As more in-house lawyers question the billable hour and continue to lean towards value-based alternative fee arrangements (VBFs), law firms are quick to counter that the economy is picking and that discounted fees may be nearing an end.
Who will win this tug of war? The economy may be the deciding factor.
A new study has some good news and some bad news for both law firms and in-house legal departments. The economy is on the rebound. The pace of claims for unemployment insurance continues to be the lowest since January 2008, and housing Rose 0.8 percent in February.
Confidence is also up. According to an article by Corporate Counsel, Managing partners’ overall confidence in the economy was up 18 points between the third and fourth quarters of 2012, and 85 percent predicted future revenue growth, according to the latest Law Watch Managing Partner Confidence Index survey from Citi Private Bank.
However, while we may no longer be in a recession, the economy still hasn’t really recovered. According to an article by the Washington Post, some 12 million Americans are still looking for work, and many millions more would confirm that it hasn’t felt like a recovery at all. That would include the people who have seen their incomes flatline or have been drowning in mortgage debt for years on end.
This is not just a feeling, but reality supported by hard data. According to the Post, since the start of 2010, growth has averaged 2.2 percent, which would be just fine in normal times, but is lousy considering the starting point was a time of mass unemployment and general economic despair.
In-house legal department are weary of the future and continue to be conservative with spending. As a result, large companies with leverage have been negotiating their way into discounted legal fees. Case in point, GlaxoSmithKline increased its use of VBFs from 3 percent to 68 percent; United Technologies Corporation’s use of VBFs is more than 70 percent; Home Depot, more than 75 percent; and Pfizer is 100 percent VBF according to Corporate Counsel.
In general, law firm managing partners are concerned that clients will continue to push for discounted fees. And they should be. Unless the economy begins to show stronger signs of a recovery, in-house legal department will likely continue to push and receive discounted fees.
The trend isn’t new, but in this economy, it’s not uncommon to see companies resort to “Do It Yourself Recruiting.” After all “Why should I use a recruiter and pay a fee for a job I can do on my own?” The sentiment is that there are so many job seekers out there that it can’t be that hard to find talent. You can choose a DIY recruiting solution, but the reality is that it’s not always the cheapest or easiest solution. In fact, you may come up empty handed.
A Tale of DIY Recruiting Gone Wrong...
Recently, we received a call from a director of human resources at a growing company who tried the "DIY" approach to legal recruiting. She had been tasked with recruiting for a replacement General Counsel, and decided that she would go ahead and handle the recruiting herself. She posted the job on several websites and quickly started to receive resumes…a lot of resumes!
The sheer bulk of the resumes received took this director and her staff more than fifty percent of their time to review and process. Rather than being able to handle their day-to-day responsibilities, they soon found themselves strapped with the enormous task of going through hundreds of resumes, not to mention follow-up calls and emails from anxious applicants waiting to hear back on the status of their submissions.
Then came the troubling reality that after sifting through hundreds of resumes and applications, few seem to be a match, at least on paper. Next came the calls to the few applicants they had selected. It soon became clear that none turned out to be a good match – as they unearthed issues related to skill set, personality fit, salary considerations, relocation, references, etc.
In short, after conducting their “DYI Recruiting” they came up empty handed, and the executives were getting increasingly anxious. By the time the human resources director called, they needed someone “yesterday,” and had been spinning their wheels for the past three months. With seemingly so many candidates available, what went wrong?
Can You Tell The Difference Between a Good and a Great Lawyer?
The “DIY” approach is great when the stakes aren’t high. In other words, if the position is not critical to your company, and you can spend months going through endless resumes, then it might work out for you, if you’re lucky. DIY has its limitations and risks. Anyone can review a resume against a set of requirements, yet few people, except for lawyers and legal recruiters, have the expertise or the time to fully go through the resumes and understand what those skills are and how to properly evaluate them. In other words, I could not tell you a good medical specialist from a mediocre one based on a resume and job description alone. Could you?
Legal recruiting is a specialized field; dedicated professionals build entire careers around it. It takes more than writing a job description and posting it on a job board to hire a talented professional. As DIY recruiter, you might understand that your company is looking for someone with M&A experience, but can you evaluate one M&A deal from another? Do you understand the financing aspects of a purchase? Do your candidates? How much did they contribute to the deal? Are they paper pushers or strategists? Can you tell the difference?
Are You Passively Collecting Resumes of Actively Targeting Candidates?
The reality is that bulk of any recruiting effort does not involve posting a job and waiting for the phone calls and resumes to pour in. In fact, passive recruiting often yields very little results. You often get the resumes of job seekers you are desperate to get back into the job force and will tailor their resumes to any job just to get their foot in the door. Successful legal recruiting is the result of professional networking and technical understanding; knowing the right players in the industry, identifying and seeking out the right talent for a specific opportunity within a specific company, and properly evaluating a candidate’s technical skills.
Recruiting is not only about being able to review a resume; it’s about digging deep into a candidate’s background, skills, and motivations to determine if they are a good fit. Effective legal recruiters spend a great deal of time screening candidates, gaining an understanding of their credentials, experience, skill, abilities, style, salary history, motivation, and personality fit as it relates to the company that is hiring. They will do this process many times over and only send the viable candidates that match the company fit. A hiring manager may only see a few candidates from a recruiter, but that recruiter has most likely sorted and interviewed dozens in the process. An internal recruiter seldom has the time or resources to do this.
Are You Selling This Opportunity Based on Your Market Knowledge?
Legal recruiters don’t only screen and source candidates; they also sell the company and the position. They seek out to fully understand the unique selling points of the company and the position to effectively relate them to candidates and create a level of interest that will continue through the offer stage. This is called “pre-closing.” The best candidates aren’t simply looking for a job they are seeking “opportunities.” It can take great finesse and communication skills to make that connection. It also takes a great deal of knowledge of the legal market to be able to provide an accurate representation of the position as it relates to other opportunities. Savvy candidates can tell the difference between a baseless pitch and one based on market knowledge and understanding.
How Well Do You Know In-House Salaries and Comparable Compensation?
Market knowledge also means understanding compensation. Often DIY internal recruiters base salary on what a predecessor was earning; or when there was none, on budget considerations. Often, they go in blind, without a real understanding of what “market” compensation is for the type of candidate they are seeking to hire.
When salary comes into play, as it always does, a legal recruiter can educate all parties about the numbers and trends for their industry and location. As legal recruiters this is all that we do; we study the job market and speak with hiring companies and employed professionals constantly. As a result, we can share figures that accurately reflect market conditions, and work with internal recruiters to modify a candidate’s profile to match compensation requirements as well. This eliminates the need to second-guess what a workable package can consist of, having to cut discussion short with good candidates because compensation is not up to par, or wasting time or candidates in drawn out salary negotiations.
In Other Words...
Next time you are thinking about DIY legal recruiting, think about what it's going to take to deliver the right hire to your company. My grandmother said it best, "the cheapest solutions often turn out to be the most expensive." For anyone who has attempted to be a weekend warrior and try DIY solutions, you might know exactly what I mean. Do it right the first time, and hire professionals to do the job.
The good news for in-house lawyers in 2011 was that there were raises for base salaries and a slight uptick in hiring. The bad news is that those improvements were relative. Base salary raises were very slight compared to the rate of inflation,. They also came after several years of salary freezes. Bonuses did offset some of these lackluster base salary numbers, but being tied to company performance, not everyone enjoyed them.
The uptick in employment did not stem from the creation of new positions per se, but rather as an effort to replace departing attorneys and rebalance overworked corporate legal departments that had suffered heavy layoffs during the Great Recession. In other words, the number of available in-house attorney positions remained quite low. On the other hands, there was some positive movement out there, which we expect to continue in 2012.
What Will In-House Legal Hiring Look Like in 2012?
The hiring trend that we identified in 2011 by corporate legal departments is likely to continue in 2012. The good news is that corporate legal departments are planning to hire in 2012 – about 40%. The bad news is that the majority of the hires will not be full-time attorneys.
Corporate legal departments are dealing with a heavier workload in part by using more paralegals and contract lawyers. About 67 per cent of corporate legal departments are comprised of lawyers with the rest made up of paralegals and other support staff. Legal departments are still operating with flat or decreasing budgets, and therefore, they are seeking the highest level of competency at the lowest cost. Compliance and contract review has been increasingly delegated to paralegals and contract managers. In other words, corporate legal departments are hiring more "staff" rather than "lawyers" in an effort to improve efficiency rather than “bulk up.”
What Are Corporate Legal Departments Looking for?
Corporate legal departments that are hiring full-time lawyers are doing so primarily to replace departing lawyers or add a specialty to handle work in a growing area. While corporate legal departments may be conducting some hiring, they are definitely looking for “more bang for their buck.” What exactly are they looking for?
Corporate legal departments are looking for experienced (5-10years) all-around corporate lawyers with a broad legal background, strong business acumen, and proven management skills. And that’s just the tip of the iceberg. Factors that are also taken into consideration includes national law firm background, few transitions, specific industry experience, and proven in-house track record of success.
The ideal candidate is a businessman who happens to be a lawyer, not the other way around. This is in response by corporate legal departments to want to demonstrate to the C-suite that they have what it takes to handle legal matters in a manner that contributes to the bottom line. Today's in-house attorney has to be packed with achievements that show how he/she can contribute to the company's bottom line; being an excellent lawyer is simply not enough.
What Are In-Demand Practice Areas?
General Business/Corporate Law (M&A a Plus) – Attorneys that can handle a company’s various transactions, regulatory and compliance matters, while understanding the business, and managing internal and external counsels, are the most in-demand. Attorneys with all of the above, and a strong M&A background are also prized.
IP/Licensing – The wave of protection for innovation that was driven by the Great Recession continues. As a result, licensing is a very hot in-house practic. An increase in patent prosecution has also heightened the need for attorneys with experience in trademarks and patents.
Contracts & Compliance – Corporate legal departments have an ongoing need for support to handle contracts and licensing. They are increasingly hiring contract administrators to manage procurement issues, and paralegals for compliance issues. There are some attorney-level hires, but these tend to be contract attorneys or contract administrators with a law degree.
International – As companies look to focus on expanding their core businesses and increase their market share, they are likely to look outside of the U.S. as part of their competitive strategy. This will drive the international law practice. U.S. companies will continue to look opportunities in the three most popular emerging markets—Brazil, India and China. Some other markets that may generate some new and renewed interest may include Mexico, Vietnam, Korea and the Middle East, with Turkey, Saudi Arabia, and the United Arab Emirates as attracting most of the attention. This boost in international transactions will come primarily from companies in the consumer and infrastructure sector seeking to expand into new markets.
What Will Compensation Look Like in 2012?
Total compensation for in-house counsel will most likely continue to rise, albeit modestly in 2012.
Base salaries will see moderate increases (around 3%). Raises will be primarily reserved for in-house attorneys that bring something unique and/or can save money by managing projects, people, and budgets. In other words, senior lawyers (10+ years) with management responsibilities at publicly trade companies, and specialty area lawyers (healthcare, patent, IP, etc.), will enjoy higher compensation levels.
Average In-House Attorney Compensation:
4-9 years = $100K-$180K
10+ years= $130K-$220K
Bonuses are where the difference will be made up.
Gone are the days of earning a bonus at your boss’ discretion. Today’s in-house counsel bonus is driven by: individual performance and company performance. In-house lawyers are held accountable for their contributions to the bottom-line, and are asked to share the risk of their company’s performance. If the economy continues to improve in 2012, and companies perform well enough to be able to share the rewards, then bonuses will continue to rise.
What Else Could You See in Your Stocking for 2012?
Companies are reticent about reaching into their pockets to offer more cash up front in the form of salaries. They want to see a return on their investment. That said, for hard-to-find candidates and performers – there are making efforts, if not with cash, by offering other incentives that include:
• Flexible Hours
• More Vacation Time
The Bottom Line
Hiring will still be very tight for 2012, but we will continue to see some improvements. Performance-based compensation is also here to stay. This is still driven by the economy, and while we have been through the worst since 2007, we have not quite gotten back on track yet. Our economy is still very unpredictable and fragile. Companies are hoping for the best, but still preparing for the worst. Most organizations are remaining conservative regarding their fixed costs, including their salary expense. Therefore, this will continue to make for a sluggish hiring market. We may see some small increases in base salary if the economy continues to slowly gather momentum. At the end of the day, much of the growth will be in bonuses. Hiring will focus on staff that can handle more commoditized work, and experienced management-level corporate attorney and specialists.
The litigation successes were among several reasons Microsoft was named Best Legal Department of 2010. The department achieved success after having its budget and staff cut for the first time, due to the economic meltdown. The department improved its diversity, it's helped laid-off workers get free computer training, and has represented immigrant children in court. In other words, it has reached out to the community and given back in tough times.
All three legal departments that were selected this year (the other three finalists) had one thing in common: they retooled and achieved great success doing "more with less."
- Finalist: Discover Financial Services
- Finalist: Hewlett-Packard Company
- Finalist: The Williams Companies, Inc.
2009 Net Income: $1.3 billion
General Counsel: Kelly McNamara Corley
Number of In-House Lawyers: 34
Pro's: Doing a lot with very little.
Con's: No formal pro bono program.
Hewlett-Packard Company (HP)
2009 Revenue/Net income: $114.55/$7.66 billion
General Counsel: Robert Holston
Number of In-House Lawyers: 190/425 (worldwide)
Pro's: Good litigation management, excellent pro bono and diversity programs.
Con's: Ad hoc flextime and fixed-fee arrangements.
Why Was It Picked as a Finalist: Retooling of the legal department, reorganization of litigation, and commitment to pro bono and diversity. "This isn't a place lawyers go to retire," said deputy GC Ashley Watson. Today, HP lawyers describe the department as "energized." In the past two years especially, there have been higher work expectations, a boatload of new hires, and ambitious new projects like revamping the company's worldwide system for complying with local laws that have meant more work for newcomers and veterans alike. Changes were not easily made, but today HP's Legal Department stands as one of the best in the country.
2009 Revenue/Net Income: $8.3 billion/$285M
General Counsel: Jim Bender
Number of In-House Lawyers: 39
Pro's: Outside counsel management, discovery, and pro bono efforts.
Why Was It Picked as a Finalist: Williams' legal department was able to do what most talk about, but never get to achieve: to cut its outside legal expenses by about 15 percent. The effort started six years ago, when General Counsel Jim Bender decided to reduce the number of law firms the natural gas company used, and implemented blended-rates (that came as close to fixed rates as can be). Williams's ability to use its data to effectively manage outside counsel is one reason it was chosen as a finalist for Best Legal Department. They've also done a god job implementing a new compliance program and developing a comprehensive approach to discovery. Kudos for a legal department that's done what most hope to achieve , but never quite get to do - make real cuts into outside legal fees.
While there is always a certain level of enthusiasm along with bringing in a new year, that excitement is not simply seasonal, but based on a historically busier quarter for hiring. The first quarter of the year tends to set the tone. While some recruiters seem to be optimistic about the lateral partner market at law firms picking up, and the thawing of salary freezes, that effervescence may be cooled by some harsh realities.
The dip in unemployment numbers may be a sign that the hemorrhaging has stopped, but if 2010 is slated to be a “better” year than 2009, better is relative. Many predict that we won't get back to full employment – or to about a 5% unemployment rate prior to the recession – until 2013 or 2014. This really speaks to the severity of the job losses that have been absorbed by the economy. They are massive. The economy lost over 7.2 million jobs since the recession began in December 2007.
Law firm partners with a book of business have always been considered a hot commodity, no matter what the state of the economy. So now that more of them may be willing to make a move does not indicate an improved market. Only the creation of new positions and an uptick in associate hiring would signify a real improvement of the market, and no one is seeing or predicting anything like it in the coming months.
We expect to see a slow return to hiring over the next six months. How slow? It will be highly conservative, with departments looking to hire replacement positions first, followed by critical needs second.
We predict that about 15-20% of corporate legal departments will be selectively hiring over the next six months of 2010. If the economy is to stall again, we will start seeing sign of a slow down in the 3rd quarter.
What might this look like over the course of the year?
• Quarter 1> 5-10%
• Quarter 2> 15-20%
• Quarter 3> 20%
• Quarter 4> 20-25+%
Companies this quarter (Q1) are re-evaluating their needs and considering staffing requirements. Many legal departments have affected cost-cutting measures, and most are now working at or above capacity. As a result, some replacement positions will become available, a small number of companies will hire to re-balance their legal departments, and some companies will look to hire their first in-house counsel. That said, unless we see a determinative change in the economy, the hiring market for in-house counsels will not be markedly different from the market we experienced in 2009. While there will be fewer layoffs, positions will continue to be few and highly competitive.
Who Will Be Hiring in 2010?
We expect few changes in the types of companies that will likely hire in-house counsels in 2010. Companies who will be hiring at a greater rate than others will most likely be in the following industry sectors:
• Health care
• Energy (alternative)
• Manufacturing (possible)
• Services (possible)
If the economy does show some signs of a recovery, we could see companies in manufacturing and service enter the hiring circle, albeit conservatively.
We can also expect smaller companies to take advantage of the market and hire their first in-house counsels. We have seen an uptick in hiring in the areas of regulation/compliance, litigation, and employment, although the boost in the number of hires was not necessarily significant. We are looking for a re-emergence of deals for 2010, with a conservative uptick in mergers and acquisitions.
What Will Salaries Look Like?
In-house attorney compensation always depends on several factors, including:
• Size of the Company
• Size of the Legal Department
• Position Level/Responsibilities
• Position Requirements
• Company Finances
• Economic Market
We expect compensation to remain flat for 2010. Salary freezes for current staff, small bonuses, and a reduction in base pay for new hires. Of those companies not cutting lawyer compensation, we can expect the majority of salaries to remain at status quo, and a minority to increase by a lower margin (expected 3%-5% increase in 2010, over 8% in 2008, and 10% in 2007).
Large Company In-House Lawyers (2010): Average of $200,000 in pay and bonuses.
Large Company In-House Lawyers (2009): Average of $206,000 in pay and bonuses.
Large Company In-House Lawyers (2008): Average of $236,000 in pay and bonuses.
Large Company In-House Lawyers (2007): Average of $226,000 in pay and bonuses.
What Should Lawyers Expect In-House?
For most attorneys practicing with law firms, 2010 will not be the year for them to transition in-house. Why? Because they will see few open positions, together with a plethora of highly qualified in-house counsels fighting for every available job.
For counsels practicing in-house, most will end up having to work more for less money. They will also work with less support – both in terms of outside counsels and internal administrative assistants and paralegals. Resources will be stretched thin. However, legal departments may be more open to selective hiring to handle the increased workload. 75% of the General Counsels we polled said they wanted to bring more legal work in-house for 2010, and 45% said they were actively planning to hire additional staff to handle the increased workload.
What’s “hot” for 2010? Compliance/regulatory is the new in-demand practice area for in-house counsels. Companies will be hiring selectively to fill in the gaps. Those looking for job security should look to develop skills in these areas to demonstrate their value and cost-saving effectiveness.
What are your predictions for 2010? Share your thoughts with us.
Why then are corporate executives so tightfisted when dealing with what is so commonly thought of as the “heartbeat” of their companies . . . top-talent?
Companies think very little about paying the often excessive fees charged by their outside accounting and legal firms . . . or even to the gaggle of consultants who promise cost-cutting and streamlining miracles in other areas of operations.
Yet, when faced with brain drains, talent deficiencies or the need to replace a legal counsel with a better one, their thoughts too often turn to parsimony. This K-mart mentality belies and contradicts their stated objectives to “hire the best,” especially at pecking order levels below the “big picture” executive suite inhabitants.
Of course recruiting fees can vary from legal search firm to legal search firm but, when they do, you will almost always find that those on the low side are sure to exclude some very key ingredients of the process, all of which are vital to providing the indispensable services necessary to satisfy the needs of the employer.
So why are legal recruiters worth what they charge? Just a few of the often unspoken reasons are:
Nobody knows the legal marketplace better than a professional legal recruiter or legal search firm . . . nobody! In-house human resources and company recruiters, no matter how effective, view the legal marketplace through an imperfect or misrepresentative prism, and tunnel vision is their occupational hazard.
Just as physicians are cautioned against treating members of their own families, so too is it folly for an in-house H/R professional to believe that they have an undistorted and unbiased picture of the legal employment landscape. They are vulnerable to the pressures of internal politics and cultural dimensions which do not hinder the outsider.
Street-smart legal recruiters already know the neighborhood, including the unlisted addresses so often overlooked by the insiders.
2. CAST A WIDER NET
A professional fisherman will always have more to show than a weekend angler. Legal search firms are in the legal marketplace day in and day out. They know the unfished coves, reefs and inlets that are unknown to others. The job-hunter bookshelves are filled with lore about the “hidden legal job market.” The same holds true for professional legal recruiters who have a detailed roadmap to the hidden talent sources which will never be accessed by newspaper ads, alumni associations, applicant databases, job boards or any of the other more familiar sources of people.
There are occasional pearls through these sources (and someone inevitably wins the Publisher’s Clearinghouse Sweepstakes too) but you have to shuck an awful lot of smelly oysters to find them. Legal search firm only give you oysters proven to contain pearls. Your only job is to determine which pearl is the best.
Want to catch what you’re fishing for? Hire a guide!
There is a misconception among employers that the cost of an attorney hire equals the cost of the ads or Internet postings run to attract the attorney hired. Nothing could be further from reality.
Try adding these to the true cost and you’ll see just how cost effective an outside recruiter can be:
- Salaries and benefits of the employment/recruiting staffs plus those of the line managers involved in the hiring activity (who are not productive in their normal job pursuits when they’re out recruiting).
- Travel, lodging and entertainment expenses of in-house recruiters; source development costs; overhead expenses including but not limited to telephone, office space, postage, and PR literature.
- Applicant database maintenance, reference checking, clerical costs to correspond with the hundreds of unqualified respondents, etc.
4. UNBIASED THIRD PARTY INPUT
For a mid to senior-level attorneys, the average legal recruiter may develop a “long list” of a hundred or more possibilities. Each must be called and evaluated against the position specifications as well as the personality “fit” with the company and the people with whom they will ultimately work. Once this is winnowed down to the “short list,” an even more intensive interviewing process begins to narrow the search to a panel of finalists for review by the client.
This process is not, as some believe, simply romping through the file cabinets, harvesting from the Monster lookalikes or putting the job opening out to others on the legal recruiter’s network with crossed fingers that someone good will show up.
It is highly unlikely that a legal search firm will be plowing new ground with your opening. They deal within spheres of influence far more familiar with your needs than any internal recruiter and, more often than not, view the finalists as people who are competent to solve client problems rather than just fill an open slot in the organizational chart.
Because they want to do business with you again and again, they are looking for (and challenging you to excellence by hiring) the “truly exceptional” rather than the “just satisfactory” so often settled for by in-house hirers.
Advertising or otherwise publicly proclaiming an opening, aside from its cost and demonstrated ineffectiveness for sensitive senior level counsel openings, often creates anxiety and apprehension among the advertiser’s current employees who wonder why they aren’t being considered or worry about newcomer transition problems. Just as often it alerts competitors to a current weakness or void within the company.
The recruiting process is always faster through a legal search firm that is continually tapped into the talent marketplace than one having to start the process from scratch. For every day that a key opening remains unfilled, a company’s other employees must grudgingly do double duty, or a company may need to rely more extensively on expensive outside legal counsels. And this doesn’t factor in the profit opportunities or competitive advantages lost to a company because a position remains unfilled or is done on a part-time basis by others less qualified.
7. POST HIRE DOWNTIME
Not only is speed an essential part of the legal search firm’s process, the ability to locate an attorney who can immediately “hit the ground running” with a minimum of “ramp-up time” saves time and money after the hire. All too often, a hire selected through less effective sources offering a smaller talent pool requires several months of expensive training and orientation.
Legal search firms often recognize and have a duty to inform clients that they may be mistaken as to the type of person sought, the salary required to attract them, or the possibilities that the solution might just lie in areas outside the traditional target industries . . . something an internal recruiter is politically disinclined to do. Too many hirers fail to understand that a legal recruiter’s primary function is not necessary to fill a slot, but to provide the right candidate to solve a problem.
Master negotiator Herb Cohen says that, “negotiation is the analysis of information, time and power to affect behavior . . . the meeting of needs (yours and others’) to make things happen the way you want them to.” As a buffer and informed intermediary, legal search firms are better able to blend the needs and wants of both parties to arrive at a mutually beneficial arrangement without the polarizing roadblocks which too frequently materialize in face-to-face dealings.
10. PRIORITIZING COMPANY RESOURCES
It is often amazing to see how much of a company’s revenues are squandered on non-productive perks for existing high-level employees while they penny-pinch on what is every company’s lifeblood . . . talent acquisition.
Club memberships and the like may be fine, but no one with an IQ higher than Forrest Gump’s believes that these expenditures substantially contribute to a company’s profit margin. But one well-placed general counsel save a company a tremendous amount of money. And the fee for having hired these legal counsels pales to insignificance when compared to the contributions they make to the bottom line.
The next time you think a legal recruiter’s fees are too high, put them in the proper perspective before asking for that Blue Light special or spinning your wheels thrashing about trying to fill vital openings with less effective (but not necessarily less expensive) pedestrian methods. Savvy executives learned long ago that the fee paid to a legal recruiter is a shrewd strategic investment, not an extraneous expense. They also know that the “best” is far different from the “best available.”
That said, no need to worry, law firms have a heart after all, and most of them won't seek an across-the-board rate increase. That’s a relief, except for those poor clients who’ll fall in the increase pool. One has to wonder who they are to be deserving of such treatment?
Will legal services be any better in 2010? Will law firm associates be better compensated in 2010? Will fixed costs increase for law firms next year? There are no reports of anything that would indicate changes in the quality of legal services to be provided in 2010. If you’ve read recent reports regarding outsourcing, law firms have been looking at creative ways to offshore legal work at a fraction of the cost. Law firm training has remained relatively stagnant over the years, and there are no changes being proposed by law schools to improve the practical skills of its graduates. The answer here seems rather clear.
As for compensation, if you’re a law firm associate, chances are you will receive a smaller paycheck in 2010. An American Lawyer survey of law firm leaders found that 40 percent of the firms had reduced starting pay for their associates, and 44 percent are considering cuts next year. If you are counting on bonuses, these are disappearing almost as fast as our polar ice caps. They are unlikely to increase overall compensation figures for 2010.
What about fixed fees? Due to intensifying focus on expense control, total overhead expenses decreased 0.6 percent from the previous year in the first three quarters of 2009 according to www.constantcontentblog.com. Law firms cut expenses and saw decreases in the areas of non-lawyer compensation, including occupancy, technology, library, marketing etc. That trend is likely to continue into the New Year. One has to wonder where the impetus for a 3.2 percent increase came from.
Could law firms try to freeze their rates for two consecutive years in a row? Yes, but are they ready to continue to deal with decreased profitability? The answer is evidently no. Partner-per-profit concerns continue to gnaw away at law firm leaders who are scrambling to find solutions to keep these profits from decreasing any further. A 5% partner-per-profit decrease seemed to take law firms into a tailspin of unprecedented layoffs, salary cuts, delayed starts dates, and other cost cutting measures. When Clifford Chance reported a record 30% decrease in partner profits; the news reports were full of dread. Of course, partners still took home a hefty $900,000 a year. That made for fewer sympathetic readers.
When the Am Law 100 showed yet-another-across-the-board 5 percent bump in profitability, you would have expected compensation figures to hit rock bottom. Profits per partner fell by 4.3 percent, to an average of $1.26 million, and revenue per lawyer dropped 1.2 percent, to $818,000. One might argue that if you were already overweight, losing 5% of your body weight is not such a big deal. I guess it's all relative.
If law firms are relying on client goodwill to support this proposed rate increase, they may have to re-think their strategy. According to a recent Reuters press release, for the first time in nine years in-house counsel predict they’ll pay no increase in outside law firm hourly rates. 64 percent said they have implemented or will implement rate freezes. 46 percent of law departments surveyed said they have cut their hourly rates paid to outside counsel, or will reduce their rates. That still leaves a rather significant 36 percent who may go along with rate increases, and 56% who will be requiring as much if not more legal services for 2010, which is probably what law firms are banking on.
I think that GCs are already making adjustments and some tough decisions about hiring, salaries, promotions, staffing, other investments, etc. to ride this wave of economic decline or at least hold the ship steady for at least another year.
When it comes to projected in-house hires; however, the answer may not be as clear-cut. In-house legal departments are continuing to trim the fat and to cutback on legal expenses. Therefore, while hiring in-house lawyers may be a less expensive alternative to outsourcing the work to outside counsels, it remains an expensive proposition. I suspect that these same companies will continue to first enforce internal cost cutting measures before considering hiring more counsels in-house. These internal cost cutting measures will include:
• Increasing the workload of existing in-house counsels
• Increasing staff hires over attorney hires
• Hiring contract attorneys rather than full time attorneys
• Hiring counsels with multiple skill-set (inc. litigation)
• Capping legal budgets, including compensation (salary freezes, no bonus etc.)
When Will This Crisis End? No one seems to be in agreements on this question, which has been on everyone’s lip. We believe that we are unlikely to see any significant turnaround until late 2009 – of course anything can happen, but 2009 may be a year for counsels to remain cautious about their career prospects.
What Practice Areas Will Rise? Will some practice areas fare better than others in a downturn economy? The answer is generally yes, and the practice areas that traditionally enjoy a boost are litigation, bankruptcy, employment, and regulatory.
General counsels are also anticipating an increase in demand for international legal services as companies continue to expand in Asia and Europe, with many noting a particular demand for securities and antitrust services. An increase in international litigation, including arbitration, is also expected.
Healthcare continues to be a practice area that is “recession-proof.” The industry has been booming and so is the legal hiring. The most demand in healthcare area for attorneys with 2-5 years of experience in healthcare transactional, regulatory, and compliance matters.
Intellectual property, especially in the areas of patents and patent litigation, is also a practice area that fares well in either an up or down economy. In-House Legal Departments will most likely take a critical look in this practice area and bring more patent-related work in-house.
Domestically, we are already beginning to see increases in litigation, bankruptcy, and employment law work related to the economic meltdown. It is also certain that the new administration that takes office in January will instigate far-reaching regulatory reforms that will significantly reshape financial institutions and the capital market, and create new legal regulatory work. In-House Legal Departments will initially need to turn to their outside counsels for assistance, but I foresee an increase in in-house hires with regulatory experience.
That said, it is unlikely, however, that any such up tick in legal activity – regulatory or litigation – will substantially counterbalance the loss of work that will continue to result from the overall slowdown in the economy in general, at least during the first half of 2009.
What About Outside Counsels? Companies will be under pressure to control costs in 2009, and according to a 2008 Altman Weil survey of chief legal officers, GCs are planning to decrease their use of outside firms. Accordingly, 26 percent of law departments will decrease their outside counsel, up significantly from 16 percent in last year's survey. Only eight percent of CLOs plan to increase their use of outside counsel, down from 18 percent. That said, companies are still actively hiring outside counsels – but more cautiously and strategically. This may be a very good year for smaller and specialized law firms that offer high quality work at discounted rates.
What About In-House Counsels? Companies are conducting a thorough analysis of outside billings, selecting practice areas that can be moved in-house, determining the capacity of in-house attorneys to handle the work, calculating the cost of adding in-house counsels, and managing expectations about savings from bringing additional work inside the company. As a result, companies who are hiring additional counsels will be primarily focusing attorneys with a combination of regulatory, corporate, litigation, and intellectual property experience.
If companies are considering growing their in-house legal ranks in 2009, no one has been able to consistently predict how many, when and how. Most surveys and reports provide conflicting results as to the number of companies planning to hire in-house counsels in the coming year.
The Altman Weil survey of CLOs conducted in May/June predicted that 49% percent were looking to bring on new attorneys in the next 12 months. However, during a November flash survey by Altman & Weil on department cost control, only 25% of CLOs said they would add new attorneys.
Although the majority of CLOs will look to do more with fewer attorneys, we predict that about 20-30% will hire additional in-house counsels to handle the additional work in-house, and reduce their outside counsel expenses. (See previous posts, Are GCs Ready to Pay Wholesale Rather Than Retail? and 2009 Predictions for In-House Legal Departments.)
What Will This Mean for Compensation? In-house lawyers in larger companies made an average of $236,000 in pay and bonuses in 2008, up from $226,000 in 2007. But 2009 compensation levels will decline as in-house staffing continues to soften.
Of those companies not cutting lawyer compensation, we can expect the majority of salaries to remain at status quo, and a minority to increase by a lower margin. We expect a maximum 5% increase in base salaries for 2009, over 8% in 2008, and 10% in 2007.
Bonuses will be the hardest hit, and when you consider that in house they make up for nearly 50% of one’s compensation package, this will hurt. We predict very few, if any, bonuses to be paid out for 2009.
What About Outsourcing and Offshoring? Will recessionary pressure to reduce legal costs push more companies to ship work overseas? Despite doubts and controversy, companies are spending more on legal process outsourcing (LPO) every year. A recent report by the Indian business research company ValueNotes estimates that spending on legal offshoring to India doubled from $62 million in 2006 to $124 million in 2007 (See Will Tough Economy Push Companies to Outsource Legal Work? by David Hechler, Corporate Counsel, December 22, 2008).
What about 2009?
The key to an increase in legal outsourcing will not only turn on savings which are considerable – billable rates range from $20 to $40 per hour – but rather on quality. Companies are not only looking for cheap rates, but for quality work that is equivalent to work delivered by U.S. outside counsels. Can LPOs deliver? The answer is yes, for certain type of work that can be commoditized such as research, analysis, and document reviews. Whether LPO’ will be able to deliver on more sophisticated legal projects remains to be seen, but I think it’s only a matter of time before they begin to be competitive on other projects.
In the meantime, legal outsourcing of commoditized work can mean significant savings for a number of companies, and could force law firms to continue to adjust. In an era where CLOs are looking at all kinds of cost saving measures, this is solution that legal departments can’t afford to overlook in 2009.
In the face of this economic downturn, are GCs ready to pay wholesale rather than retail for legal services? Companies will be under pressure to control costs in 2009, and according to a 2008 Altman Weil survey of chief legal officers, GCs are planning to decrease their use of outside firms, which will translate into more work in-house.
While bringing more work in-house has proven to be cost-efficient for companies, the majority of GC’s seem nevertheless reluctant to hire additional in-house counsels. Doing more with less appears to be the preferred approach. However, the majority of in-house legal departments are already thinly staffed (declining from 4.2 to 4.7 lawyers per billion dollars of U.S. revenues to 3.8). An onslaught of legal work may not only create inefficiencies, but also expose companies to a myriad of problems associated with understaffing. Moreover, companies' reliance on outside counsels will not be substantially reduced if in-house legal departments are ill equipped to handle the increased workload.
If companies are considering growing their in-house legal ranks in 2009, questions regarding how many, when, and how remain. Most surveys and reports provide conflicting results as to the number of companies planning to hire in-house counsels in the coming year. Throughout May and June, Altman Weil surveyed chief legal officers and one of the questions was about hiring new attorneys in the next 12 months. At that time, 49% percent said they were looking to bring on new attorneys. However, during a flash survey conducted by Altman & Weil on department cost control in November, only 25 percent said they would add new attorneys.
Why more companies are not adopting the basic cost-benefit approach of hiring more lawyers in-house is disconcerting. Management may be understandably reluctant to outlay the financial resources to recruit and hire more attorneys in time of budgetary constraints, but adding in-house lawyers is cheaper in the long run than paying increasingly rising outside attorney fees.
Companies can hire experienced in-house lawyers for an average of $150,000 to $200,000 per year – that’s 236-314 hours for the use of a law firm associate on average, or 176-235 hours for the use of a law firm partner on average. Assuming your in-house counsel works 50-hours a week, the hourly cost of your in-house counsel comes to about $57 per hour (compared to an average of $635 for a law firm associate, or $850 for a law firm partner). Your in-house counsel can also provide your company with an average of 2600 hours of legal services per year, or about ten times what your outside counsel can provide for the same amount of money. You do the math; the savings are considerable.
In addition to the compelling cost-analysis argument for hiring more in-house lawyers, the addition of in-house counsels can provide companies with other added benefits. In-house counsels typically understand a company’s business and overall strategy better than outside counsels who are one step removed from the decision makers. As a result, they understand the context of the legal issues that affects their companies and can provide more value in their abilities to formulate solutions and choose courses of actions that are designed to further company goals. In-house counsels retain institutional knowledge and are invested in their company’s success. They are typically better suited to provide the kind of legal advice that will assist a company meet its business objective in the most cost-effective and efficient manner.
Can companies completely do away with outside counsels? Not likely. In certain instances, companies are still better off relying on law firms. Companies should continue to turn outside counsels in highly specialized practice areas or with respect to substantial litigation matters (i.e. high-stakes, bet-the-company patent matters, or IP litigation). Most legal departments, including the largest ones, generally do not have the capacity or the infrastructure to handle either large-scale litigation or large M&A matters completely on their own. This too could change in the future, but for now, companies should continue to seek the assistance of law firms with respect to these matters on negotiated rates.
The cost-benefit analysis is clear: hiring more in-house lawyers means considerable savings on legal expenses. Can your current legal department handle more work with fewer resources? GC’s and management need to be realistic about what an increase in the quantity of work will mean in terms of quality. Moreover, there has never been a better time for companies to hire attorneys – legal positions are scarce, law firms are shedding associates and non-equity partners, bonuses are down and salaries are flat. Making an investment now in the company’s legal department may be one of the smartest moves to be made.