can process improvement transform the pricing function from there?

Fred Esposito: The goal is to create efficient processes that positively impact the bottom-line without sacrificing quality and while improving client and employee experiences. Firms need to have the right amount and type of data which can provide the details for how much time a task should take and at which attorney level it should be done.

This is further complemented by firm financial data surrounding operations and productivity. In short, law firms need to ascertain how much it costs them to produce a billable hour, by attorney and by practice area. Again, it is not about rates, it is about the amount of time being spent to produce the work. Deeper dives into the how the work is currently produced will be the playing field for a process improvement initiative.

Law firms must first understand how a current process is working to order to identify where improvements can be introduced. This is best accomplished by defining how the current process is working and measure and analyze the data produced.

Law firms cannot improve efficiency and create that added value unless they understand the issues that are keeping them from reaching that optimum performance. Law firms that can strike that balance will differentiate themselves from their competitors in developing business. Once a law firm is conversant with their economics, pricing becomes more predictable and profitable. Also, an inherent flexibility in what the law firm can do with pricing becomes more apparent, and more importantly, more innovative.

Thomson Reuters Institute: So, would process improvement support that better understanding of the pricing function?

Fred Esposito: Well, pricing is, in and of itself, a process that can be improved. The key takeaway is that law firms are getting the message from their clients and working harder to develop smart pricing that produces a win-win. They are also getting better at client, project, matter/case, knowledge, and budget management. Overall, they are making strides to pricing and managing their legal services.

Yet, pricing has always been viewed as a financial component; however, with streamlined processes that promote cost reduction, efficiency, and client value, it can be a significant stepping-stone for taking the client relationship to a whole new level of strategic growth. It is not just about finance; it is about building relationships with innovative and competitive advantage.

The success of this process is attributed to firms’ ability to align the needs — or the voice — of the client and their own need to provide efficient legal services while generating a profit, delivering higher quality work product and service, and providing a better employee experience, too. Taking it a step further, law firms that are successful in this area are using this work to gain competitive advantages in their marketing and business development efforts.

Using process improvement for pricing is important not only for profitability and delivering what clients want, it is quickly becoming “table stakes” for law firms that want to remain or become competitive in today’s marketplace.

Next, we’ll look at what the future holds for process improvement and the firms that pursue it.

Fred Esposito, COO of the regional law firm Rivkin Radler, has more than 25 years of law and accounting firm experience, is an author and sought-after speaker specializing in financial and organizational management, process improvement and project management, and has managed and worked in a consulting capacity with several domestic and international law firms. He is also a senior consultant with the Legal Lean Sigma Institute, LLC, and a Certified Green Belt in Legal Lean Sigma with a Project Leader designation. Fred is working towards his Black Belt Certification.