Alex Tolston, the chief legal officer for Coral Gables, Fla.-based Hemisphere Media Group Inc., a Spanish-language broadcast company, took a 15% pay cut as a result of the coronavirus and expects the law firms he works with to make similar sacrifices.
Firms unwilling to discount their billing rates “are going to have a really hard time justifying it to chief legal officers across the country taking voluntary pay cuts,” said the 39-year-old Tolston, Hemisphere’s legal chief since 2013.
The belt-tightening at Hemisphere and other corporate law departments presents challenges to law firms and could prove to be a singular moment for in-house legal operations, which have functioned more like other business units, efficiencies and all, in the last decade.
As during past downturns, corporate counsel facing pressure to reduce costs may bring more work in-house or adopt new vendors, such as alternative legal service providers. The use of automation to perform certain legal tasks, whether through artificial intelligence or the use of contract management technology, means in-house counsel have more options than ever before, said Lee Udelsman, a managing partner and head of in-house counsel recruiting at legal consultancy Major, Lindsey & Africa.
“Things were already at an inflection point,” Udelsman said. “What Covid-19 is likely to do is simply accelerate that trend.”
New Cost Calculus
The Covid-19 pandemic could be the impetus for a sea change in how in-house legal departments optimize their operations and realize cost savings, said Mark Harris, a founder and former CEO of alternative legal service provider Axiom, which he sold last year.
Harris told Bloomberg Law about the evolutionary theory of punctuated equilibrium, which holds that long periods of incremental change build up over time until a significant disturbance shatters the status quo.
“This is going to accelerate and catalyze what could be a real positive for legal tech and alternative providers who are looking to help companies do things more efficiently,” Harris said. Law department leaders “numbed” to big legal bills during good times often become more sensitive to them during a downturn, he said.
Reducing the number of outside law firms a company employs is a time-honored tradition used by in-house legal chiefs to seek better rates and outcomes during stressful times, added Udelsman. Most firms will eventually agree to reduce rates in order to remain competitive and maintain relationships in this new economic environment. “Half a loaf is better than no loaf,” Udelsman said.
Tolston, Hemisphere’s top in-house lawyer, told Bloomberg Law that firms “need to have a certain degree of flexibility” on fees as the current crisis has “probably been the greatest single disruption” that his generation of in-house lawyers have experienced in their careers.
He praised Hemisphere’s outside counsel for putting together primers on a “no-cost basis” summarizing recent legislative changes such as the CARES Act, new regulatory guidelines, and tax relief issues. Tolston said he’s not yet had discussions about alternative fee arrangements but noted that legal spending by Hemisphere has slowed amid the disease-induced downturn.
As corporate counsel push through the first few weeks of their new financial reality, Tolston expects there will be an internal “drilling down” on the cost sides of businesses. Bloomberg Law reported earlier this month that some alternative providers are doing just that.
Tolston’s small in-house legal team at Hemisphere handles a significant amount of work, including licensing deals, and while the company doesn’t employ any legal operations professionals or use alternative legal services providers, there could always be future opportunities.
A Legal Look Ahead
Whether the coronavirus is the catalyst for a significant shift in the relationship between large firms and the clients they serve probably won’t be known for some time, as the initial legal triage from the crisis is still being done, said Harris, Udelsman, and Tolston.
Once the immediate pandemic response is finished, Tolston predicted the acceleration of a decades-long trend of bringing more ordinary course work in-house that doesn’t require the “firepower” of large firms. Furloughs, layoffs, and pay cuts by some of those firms in recent weeks could create an outflow of mid- to senior-level associates that provide a pool of talent for corporate law departments to recruit from, Tolston said.
Alternatively, the staff reductions at big firms could create another “lost generation” of would-be entry level associates as companies are usually unwilling to shoulder the financial cost of bringing them up to speed, Tolston said.
Much like their corporate clients, law firms are adapting and entering the alternative legal services market. Keith Maziarek, director of pricing and legal project management at Katten Muchin Rosenman, recently told Bloomberg Law that positions like his emerged out of the 2008 financial crisis. Large firms, like their clients, are increasingly embracing innovation.
Maziarek said corporate law departments “will often slim down to shed expenses during hard financial times,” which could adversely affect demand for legal services from firms over the next few quarters. But he’s also heard from colleagues that in-house legal operations professionals are being pulled into crisis management matters, such as evaluating spending and what to prioritize on a day-to-day basis, a potential harbinger of their future importance both in-house and in law firms.
Toby Brown, chief practice management officer at Perkins Coie, said that on the “back side” of the coronavirus-induced downturn he expects that legal operations roles “will become more valuable, as will law firm roles that are driving change and innovation.”
Harris, the former Axiom executive who has since launched his own contract management platform called Knowable, added that the Covid-19 pandemic could prompt companies to become more comfortable with the flexibility that comes with freelance and remote workers to reduce their fixed costs. That new workplace paradigm could be the lasting legal legacy of the coronavirus, he said.
—With assistance from Roy Strom.