2024 Legal Industry Challenges & Empowerment Opportunities for In-house Leaders
Experienced corporate counsel Tressa uses her experience as a member of Axiom’s talent bench to explore Thomson Reuters Institute's 2024 State of the US Legal Market Report and how in-house leaders can navigate rising law firm costs.
For many in-house counsel, partnership with external counsel is indispensable. External counsel provides critical knowledge, guidance, and “heavy lifting” to time-and-resource-strapped legal departments. However, this partnership can come at a cost – and that cost appears to be rising.
According to the Thomson Reuters Institute’s 2024 Report on the State of the US Legal Market (the “Report”), two in five in-house counsel expect their spend with external counsel to increase in 2024, with only one in five expecting to see a decrease. This increase in spend is driven, in part, by an increase in fees, as demonstrated by last year’s six percent increase for new engagements. While it would be easy and satisfying to attribute the increase to the Deadly Sin of Greed, the truth is a bit more complicated.
The fact is, AM Law 100, AM Law 200, and midsize firms are presently facing significant challenges that, if not addressed promptly, will result in waning profitability. However, even in the face of rising costs, opportunity knocks. External counsel’s need to right-size various aspects of their operations, when combined with practical approaches to managing legal spend, will benefit in-house counsel savvy enough to recognize the opportunities presented in this current environment and shameless enough to exploit them.
Challenge #1: Rising Costs
The first challenge is simple: rising costs. The Report illuminates the uptick in law firm costs, driven primarily by direct (i.e.: payroll) and overhead expenses, particularly those associated with return-to-office policies following the global pandemic.
Unsurprisingly, the response across all law firm segments has been to increase billing or “worked rates,” with AM Law 100 firms leading the charge. Except for a minor dip in 2021, the percentage of increase has accelerated since 2017, doubling that of inflation in most years. However, while increased fees would ordinarily be a good thing (for law firms), these fees are increasingly going to offset rising costs, rather than bolster profits.
You read that right.
Despite an increase in worked rates and a modest increase in counter-cycle practice activity (e.g. bankruptcy, litigation, and regulatory compliance), law firm leaders across all sectors are scrutinizing their bottom lines with diligence not seen since the Great Financial Crisis of the late-2000s. The “why” leads to a second challenge: declining realizations.
Challenge #2: Declining Realizations
Even as worked rates increased, “collected realizations” – that portion of worked rates firms actually collected – have decreased. Collection realizations, standing at 94% in 2007, have seen a steep decline, and, after taking nearly a decade to recover, currently hover around 90.5%.
Many would be justified in attributing the decrease in collection realizations to in-house counsel’s tendency to review legal invoices with a “tut-tut” and a red pen. In-house practitioners will recognize the invoice review process as an exercise in genteel hostility, seasoned with the ever-present threat of open warfare (enter the Deadly Sin of Wrath).
However, the decline in collection realization is driven not by grumpy in-house clients, but rather by a decrease in “billing realization,” or the preemptive adjustment by external counsel of hours spent on a matter, and, by extension, the total amount of worked rates ultimately invoiced. While reasons for the decrease in billing realization vary, for many firms, the practice appears to have resulted in the paradox of firms billing higher but collecting the same - or less. This leads directly to a third challenge facing law firms.
Challenge #3: Right-Sizing Staff
Just as firms have needed to right-size billing practices, so too has it become necessary for them to right-size staff. I attended law school during the heady days of the internet boom when stories abounded about lawyers siphoned off to feed what appeared to be the bottomless appetite for practitioners to support the burgeoning industry. The excitement was palpable, the pay was astronomical, and the exuberance irrational. By the time graduation rolled around, the internet boom - and the frenzied hiring - had dissected into a sad, sad memory. This generalized malaise was further compounded by the stock market bust that followed on the heels of the internet bust. Law firms from all segments did a swift about-face in response, shedding staff and foregoing new hires.
Facing financial headwinds in the last few years, AM Law 100 firms have taken a similar approach to addressing financial woes. Beginning around 2020, firms in this segment “right-sized” staff by decreasing headcount and cutting back on hiring. Meanwhile, midsize firms took the opposite approach, hiring aggressively to create and/or capture new business, including from other market segments. While it may not be the greatest time to be a 3L dreaming of landing a job with BIGLAW, it is a great time for in-house leaders, and here’s why.
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Three Robust Opportunities to Control External Legal Spend
As in-house counsel to a variety of domestic and international corporations, I have often been tasked with researching, interviewing, hiring, and managing external counsel, always with the companies’ legal, business, and financial interests top of mind. As head of a major cost center and charged with being a good financial steward, I have utilized various tactics to manage my department’s legal spend. The gentle reader may find the practices below particularly impactful in the current legal environment.
1. Develop and Push the Billing Guidelines.
Billing guidelines are my favorite. These handy-dandy documents upend the firm/client relationship, putting the power of cost containment more firmly into the hands of the client. My first encounter with billing guidelines was at an international holding company with multiple subsidiaries in multiple states, requiring multiple external counsel.
This multiplicity of counsel meant negotiating and keeping track of a multiplicity of engagement letters – documents that would vary not only by firm but also by matter. Having billing guidelines in place helped prevent billing practices the organization deemed problematic and made invoice review easier and much less contentious.
- First class travel to an out-of-town meeting? Nope!
- Two attorneys billing for attending the same negotiation/deposition/meeting? No way!
- Three levels of review for the same work product? Somebody, pass me another red pen.
There is no one-size-fits-all solution for developing billing guidelines, nor should there be. Billing guidelines are most effective when crafted to meet the unique requirements of the entity seeking to implement them. While developing and implementing billing guidelines may take time, the clarity, consistency, and cost savings produced by the effort should be well worth it.
2. Develop Paraprofessionals.
While all lawyers perform legal work, not all work performed by lawyers is strictly speaking “legal.” Para-professionals (paralegals, legal secretaries, and even department interns) are often overlooked and untapped sources of increased productivity – and, yes, cost savings. Some of the most highly skilled paraprofessionals I’ve encountered worked for a Fortune 500 manufacturer of building products.
These professionals functioned at an incredibly high level, researching, reviewing, and redlining contracts and marketing materials, interfacing with the Human Resources department on complex matters, and collaborating on discussions of risk mitigation and litigation. They had developed the ability to operate with minimal oversight from the supervising attorneys, freeing the attorneys to handle other more critical matters.
The individual and collective skills of these professionals were rare, but can certainly be replicated through intentional hiring, mentoring, and oversight. Admittedly, not all paraprofessionals will be interested in or comfortable with engaging in the level or scope of activities described above. However, in-house counsel should welcome – no, seize – the opportunity to help grow the skills of paraprofessionals willing and able to expand their professional competencies.
3. Develop and Diversify the Portfolio of Legal Providers.
As mentioned at the outset, busy in-house counsel relies heavily on the familiarity and consistency of firms knowledgeable about their business. As a result, many are loath to change those firms without good reason. I have been very guilty of this. Don’t be like me. This reticence can lead to firms perpetuating themselves - along with fee increases. Instead, be proactive.
Periodically evaluate outside counsel to ascertain whether the value of the legal services rendered remains commensurate with the legal spend. Treat anything less than a full-throated “Yes!” as a call to action. Shop around. The Report indicates that law firms are actively jostling for new clients, allowing in-house counsel to negotiate from a position of greater strength. As a bonus, restricted hiring practices at AM Law 100 firms mean the availability of top-tier talent at more competitive rates.
What’s more, flexible legal talent providers like Axiom can fill the gap between costly law firm personnel and the cost of adding a full-time equivalent. Axiom’s legal professionals practice in every area of law, possess various levels of experience, and can be had on terms specifically tailored to meet the client’s needs, reducing costs. Clients can retain for discrete projects of short duration, for longer engagements of greater complexity, and anything in between, without the high costs.
Just as the Report sheds light on the top challenges facing the legal industry, AM Law 100, AM Law 200, and midsize firms, so too does it make the case for in-house leaders to review and possibly modify their practices to derive long-term benefits from the current legal environment.
💡 Want to “right-size” your legal spend? Discover where and how you can use Axiom to supplement traditional law firms and help your legal team do more for less.
