Why law firms are shooting themselves in the foot

BDLN meets the Sheriff of Clientsville…Paul Smith, global chairman of Eversheds Sutherland

On the mean streets of Clientsville, Marketplace County, law firms are feeling the heat. Gunslingin’ procurement departments holler for “value adds” (gringo speak for “freebies”) and grizzled CFOs sip bourbon while calmly instructing their teams to delay invoice payments till the cows come home. And as the sun beats down, the need for hard profit grows. Fast and dirty cyber attacks from raiding gangs can only be fended off using pricey freelance bounty hunters, and those who can’t afford a sleek new breed of horse called ‘AI’ risk grinding to a halt on unforgiving desert highways. Meanwhile, the law firms’ very own folk – a dusty but clever old gang known as ‘The Lawyers’ – demand a pretty dollar to keep ‘em sweet. It sure is tough in Clientsville, Marketplace County.

Or is it? Are the law firms in fact architects of their own woes? Are they, to stick with the increasingly laboured imagery, shooting like drunken cowboys? The answer, believes Paul Smith, global chairman of Eversheds Sutherland, is yes – to some extent. While acknowledging increasing financial pressures, he thinks problems are mounting because lawyers are not behaving commercially.

“If a long-standing client tells you they are under pressure from their finance people to cut costs and asks for a 20% discount,” says Paul, “the typical lawyer reaction is to say: ‘That will be hard but, OK, we don’t want to lose you, so we’ll take the hit.’ What they fail to do is talk to the client to really understand what’s behind the request. Also, if the client asks for a 20% deduction, you need to find out more. A 20% deduction from what? All firms charge different rates to different clients. You need to nail what the market rate actually is and potentially discount your rates from there.”

The Eversheds Sutherland global chairman sees a general trend among law firms to pluck rates from the ether and a failure to drill into commercial detail.

“I remember a talk by Kevin Doolan [managing partner at Moller PSF Group],” continues Paul. “He’s a member of the Chartered Institute of Purchasing & Supply and attends their conferences. The big joke is that when procurement departments deal with law firms, lawyers give discounts in 5% chunks. Can you imagine that happening in other industries? When you’re negotiating with, say, a photocopier supplier, they’ll say something like: ‘The most we can give you is 0.83% discount on that product’. But lawyers choose 5, 10, 15 or 20%. It’s hilarious! If you’re a photocopier supplier in a competitive market, you know your margins, your costs and the exact difference between selling at a loss or a profit. Most lawyers do not. They just use hourly rates, which are calculated by seniority or expertise, and those rates are usually invented by the firm.”

But the market does have a rate, and with financial pressures growing, it’s increasingly important to find out what it is. But how do you do that?

“You might find this surprising, but clients usually give you data about how much they spend with other firms,” says Paul. “People ask me how I get that information. My sophisticated response is to say that I asked and they gave it to me. You’ve got to get as much data as possible. Once you see that data – such as how much clients are paying Magic Circle firms, specialist firms and Silver Circle firms – you have the knowledge to decide upon a sensible course of action. You can decline the work because you can’t compete, or you can offer a better price.”

And that sensible course of action must be just that – sensible. Winning work for winning’s sake does not make for a happy, flourishing ship. Accepting a low price to achieve non-specific long-term gains is a slippery slope. “It’s better to walk away if you can’t make it pay,” says Paul. “Yes, there’s pressure on partners to demonstrate success by winning new clients, but if you’re just going to make a loss on the work each year, you’re effectively tying a lead weight around your firm’s neck.

“You have to build your economic model. Share it with the client – full transparency. The other thing to remember is that no procurement department I’ve ever met wants a supplier to make a loss. They know that if you’re locked into an unprofitable contract, you’re not going to put your best people on it. So when I talk to procurement people I say: ‘Look, here’s our model. This is how much it costs to do the work. We’re here and you’re there. So if you push us to there, we’re not going to make any money, so why should I saddle the firm with an unprofitable client?’ That gives you strong negotiating power to find the pricing sweet spot.”

It’s not just firms that would benefit from showing greater financial rigour; individual lawyers can improve their lot by doing so, too.

“Many lawyers still, to my amazement, get calls from clients asking them to do jobs but they don’t discuss what the client actually wants,” explains Paul. “You must scope the job properly: does the client want you to look at every word of the contract or just the limitation of liability clause? Where it all goes wrong is when lawyers just go to work to the best of their ability, and then send their clients a bill for twice the amount they were expecting. That shows a real lack of commerciality.”

And this, believes Paul, is the crux of the issue. Lack of commercial thinking is making life tougher for law firms than it should be. The Eversheds Sutherland global chairman says there are two types of lawyer: lawyers – and business people who are lawyers. To build a law firm that thrives in today’s tough environment, every player needs to think more like a businessperson while retaining those much-needed lawyerly skills. By doing that, Clientsville in Marketplace County will become a much less dangerous place to live.