COVID-19 has thrown our economy into disarray, and the legal sector is no exception. Corporate law departments (CLDs) in many sectors are reeling under pressure from above to cut expenses and, while reopening offers hope for relief, that hope is fragile. At the same time, law firms are struggling, with pay cuts of up to 30%, layoffs, limits on new hiring and summer associate programs, and reduction or elimination of partner draws. No one is spared.
I’ve spent the last two months in deep conversation with many industry leaders, and the consensus seems to be that the industry will be forever changed, just as it was after 2008. That year kicked off many years of consolidation in banking, utilities, retail, and other areas. Law firms consolidated, too, as more solvent firms absorbed those less solvent. The economy went on to a historic recovery, but the fact that clients tend not to change firms made it easier for firms to “buy market share” through merger than to grow organically. Indeed, the largest law firm in America in the late 1960s was only about 200 attorneys, whereas Dentons now claims to employ over 10,000 worldwide. That didn’t happen organically.
Especially after 2008, CLDs added fuel to the law firm consolidation fire by initiating convergence programs. Law firm convergence programs, pioneered by DuPont legal in the 1990s, run on the common-sense proposition that you can get a better price for services if you buy a larger volume of them. In addition, you can raise the quality of those services because you have a smaller number of providers to manage and, therefore, fewer cats to herd. Looking to save money after 2008, many of the largest corporate purchasers of legal services initiated convergence programs. A number of smaller corporations have since followed suit, and I’ve personally worked with many CLDs that have converged at least some kinds of work into a preferred provider panel.
The present financial crisis has got experts talking about whether there will be another wave of consolidation and convergence. To me, it seems like a strong possibility – perhaps even more so than in 2008 – and this perception is backed up by a recent poll of Wolters Kluwer’s ELM Solutions clients showing that more than 78% already have convergence efforts underway. Although this poll was informal, the results are striking and reinforce what many industry observers have predicted.
Back in 2008, legal ops as we know it didn’t exist, but today it does — a whole profession of thousands who have found themselves in the kind of career-defining crisis that creates a rare opportunity to make real change. Add to that the fact that technology has improved greatly since 2008 — at that time, many, many corporate law departments still didn’t even have e-billing — and now there’s a cottage industry of folks with JDs, MBAs, and other high-level degrees combined with an unprecedented mandate to better manage costs. They’ve known all along where the levers are — they just needed permission to pull them.
But could there be a cloud to this silver lining? For a lot of CLDs, I think the answer is yes. By their very nature, convergence programs don’t happen often, and few legal ops directors will have been through more than one. Furthermore, they will be getting pressure from higher-ups to make changes happen quickly. Some of these senior managers may have very black-and-white thinking around convergence, mantras that basically equate to “convergence = savings,” much like the black/white thinking that “AFAs = savings” (which isn’t exactly true — they only save money when you’re good at them). While still remaining responsive, legal ops directors need to remember that their job is not just to execute decisions but to provide expert advice and help craft a superior plan of action that reflects a nuanced understanding of the marketplace that few lawyers — even law firm partners — have. Here are examples of some nuances to consider:
- Don’t overconverge. Dropping 80% of your work from 200 firms to 20 is great, but dropping from 20 to 10 is risky. What if one of those firms goes under, loses key partners, fails to modernize going forward, or otherwise becomes unable to help you? Every practice area should continue practicing with enough firms where it isn’t the end of the world if one or two of them disappear from the picture. Because they just might.
- Converging often means sending work to more expensive firms. There is only so much work you can converge into a 20-attorney firm in Muncie, Indiana. If you want to converge a lot of work, you have to go to nationwide and worldwide firms that have global coverage and staffing of most practice areas. These tend to be some of the most expensive firms. You might get a discount by providing greater volume, but you could have gotten a better overall price by going to smaller firms.
- Not all firms are firms. Sometimes, giant firms operate like true businesses, with centralized reporting and decision-making, shared services, and technological infrastructure. Others may be little more than an umbrella brand where firms have banded together for marketing purposes so they can refer business to one another. In some ways, converging work into that second type of firms isn’t convergence at all because you are paying for services that are branded the same but actually vary a lot in terms of cost, quality, speed, and consistency. That somewhat defeats the purpose.
Look for a follow-up post soon, in which I will cover some of my thoughts about what to keep in mind when selecting specific firms to include in your smaller panel.
To dig deeper on law firm management, download our whitepaper: Building Better Relationships with Your Law Firm Partners.