There is ongoing awareness amongst large law firms and their key advisors that (a) profits are taking a hit and (b) the trend is not their friend.
Bruce MacEwen at Adam Smith, Esq. has done a masterful job once again of putting this issue in sharp focus. It is a three-parter flying a “Growth is Dead” flag; most participants who matter in that industry have probably read them and wept. (Update: Part 4 is now here.)
Bruce’s analysis looks at what a low- or no-growth scenario means for large law firms: the revenues they realize and the prices they charge. What I want to highlight is what happens before the outside law firm is called: how general counsel are managing demand for outside legal in the first place. That will be in part 2 early next week.
Ron Friedmann has added to the discussion here, and noted some options that certain firms are exploring to reign in costs and (hopefully) improve profitability. I’ll address that in part 3 later next week.
Bruce raised the bar with a highly effective grouping of charts and graphs. I do better with pictures. So here it is:
The history of the in-house function in five figures:
(It took me a long time to find this; sorry it’s male-dominated. A female version is in the works; it might not pass ALM’s Codes and Standards department.).
Now, the key:
1. [1950s-1960s] The first general counsel was a buffer between outside counsel and their friends on the board. The CEO either liked their outside law firm, or had no choice in the matter. But at some point, the invoices were so big, or grew so fast, that he couldn’t in good conscience keep initialing invoices for payment. Presto! An in-house party of one.
2. [1970s] This is a short detour wherein some CEOs would shift this legal burden off to the CFO. Cost management of outside counsel was more of a math exercise. The good news is that CFOs and their staff are aces at math. This is also why you would see some companies try to slot their first general counsel under the CFO. It is an intractable arrangement, so note the step-down in GC “stature.”
3. [1980s-1990s] In this era, we see the fastest growth of the in-house legal function, both in budget, and in headcount. The business cycle is mostly expanding, and it is all the GC can do to keep up with demand. Even with all the work “brought inside,” there’s still a good 50% of expanding budgets being spent outside, at max rates that increase 5-10% yearly. The GC is truly “walking tall.”
4. [2000-2007] The finance function that the GC escaped from decades earlier has a long institutional memory. The incumbent CFO starts to ask about effective rates; she even has some data from peers about what other companies are spending on legal as a percentage of revenues. Note the slightly slumped shoulders of the GC, and the longer hair, a consequence of expanded hours, shrinking budgets, and endless planning meetings.
5. [2008-2012+] The last GC standing is aware of options for legal services and sees a consistent stream of new ways to do things cheaper each passing year. Some tasks don’t even need to be done at all, or can be re-assigned to client groups with forms and bands of authority. The GC pictured here is seen striding confidently into a board meeting, obviously under budget for the quarter and with good news about the forecast for next year. Note the “mullet” haircut and day-old growth on the face. Sure signs of a “man with a plan.”
So the general counsel has evolved over time. It’s important to note that not all GCs are at the same point; some may be at #5, many others struggling a bit to get from #3 to #4. But they all clearly know they have to manage demand before they really manage costs.
Next time, why “growth” for clients may not mean “growth” for all law firms.