An Excellent Year for Private Law Firms

Corporate counsel will outsource more legal work at higher rates in the coming year, and supervise the law firms less closely, issue fewer RFPs and request alternative fees less often, according to projections based on a survey by the Association of Corporate Counsel (ACC) and Serengeti Law. The survey shows that the balance of power has swung away from corporations and in favor of private law firms, which will continue to bill by hour and face less convergence,' or consolidation of legal work by a corporation to a small number of firms.

Huge Marketing Opportunity

Meanwhile, a huge marketing opportunity exists for well-connected lawyers. Corporate counsel usually find new lawyers through personal referrals, and retain individual lawyers rather than the firms they work with. The primary service corporations are buying are:

• Litigation (34.3% of overall corporate legal spending);
• Intellectual property (11.1%);
• Employment/labor (9.9%);
• Commercial transactions (7.1%);
• Securities/finance (6.8%);
• Real estate (5.6%); and
• Regulatory (5.6%).

An area of 'client pain' has been created by the Sarbanes-Oxley Act (SOX) and other legal requirements for corporate counsel to provide periodic reports about legal spending, exposure, status and results. Law firms can ease the pain and gain new business by making it easy for corporations to collect the information. The pressure to keep track of company activities now outweigh corporate concern about controlling legal costs, according to the report.

Client Satisfaction

Attorneys can keep their corporate clients by focusing on client satisfaction. The predominant reasons that law firms are terminated are for poor quality work or results, lack of responsiveness, too high fees or costs and personality conflicts. In 2005, 55.6% of corporate counsel terminated relationships with at least some of their law firms, up from the previous year, creating opportunities for new firms to replace them.

Key Findings

The data derive from an annual survey by Serengeti, provider of Serengeti Tracker software for electronic billing and matter management, of 169 law departments, which are members of ACC, the in-house bar association. ACC has 20,000 members in more than 8000 corporations.

Among the key findings:

• Spending on law firms may increase by up to 10%, which was the percentage increase for 2005.
• Rates charged by law firms should increase, perhaps as much as the 5.15% increase reported for 2005. Corporations regularly underestimate the increases they will pay (see the chart below).

Corporations spent a median of $1.8 million on outside law firms, with small companies (less than $100 million in revenue) spending $525,000, medium companies ($100 million to $1 billion) at $963,500 and large companies (+$1 billion in revenue) at $5,177,000.

The median number of law firms used in the US by law departments during 2005 was 12. Small companies have a median of 4 law firms, medium companies have 18 firms, and large companies have 30 firms. Some 19.5% of companies have more than 50 law firms.

Corporate law departments remain tiny, with a majority (64.9%) having five or fewer full-time lawyers. Corporations spend 1.8 times more on outside law firms than their own in-house counsel.

Hourly Rate Is King

The vast majority of legal work for corporate clients is still done under the hourly rate, despite efforts by the American Bar Association to the contrary. However, corporate counsel typically seek a discount, for example, for early payment.

One negative trend that is in decline is 'convergence.' Only one-fourth of corporations engage in the strategy of reducing the number of outside law firms they work with. More large companies (35.6%) use the strategy than small companies (22.2%).

Also in decline is competitive bidding, or issuing RFPs. Only 24.9% of in-house counsel issue RFPs at all, and the number issued was lower in 2005 than in prior years. 'One reason that this practice has not gained momentum may be the historical low rate of law firm responses to RFPs,' said Robert J. Thomas, Vice President of Strategic Development for Serengeti Law and author of the survey.

Smart law firms are avoiding subjecting themselves to the corporate procurement process. Apparently, law firms recognize that there is virtually no chance of winning an RFP at a corporation where they don't have a personal relationship. And having a personal relationship is the key to getting new business in the first place.

Year after year, in-house counsel say that they locate new outside counsel through their personal networks: their current outside law firm, in-house counsel at their own and other companies. 'When searching for a trusted legal advisor, personal experiences are more important than publicly available sources such as directories and websites. The specific factors that in-house counsel consider when making their decisions all relate first to the experiences and reputation of the specific lawyer, then secondarily to the reputation and capabilities of the lawyer's firm,' Thomas wrote.

What Clients Want

For the first time in 2005, budgets were required for a majority of the work done by outside law firms. Budgets are most common for litigation (66.9%) than for business transactions (40.8%) or intellectual property work (33.1%). In-house counsel frequently cut legal bills when they see 'time not well spent,' such as for administrative or filing work, overstaffing at hearings, time billed to the wrong matter and office conferences.

'In-house counsel expect outside counsel to keep them informed on a regular basis, when there are major developments that require decisions, and if there is a change in projected spending or staffing. They are more likely to require that outside counsel provide an early assessment and plan, a budget, reports tracking against the plan, and a results report summarizing what was achieved and lessons learned,' the report states.

That said, only one-fourth of in-house counsel are more actively managing outside counsel than their peers ' which are imposing less scrutiny. In the final analysis, there has been 'a shift in the balance of bargaining power between in-house counsel who need high-quality legal work and their outside counsel who provide it.'

If these trends continue, law firms can expect blue skies for 2007.

Larry Bodine is a Strategic Marketing Consultant based in Glen Ellyn, IL. He advises law firms on marketing strategy, individual lawyer marketing plans and Web site plans. He can be reached at www.LarryBodine.com, or 630-942-0977.

Corporate counsel will outsource more legal work at higher rates in the coming year, and supervise the law firms less closely, issue fewer RFPs and request alternative fees less often, according to projections based on a survey by the Association of Corporate Counsel (ACC) and Serengeti Law. The survey shows that the balance of power has swung away from corporations and in favor of private law firms, which will continue to bill by hour and face less convergence,' or consolidation of legal work by a corporation to a small number of firms.

Huge Marketing Opportunity

Meanwhile, a huge marketing opportunity exists for well-connected lawyers. Corporate counsel usually find new lawyers through personal referrals, and retain individual lawyers rather than the firms they work with. The primary service corporations are buying are:

• Litigation (34.3% of overall corporate legal spending);
• Intellectual property (11.1%);
• Employment/labor (9.9%);
• Commercial transactions (7.1%);
• Securities/finance (6.8%);
• Real estate (5.6%); and
• Regulatory (5.6%).

An area of 'client pain' has been created by the Sarbanes-Oxley Act (SOX) and other legal requirements for corporate counsel to provide periodic reports about legal spending, exposure, status and results. Law firms can ease the pain and gain new business by making it easy for corporations to collect the information. The pressure to keep track of company activities now outweigh corporate concern about controlling legal costs, according to the report.

Client Satisfaction

Attorneys can keep their corporate clients by focusing on client satisfaction. The predominant reasons that law firms are terminated are for poor quality work or results, lack of responsiveness, too high fees or costs and personality conflicts. In 2005, 55.6% of corporate counsel terminated relationships with at least some of their law firms, up from the previous year, creating opportunities for new firms to replace them.

Key Findings

The data derive from an annual survey by Serengeti, provider of Serengeti Tracker software for electronic billing and matter management, of 169 law departments, which are members of ACC, the in-house bar association. ACC has 20,000 members in more than 8000 corporations.

Among the key findings:

• Spending on law firms may increase by up to 10%, which was the percentage increase for 2005.
• Rates charged by law firms should increase, perhaps as much as the 5.15% increase reported for 2005. Corporations regularly underestimate the increases they will pay (see the chart below).

Corporations spent a median of $1.8 million on outside law firms, with small companies (less than $100 million in revenue) spending $525,000, medium companies ($100 million to $1 billion) at $963,500 and large companies (+$1 billion in revenue) at $5,177,000.

The median number of law firms used in the US by law departments during 2005 was 12. Small companies have a median of 4 law firms, medium companies have 18 firms, and large companies have 30 firms. Some 19.5% of companies have more than 50 law firms.

Corporate law departments remain tiny, with a majority (64.9%) having five or fewer full-time lawyers. Corporations spend 1.8 times more on outside law firms than their own in-house counsel.

Hourly Rate Is King

The vast majority of legal work for corporate clients is still done under the hourly rate, despite efforts by the American Bar Association to the contrary. However, corporate counsel typically seek a discount, for example, for early payment.

One negative trend that is in decline is 'convergence.' Only one-fourth of corporations engage in the strategy of reducing the number of outside law firms they work with. More large companies (35.6%) use the strategy than small companies (22.2%).

Also in decline is competitive bidding, or issuing RFPs. Only 24.9% of in-house counsel issue RFPs at all, and the number issued was lower in 2005 than in prior years. 'One reason that this practice has not gained momentum may be the historical low rate of law firm responses to RFPs,' said Robert J. Thomas, Vice President of Strategic Development for Serengeti Law and author of the survey.

Smart law firms are avoiding subjecting themselves to the corporate procurement process. Apparently, law firms recognize that there is virtually no chance of winning an RFP at a corporation where they don't have a personal relationship. And having a personal relationship is the key to getting new business in the first place.

Year after year, in-house counsel say that they locate new outside counsel through their personal networks: their current outside law firm, in-house counsel at their own and other companies. 'When searching for a trusted legal advisor, personal experiences are more important than publicly available sources such as directories and websites. The specific factors that in-house counsel consider when making their decisions all relate first to the experiences and reputation of the specific lawyer, then secondarily to the reputation and capabilities of the lawyer's firm,' Thomas wrote.

What Clients Want

For the first time in 2005, budgets were required for a majority of the work done by outside law firms. Budgets are most common for litigation (66.9%) than for business transactions (40.8%) or intellectual property work (33.1%). In-house counsel frequently cut legal bills when they see 'time not well spent,' such as for administrative or filing work, overstaffing at hearings, time billed to the wrong matter and office conferences.

'In-house counsel expect outside counsel to keep them informed on a regular basis, when there are major developments that require decisions, and if there is a change in projected spending or staffing. They are more likely to require that outside counsel provide an early assessment and plan, a budget, reports tracking against the plan, and a results report summarizing what was achieved and lessons learned,' the report states.

That said, only one-fourth of in-house counsel are more actively managing outside counsel than their peers ' which are imposing less scrutiny. In the final analysis, there has been 'a shift in the balance of bargaining power between in-house counsel who need high-quality legal work and their outside counsel who provide it.'

If these trends continue, law firms can expect blue skies for 2007.

Larry Bodine is a Strategic Marketing Consultant based in Glen Ellyn, IL. He advises law firms on marketing strategy, individual lawyer marketing plans and Web site plans. He can be reached at www.LarryBodine.com, or 630-942-0977.