Corporate Clients Will Spend More on Fewer Law Firms

By Michael B. Rynowecer, President, The BTI Consulting Group.  Based in Boston, BTI is the leader in providing high-impact research, consulting and training to the buyers and sellers of professional services. BTI offers the most compelling market research, client satisfaction surveys, business strategy, client development and client focus tools.  Michael can be reached at mrynowecer@bticonsulting.com and 617.439.0333.

Fortune 1000 clients are going to cut their roster of law firms by 40% over the next three years.  This news comes with a drop in client satisfaction -- with only 30.6% of clients willing to recommend their primary law firm – down from 35.6% last year.

The findings are the result of individual interviews BTI just completed with more than 180 Corporate Counsel from August through October 2003. The clear message – clients are shaking up their law firm rosters and scrutinizing the law firms they hire more closely. Corporate counsel’s new hiring criteria, along with their willingness to add new law firms, affects virtually every law firm serving these clients. 

BTI research shows that during the last 12 months:

w      69.6% of clients added a new core law firm to their roster

w      Clients are bidding almost 20% less work

w      Spending on outside counsel increased $2 million per client to an average of $13.9 million per year

w      Three practices are targeted for big spending growth

69.6% of clients added a new core law firm to their roster

BTI finds that during the past 12 months almost 70% of clients added a new core law firm to their roster. This is up 10% from last year.  Clients are adding new law firms as their spending on outside counsel surges. The primary reasons:

w      Lack of new ideas coming from law firms the currently use

w      Inflexibility by the law firms

w      Lower client satisfaction

w      Higher expectations for law firms

Interestingly, the number of clients adding new law firms is almost identical to the number of clients that don’t recommend their primary law firms.  This continues in a stream of mounting evidence that clients hire new law firms when they are less than happy.  Our research shows that clients start with a new law firm and add more work as satisfaction levels improve. 

We believe 32% of the new firms added to the roster will eventually replace current primary firms.

Client satisfaction heads south

BTI research shows client satisfaction slumped to 30.6% from 35.6% last year.  Clients are less happy this year than last.  Corporate counsel face new demands and pressures. The pressure comes on three fronts: 1) legal demands, 2) management issues – that is running their departments and meeting business demands and 3) risk management – finding the new unknowns and predicting where the new issues will come from.

Clients not only face new high-profile legal and compliance issues, they face new reporting demands as well.  Most general counsel are reporting their progress and making assessments to their management more frequently.  Clients tell us that their law firms are often more of a burden than a help. The corporate counsel we interviewed cited four problem behaviors:

·       Law firms show increased complacency

·       Lack of proactive thinking around new issues

·       Unresponsiveness to requests for changes in work process and protocol

·       Little response to request for timely progress and budget reports

Outside counsel spending increased $2 million per client

Despite their continued complaints, clients added another $2 million to their already surging outside counsel budgets.  We expect this number to grow again in 2004. Fortune 1000 clients now spend an average of $13.9 million on law firms. Outside counsel spending is growing twice as fast as the overall legal budgets. As noted above, clients are looking to outside counsel more as they have fewer in-house resources. Outside counsel now makes up 51.2% of the total legal budget, up from 41.6% in 2001.

Meanwhile, clients have cut back on their competitive bidding by almost 20%.  This means fewer bidding contests and competitive proposals.  More law firms are competing on the basis of their actual performance instead of the promises delivered in a proposal.

Clients are doing more due diligence when hiring a law firm.  Clients find that they learn more relevant information about law firms from their informal networks.  The number of clients that rely on informal networking as a source of hiring more than doubled to 32.2%.  Clients may also make discrete inquiries to law firms during the evaluation period and use the nature and extent of response as one guidepost in their decision-making.

Convergence is still alive and well. Clients plan to cut their core law firm roster by more than 30% over the next three years. Typical clients want to have only six law firms on their core list by 2006.  BTI research shows that clients are investing more time and resources in building the right team.  Clients see more spending going to outside counsel and a bigger role for law firms. 

What stops law firms from getting hired

As clients evaluate, reevaluate and hire new law firms, we found recurring reasons that prevent law firms from getting hired. Few of these have anything to do with legal skills.  The biggest reasons include:

w      Poor (or no) chemistry with the client

w      Law firms being unresponsive

w      Failure of law firms to differentiate themselves

Successful law firms put as much energy into selecting the right personalities for the team, as they do the skills and experience.  Corporate counsel want people with whom they feel comfortable. Knowledge management systems notwithstanding, most key information transfer still happens verbally.

Three major practices targeted for big boosts in spending

Clients have shifted their spending from prior years.  Clients are putting more money into high-risk areas.  BTI asked clients to delineate their spending plans for several practice areas.  We found that three practices are the beneficiary of substantial planned spending increases:

w      50% of clients plan to increase spending on securities and finance

w      41% plan to boost spending on litigation

w      38% plan to boost regulatory spending

Law firms can differentiate themselves, and command premium rates, by helping clients deliver on the their own performance objectives.

w      22% of clients have a specific business objective, including

s       using changing regulations to their advantage

s       company-wide litigation management strategies

s       improved M&A process and support

w      18.8% of clients see risk management as their mission critical objective

Fortune 1000 clients tell us their law firms offer few risk management strategies.  These corporate counsel are evaluated by their bosses on the ability to deliver risk management.  We see this as an open opportunity to help clients. Law firms also get a deep look into major risk exposures their clients face.  Savvy law firms will seize this opportunity as one of the best rate protection and cross selling platforms today. Offering risk management strategies will also boost client satisfaction and make your clients look good.

Implications for law firms

Overall, 52.7 % of AmLaw 200 law firms are losing market share while 69.6% of clients are hiring new law firms.  This is a big money game as clients add millions to their outside counsel spending.  More sustainable fees and client spending share is going to the primary law firms that deliver superior client service.  In fact, only two primary law firms will get more than 50% of the increase at each client.  Everyone else will get a smidgen.

We recommend the following to stake your firm's share of increased spending and to boost client satisfaction:

w      Catalogue one short-term, high-impact risk management idea from each practice head in your firm

w      Review your client’s legal strategy with your client

w      Prioritize your client’s top five risks, with your client

w      Measure and target client retention rates

w      Find out what clients are really saying about your firm

You can learn more about increases in client spending (by practice), client relationships, superior client service, client priorities by practice, budgets by practice and a host of other high impact data and insights in BTI’s brand new just released Strategic Review and Outlook for the Legal Services Industry 2004.

Your definitive guide to powerful insights into Fortune 1000 Clients, The Strategic Review and Outlook for the Legal Services Industry 2004 is your most powerful guide to client-based insight. Discover and act on the key drivers behind client relationships, client spending, and the future direction of the legal profession. You get exclusive, driving insights and facts that are proven to anticipate the changes in key client behaviors and improve results. Click here to learn more.

(c) 2003 The BTI Consulting Group, Inc. Boston, MA 02109 All Rights Reserved. Compelling Research for Compelling Results ^sm