White Papers | Survey of CEOs Shows Growing Concerns About Outside Legal Counsel
The way that corporate clients buy legal services has changed – particularly with regard to the Fortune 1,000.
Historically, the legal department within corporate America fell outside of the scope of all the other traditional departments within the corporate framework. As a result, they were pretty much left on their own to do their own thing in terms of outside support, process standards and the like.
Now, due in large part to the costs of outside counsel, the typical corporate legal department has been brought back into the fold. Contracts for corporate legal are often negotiated by central purchasing and new standards for billing (to the corporation) have been applied.
All of this has resulted in the larger law firms bringing their service offerings and work processes in line with the emerging needs of their institutional clients. This translates to more creatively packaging their services – outside contractors, at risk billing structures, etc.
Along those lines, there are several points of interest for law firms revealed in the 2005 Corporate Legal Times/Dickstein Shapiro Morin & Oshinsky Survey of CEOs.
While selecting and negotiating with outside counsel is an essential part of job of general counsel, CEOs are more than willing to give their two cents worth. According to the survey, 40 percent of CEOs are “very involved” in their company’s selection of outside counsel and another 37 percent say they are “somewhat involved.” Only 23 percent leave the decision entirely to the company’s head lawyer.
Why are we seeing this micromanagement? It’s clear the job of CEO has changed dramatically in the years since the corporate scandals at Enron and WorldCom. According to Booz Allen Hamilton’s annual study of CEO succession at the world’s 2,500 largest companies, the average CEO tenure has dropped to only 8.8 years, down 23 percent in the past decade. More than 14 percent of the CEOs of these corporations left office in 2004, nearly a third were forced from office for performance-related reasons or because of disagreements with their boards. This represents a 300 percent increase over 1995.
CEOs can’t afford to focus on long term objectives. They need immediate results.
When asked in the Corporate Legal Times/Dickstein Shapiro Morin & Oshinsky Survey what they thought the most important thing their general counsel could do to improve the legal department, 14 percent answered, “manage outside legal counsel better.” Only “communicate more with business units” with 33 percent and “reduce costs” with 16 percent were considered more important.
Clearly, with a keen eye on the bottom line, CEOs are looking for more cost efficiencies from their outside legal counsel. In the 2004 Corporate Legal Times/Dickstein Shapiro Morin & Oshinsky Survey of CEOs, only one percent of CEOs indicated cost was a determining factor in outside counsel selection. This year, 23 percent of respondents indicated it was a primary factor. Cost was rated higher than relationships (21 percent) and the range of services offered by the firm (21 percent).
The selection criteria mentioned most often was the law firm’s knowledge of the industry in which the company operates, with 44 percent of CEOs saying it is what closes the deal. Reputation was CEOs’ second most cited factor in selection of outside counsel (37 percent).
Interestingly, although most law firms feature their clients and case studies in their marketing materials, they don’t appear to carry much weight with the CEO. Having representative clients and engagements was cited by only 17 percent of respondents as a primary selection criterion.
With sensitivities about costs jumping, it’s not surprising that a growing number of CEOs aren’t happy with the amount they pay their law firms. Nearly one third of respondents said they believe their general counsel spends too much money on outside counsel.
Despite the fact that contracts for corporate legal work now are often negotiated by central purchasing, many of the small to mid-size firm attorneys have yet to grasp this new "corporate" model. They still believe that creating a relationship, being responsive and doing good work is enough to keep the client.
But in reality, that is the "minimum" in terms of client expectations. Corporate America is saying, "We expect that you are good attorneys. We expect that you are responsive and do good work. Now what? Can you also do it cheaper?”
Corporate America has raised the bar on what differentiates one firm from another. Of course, they would like to turn it into a price issue.
Unless a firm is large enough and has the business vision to create a process to actually perform the work at a lower cost, they are going to have to create a different type of differentiator. The obvious one is a deep understanding of the client's business issues and how that client might position themselves to "win."
This understanding goes way beyond the boundaries of a particular case or even the responsibilities involved in the typical attorney/client relationship.
