I was asked last week what I thought about the prospects for “BigLaw.” That question can result in an answer which is too long at 20 seconds or too short at two hours.

I opted for two minutes, suggesting that the sometimes pejorative term BigLaw really doesn’t do high-end corporate legal services justice. I noted that there is really no homogeneous “BigLaw Industry” per se; you have to look at what clients given firms are successfully targeting and servicing. Each “BigClient” faces its own challenges, and a law firm that helps a client compete and win will do well. Many others may continue to be profitable, but will struggle as those profits inevitably decline. Sadly, some firms won’t make it in their current form.

I had a few examples of the reality facing several companies in the “BigClient” category, but the conversation ended there (it was off the meter!).

Just such an example jumped out when I read the morning news last Friday. I saw the earnings announcement by Wells Fargo: second-quarter profits up 19 percent, beating analysts’ estimates. But there was more to this story, and a headline later that day by Bloomberg captured perfectly the BigClient world:

There is a reason Wells Fargo has has been a leader for years. They invest money opportunistically, but they always watch the cost side of the ledger. As an analyst quoted by Bloomberg noted:

“Expenses are probably between $500 million and $1 billion too high,” Marty Mosby, an analyst at Guggenheim Securities LLC, said in an interview before results were disclosed. “That’s a cushion they are whittling down.”

Now do you think legal expenses, particularly for outside services, are part of hitting this nine- or ten-figure cost reduction target?

Before his abrupt exit from HP, Mark Hurd gave this insightful quote to the New York Times in 2006:

Costs and growth are different sides of the same coin. […] We will spend money to save money and save money to spend money. We will never be done looking at our cost structure.

So what seems normal now really isn’t totally new, is it?

The key takeaway for me: the best companies of the BigClient bunch are more focused than ever on costs. Even with a nascent signs of economic recovery. That mindset is a big reason why they became market leaders in the first place.

Cutting costs during a Great Recession is hard, but it’s almost a reflexive process. Controlling costs when not in urgent crisis-mode requires great management and even better employees.

To meet this challenge, maybe “BetterLaw” is a more productive focus for lawyers and clients alike.

As we move away from hypothetical lawyer-client letters, sometimes it’s helpful to see what other interested parties have to say about the corporate legal market.

One such person is Dan DiPietro, chairman of The Law Firm Group at Citi Private Bank. He recently gave a wide-ranging interview to Bloomberg Law’s Lee Pacchia (which is embedded below). This interview coincided with the release of the group’s most recent industry report.

Three items really caught my eye; I am paraphrasing the video and providing the rough locations if you want to find certain remarks fast:

1. Work moving in-house (4:00): Mr. Pietro sees more transactional work moving in-house. Not necessarily the entire deal, but parts of it, as GCs get more comfortable “compartmentalizing and dis-aggregating” work. Certain work can go to a low-cost provider (i.e. the in-house staff); other “Rocket Science” work would still be placed with their “go-to firm.” The issue is law firms have built their leverage model based upon doing all the work, and if this trend continues, firms will have to look at their leverage models.

WGC comment: This trend isn’t just continuing, it’s accelerating. And LPOs may even be lower-cost providers than in-house staff for some transactional work, as they take litigation project management experience and map it over to deals.

2. Excess capacity drives bad pricing decisions (5:15): An example is one Am Law 50 firm talked about litigation work that was quoted for $350,000 per matter (heavily negotiated, thin profit margin), and finding out that the same client received a quote from another Am Law 50 firm for $75,000 for the same work. The relationship partner at the first firm wanted to match the lower bid to keep the business; the head of litigation and the firm managing partner decided against it under the logic that it would “send a message that we have been overcharging the client for the last 18 months.”

WGC comment: The client already figured this out. Maybe the competitor is putting excess capacity to use and grabbing this work as a loss leader to make inroads with a new client. Or the nightmare scenario: maybe the other firm has figured out how to do the same work at cost or (gasp) at a slight profit.

3. What productivity means for law firms (8:30): A primary financial metric that Mr. Pietro uses for law firms is “productivity.” This is “average hours per equity partner.” If below industry norms, that’s a red flag as a lender.

WGC comment: Aha! If this is how law firms also measure “productivity” then it is a red flag for clients.

Most GCs I know work for companies facing withering global competition. If they are a supplier (business-to-business) rather than a end producer (business to consumer), they are in a similar position to law firms, trying to balance efficiency with profitability.

The fact that one of the leading bankers to the legal industry is talking publicly about how leverage models and lawyer capacity is meshing with market demand is striking. Note the title that ace Bloomberg writers gave to this YouTube video:

BigLaw’s Banker: I’ve Got a “Robust” List of Firms That May Fail.

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Toby Brown posted a compelling (and slightly hypothetical) letter from a law firm to a client. You should read it at the link in the prior sentence. The “tl;dr” short summary: we get you want speed, quality and low cost; unless you’re OK with two out of three, we need to talk.”

When I was a general counsel, I didn’t receive a letter like this. Maybe it would have helped. I did have a number of discussions with outside counsel that proceeded along those lines. So since I didn’t have a chance to respond to a letter that was never sent, I thought, with Mr. Brown’s understanding, I’d respond here.

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Dear Waiting for More Guidance:

I am in receipt of your letter dated November 19, 2012. I appreciate your candor and willingness to reach out and get further insight into what MegaCorp expects from its outside counsel.

As far as your choice of less hours or cheaper hours, we’ll take both if possible. Some of our other firms are doing this, and are getting there by integrating technology when warranted. Of course, We don’t want to tell you how to run your business. But the competition we are facing in ours forces us to ask.

I agree with your point that most law firms think they are already efficient. I fell out of my chair laughing, but I agree.

You may be right that some firms are confused by this state of affairs. As far as you wondering whether others are “ignorant of our needs,” that’s something we wrestle with every day.

You conclude your helpful letter with this: “as a favor to your firms, be a bit more specific about what it is you want exactly the next time you ask for more efficiency.” We should do this, and we should start right now.

So tomorrow your firm, as our primary outside counsel, and nine other similar law firms (I think these would be the “ignorant” ones you mentioned) will receive a Request for Proposal to perform all the work (a) your firm currently handles for us and (b) the work I was just about to refer to you today before I received your letter.

I am attaching your letter as an exhibit to the RFP, and am asking for guidance on those issues from the recipients. It will be extra credit added to our final ranking. Since you do not have anything else to add on those issues at this time, your firm should not complete that portion of the RFP.

Thank you for your thought-provoking letter, it really helped us get going on an RFP process that we have been kicking around internally for the last year.

Very truly yours,

John Client
GC, MegaCorp

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I’ve always wanted to respond to a “Dear John” letter.

Last time, we took a revisionist look at the history of the general counsel. This was provoked by recent commentary about growth challenges for large law firms from Bruce MacEwen (the latest installment is here).

To look at legal demand from the inside out, I see 7 main reasons it’s trending lower:

1. The economy. This is often cited as reason #1 by law firm managing partners. It’s true, but it’s more correlation than causation. Forward-thinking general counsel had been taking a scalpel to outside services costs for years.

2. Global competition. Bruce talks about this as “Economy I,” the competitive one that almost all clients operate in. He notes that many large law firms think that they can trundle along in “Economy II.” This has little competition because it’s typically governmental entities insulated from the back of the invisible hand of one Mr. Adam Smith.

3. More alternative providers. Look no further than the special Deal Book section in today’s New York Times. The lead article by Andrew Ross Sorkin focuses on one such provider, Axiom. It’s a very positive view of Axiom, which deserves it. One small note is that the lay reader may think Mr. Sorkin is referring to a new-age “law firm.” Axiom expressly disclaims that it is one here. The good news is that its customers know this and like it.

4. Pricing transparency. More buyers of legal services are not just aware of high costs, but informed of how Firm X compares with Firm Y and how Lawyer Z compares with both. Sky Analytics is one company offering corporate counsel data and a decision tool to shine a light on the formerly dark art of lawyer selection and law firm pricing.

5. Uneven quality. One reality for very large law firms is the difficulty that clients have in paying top rates for any one of a 1,000-plus lawyers. True, you can have 1,000 very good lawyers, maybe 200 great ones. But all cross-sold as a fungible “branded” product? It costs a firm as much to deploy David Boies as it does to deploy one of David’s Boys. (Coincidentally, the New York Times covers the saga of Cravath in today’s paper here).

6. The Convergence Myth. There was a time when general counsel were told to consolidate most work with a small number of law firms. While there were some efficiencies in many cases, it’s more of a transitional tactic than a long-term, stand-alone strategy. If you ask a large law firm to manage a lot of matters for you, you better have a lot of confidence in the partner whom you call first when things go awry. Today, any efforts toward “convergence” would have to include a number of alternative providers, operating under alternative billing structures. And just who manages them?

7. The in-house mindset. As I mentioned last time, the early-stage GC was in triage mode, just trying to make sure all the work got done, and hopefully most of it done right. Today, more sophisticated law departments of any size aren’t trying to farm work out to large law firms in the first instance. They are trying to do it inside, do it cheaper without high-cost law firms, automate it, or (heaven forbid) not do it at all. I once likened legal fees to “hazardous waste” and I think that still holds.

So one take-away for many large law firms is this: when they try to do things that used to be effective in (a) getting more work and (b) charging more for it, they will hear a dead silence on the other end of the telephone. And maybe find that their next call goes straight to voicemail.

John Maynard Keynes said fighting a recession with monetary policy is like pushing on a piece of string. Many large law firm managing partners are seeing something very similar. Working with today’s informed general counsel is more like a tug-of-war.

On Thursday, a look a what new some of these new service models may mean for certain old law firms.