Closing Argument: The economic side of the practice

By Tyrone C. Fahner
Mayer Brown

Today, whether you practice in a big firm or small firm or are a solo practitioner, the practice of law has changed and will continue to change dramatically. Almost all of the change tests the bond between lawyer and client and is driven by economics.

For example, economic forces make more difficult the recruitment, promotion, and retention of the very best associates and partners. Each law firm hiring cycle brings an announcement that starting salaries for brand-new associates have risen once again. This causes an upward spiral of salaries for each more senior associate class. The financial impact on firm partners is negative unless associate and partner rates are increased in a corresponding fashion.

It does not sit well with clients when law firms and legal publications trumpet the high level of associate salaries, which exceed those of judges of the federal court; and average profits-per-partner of a firm, which often exceed the compensation of a general counsel or many of the clients’ more highly paid managers. The sum of these circumstances does little to strengthen the bond between client and counsel.

On the other side of the equation, general counsels are under immense pressure to reduce the amount of company resources consumed by litigation and related legal expenses. As a result, our clients insist that we manage relationships with them as part of their business, and not simply as a cost of doing business that adversely impacts their bottom line.

The pressure to reduce fees has been felt for several years. The extent to which institutional clients are willing to part ways for discount fee arrangements, even at the expense of the deep knowledge lawyers hold of the company’s business and place within an industry, is relatively new. Many general counsels are seeking to practice law in a new way, altering the traditional relationship between company and counsel. They are looking for firms that will embrace an approach of legal service delivery in a partnership focused on business objectives as well as legal objectives. The success of such an approach depends on law firms and counsel who understand the idea of operating as a single integrated team with in-house counsel.

While most of us like to believe that we are indispensable to the success of our clients, and in some cases we are, in-house counsel will frequently point out that the profession abounds with great lawyers who have successfully tried complex bet-the-farm cases to judges and juries.

In their eyes, the same is true for firms and lawyers who have managed multibillion-dollar mergers and financings.

So, the issue becomes how to distinguish yourself and your firm from any other good law firm. How do you achieve being viewed as a colleague, as part of a team, as a problem-solver, as opposed to a necessary but unwanted expense?

To earn or retain a client you must make clear to them that you fully understand both the business and the place of the company within its given industry.

You must demonstrate the skill to give them necessary representation at the least expense. They will want your best attorneys and transparent and appropriate levels of staffing.

Clients will no longer pay for the training of a firm’s associates (as in second-chairing a deposition or observing and taking notes at a court hearing). Clients will not pay associate rates for paralegal work; and they will not pay paralegal rates if the work may be outsourced. This structure is becoming the norm in big cases requiring extensive discovery and production of electronic and hard copy materials.

Simply put, most clients of any size or business want matters handled as quickly and as well as possible for as little cost as possible. An inability to fulfill this expectation puts important and long-standing profitable client relationships at risk.

One of the ways in which general counsels achieve reduction in their overall legal budget is through convergence of their legal services. This means that companies who may have as many as 40 law firms working for them nationally or worldwide will put out a Request for Proposal to each law firm with the stated intention of reducing the number of law firms in use and the total spend for outside legal services.

The law firms then compete with each other in terms of rates, the provision of free legal education for in-house lawyers, arranging alternative fees, instituting success fees, sharing risks, and similar arrangements. It has become the norm for clients to ask for a detailed analysis of costs, a monthly or quarterly budget, and an explanation when the budget for a project is over or under estimates. Clients do not like surprises, and so, predictability is almost as important as cost.

All of this points to the fact that lawyers and law firms, whether large or small, must sell more than their legal skills as productive partners to financially awake clients. We must be creative and resourceful to obtain and keep clients. The challenge will be to get the right economic balance in the relationship between lawyer and client.