In a previous article written at the end of last year, we reported that the AmLaw second hundred (meaning the firms ranked 101-200) had picked up 1% in corporate client market share from firms in the top 100. While, for the top hundred, hours billed declined by 6.4% and fees paid fell by 3.5%, firms in the AmLaw second hundred saw their hours billed increase by 6.2% and fees paid tick up by 3.3%. While 1% may not seem like a lot, it is certainly enough to grab the attention of top hundred firms. It also indicates that firms in the second hundred may be on to something that is resonating with their clients.
A recent article by Jay Fitzgerald of the Boston Globe highlights one trend in the Boston legal market that could help account for the change in other cities as well. Fitzgerald talks at length about how now some six years into the recession, the balance of power appears to be shifting from law firms to their clients. As companies are becoming more and more cost-conscious, they are demanding that their law firms do the same—by offering alternative fee agreements, more affordable rate structures, and greater flexibility in billing. There also seems to be a general sense that companies are no longer as concerned about a law firm’s size or brand name than they are about total cost and flexibility. Companies of course still want quality legal work, but what is changing is they are now more vocal about wanting it at lower prices.
In Fitzgerald’s own words: “As a result, many law firms are adopting new business models and doing what once seemed almost unthinkable in the industry: cutting hourly rates, bidding for corporate work against rival firms, capping prices, and keeping a sharp focus on the corporate client’s bottom line. In turn, the firms are cutting their own costs in a drive to become more efficient, using fewer attorneys on cases, and moving back-office operations to lower cost states — and even nations.” Many firms are finding this more than just competitive advantage, but as a must-have in order to survive amidst the new and capable competition that exists.
What is particularly interesting is that many of the changes have been proposed and driven by clients themselves. Fitzgerald quotes Elizabeth Murphy, Legal Operations Manager of Boston Scientific as saying: “I’m not sure how much longer we’ll continue to work with firms that won’t change”. And with Murphy responsible for doling out $10M in legal work each year in a tight economy, firms are listening.
Fitzgerald goes on to say that firms are also agreeing to alternative fee arrangements, which include “fixed fees for certain duties, such as filing patents, or flat rates for individual cases, rather than charging by hour”, with the result being that “smaller firms are starting to nab more corporate business—growing in both revenue and number of attorneys at their firms.” The change does not come as a total surprise, however. For many years before the recession, it was not uncommon for billing rates to rise much higher than the cost of inflation. Accordingly, many law firms are starting to move away from their traditional hourly fee structures and move towards a more client-centric approach. Other professional services firms (such as accounting and consulting firms) have been quicker to adapt. However, if the second hundred AmLaw firms continue winning a larger slice of the market share pie, the legal industry could begin to change much more quickly.