Of all those providing professional services, lawyers have often been the last to suffer in a downturn. Many actually do quite well when the economy looks ominous. Retooling for insolvency and restructuring work has served many firms that have found their previously booming corporate and capital markets practices underemployed in straitened economic circumstances.
But in the recession of the early 1990s some firms did what had previously been unthinkable: they laid off lawyers. A return to this looks increasingly likely for some firms. Those that have grown spectacularly on the back of a continuous flow of deals are now having to reassess how they will cope now that demand has dropped off.
There has been unprecedented growth in the legal sector over the past five years or so. During this time many firms have appointed new partners, and associate salaries have in some cases more than doubled in the past five years. What has been called the war for talent has meant that the payroll at the largest firms has climbed ever higher. With the decline in work that some departments are already facing, firms need to look for ways to keep lawyers busy and maintain revenues. One such initiative is partnering between law firms and their clients. Partnering is a real departure from the way that law firms and their clients have traditionally worked together. And it may be that in a more cost-sensitive climate more and more firms, and their clients, will examine the approach with greater interest.
Many professional services firms describe themselves as being in partnership with their corporate clients. The term implies a collaborative and active relationship in which the external lawyers, accountants, or service providers from any number of disciplines work with their clients to produce solutions to business problems and opportunities.
But in many ways these relationships fall short of true partnerships. Law firm relationships with their clients, particularly those in the financial services industries, are in many instances driven by transactions. The flow of those transactions is the key determinant of the amount of contact and collaboration that will take place between a law firm and its client. In the absence of any continuing matter, contact between the firm and its clients is likely to be minimal, as the basis for their economic relationship is the time spent on a particular transaction or case. If there is no matter to be billed for, law firms are understandably reluctant to invest their non-billable time in discussing general business matters with their clients, and clients are equally reluctant to incur fees without a particular matter being resolved to their satisfaction.
However, rapid developments in technology and globalization of the legal marketplace are forcing law firms and the corporations they advise to analyze how they work together and how, for both parties, greater value can be generated from their relationships. In the near future it is likely, for instance, that many of the presently time-consuming and labour-intensive aspects of providing legal services for transactions will become increasingly automated. This means that law firms will have their precious intellectual resources liberated to focus on providing insightful, strategic and value-adding advice to their clients.
But to make the most of the changes created by developments in technology, a new model for the relationship between law firm and client needs to be developed, so that the true partnership many firms now claim to enjoy with their clients can emerge. Arrangements such as those created by Heller Financial and its stable of law firm partners, which includes Andersen Legal, Winston&Strawn, Katten Muchin Zavis and Latham&Watkins, are, perhaps, showing the way. Partnering between law firms and corporate counsel is a fundamental shift in the way that these relationships are constructed and managed. Deborah Snider, general counsel of Heller Financial, has described partnering between law firms and their outside counsel as “being in business with each other as opposed to doing business with each other.” Partnering recognizes that the transfer of information and intelligence is the key to increasing collaboration and pursuing mutually beneficial goals, which can include new business developments, transfer and exchange of personnel, and joint training and education initiatives.
Typically, partnering involves a reduction in the number of firms that a corporation will use. In Heller Financial’s case, five firms now do 80% of the work that was previously covered by between 200 and 250 different firms. The law firms benefit from a greater commitment and flow of work from the client, and the client benefits from better-managed and more predictable legal costs.
But though cost management may play a part in the decision to examine partnering arrangements, it is the value that such relationships can deliver that provides a far more compelling argument for their implementation.
LawPartnering is a US-based organization that was set up to spread the word about partnering. It sums up the benefits of partnering for both the corporation and the law firm. For the corporation, LawPartnering says, it offers improved communications, accelerated implementation of initiatives, cost savings, price certainty, a higher quality of service, increased accountability, and continuity of relationships. For the law firm the advantages cited include increased revenues, realization and profitability; faster bill payment; cross-selling opportunities; enhanced client loyalty; and association with other partnering firms.
Since US chemical corporation DuPont implemented what is widely acknowledged as the first partnering-style arrangement, it has been able to point to quantifiable benefits of the programme that include a 48% reduction in legal service expenses resulting in savings of nearly $50 million.
Partnering is not a static concept, in which the relationship and its terms are formally agreed at the outset and then rigidly adhered to. Rather, partnering is a dynamic concept that involves new areas of cooperation and collaboration constantly emerging. In Heller Financial’s case, the relationship with outside law firms has been continually reviewed and updated. For example, at the end of 1999 Heller decided that it needed to review the way in which its outside counsel billed for non-legal services.
These non-legal services include training, technological developments, business referral, creating best-practice models and sharing knowledge. In the traditional relationship between law firm and client, these services, being outside the strict definition of legal work, are accounted for in the overall fees charged for a particular matter. The Heller approach enables law firm and client to enjoy a greater degree of transparency in their client services, and for both parties to devise new ways to create value.
Of course, some commentators have dismissed partnering as nothing more than a stick with which corporate counsel are able to beat down the fees charged by their private-practice advisers. As law firms become stretched by less rosy economic circumstances, there will inevitably be a pressure on their fees, and “partnering” might appear to be a euphemism for “cut-your-fees-or-else”-style bargaining.
However, the experience of corporations such as Heller Financial shows that all sides can win in these arrangements. The far greater degree of transparency and commitment than is common to traditional law firm/client relationships brings substantial financial benefits to both law firm and corporate client. But most important, enhanced collaboration and greater integration of law firms’ and clients’ resources – people and technology – are forging new ways of working that will deliver greater value to both parties.
