Warning Signs in the Inside/Outside Counsel Relationship, Part I
Few relationships end with a bang. Most end with a whimper as the two sides slowly drift apart. While there are no immediate existential threats to the relationship between law departments and law firms, the drift has been apparent for over a decade. Realizations have crept ever downward. And the trend continues with law departments planning to redirect ever more resources away from law firms and towards internal hiring, technology and alternative service providers. One estimate calculates that law departments have redirected more than $8 billion in legal spend away from large law firms in the last three years alone. The attrition is not nearly enough to sink a $100+ billion industry. But this fraying around the edges is already an issue and evinces more trouble on the horizon.
Maybe it’s for the best. Maybe the relationship between law departments and law firms is fundamentally flawed and not worth repairing. Or maybe not. As long as the two sides avoid the hard conversations and simply hope that the good ol’ days return of their own volition, the questions of reconciliation and reinvigoration are purely academic. Real friends, real partners have real conversations about the real reasons they are no longer as close as they once were and whether the relationship is worth salvaging. Us? We talk about discounts.
Sure, inside counsel complain publicly in generic terms about outside counsels’ inefficiency, lack of innovation and inability to rein in costs. These complaints are valid. They also are vague. What evidence do we have that inside counsel could actually identify efficiency, innovation and cost consciousness if they found it? What evidence do we have that inside counsel will reward law firms for anything other than brand names and ever deeper discounts?
I do not pick on inside counsel because they bear the blame. I pick on inside counsel because they bear the responsibility. While law firms are easy targets, legal is a buyer’s market and has been for a decade. Whatever deficits exist are for the sophisticated consumers of legal services to remedy through the power of the purse. Or not. Except, of course, that the majority of corporate legal spend is still with law firms and will remain so for the foreseeable future. Thus, whether by commission or omission, inside counsel are stewards of an industry that plays a vital role in the success of their companies.
At the level of the profession, we complain about inefficiency, lack of innovation and cost. But at the relationship and matter level, we only address the latter and only in the most immediate sense. Unhappy with an invoice? Ask for a discount. Unhappy with how much was spent with a firm last year? Ask for a discount. Need to reduce the total legal budget? Ask for discounts from everyone.
Discounts, however, are a stop-gap measure. You can only return to that well so many times before it stops having an impact. Discounts offer an immediate, measurable benefit paired with the underlying logic that the fiscal pressure will incentivize a change in behavior. How’s that working out? Behavior has changed but not in ways that repair the relationship. Nonbillable staff have been let go. The equity partner ranks have thinned. Associate hiring has slowed. Rates have gone up. So have profits. As has the discontent of inside counsel. Discounts have their place, but they should not be the sole mechanism mediating the relationship. As I explained in my last post, with people and pricing in place, process offers the most levers to drive continuous improvement. Moreover, the discount demand is a weak signal lost in the noise of the relationship. If we want to improve process, we should talk about process – and we will do that in part II.
This post was written by Casey Flaherty, founder of Procertas and former outside and inside counsel who first rose to prominence when he created the Service Delivery Review (“SDR”) to change the way he communicated with his outside counsel. Instead of generic complaints about inefficiency and arbitrary reductions in invoices, Flaherty sought to use metrics and benchmarking to foster structured dialogue, drive continuous improvement, and deepen the integration between his law department and his outside counsel. Follow Flaherty on Twitter at @.