Are commercial law departments in law firms at a tipping point?
When talking recently with the out-house community, I’ve discussed the old chestnut of law firm billing (a chat with me is a guaranteed riot). I’ll start at the end of the conversation. We discussed that the current law firm model is in rude health for corporate transactions, but has a challenging future for run-of-the-mill commercial work. The outlook is sunny for the corporate rainmakers but cloudy for those who don’t know an SPA from a TSA.
Well the out-house theory is thus: clients who five years ago had no in-house lawyers now have one or two. Clients who five years ago had one or two in-housers now have six or seven. Clients therefore keep most regular commercial work in-house and even when they do outsource it, clients want expert advice but don’t want to pay much for it. They don’t value it because they can do it themselves if they have to. Contrast this with corporate work, which clients generally can’t handle in-house and which they are happy to pay a handsome fee for.
This chimes with a point made to me recently by the managing director of one of the newish ’alternative’ providers of legal services. When I asked him who his competitors were, he said: “You.”
Certainly the above theory is borne out in practice in my experience. When I joined my employer many light years ago, the bigger ticket more complex commercial work was outsourced regularly, if not as a matter of course. This was no one’s fault, it just reflected the size and specialisms of the team at the time. Fast forward 10 years or so and outsourcing commercial work is the exception in our team rather than the rule. Without realising it we have as an in-house team been competing successfully for that work with the outside lawyers we would once-upon-a-time have sent it to.
The fees aspect to this subject is also important. It is correct that clients do not want to pay (much) when they send commercial work out the door, whatever the rights and wrongs of that. I have a rough idea of what a first draft of a contract should cost for what I’d define as a medium-sized project with a few bells and whistles but which is not too complex. I price that at around £2,000 to £3,000, give or take (preferably take).
Most firms, and I’m thinking non-magic circle, will do it for that price and as you would expect will do a very good job. Thing is, though, as a partner or associate you need a lot of those £3,000 projects to meet your billable-hours target. You need a whole lot more of them to get your billings anything close to the corporate lawyers’ upstairs, who can rack up a six-figure bill faster than you can say the words “share purchase agreement” (okay, slight exaggeration, but certainly faster than you can conclude negotiating one).
The tipping point from out-house to in-house for this kind of commercial work is only going to tip further towards more work going in-house, or to alternative providers, away from law firms. In my view, the corporate rainmakers can continue as is for quite some time yet.
Where then does this leave the leaders of commercial teams in City firms? Needing to reinvent the service they provide I think. Rather than reactively wait for decreasing levels of contract-monkey drafting instructions to come in, how about proactively selling some new services. Here is a potential menu:
1. Access to firm precedents – £20,000 per annum.
2. Access to precedents plus two-hours’ consultation on any first drafts produced in-house using firm precedent – £30,000 per annum.
3. Provision of first-draft agreements for 20 unspecified agreements over the next 12 months – £30,000 per annum.
4. Quality assurance audit of 15 random contracts produced by in-house team – £5,000 per annum.
5. Intensive training over the year for an in-house team to obtain an accredited qualification in a specialist subject, such as copyright – £10,000 per annum.
No doubt some law firms are offering aspects of this service already to their more valued clients. But I recommend they make it a ratecard product that is sold on a standard T&C basis by proper sales people, not by lawyers who also have to do a bit of sales.
After previous blog posts looking at law firm models, a couple of people have commented that I should concentrate on looking at how in-housers function rather than concerning myself with how law firms operate. I disagree. I’m not writing this to try to help law firms. I’m writing it to try to make the point that what clients want is changing.
Firms who are serious about the long-term future of their commercial practices need to incentivise portions of their partnership to think innovatively in these changing times. Because if the entire partnership remains incentivised to keep on billing for this year’s targets, then we have a turkeys voting for Christmas scenario for any partner who goes out on a limb in the way I’m suggesting. Point is, law firms incentivise their staff for the here and now, not for the there and future.
Due to the growth in numbers and excellence in the in-house side of the profession, without a sea change in product offerings the seesaw will continue to tip and commercial teams in law firms will continue to become the ever poorer cousins of the corporate powerhouse departments. They will be stuck at the top of the seesaw, unable to get off without jumping.
The landing may not be soft if their corporate law colleagues do not feel like catching them.
Tim Bratton is general counsel at the Financial Times