Sunday, 29 April 2012

See Saw Commercial Law


Are commercial law departments in law firms at a tipping point?

When talking recently with the out-house community, I’ve discussed the old chestnut of law firm billing  (a chat with me is a guaranteed riot).   I'll start at the end of the conversation.  We discussed that the current law firm model is in rude health for corporate transactions, but has a challenging future for run-of-the-mill commercial work.  The outlook is sunny for the corporate rainmakers but cloudy for those who don't know an SPA from a TSA.

Why so?

Well the out-house theory is thus: clients who five years ago had no in-house lawyers now have one or two.  Clients who five years ago had one or two in-housers now have six or seven.  Clients therefore keep most regular commercial work in-house and even when they do outsource it, clients want expert advice but don't want to pay much for it.  They don't value it because they can do it themselves if they have to.  Contrast this with corporate work which clients (generally) can't handle in-house and which they are happy to pay a handsome fee for.

This chimes with a point made to me recently by the MD of one of the newish "alternative" providers of legal services.  When I asked him who his competitors were, he said "You".

Certainly the above theory is borne out in practice in my experience.  When I joined my employer many light years ago, the bigger ticket more complex commercial work was outsourced regularly, if not as a matter of course.  This was no-one's fault, it just reflected the size and specialisms of the team at the time.  Fast forward ten years or so and outsourcing commercial work is the exception in our team rather than the rule.  Without realising it we have as an in-house team been competing successfully for that work with the outside lawyers we would once-upon-a-time have sent it to.

The fees aspect to this subject is also important.  It is correct that clients do not want to pay (much) when they send commercial work out the door, whatever the rights and wrongs of that.  I have a rough idea of what a first draft of a contract should cost for what I'd define as a medium sized project with a few bells and whistles but which is not too complex.  I price that at around £2-3k, give or take (preferably, take).  Most firms, and I'm thinking non-Magic Circle, will do it for that price and as you would expect will do a very good job.  Thing is though, as a partner or associate you need a lot of those £3k projects to meet your billable hours target.  You need a whole lot more of them to get your billings anything close to the corporate lawyers upstairs who can rack up a six figure bill faster than you can say the words "share purchase agreement" (okay, slight exaggeration, but certainly faster than you can conclude negotiating one).

The tipping point from out-house to in-house for this kind of commercial work is only going to tip further towards more work going in-house (or to alternative providers) away from law firms.  Whereas in my view, the corporate rainmakers can continue as is for quite some time yet.
Where then does this leave the leaders of commercial teams in City firms?

Needing to re-invent the service they provide I think.  Rather than re-actively wait for decreasing levels of contract monkey drafting instructions to come in, how about pro-actively selling some new services.  Here is a potential menu:

1. Access to firm precedents - £20k per annum.
2. Access to precedents plus 2 hours consultation on any first drafts produced in-house using firm precedent - £30k per annum.
3. Provision of first draft agreements for twenty unspecified agreements over the next 12 months - £30k per annum.
4. Quality assurance audit of 15 random contracts produced by in-house team - £5k per annum.
5. Intensive training over the year for an in-house team to obtain an accredited qualification in a specialist subject (e.g. copyright) - £10k per annum.

No doubt some law firms are offering aspects of this service already to their more valued clients.  But I recommend they make it a ratecard product which is sold on a standard t&c basis by proper sales-people, not by lawyers who also have to do a bit of sales.

After previous blog posts looking at law firm models, a couple of people have commented that I should concentrate on looking at how in-housers function rather than concerning myself with how law firms operate.  I disagree.  I'm not writing this to try and help law firms.  I'm writing it to try and make the point that what clients want is changing.

Firms who are serious about the long-term future of their commercial practices need to incentivise portions of their partnership to think innovatively in these changing times.  Because if the entire partnership remains incentivised to keep on billing for this year's targets, then we have a turkeys’ voting for Christmas scenario for any partner who goes out on a limb in the way I'm suggesting.  Point is, law firms incentivise their staff for the here and now.  Not for the there and future.

Due to the growth in numbers and excellence in the in-house side of the profession, without a sea change in product offerings the seesaw will continue to tip and commercial teams in law firms will continue to become the ever poorer cousins of the corporate powerhouse departments.  They will be stuck at the top of the seesaw, unable to get off without jumping.  The landing may not be soft if their corporate law colleagues do not feel like catching them.

7 comments:

  1. are there enough high skilled out-house commercial lawyers to quality check your contracts - doesn't seem likely. You are on your own now

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  2. Great points. But in addition to proactively creating a menu of products, I think there are other ways in which commercial lawyers can move up the value chain away from churning out contracts. For those of us out-housers working in the media, IP and creative industries, we've got great experience in helping devise new business models with different revenue sharing and IP sharing arrangements. We should aim to make IP strategy the heart of our offerings, with the legal implications as a follow-on, not the other way around. And if we take a look at the media and entertainment industries, 'cross-media' collaboration, combinging music, stories, games etc. in innovative ways, is a growing trend. We should be basing our services around the architecture, negotiation and implementation of these cross media ventures. So I think there's plenty of scopes for us 'contract monkeys' to get higher up the tree and find some juicy fruit.

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  3. I love your suggestions and I hope they are acted upon.

    I remember as a 21 year old graduate at a vac scheme being asked to present 'innovative' suggestions for billing and securing new clients.

    When I suggested a bulk purchase of legal services option and/or a loyalty scheme for clients, I was laughed out of the room.

    I think the exact comment from the managing partner was "What, like Tesco? We're a law firm, dear".

    Its no wonder I'm not a lawyer any more....

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  4. Completely agree that it is very difficult to make the economics of commercial work stack up as easily as corporate work as it is generally needs to be more tailored to the specific situation as is less valued by clients.

    In my experience the problem is that the precedents are either so good/standard they barely need any tweaking (website ToS) or no suitable precedent exists at all, resulting in a lot of original drafting - complete nightmare.

    Having just left a law firm, I wanted access to PLC precedents, but they were too expensive (but nowhere near £20,000 - for that amount they would have to be bloody marvellous), but I can get a year's subscription to various simple precedent websites for £100. With some experience, these are good enough to get you started, and a hell of a lot cheaper than getting a first draft from a big law firm.

    So my answer is that the docs should be open sourced and law firms just charge for making the tweaks, then you can charge a couple of grand per job but do about half the work (but the valuable bit).

    However, based on recent experience, I would say there are still plenty of big clients out there who have not got sufficient in house coverage for commercial contracts - especially the time consuming and intricate ones, and there is still plenty of work available for the skilled in housers.

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