A recent Law.com story by Christine Simmons, “Both Law Firms and Clients Can Boast About Fee Wins,” reports that, several organizations have reported that, despite the Am Law 200’s worst fears, the legal industry enjoyed growth in 2020. Citi Private Bank Law Firm Group and Hildebrandt Consulting have projected mid-single digit growth in revenue and mid to high single digit growth in profits.
Last year, large firms managed to raise rate about 5%, according to James Jones, a senior fellow at the Georgetown Law Center on Ethics and the Legal Profession. That’s remarkable considering the chaotic and depressing environment of 2020, and even more remarkable that the average annual rate increase for firms since 2008 has been about 3%.
But weren’t general counsel in cost control mode? After all, according to survey data collected in June 2020 from 223 corporate legal departments, 89% of respondents said controlling outside counsel costs was a high priority. So what gives? How could law firms push through high rates at a time of such fee pressure?
Reconciling legal departments’ pressing need to cut costs with law firms’ revenue, profit and rate growth in 2020 requires a closer look at law firm segmentation, sector performance and the trajectory of the year. But in the legal industry, 2020 is also a story about demand and the benefits of close cooperation on fee agreements, allowing both law firms and legal departments to have some bragging rights.
The lucrative year extended up and down the Am Law 100 and likely into the Second Hundred, but it came at different client relations strategies. For the elite, rate and fee pressure was so little they could give out double bonuses to associates without billable hour requirements. Wall Street firms and the Am Law 20 saw the benefit of ‘fight to quality” during an unpredictable year in business. Meanwhile, some law firms did work with their clients on a mix of fee strategies and arrangements, to the benefit of both.
For instance, at Akerman, ranked No. 88 in the Am Law 100 last year, CEO Scott Meyers said collections remained steady last year, although Akerman worked with its clients to help them meet their own budgets while paying their legal bills. “We’re close to our clients,” he said. “We reached out to each one to understand, ‘what’s your financial position? What’s your cash position? What can you do, what can’t you do?’” At the end of the financial year, the firm said it had a 6.5% increase in gross revenue in 2020.
Fee pressure, of course, depends on the industry. And those with insurance industry clients and municipal clients are among those seeing the most discount pressure. Mark Thompson, president and CEO of Marshall Dennehey Warner Coleman & Goggin, said while the firm’s hospital clients have returned to their pre-COVID payment rates, the firms’ base of municipal government clients haven’t yet returned to pre-COVID fee arrangements as a result of financial distress. “That is going to remain a problem going forward,” Thompson said in a Dec. 22 article.
But nearly all sectors saw pressure in the beginning of the pandemic. At General Motors, the automaker reached out to the 19 firms on its panel of “strategic legal partners.” The second quarter presented an enormous, worrisome question mark, and the automaker—like so many businesses of all sizes—was looking to preserve cash.
GM general counsel Craig Glidden said the company didn’t know what would happen in the auto markets, which meant asking firms for help. And those firms stepped up, agreeing to deferred billing and alternative fee arrangements to relieve some of the company’s pressure.
Yes, law departments are seeking high cost savings. The 2021 Report on the State of the Legal Market from Thomson Reuters and Georgetown Law said spending on outside counsel did, in fact, decrease in the second and third quarters of 2020. The report said 81% of legal departments found that general enforcement of billing guidelines, including reductions of invoice fees and expenses, was the most effective way to keep billing down. Meanwhile, 53% of respondents requested standard discounts; 49% of respondents reduced timekeeper rate increases; and 45% used volume discounts.
At the same time work, the report shows that the average daily demand for law firm services per lawyer, based on billable hours, increased in the second half of the year, picking up in November to almost match the previous two year average. So what happened to the portrait of the general counsel scrutinizing every line item and grilling firms about rate increase and discounts?
That picture is becoming increasingly faint. Instead, the portrait emerging from 2020 is one of cooperation and demand. Clients rushed to law firms for urgent legal advice during the pandemic, including counseling for workplace laws, PPP loans, restructuring and data security concerns. Secondly, the circumstances from the pandemic gave rise to conversations about pricing, driving both sides of the law firm-client relationship to seek common ground—both in the form of tried-and-true alternative fee arrangements and those that reflect a more innovative approach.
Law firms have some leverage. Just because a client wants a discount doesn’t mean a firm has to provide it. “Clients understand the difficulty of onboarding new external counsel,” says McKinsey & Co. senior partner Alex D’Amico. “There’s a real cost to bringing on a new firm.”