A perfect storm threatens law firms

IF any lawyers thought that the effects of the downturn on law firms are over, then they would have got a rude shock last week when Halliwells announced that it was going into administration. It was a clear sign that law firms have to change if they want to survive. While many have bumbled along doing things in the old ways and relying on repeat business, the reality in this new, leaner world is different and law firms have to become sharper. These days, the client is king.

In fact, most of the changes that are taking place in the legal world are themes that have been developing for years: the impact of globalisation, the increased use of technology, the change in the billing structure. But with the downturn, a “perfect storm” of factors has combined to bring about this shift in firms’ focus. So says a report by City firm Eversheds, called Law Firms of the 21st Century: The Clients’ Revolution. Following an earlier report carried out in 2008, before the worst of the downturn, it shows a dramatic change in attitudes and a law industry that is adapting to the new realities.

The report, for which Eversheds spoke to 130 general counsels and 50 partners at law firms worldwide, says that 76 per cent of legal clients and 75 per cent of partners think that the balance of power in the client-lawyer relationship is now with clients, and they expect it to stay that way. This promises to bring about fundamental changes in the law industry. Unlike the boom years, when the new financial products meant lots of expensive work for City lawyers, the report says that “many managing partners have recognised that they are becoming primarily service providers and that their previously dominant role at the centre of the client-lawyer relationship has irrevocably altered”. Clients see themselves as purchasers of services, and as they have had to tighten their belts they are looking to get value for money.

Perhaps the biggest consequence of this is the more central role for the general counsel – seen most vividly, perhaps, in the appointment of Barclays Bank’s GC Mark Harding to the bank’s executive committee in October 2009. Eversheds’ report found that 74 per cent of GCs said that they now occupied a more senior commercial advisory role compared to before the recession, with many saying that the in-house team was now seen more as a business unit rather than as a support unit. And 90 per cent of GCs said that they were under more pressure to provide better value, efficiency and cost reduction while 60 per cent said that they have already reduced their external legal spend. And as such, 73 per cent say that they have changed or reduced the number of external legal advisors they are using. Their whole attitude towards law firms has changed, and over half of GCs said that they would now look to use outside lawyers only as “a source of highly specialised advice”.


Two-thirds of GCs are calling for lower fee rates from their external lawyers. If law firms want to survive, they should start paying attention. While 47 per cent of partners realise that this is the number one priority for clients, only 25 per cent say that they are delivering reduced rates – perhaps explaining why 52 per cent of GCs say that they are taking more work in-house and 55 per cent say that in-house teams will grow over the next five years, a trend boosted by the recession.

The general counsel’s role has been further boosted by an increased focus on regulation, a trend towards risk-awareness and a focus on ethics. Seventy-three per cent of GCs said that their firm’s attitude to risk had changed since the start of the crisis, and 33 per cent said that they are acting as “ethics champions” in their firms. At the same time, 55 per cent said that they now have more responsibility for corporate governance than they did before the crisis, and are having to assess risk more.

The results of this new client focus are changing the legal landscape, although none of what is happening should come as much of a surprise to law firms. As the report says, “the recession itself was not thought to be the key driver of change. What it has done is accelerate other significant, long-term drivers of change”.

Among these changes are law firms becoming more global. When the client is king, you follow him. “When your clients are in Asia, then you have to support them,” says Bryan Hughes, chief executive of Eversheds. “If we couldn’t then our competitors would.”

Most significantly, perhaps, clients are also driving a change in the fee structures that law firms use. “Even before the credit crunch, it was clear that business people were disillusioned with ever-increasing fees, wasteful practices and an unwillingness to change,” says the report. What this means is that now some of the legal shibboleths are under attack, even including the hallowed hourly rate. Eversheds predicts that this will now be “one of many tools in a varied fee tool box”. Seventy-nine per cent of UK law firms’ managing partners said that the hourly rate was “almost dead” and “simply one fee arrangement among many”. This will see the UK catch up with European and US practice, where the hourly rate is seen as just one fee structure among many.
“If you look at it from the perspective of the client, they are all being asked to look at cost and those pressures are then being put in turn onto the law firms,” says Hughes. “Clients are asking us to add more value, not just hourly rates, but being more imaginative. The clients also want a greater sharing of risk and reward.” While admitting that “there is a strong sense that it is now limping towards the finishing line” of its life, he insists that the hourly rate will never die entirely, and will be used in “more esoteric work types, like hostile takeovers, or major pieces of litigation”.

In 2008, when Eversheds carried out a similar report, only 22 per cent of clients saw value billing – that is, billing based on the value of the work rather than the number of hours spent on it – as a future trend. This has changed so that now 86 per cent of clients and 88 per cent of partners say that they now often or sometimes use value billing, a vivid illustration that the client is now driving the way that law firms have to go about their business.

“There has been a fundamental change and we have to adapt, or we will struggle,” says Hughes. “We aren’t going back to the good old days of 2006 and there has been a realignment in the client-lawyer relationship. That change is here to stay.”

Law Firms of the 21st Century: The Clients’ Revolution is available to download from


of legal clients think that the balance of power in the client-lawyer relationship is now with clients

of general counsels said that they were under more pressure to provide better value, efficiency and cost reduction

say that they have changed or reduced their use of external legal advisors

of UK law firm managing partners said that the hourly rate was “almost dead”

of UK law firm managing partners said that the hourly rate was “almost dead”

of partners say that they now often or sometimes use value billing