The message to general counsel and chief legal officers from their CEOs and CFOs could hardly be clearer: “Get the costs of your legal department under control or face the consequences. In the last decade, general corporate operating expenses have gone up about 20 percent, but overall legal costs have gone up 75 percent, far outpacing inflation. Our business got beaten up big time by the recession; time for you to share the pain and share the accountability.”
Henceforth, the memo goes, you must manage the legal function as proactively and efficiently as the company manages every other business unit — perhaps even more so, since the legal department is, after all, a cost center and not a profit generator for the company. Yes, you have more on your plate these days with increasing legal and regulatory demands, but it’s time to do more with less.
Skip the excuses and rationalizations; it’s time for lean-and-mean budgets, aggressive cost management and clear standards for demonstrating the value you provide the company. Yes, quality legal service matters, but tightening the screws on legal costs matters more. Your bonus — and perhaps even your job — depends on your ability to reduce your total legal spend.
The issue of increasing costs certainly is not a new one for general counsel. In surveys for the last five years, GCs have consistently identified the need to control costs as one of their top concerns and most important priorities. Until 2008, though, that concern rarely translated into significant changes in many legal departments. Then, when the economy tanked, they had to at least appear to tighten their belts.
For many senior in-house counsel, this was a rude awakening. Like beleaguered law firms, they took some painful emergency short-term action steps that often translated into cutting some staff lawyers, fewer employees (or FTEs) and fewer trips to conferences. The result, however, was not doing more with less. It really was doing the “same with less,” and even that heavily stressed the legal department.
Long term, they prayed for a return to the status quo ante. Many still hope to continue to enjoy “black box budgets.” (“Just give us what you gave us last year, plus 20 percent.”) Many claim that cost predictability is impossible in an “uncertain legal environment.” Others believe that no solid metrics exist for measuring the value of lawyers’ experience and expertise.
Wiser heads embrace Stephen Covey’s famous quote: “If we keep doing what we’re doing, we’re going to keep getting what we’re getting.” Savvy CLOs realize that the upside of the pressure to control costs put on them by their own management is the increased leverage it gives them in their relationships with outside counsel. They no longer can afford to buckle under to steep annual hikes in law firm billing rates; they no longer can allow law firms to pass all expenses and inefficiencies through to the client. They must learn to wield the whip hand, a skill alien or uncomfortable for many of them.
This shift in the law firm-client balance of power has left some general counsel a little bewildered. “I feel like the dog that, after years of chasing the fire engine, finally caught it,” said one. “Now I have to figure out what to do with it.”
Through convergence programs, RFPs and value-based alternative fee arrangements (AFAs), many general counsel are significantly altering the balance of power between client and law firm. Among law firms that understand the implications of this sea change, there has been a rush to embrace legal project management (LPM) as a discipline to manage legal tasks efficiently, consistently and predictably –and deliver on the promises they are making to clients in their AFAs.
