New law firm reality: The changes rocking the legal profession will outlast the recession

By Steven R. Strahler

Feb. 15, 2010

One of the firms reshaping the legal industry for the long term is not a law firm at all. It's Tellabs Inc. The Naperville telecommunications equipment maker knocked 5% to 6% off its legal bill last year and plans to whack another 5% to 10% this year.

Tellabs and other clients are forcing law firms to adjust to a new way of life, resulting in a fundamental shift in billing, pay and other practices that will outlast the recession.

"This is just going to be part of our annual way of doing business," says James Sheehan, general counsel and chief administrative officer at Tellabs, which bled red ink in 2008 before turning profitable last year.

A surge in legal costs before the recession prompted Aon Corp., Abbott Laboratories, Sears Holdings Corp. and other local companies to install fiscal watchdogs in their legal departments. Akin to chief operating officers, they manage the department, in some instances overseeing recruiting and training, while freeing general counsels to focus on strategy and risk.

"We are getting more aggressive and finding more ways to keep these costs in check," says Heidi Rudolph Mitchell, who moved from Sears in 2006 to Sara Lee Corp., where she's vice-president of government and legal affairs. "I'd like to believe I've saved them several hundred thousand dollars."

Because of such pressures, revenue last year at 50 of the 100 largest law firms fell 4%, following a 7% rise in 2008 and an average gain of 12% during each of the previous seven years, according to Citi Private Bank, a unit of Citigroup Inc. in New York. A Crain's survey found the number of attorneys at Chicago's 26 largest law offices shrank last year by 609, or 9%, to 6,271.

5,000 LOSE JOBS

Nationwide, nearly 5,000 lawyers lost jobs last year, compared with fewer than 1,000 in 2008, according to Web site Law Shucks.

Noel Elfant, until recently general counsel at Zebra Technologies Corp. in Lincolnshire, personifies the new buyers' market in legal services. "Last year was the first year we got 20% off, almost without a blink," he says. He started to scrutinize legal bills and cross out hourly charges he felt were unjustified. "In the old days, I'd have to say no to the whole bill," he says.

When Mr. Elfant hired Alston & Bird LLP to represent the maker of bar-code printers, he imposed a condition: The Atlanta-based law firm would foot airfare and hotel charges associated with required visits to Zebra's engineering facilities in California and Rhode Island, he says.

Alston & Bird won't comment on the relationship but says it avidly pursues alternative billing arrangements, including fixed annual fees covering all assignments for a given client and "slicing and pricing," or bidding work in stages.

"We're just trying to be nimble," says Timothy Pakenham, a former chairman of Alston's partners' committee. "We've experienced a genuine and permanent paradigm shift in the way legal services are valued and priced."

Zebra declined to comment.

Consultants such as Joel Henning in Chicago have come to the same conclusion. He says he used to believe a recovering economy would restore traditional habits: "Clients would once again start screaming for services and make it possible for law firms to go back to the same old pattern of substantial rate increase on an annual basis."

He no longer considers that possible, especially with more and more legal work becoming commoditized and subject to technology-based routines.

Winston & Strawn LLP, Chicago's fourth-biggest law office, uses computers to analyze billing on a case-by-case basis. Managing Partner Thomas Fitzgerald expects alternatives to the billable hour — including monthly retainers and fixed annual fees — to approach 20% of assignments this year.

RATE FREEZES, DISCOUNTS

Meanwhile, clients such as OfficeMax Inc. in Naperville are subjecting legal budgets to new scrutiny by executives outside the legal department. This year, General Counsel Matthew Broad must cut outside counsel expenses by 10% — a stiff mandate, he says, after legal costs were slashed last year by 23%.

"Changes we made will end up being institutionalized," he says, mentioning rate freezes, discounts and farming out nationwide employment litigation work to regional firms in an attempt to capitalize on competition and lower rates.

Increasingly, corporate legal departments are taking more control of the law firm-client relationship, insisting, for example, on identifying which subcontractors law firms should hire, according to Gary Levin, national leader of litigation and dispute consulting at Deloitte Financial Advisory Services LLP in Chicago. The trend has affected Deloitte itself, he says.

STATUS QUO DISTURBER

Outsourcers such as Chicago's Mindcrest Inc. are big winners. Mindcrest employs lawyers in India to handle electronic discovery and other routine tasks and competes with law firms for work from in-house legal departments.

But law firms themselves could soon be Mindcrest's dominant customer base as they trim overhead, CEO Ganesh Natarajan says. With 700 lawyers, Mindcrest could have 1,000 by yearend as its annualized revenue continues to double, he says.

Another disturber of the status quo is Axiom Law, which began in New York in 2000 and opened a Chicago office in 2008. Not a law firm per se — and thus unable to issue legal opinions for corporate transactions or perform as lead trial counsel — it is a subchapter "C" corporation that has about 40 attorneys here on call.

Axiom sometimes acts as a rent-a-general counsel for smaller companies but mostly serves larger clients such as consultant Accenture, says office head Thomas Finke, a former senior vice-president for strategy at Tribune Interactive. Accenture declines to comment.

"Our office is about the size of your living room," he says, citing low overhead that results in an effective billing rate of about $200 an hour, compared with a nationwide law firm average of $372. "Over time we will absolutely put significant downward pressure on law firm rates."

Tellabs uses fixed-price contracts to cap the amount the company is willing to pay on certain matters. Law firms get wiggle room amounting to 2% of the contract value, plus a "success fee" of up to 10%.

Tellabs' Mr. Sheehan, 46, says Sidley Austin LLP and Kirkland & Ellis LLP are cooperating. "This is an area where they're trying to differentiate themselves," he says.

©2010 by Crain Communications Inc.