ACC/Serengeti Survey: The Economic Picture for Law Firms Gets Worse

By Larry Bodine, Esq., a business development advisor based in Glen Ellyn, IL. With the Apollo Business Development Program, he has helped law firms nationwide get new clients and generate millions of dollars of new revenue. He can be reached at 630.942.0977 and www.larrybodine.com.

A new study reveals that one reason for the economic downturn in the legal profession is that corporations are sending less legal work to law firms, and handling more work by in-house lawyers. Median spending on outside counsel last year fell 9.1 percent. Making matters worse:

• The legal profession has been in a recession for one year now, as evidenced by high-profile layoffs at major law firms.
• Rate increases for 2008 will be smaller than in the past.
• More than 40%+ of corporations have fired some of their outside counsel during the prior year.

The 2008 ACC/Serengeti Managing Outside Counsel Survey found that median spending on outside counsel was at the lowest level in the eight years the survey has been conducted. “A growing amount of work being kept in-house, this year’s median spending on outside counsel continues a downward trend begun last year, falling to the lowest in survey history. This year’s median outside counsel spending was $1 million (compared with $1.1 million in 2006, $1.8 million in 2005, $1.3 million in 2004, $1.6 million in 2003, $1.2 million in 2002 and $1.1 million in 2001).” “Median outside counsel spending continues to vary significantly according to the size of the company, with:

• Small companies at $350,000
• Medium companies at $852,000
• Large companies at $4.8 million,” it reported.   

The primary driver of corporate legal costs is outside legal spending, which is roughly double the spending on in-house counsel. However, during the past several years the ratio has shifted in favor of law departments, reflecting the increasing recognition of the value of in-house counsel and the legal work being done in-house.

An economic decline

The evidence shows that the legal profession is in an economic decline.  As reported in January 2008 in “The Legal Profession Has Entered a Recession,” on the LawMarketing Blog, “Once thought to be recession-proof, the legal profession is now in a recession that will include a drop in profits per partner, declining spending for legal services by corporations, attorney layoffs and a major competitive threat from law firms in London.” The recession started in late 2007, with firms laying off lawyers and staff, a decline in M&A and transaction work, a drop-off in litigation, particularly in Texas and California and work once thought to be complex, like project finance, is now viewed as routine and is priced accordingly. Corporate procurement departments are getting involved in hiring law firms, and demanding rate freezes or discounts. See also “2009: Another Year of Economic Darkness for Law Firms” on the LawMarketing Portal. So far this year, layoffs have hit major law firms, such as:

• 'White & Case laid of 70 associates and 100 staff in November 2008.
• The demise of Thelen Reid Brown Raysman & Steiner, announced October 28, 2008.
• The dissolution of Heller Ehrman, announced in late September.
• Sonnenschein Nath & Rosenthal October layoff of 37 lawyers, 75 staff members, and 12 nonlawyer timekeepers. This follows Sonnenschein's dismissal of 124 employees, including 37 attorneys, six of whom were partners, in May.
• Jenner & Block’s firing of additional 10 partners in October, on top of its firing of other 10 parners in May.
• Katten Muchin Rosenman and Sonnenschein Nath & Rosenthal layoff of 21 associates and counsel in October.
• Clifford Chance's dismissal of 20 lawyers in October.
• Cadwalader, Wickersham & Taft cutting 96 attorneys in July.
• Thelen Reid Brown Raysman & Steiner slashing 26 associates and 85 staff members in March.
• Edwards Angell Palmer & Dodge layoff of approximately 10 associates in March.
• Ten U.S. partners and two dozen associates voluntarily leaving Thacher Proffitt & Wood starting in January after a severe slump in the structured finance practice.

“Biglaw clients also are feeling the stress of an economic crisis. In-house counsel not only have budgets to meet, they also want to avoid being a casualty of the crisis. This means they may be keeping more work on their own desks and spending more time scrutinizing the monthly invoice from Biglaw,” a Fulton County Daily Report columnist stated on October 22, 2008. This year is expected to be worse for law firms. "For 2008, in-house counsel expect that rate of change in outside spending will be even lower: the median prediction is for no change in annual spending on outside counsel," the report says.

Smaller rate increases

The average projected change in law department spending for 2008 is 3%, lower than the average increase this year and only half what was projected the prior year. “Last year, in-house counsel on average predicted a 5% increase in outside legal spending for 2007. The median change in outside counsel spending reported for 2007 was actually lower than what was predicted, an increase of only 1%. This is the smallest increase since the question was asked (compare with 5% in 2006, 10% in 2005, and 6% in 2004). For 2008, in-house counsel expect that rate of change in outside spending will be even lower: the median prediction is for no change in annual spending on outside counsel,” it stated.

“It is interesting to note that if in-house counsel have correctly predicted that in 2008 there will be no change in outside counsel spending, and that hourly rates will increase by 5%, then by implication this means that there will be a lower volume of work performed by outside counsel during the coming year,” it stated.

40%+ of corporations have fired law firms

According to the report, more than 40 percent of in-house counsel now state that they have terminated relationships with some of their outside counsel during the prior year. This is actually lower than prior years, perhaps because in-house counsel have already terminated poor performing outside counsel. Specific reasons for termination are what would normally be expected:

• Lack of responsiveness
• Costs that were too high
• Poor work product or results.
• Communication and personality issues, now cited by one-third of in-house counsel as a reason for termination.

Other points of note

• Small companies have a median of 4 law firms, medium companies have 8 firms, and large companies have 20 firms.
• “Convergence (reducing the number of law firms with which a company works on a regular basis) does not appear to be gaining momentum, with 71% of corporations not using the approach.
• The practice of issuing a bid or a request for proposals (“RFP”) is used by a minority of in-house counsel, and appears to be decreasing, with a small minority of in-house counsel (16.3% compared with 23.9% in 2006) having issued at least one RFP during the past year. The average number of RFPs per in-house counsel was also lower than last year (6.9 compared with 8.4 in 2006, 3.8 in 2005, 4.5 in 2004, and 6.7 in 2003). One reason that competitive bidding has not gained momentum may be the historical low rate of law firm responses to RFP’s.
• The minimum level of experience required by corporations dropped from four years from five.
• The hourly billing process is solidly entrenched, and fewer in-house counsel – only 12.7% -- got a discount from their law firms.
• The most common methods to control outside legal spending during the past year were: case/matter budgets (52.9%), discounted/ alternative fees (52.9%), re-allocation of work to firms with lower rates (43.7%), billing guidelines/ spending rules (43.7%), and electronic bill reviewing and auditing (34.6%).

There were 337 law departments that completed the non-hourly rate portion of the survey; hourly rate tables were provided by an additional 108 law departments.

• Respondents who are General Counsel constitute 70% of the respondents, and “assistant general counsel/staff attorney” constitute 21%. The remaining respondents include law department administrators and other in-house counsel titles.
• The breakdown of respondents by company size is: “small” companies (less than $100 million in annual revenues)—30.3%; “medium” companies ($100 million to $1 billion in annual revenues)—37.9%; and “large” companies (over $1 billion in annual revenues)—31.8%.
• 33.6% of the respondent law departments were small (one attorney or no attorneys); 50.7% were medium (two to ten attorneys); and 15.7% were large (more than ten attorneys).

The Association of Corporate Counsel (ACC) is the only professional organization focused on the needs of in-house counsel. With nearly 25,000 members in over 80 countries, employed by over 10,000 organizations, ACC's community connects its members to the people and resources necessary for both personal and professional growth. Serengeti Law provides Serengeti Tracker®, the highest-rated and most widely used system for both electronic billing and matter management in recent surveys of both law departments and law firms. With only an Internet connection and an hour of training, hundreds of law departments save both time and money by working online with all of their outside counsel, including over 16,000 law firm offices in more than 160 countries worldwide. More information is available at: www.serengetilaw.com.