As we approach ELM Amplify 2020, the ELM Solutions online user conference, we are highlighting a few of the informative and thought-provoking sessions that will be a part of this unique event. Keep checking back to the blog for more about what you can expect at ELM Amplify.
According to a recent survey, the #1 piece of advice general counsel would give to law firms looking to improve performance is, “know my business better.” By the same token, corporate law departments (CLDs), as purchasers of billions in legal services every year, would behoove themselves to understand the business end of their suppliers. In the panel If This Firm Were a Stock, Would I Buy It?, legal industry insiders Preston McGowan and Kevin Iredell will dive deep into how CLDs can understand their suppliers better and reap the benefits of doing so.
For instance, if CLDs fully understood the breadth and depth of their firms’ practice offerings and not just those practices they have personal experience with, they would find that, when a new legal issue occurs, they have more sources of quality legal help (and consequently more bargaining power) than they realize.
But the level of understanding CLDs ought to have about their suppliers goes far deeper than just their legal capabilities. Rather, like purchasers of fine automobiles, law departments need to see past the shiny paint job and look under the hood to get a feel on how well suppliers run as actual businesses.
They need to know the answer to the question: “If this firm were a stock, would I buy it?”
Why? Because the nature of legal relationships is changing. Relationships used to be, and to a large extent still are, personal in nature. In fact, when asked to identify the main thing that differentiates them from their competitors, most law firms continue to point not to better service, technology, pricing models or any of the other “business” differentiators but to good old “personal relationships with clients” (see p. 7 of this report). Those personal relationships will remain important but will increasingly be subject to much larger and more formal relationships maintained at the institutional level, which do not depend on particular individuals to remain intact. In this new world, CLDs purchasing legal services need to ask themselves not only whether a given law firm has sufficient legal expertise but also whether it has the financial, cultural, and other resources to not only survive tough times but to come out of them prepared to invest serious money and nonbillable time in bets that – unlike the billable hour – have no immediate, guaranteed payout.
CLDs that do not take this view, and that continue to look to expertise and the strength of relationships between individual, influential personalities as the primary criterion for vendor selection, take three huge risks.
Vendor implosion. The COVID pandemic has already supplied proof that prestige does not implosion-proof law firms; if firms cannot pay key partners enough and otherwise keep them happy, those partners leave, taking clients with them. That puts more financial burden on the remaining partners and can lead to a domino-effect of departures.
Vendor absorption. CLDs that want to move into the future by creating institution-level business relationships need to be conscious of the risk that some of the firms they invest in may flounder only partially – not enough to fail but enough to require absorption into larger, more stable entities. The trouble is, there is no assurance that the carefully crafted institutional relationship you invested in so heavily will port over to the new firm. Law firm mergers can be messy and the ways of doing business you previously established won’t necessarily be preserved or respected.
Nothing happens. This third risk is the most subtle. Your firms don’t implode and don’t get absorbed, but they also don’t grow in size or business maturity. At the end of the year, they zero out their balance sheet and send the partners home with big checks, and not a penny is invested in the future. I believe this, even more than the other two risks mentioned, is the way much of the industry will go.
To avoid such pitfalls in their vendor mix, CLDs are going to have to ask tough questions, which many firms – particularly the shakier ones – will be reluctant to answer. How liquid are you? How’s your revenue? What kind of “emergency survival measures” have you had to take to withstand COVID? How much have you spent on technology in the last five years? How diverse is your firm? How secure is the client data stored within your firm? These are the kinds of questions CLDs fail to ask at their own peril.
In many cases, firms will refuse to answer these questions. Just as frequently, I suspect they will be unable to provide clear answers, particularly where strong data analytics capabilities are required. However, the beauty of asking these questions is the firms that are hitting home runs in these areas are going to want to share those successes with you. And even firms that aren’t entirely forthcoming at least have an opportunity to engage in discussion that can give clients a window into how competent they are at managing themselves as a business. The rest of the firms – the ones that are unable or unwilling to give straight answers to reasonable questions or even engage in meaningful discussion – may have already told you everything you need to hear.