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‘This is Who We Are:’ Tech-Minded Law Firms Don’t Fear Recession

Sept. 9, 2019, 8:51 AM

About 45 leading partners from Cleveland-based law firm Thompson Hine met last October at a Washington hotel to plan how the firm would respond to a potential recession.

The consensus: double down on its strategy of requiring its lawyers to use budgets for clients’ legal work.

In the wake of the Great Recession, the firm’s managing partner Deborah Read invested in building proprietary software that helped lawyers build budgets for legal matters and let clients track their progress and bills in real-time.

While that seemingly simple workflow remains rare in Big Law, Thompson Hine has pushed it to the limit. The Cleveland-based firm today budgets and tracks $170 million worth of legal fees—more than three-fourths of the firm’s revenue in 2018.

“Innovating service delivery really defines us now. It is a core strategy of Thompson Hine,” Read said. “And just like any good business, you can’t stop investing in a core strategy when a downturn comes along. You can’t do that. This is who we are.”

As stock markets tremble, bond yield curves invert, and presidential Tweets stoke fears of a trade war, talk of a recession has grown more urgent at law firms. But some firm leaders are anticipating that this time around, they will be buoyed by investments in technology and other efficiency-focused practices, many of which were borne out of the last recession.

Recession Fears

An Altman Weil survey of more than 800 managing partners from earlier this year found a broad economic recession was the most-feared threat to law firms’ business over the next five to 10 years.

Law firm leaders have also been focused for years on improving efficiency, with 96 percent of leaders polled by Altman Weil agreeing that this is a permanent trend. Nearly 65 percent of firms with 250 or more lawyers said in an Altman Weil survey this year that they were using technology tools to replace human resources.

Legal tech leaders hope that will translate to sustained technology purchases during the next downturn. One CEO of a legal technology company told Bloomberg Law there will likely be some decline in law firms’ innovation budget, but noted it would be “nothing dramatic.”

“The industry does now have a mantra about efficiency,” said the CEO, who declined to be named due to client relationship concerns. “We’re not a fixed-price industry yet, but it is a very different climate from a decade ago. A decade ago, tech purchases just stopped dead. People stopped buying new copies of [Microsoft] Windows.”

Another difference between today’s legal market and the market in the one that withstood the 2008 recession is the red-hot growth in legal tech start-ups. After $1 billion was invested in legal tech companies in 2018, more than $400 million was invested in the industry during the first quarter of the year.

‘The Way We Do Business’

Like Thompson Hine, Baker Donelson has been boosting efficiency in the years since the last recession.

The firm’s proprietary legal project management system, BakerManage, has won industry awards and the firm has launched a subsidiary, LegalShift, which helps law firms and law departments improve their operations to become more cost effective.

“We have had to be efficient and start focusing on being a well-run business, which is something, historically, that law firms didn’t have to do. They just raised their rates,” said William Painter, the firm’s former chief innovation officer.

Baker Donelson’s Client Solutions Group has helped the firm’s lawyers implement efficiency tools by building “triggers” and “nudges” into its workplace software systems. For instance, when partners open new matters, they are met with a prompt asking if the partner wants to implement a budget or BakerManage tracking tools for that work.

But the firm has also been tightly managing its technology budget. Painter said the firm’s innovation team three years ago implemented a zero-based budgeting approach in which all expenses are justified for each new spending period.

Painter said a recession likely would not force the firm to stop making technology purchases in areas supporting project management, budgeting, document assembly or using extranets to deliver legal work and other information directly to clients.

“All of that stuff is becoming the way we do business. You don’t just say, ‘We’re going to stop doing that,’” Painter said.

Client Pressure

Corporate legal departments took an overall stronger stance after the Great Recession on asking firms to work more efficiently, an emphasis that could well accelerate in another downturn.

“If a recession hits, that pressure from clients is going to hit one-hundred,” said Jeremiah Weasenforth, managing project attorney for Orrick Herrington & Sutcliffe’s analytics group.

The ability to allay concerns from clients that costs are being reined in to every degree possible, including through tech adoption, will become a key attribute for firm leaders, Weasenforth said.

Chris Adams, chief strategic counsel for McDermott Will & Emery, said that especially with the rise of alternative legal service providers over the last decade, firms “need to be competitive in the marketplace, no matter what the economy is doing.”

Adams heads McDermott’s 40-person Strategic Solutions group, which recently branched out from its original e-discovery focus. Toward that end, he said his group recently signed a licensing agreement with a legal tech provider to gain access to an AI-infused tool that will aid with due diligence contract reviews for mergers and acquisitions.

Adams, who is based in Washington, said his team has grown and has received consistent support from firm higher-ups, which he doesn’t expect to change.

Never Over Budget

For Thompson Hine, the shift to focus on a budgeting tool continues to pay dividends.

Since the leader of its business litigation department implemented “mandatory” use of the tool in early 2016 the number of matters being budgeted has increased 424%, said firm leader Read. Other practice groups including M&A have adopted the tool as well. The firm has also been approached by an alternative legal provider interested in licensing its budgeting software, Read said.

At the meeting in Washington last year, Read asked every practice group leader to subject a “material service they deliver” to mandatory budgeting. Read said the firm’s commitment to providing clients with budgets has won it work from “companies that didn’t know we existed.”

“We are focused on being more transparent and more efficient. And what better time is there for clients to look for more predictability and transparency than an economic downturn?” she said. “For us, to cut back at this time would be crazy.”

To contact the reporters on this story: Sam Skolnik in Washington at sskolnik@bloomberglaw.com; Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Jessie Kokrda Kamens at jkamens@bloomberglaw.com; Rebekah Mintzer at rmintzer@bloomberglaw.com