Corporate & Securities Law

Law Firm Reality Check: Leaving Lake Wobegon

By John Wallbillich

Last time, I took a look at how legal cost transparency sets pricing expectations. I believe that GC knowledge about how discrete services are priced and what certain results cost will lead to more informed purchasing decisions. This, in turn, will be a game-changer for corporate law firms. Why? Let’s take a look.

The first part of this story for me is to dispense with the fiction that the corporate law firm “industry” is monolithic. Even law firms very close together in the AmLaw 200 can be very different in terms of their client roster or geographic and industry reach. The classic outlier here is Wachtell, Litpton with M&A; you could also throw in a Skadden Arps or a Sullivan Cromwell in their most specialized areas of expertise. This post is not about them. They at the high end of the leading 20%, price-wise. We’ll call them America’s Legal Top 40, and will retain some pricing power for the near term.

Probably.

But for the balance of the AmLaw 200, this remaining 80% now scrambles to be one of the survivors. Some of these 160-odd firms are in better shape than others because of lower debt loads and better cost structures. They may even be able to keep some of their pricing power over certain practice areas. But not across-the-board, and not for long. Pricing pressure for some firms is masked a bit, because so much of their legal work hit came in months or years ago.

Many of these firms have been focused on delivering more value, which is good (if overdue). However, we have seen over the last week that some newer legal services are being priced between 30% to 50% to 80% less than invoiced by incumbent law firms. In this new reality, a dutiful scattering of value pixie dust over the latest iteration of an AFA just won’t be enough. Much of law firm pricing is now out of market, and that market is heading the other way fast. And since big chunks of a law firm’s cost structure is fixed, there are no easy answers in the short run.

To maintain morale, some law firm managing partners point to the economic recovery. Alas, they are mistaking correlation and causation.

The GC’s mandate from the CFO to lower legal costs was received before September 2008. It was sent by regular mail. The current mantra of legal cost control is repeated almost daily by the CEO, perhaps delivered with a Post-It note to the forehead.

Since cost structure drives a corporation’s competitive position in international markets, the pressure to reduce costs for GCs will likely increase as economic conditions improve. Re-read that last sentence a few times, since it will be a key driver for law firms that aspire to retain these GCs as clients.

There simply will not be enough Legal Top 40 work to keep the AmLaw 200 fully engaged at anything approaching their current rates.

If Garrison Keillor was leading a law firm years ago, he might have toasted their special home thusly:

“all the partners are strong, all the associates are good looking, and all the clients are above average.”

That was then. The news for today isn’t so rosy.

Friday a look at the options for managing partners outside the Legal Top 40. Mr. Keillor isn’t standing for re-election. He’s taking an early out, retiring to a better place.

Full post as published by The Wired GC on January 26, 2011 (boomark / email).