Earlier this month, the 2019 LexisNexis CounselLink Enterprise Legal Management Trend Report was released. This is the 7th year the Report, which looks at data from invoices of over $33 billion in legal spending processed through the CounselLink platform, was compiled and issued.
CounselLink is a cloud based legal management platform that provides work management, financial management, vendor management, and legal holds solutions for corporate legal departments. It offers analytics and benchmarking tools for evaluating invoices and fees.
I had a chance recently to talk to Kris Satkunas, Director of Strategic Consulting and author of the Report about the findings late last week.
Satkunas identified three key and interesting trends from the Report that to me are troubling for mid-size law firms.
Satkunas identified three key and interesting trends from the Report that to me are troubling for mid-size law firms.
First, Satkunas noted that the use of alternative fee arrangements (AFA) increased from use in less than 10% of matters—where it has been for the last several years—to 12.2% last year. While the overall percentage is still small, the increase is the largest since CounselLink has been tracking this statistic. Employment litigation continues to be the area where AFAs are most commonly used. This is because the issues and work processes in these matters are the most predictable given the volume and available data.
These providers, given their structure and makeup, may be able to do the work for lower flat fees, ultimately shifting what it means to be a lawyer and legal professional and what their respective roles in a case might be.
Satkunas also noted, importantly, there appears to be a greater willingness to use AFA on portions of the work—say discovery depositions—in a case. This greater willingness is significant since it could lead to a greater use AFAs in general. Perhaps more important, it could lead to greater collaborative disaggregation or unbundling of casework. As corporate counsel become more comfortable with having part of the work done in a case for a flat fee, for example, they may also seek alternative providers to do some of that flat fee work. These providers, given their structure and makeup, may be able to do the work for lower flat fees, ultimately shifting what it means to be a lawyer and legal professional and what their respective roles in a case might be. Larger law firms are seeing this and creating their own ancillary alternate legal service providers to deal with this phenomenon.
Second, Satkunas noted that when it comes to median hourly rates, larger firms are gaining, and smaller firms are losing. Firms with over 750 lawyers average over 50% higher rates than smaller firms in 2018; the year before, this gap was 45%.
The median and overall rates of smaller firms are dropping because they are losing higher paying work
Combined with this was a shift of more higher rate work from smaller firms to the 750+ person law firms. The result, according to Satkunas, is that the median and overall rates of smaller firms are dropping because they are losing this higher paying work—not because the larger firms are raising their rates disproportionately.
Both of these trends are compounded by the continuing consolidation of work among firms. According to Satkunas, corporate counsel are being encouraged by C-suite to work with fewer and fewer firms. More work is gravitating to the larger firms who can over one-stop shops for legal work. These firms can also provide volume and technological benefits to improve efficiencies and reduce overall costs. While, according to the Report, this trend has stabilized, it has certainly not gotten anybetter for mid-sized firms.
What’s Happening Here?
So, what’s happening here? The very large firms, by increasing volume, particularly at the higher end have increased their revenue without necessarily and significantly raising their rates. This increase has come at the expense to smaller firms who have lost higher rate work. These smaller firms are now faced with a Hobson’s choice: either try to raise rates on lower paying work to make up the difference, bill more hours on fewer matters or, simply, make less money — not very attractive choices.
The bigger firms, because of the increased volume at the high end, can now double down on being more efficient at the low end and offer to do more commodity type work
There is another problem for smaller firms. The bigger firms, because of the increased volume at the high end, can now double down on being more efficient at the low end and offer to do more commodity type work. Using technology and even volume discounts, these larger firms stand to be more competitive for this work as well. Due to their size and number of partners to whom costs can be shared, these larger firms can invest in more robust and state of the art technology to do commodity work better, cheaper and faster, reducing the main competitive advantage trumpeted by small firms: lower rates.
Moreover, by using technology and data analytics, the big firms can also become even more proficient at profitably undertaking work under the AFAs that are becoming more popular. Finally, because of the continued interest in the consolidation of work among firms, the big firm offerings stand to gain even greater traction in the marketplace. Looks a lot like the Wal-Mart effect on Mom and Pop stores. Wal-Mart used increased revenue, better technology and efficiencies to bury smaller stores who couldn’t compete. There’s a good description of this in Derek Lidow’s book entitled Building on Bedrock.
As I previously reported, these are troubling times for mid-size firms. The CounselLink findings seem to confirm just that.