People really didn’t like last week’s prediction.
I was bombarded by emails letting me know all the reasons that tech companies will never be able to compete with law firms.
If you didn’t like that one, I’m guessing you really aren’t going to like this one.
Prediction #2 – In-house teams are going to be culled significantly in the next 12-18 months as the recession deepens.
This isn’t the most pleasant prediction I’ll ever make and as a business that sells a product to in-house teams, perhaps not the most comfortable. (It should go without saying that should it come to it, I would be happy to open Alacrity’s in-house and private practice networks to help – I hope anyone who finds themselves in difficulty will get in touch.)
Let me walk through my logic.
In-house teams have exploded in size since 2008.
The numbers are sketchy but by most estimates the average in-house legal team has tripled over this period.
That’s been driven by a couple of principal factors:
- In-house teams are better aligned with the business than external counsel could ever be.
- Private practice lawyers are roughly 20-40% more expensive than an equivalent in-house resource.
- There are significant organizational gains in standardization and process improvement from a captive team.
All very valid reasons for adding to the in-house team versus sending work externally.
These arguments however are about to meet with the ugly reality of significant cost cutting.
Lawyers are expensive – to put it in perspective the 2019 CLOC State-of-the-Industry paper put the average cost of a full time in-house team member at $290k per annum.(1)
That’s somewhere between 4 and 6 times an average employee’s cost and it makes lawyers some of the highest paid staff at most companies.
Rightly or wrongly most in-house teams are also considered cost centers.
When a CFO is sat with their spreadsheet looking to save 20-30% of costs these two factors paint a giant target on the back of in-house teams.
There is a range of academic business literature out there that suggests that when cost cutting exercises are undertaken during recessions, support functions generally bear the disproportionate brunt.
If history is any guide we’re likely to see a similar pattern this time around.
The perversity of course is that for most businesses the workload of the legal team will not change.
In fact we had a global bank tell us the other day that their workload had actually risen by 40% due to COVID related requests.
Couple that with a 30% reduction in their team and you’ve got to find a way to resource a workload that’s gone up by 70%.
Hang on a minute you might be saying. Why would a CFO cut cheap in-house resources if they know that that capacity (or at least a chunk of it) is likely to be made up by higher cost private practice work?
Two principal reasons, flexibility and the ability to squeeze suppliers.
One of the lessons from 2008 was that businesses should cut expenses harder than they think they need to, earlier than they think they need to, in case things don’t go as well as expected.
Laying people off now and switching to external counsel gives the businesses a more flexible way to manage capacity versus doing wave after wave of redundancies if circumstances change, even if it is a bit more expensive.
Not to mention that psychologically and morally people respond far better to one round of layoffs than smaller, more frequent ones.
We then come to the second reason, squeezing suppliers.
CFO’s are generally pretty straightforward about this.
If our business is suffering our suppliers should share the pain.
So after the redundancy conversation the CFO is going to expect reductions in external spend in total.
The old ask, do more, with less.
If the above hasn’t yet been the conversation in your business it’s time to get ready for it. If it has then it’s time to work out the best way to respond.
There are a couple of easy wins.
You can call your firms and ask for an above the board cut of 10 or 15% in rates.
They might do this for you but I would guess if you do, your calls to your partners won’t be returned nearly as quickly as it used to be.
Alternatively you can try and rejig your operating model to use lower cost resources.
This might be beneficial in the long term but you’ll probably have a lot of questions around quality control and this will take time when your CFO wants results in short order.
I think there’s a way to avoid the pitfalls of either of these approaches.
Instead of using price as your metric for success, focus on value.
Demonstrate transparently how you’re doing so to your stakeholders.
Instead of being reactive go to your CFO and show:
- You’re injecting competition and optimizing price in your selection of counsel using a proposal process that allows for side-by-side comparison.
- Upfront budgeting and staffing to ensure you’re getting only what you need with no surprises.
- You’re rigorously monitoring service delivery to ensure consistency of product.
- Reporting that clearly illustrates just how much you’re saving by using a value based process to manage external counsel.
Get ahead of the game in a way that your management team will understand and appreciate.
There are no easy choices when businesses are under stress but you can ensure that the choices you make are the best ones.
Being transparent,
Christopher Thurn
Founder – Alacrity Law
(1) CLOC, 2019 (https://cloc.org/wp-content/uploads/2019/07/2019-State-of-the-Industry-FINAL.pdf)
