When a theory takes on a life of its own, a reality check can help: results of a survey conducted by Bucerius CLP and Deutscher AnwaltSpiegel
By Markus Hartung and Arne Gärtner
- (formal) a [seemingly] irresolvable contradiction in terms; nonsensical, contradictory
- (colloquial) very strange; utterly absurd, nonsensical
The issue at hand
In the wake of the financial crisis, the legal markets have been subject to constant change, and nothing has been, at least at first glance, like it was before. This has raised the question of which trends might decisively influence the future development of the market. This question was systematically addressed for the first time by Richard Susskind in his book Tomorrow’s Lawyers: An Introduction to Your Future in which he identified three key drivers: (a) the “more-for-less” challenge, (b) the process of digitization and (c) liberalization, understood as increasing deregulation, in particular in conjunction with the dissolution of the monopoly of the legal consulting sector.
The effects of digitization, in other words the revolutionary or perhaps merely evolutionary impact of innovative technology on legal consulting activities, were the focus of last year’s and in particular this year’s fall conference of Bucerius Center on the Legal Profession (CLP, Hamburg). Indeed, the (postponed) launch of the beA (besonderes elektronische Anwaltspostfach), an electronic mailbox for legal professionals, is apparently a greater source of inspiration for the German legal profession than Watson, the IBM supercomputer, whom most others look to in wonderment. Nor has the topic of deregulation made its way into the German legal landscape, where most participants still feel couched in the comfort zone of the Legal Services Act (Rechtsdienstleistungsgesetz) and the rather conservative German Federal Bar.
The more-for-less challenge, for its part, dances to a different tune. Its aim is to, in short, bring general counsels to cut 30% to 50% of their budgets under intense and increasing cost pressure – with direct consequences for external legal counsels. The latter are expected to, in the face of increasingly complex regulatory demands, provide more services at significantly lower fees. Susskind, for his part, believes that “the more-for-less challenge, above all others, will underpin and define the next decade of legal service. The more-for-less challenge will, I expect, irreversibly change the way that lawyers work.”
More for less: a self-sustaining machine
This concept has become very prominent within very little time, with nearly everyone immediately taking it at face value. There’s no law firm that does not try to explain issues without reference to this trend, not a general counsel who will not assuredly refer to these constraints when negotiations with firms become difficult. The theory is indeed compelling and convincing—and we, consumers that we are, are happy to buy into this concept.
But is that really all there is to the idea? Can it be that simple? Susskind’s books appear to remain, despite enjoying a certain degree of notoriety, by and large unread. At Bucerius CLP, we regularly examine market data and developments of individual law firms. For some time, we’ve had doubts about whether the more-for-less concept, as commonly understood, is tenable. The latest economic data of the leading German commercial law firms tend to invalidate the theory, yet lacked consensus; and the same applied to the results of the Juve 2014/15 in-house survey.
For this reason, Bucerius CLP, in collaboration with Deutscher AnwaltSpiegel (a sister magazine of Business Law Magazine), conducted a brief survey among in-house lawyers in October and November 2015 in order to capture the mood of the time. Of 700 in-house lawyers contacted, 66 responded. Clearly, this response rate of not even 10% does not reach statistical significance and qualifies, if anything, as “empirical impressionism.” Nevertheless, we believe that, taken together, the economic data of big law firms, the Juve in-house survey and our survey provide a sufficiently solid basis from which to conclude that the more-for-less theory does not hold.
The facts show …
First, the figures of the law firms: When looking at the segment of the 30 largest law firms in Germany as determined by revenue , we observe a significant increase in sales since 2006. In that year, the revenue of these firms was approximately €2.7 billion, compared with about €3.5 billion in 2014/15. That represents an increase of nearly 30%, despite a decline in 2008/09 following the onset of the financial crisis. What also increased was the number of lawyers and other professionals working in this sector, namely from 5,406 in 2006 to 6,771 in the 2014/15 period, representing a 25% increase. By contrast, the revenue per lawyer as a measure of productivity has been stagnating since 2007, albeit at the high level of over €500,000, and has regained its precrisis level of 2006 in the 2014/15 period.
“More” yes, but not “for less”
With all due respect, this demonstrates at best “more,” but not “for less.” These law firms were able to expand their business such that productivity remained the same despite strong growth in human resources. This speaks for stronger demand as well as a largely stable price structure. Nevertheless, the market segment of the top 30 is rather specific, and the figures available have more of an indicative effect, meaning that on their own they do not allow us to draw any reliable conclusions.
The decisive factors: efficiency, quality and intelligent resource management
Our survey showed that the more-for-less theory was unknown to a quarter of the respondents; and of the remaining 74%, 41% said they were not confronted with this challenge in their function. The question of whether in-house lawyers expect more performance from their external counsels at lower fees was answered by 41% respondents with “yes” and by 35% with “no.” The remaining 24% gave very differentiated responses, which essentially confirms that in-house lawyers have clearly become more professional in their purchasing behavior and their expectations in recent years. This is because expectations of efficiency in the provision of legal services have risen, while those of quality have changed. This means that clients thoroughly understand that services supplied by lawyers have a price and that they therefore expect intelligent resource management from law firms. This generates pressure on the business model of law firms, a topic we have already examined and discussed in the May 2015 issue of Deutscher AnwaltSpiegel (“Die Revolution fällt aus, Unternehmen treiben die Evolution,” by Markus Hartung).
Workload in legal departments, internal budgets …
Apart from these assessments, we also inquired about changes in the workload of companies as well as about changes in internal and external budgets. The results were surprising, and they likewise invalidate, as do the reported changes in firms’ sales figures, the more-for-less theory.
More than 80% of respondents said the workload has grown or grown strongly. There is thus hardly any doubt regarding the “more,” which is consistent with the sales growth experienced by law firms. But the strategy of the companies is not as simple as is suggested by the theory (as it is commonly understood). This is because nearly 80% of respondents declared they are meeting the increased requirements through the improvement of internal processes and savings in the use of external counsels, with only 4% observing a concomitant pressure to reduce lawyers’ fees as a result.
Number of employees …
When asked about a change in the number of employees in legal departments, 40% of respondents reported the number of employees has grown strongly or very strongly. According to the Juve in-house survey, this percentage even lies at 60%. When asked whether the number of employees declined, 30% of respondents said “yes” in our survey, compared with 11% in the Juve survey. Nevertheless, results were fairly similar when respondents were asked whether the number of employees remained the same. This, in turn, is a very strong indication against the “for less” part of the theory and instead suggests that companies are responding to an increasing workload through insourcing. Thus the indirect pressure on law firms, as such, does not confirm the validity of the theory.
Last but not least, counsels’ budgets
In the end, we also examined the development of counsels’ budgets; and here, too, the theory proves untenable, with a total of 31% of respondents stating the budgets for external counsels have grown or have grown strongly. Only 38% of respondents observed a reduction in the budget, while the budget was estimated to have remained the same according to one-third of respondents.
Instead of a uniform pattern, a very nuanced landscape
Taken together, this information appears to strip the more-for-less theory, as commonly understood, of its clout. While it appears to be true that the workload has grown (strongly) in recent years, in many cases both the number of in-house lawyers and the external budgets grew as well. Only a smaller portion of respondents observed the number of employees and/or budgets had decreased.
That said, what is the bottom line? Companies respond to an increased workload through a combination of insourcing and the greater use of external counsels. Layoffs and budget cuts also occur, but not as the primary means. Companies thus respond professionally to the changing world when they expect law firms to participate in this professionalization. Here, law firms cannot afford to lean back; instead, they must engage in meeting the growing demands for intelligent resource management. In that context, the legal consulting sector is no longer associated with the traditional business model or as a service to be provided exclusively by lawyers.
Furthermore, the data show companies’ changed commitment to quality, which is now focused more on the output than on the input. In a nutshell, while companies acknowledge that lawyers in full “war paint” (for example, honors degrees, academic titles) come at a price, they are willing to dispense with them if corporate needs can be met with other means. This was evidenced in the discussions at this year’s fall conference and the much stronger interest on the part of in-house lawyers in innovative technology. As predicted, companies will continue to drive developments in the legal market. Here, law firms have the choice of drifting passively with the tide or of responding professionally, for example by taking entrepreneurial action.
Conclusion: more for less does not hold
What then is the upshot of the more-for-less theory? If understood in simple terms as denoting more value for less money, the theory is refuted or at least not validated. Yet we should in any event be parting from this understanding. If interpreted in a more nuanced way as a call on in-house lawyers and external counsels to keep a watchful eye over how, by whom and at what cost services are delivered, the theory is tenable. It is this latter understanding that will indeed change the nature of the provision of services by law firms – albeit more slowly than anticipated by many.