Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at how law firms can respond to clients who will seek to cut costs in the wake of an economic and health crisis.
The coronavirus pandemic has done a lot to this country and to businesses around the globe. One high-level (and, yes, understated) way to describe what it has done is to say it has drastically shifted priorities.
What was “bet-the-company” a month ago is not the same today. It’s happening all over the economy.
Without dinner guests, restaurants are scrambling to offer curbside takeout. Without brick-and-mortar stores, retailers are wholly dependent on e-commerce. Without certainty that their workforces are healthy, companies are tracking the status of their employees in new ways that would have caused regulatory red alerts just weeks ago.
This is the new reality for law firm clients. So, managing partners are still asking some variation of the same question. How will this great re-shifting impact Big Law?
There will be plenty of answers in the coming months. But one will almost certainly be that some portion of legal work that clients used to consider utmost priority will no longer be, as law firms love to say, “bet-the-company,” industry shorthand for work that costs a lot of money.
Amid new scarcity, client resources will be reallocated. Law firms will be impacted. Clients will want price relief in the form of discounts or flat fees. They will want lawyers to stop working on certain matters altogether. And they will stop doing some activities that used to keep highly paid lawyers busy.
Of course, other activities will become paramount.
Law firms can shuffle their personnel as best they can to respond to these shifts. Hiring bankruptcy lawyers is all the rage. But that is a big ship to turn.
Firms are better prepared in the near-term to respond to clients seeking rate relief. That is not to say law firm partners should be handing out discounts to anyone who asks. For help in navigating clients’ requests, many of the bigger firms can turn to their friends in the pricing department. Those groups can help partners and clients reach mutual agreements that bring relief without jeopardizing the health of the firm.
“The reason there are pricing professionals now is because of the last downturn,” said Keith Maziarek, director of pricing and legal project management at Katten Muchin Rosenman. “There was no such thing before 2008. And that investment in dedicated pricing teams and tools to support their work helps you in good times, and it really helps you in bad times.”
Pricing directors who spoke on the condition of anonymity to discuss their firm business said that, so far, clients have not made many requests for discounts or other price relief. The sense among the law firm executives was that clients had other priorities at the moment, but that rate relief and cost cutting would be a mid-term consequence of the coronvirus pandemic and accompanying economic pain.
One AmLaw 50 executive said two clients had made such requests. One was a large company that had recently suffered a business crisis and asked the firm to provide rate relief. Another was a client that said it wanted no billing on an ongoing lawsuit for 30 to 60 days.
The executive said the industries hit hardest by the crisis like healthcare, retail, hospitality, and the airlines are too busy right now to ask for billing rate decreases. But not for long.
“Those industries will go to cost control mode fast,” the executive said. “And that is when they will say this is not bet-the-company work, and they’ll go to lower-rate firms or take other actions. And it will come fast when it comes to that.”
Firms can prepare now for that moment. The challenge for firm leadership will be to steer partners away from the thought pattern that continuing to work at cut-rate prices is better than not working at all.
That is a dangerous strategy, said Richard Burcher, managing director of law firm pricing consultancy Validatum, who wrote this week about the perils of “emergency pricing” for law firms. Firms that adopted a slash-and-bill approach in 2008 took much longer to recover than firms that used other strategies that did not damage their medium-term pricing power.
Burcher suggested a number of strategies to help law firms band together in a moment where individual partners may be enticed to cut rates to meet their own billable hour targets. Included in his suggestions: Eliminate billable hour targets and centralize pricing strategies.
“Individual partner pricing autonomy and discretion should be largely and aggressively suspended,” Burcher said in an interview.
“At the end of the day, many of them don’t care about the firm per se,” he continued. “They care about making their numbers, and making sure they are not at the bottom of the food chain. And when you get that disconnect between the individuals and the firm, guess what? The firm is going to take an absolute pasting. We saw it savagely in 2008.”
Still, pricing directors said they want to be empathetic to clients who need relief.
Here are a few strategies they recommended to help alleviate clients’ cash crunch while preserving billing rates for after the crisis.
- Offer billing credits. Credits can be applied to existing bills or future payments.
- Change the scope of a matter. Instead of turning over every rock, agree to a model that involves less work.
- Offer early-pay discounts. Staggered discounts within 30 days, 60 days, or other timetables provides savings while securing certainty of revenue.
- Negotiate limited-time fixed fees or volume discounts. Firms are often wary of the risk involved in these types of deals, but they can be put in place for a period of time that caps potential exposure. And they show clients you are willing to partner with them during a difficult time.
Read More: Bloomberg Law is tracking the latest updates about the pandemic on our coronavirus news channel.
Worth Your Time
On Coronavirus and Law: Wills are in demand as health fears take grip. Jones Day helps General Motors Co. with the legal issues of a carmaker making ventilators. Wilson Sonsini’s automation subsidiary offered a free platform to draft virus-related policies and to track the health of employees. 3M General Counsel Ivan Fong shared tips for legal departments to survive a “surreal and scary” crisis. And the July bar exam may be delayed in some states.
On Big Law Hires: Amid the virus, we are have still been hearing about new laterals this week. Winston & Strawn hired a trio of healthcare partners in Washington from McDermott Will & Emery and Bristol-Myers Squibb. Gibson Dunn hired a private equity and M&A partner in New York from Paul Hastings.
On Litigation Finance: Some litigation funders have told investors that court delays from coronavirus could lead to better investment returns. But delays could also cause disputes between the funders and the very plaintiffs whose cases they pay to pursue.
That’s it for this week. Thanks for reading and please send me your thoughts, critiques, and tips.