The tendency among law firms is to look at factors involving the client as their first option to improve profitability. As I speak with leaders from law firms of all sizes around the globe, I hear many of the same questions: How does speed of billing impact my firm鈥檚 profits? and What are the average write-off clients are asking for on invoices? or What is the average discount that firms are offering to arrive at their agreed-upon rates? And, perhaps most frequently, Do you have any suggestions for how I can get my clients to pay a higher percentage of their invoice?

Each of these questions have a common element 鈥� they all focus on the client. Now, it鈥檚 not a bad idea to focus on clients in any aspect of a law firm鈥檚 business; however, we must also acknowledge the reality that each of these questions must necessarily involve a change in the client鈥檚 behavior or mindset to affect a positive outcome for the law firm. That is an incredibly difficult outcome to make happen.

Of the common questions I listed, the last one is, perhaps, the most interesting. It鈥檚 actually the one that comes closest to what I think is the most direct solution to the problem.

Improving realization

Let鈥檚 rephrase the question. Instead of focusing on how to get clients to pay more, what if we asked, How do I improve my firm鈥檚 realization against the rates we charge? Now we鈥檙e on to something. This begs a return question, What kind of realization are you talking about? Do you mean realization against the invoice or realization against what the client originally agreed to pay you? Those two aren鈥檛 necessarily the same.

Why not? Because realization against the invoice only involves the client鈥檚 behavior inasmuch as they ask for a write-off or discount on the invoice. Realization against the agreed-upon rate involves a crucial and much more influential step in the form of pre-bill adjustments, more commonly known as write-downs.

We have written frequently on the topic of write-downs by law firms, including discussing the impact of write-downs on profitability at length. Write-downs by law firms present a much bigger impediment to law firm profitability than do client-driven write-offs or discounts. Yet law firms consistently look at the client as the way to solve the problem.

I have worked with law firms and their data closely, examining on a case-by-case basis what is impacting their ability to improve realization. In nearly every case, the amount that profitability is impacted by firm-initiated write-downs dwarfs the total amount of client-driven write-offs.

We can look at this problem in terms of fees worked (what goes into the time and billing system), compared to what is billed, and then compared to what is worked. It鈥檚 not uncommon for firm-initiated write-downs to account for between two-thirds and three-quarters of the total erosion from fees worked to fees collected.

Finding the easy button

And that is where we find the easy button for law firm profitability. By looking closely at the behaviors and mindsets that contribute to firm-driven write-downs, we can start to unpack a solution for how to turn this situation in the firm鈥檚 favor.

In fact, the legal industry as a whole did exactly this in 2020 and 2021, albeit inadvertently. During that time, firms became hyper cash conscious. Their close monitoring of the collections process led to an uptick in billing realization across the industry, and law firm collections followed in near parallel. By 2022, much of the intensity of that focus had softened and realization started to decline once again. But the precedent had been established 鈥� law firms could drive improvements in realization through a focus on internal billing practices rather than focusing first on the clients.

The importance of getting internal practices in proper shape first and foremost really can鈥檛 be overstated. First, improving internal practices has been shown in myriad examples to have a near-immediate and positive impact on realization rates and, therefore, firm profitability. Second, it鈥檚 far easier to influence behaviors within one鈥檚 own shop than to try and change customer or client behavior as an outside firm.

Let鈥檚 close with an analogy. Instead of a law firm, let鈥檚 think about a company that makes widgets. This company wants to improve the percentage of widgets it sells relative to the number it produces. More than 90% of what gets shipped to stores sells, but only about 85% of what gets made ever gets shipped. Wouldn鈥檛 it make more sense to look at why so many widgets never get shipped out of the warehouse?

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Following sustained expectations of growth in corporate legal spend since the pandemic, key in-house legal decision-makers are becoming more cost-conscious. For law firms, that means the commercial value of the advice they can offer 鈥� from both a business and sector perspective 鈥� is becoming a more important part of their own value proposition and can play a key role in helping law firms avoid rate erosion or discounting.

Indeed, it is critical for law firms to understand the strategic weight that in-house legal professionals are giving to certain concepts, many of which are often reactions to shifts in social, economic, and geo-political behavior.

How have strategic priorities changed among clients?

While many key priorities of corporate general counsel have remained the same, there have been a few critical shifts of which law firms must be aware if they want to effectively deliver what is of value to their clients. While factors such as controlling costs, finding efficiencies, and protecting the overall company from risk remains the fundamental concerns of in-house legal professionals, there have been some shifts in some strategic priorities. And one of the biggest shifts in strategic priorities among in-house legal professionals since 2019 is that many corporate clients are looking to simplify their internal legal processes.

While clients still place some importances on the day-to-day advice being offered by their outside counsel, for example, law firm leaders should know that this perceived importance has waned since the pandemic. And for outside lawyers, this makes it all the more difficult to maintain strong points of contact and engage in discussions about company strategy.

Indeed, as corporate general counsel become more proactive and less reactive in their approach, reducing their organizational need to outsource legal work, such as regulatory compliance, to law firms, law firms need to adapt to this reality and understand GCs efforts to limit the financial burden of the legal department on the wider organization. Therefore, to remain top of mind, an outside law firm must look for ways to serve these needs and ensure that client engagements are conducted from the perspective of a strategic business partner, not just as an outside legal advisor.

What can law firms learn from C-Suite executives鈥� perspective?

Another way law firms can more deeply understand the legal needs of their corporate clients 鈥� and especially find ways to offer the most valued advice 鈥� is by understanding how C-Suite executives see the role of their internal legal function. In some areas, business leaders鈥� expectations are largely in line with the priorities of their in-house legal professionals, particularly when it comes to driving efficiencies within operations through the adoption of new technology.

However, there are notable differences in business executives鈥� perspective, and how legal departments describe their own reality, as shown in the 成人VR视频 Institute鈥檚 recent 2024 State of the Corporate Law Department report. In-house legal professionals emphasize their role in safeguarding the business, through overall risk management and understanding the impact of regulations to the organization. Yet, C-Suite-level executives think that those in legal departments should be focusing their attention on the effectiveness of the overall business in both serving its customers and retaining top talent.

While many key priorities of corporate general counsel have remained the same, there have been a few critical shifts of which law firms must be aware if they want to effectively deliver what is of value to their clients.

So, what are outside law firm supposed to take away from this misalignment in expectations? It is far from surprising and is largely influenced by those internal biases which are influenced by the responsibilities individuals hold. If law firms want to help GCs and legal department heads be seen as strategic partners to top leadership, it is vital for outside lawyers to have as holistic a vision of the company鈥檚 overall business as do internal leaders.

This way, law firms can best determine their course of strategy, whether they should be leaning into efficiencies or technological innovations in their own legal delivery that could benefit the client, or helping the client develop new businesses or markets or expand existing ones.

For law firms, this strategy could raise their own profile among client leaders even as it helps provide clients鈥� legal departments with greater influence within their own C-Suite.

Positioning the relationship and differentiating from the crowd

To this end, law firms should position themselves to support the ambitions of their most important decision-makers within their top legal clients, especially those who oversee the law firm hiring process.

Indeed, successful execution of this strategy is where a law firm can both differentiate itself from the crowd offering fundamental expertise and instead begin making an impact in areas in which their clients are laser focused: proactively managing risk and ensuring cost control through efficient application of legal advice while bringing strategic direction into the legal department鈥檚 operating environment. Most importantly, law firms will need to consider how they can demonstrate the breadth and quality of their services in a competitive legal market focused on clients鈥� needs.

As clients have put less focus on the day-to-day advice they receive from outside law firms, diminishing what was once considered a prominent part of the value of the legal services provided, law firms have to adapt. Today, a heightened focus on cost control and risk mitigation are concepts which are much closer to home for the in-house legal department and its overall business 鈥� and law firm鈥檚 service offerings should reflect that.

In today鈥檚 legal market, value is becoming increasingly conceptual. Law firms must spend the time to position themselves as an internal stakeholder and bring solutions to issues with which they weren鈥檛 once involved. Indeed, this might feel like a step away from the historical path of the legal profession, but for those law firms that are dynamic and able to stay light on their feet amid times of change, today鈥檚 environment may be a place to shine.

For deeper insights around how law firms can address their clients鈥� top strategic priorities in 2024 and beyond, .

Recordkeeping is a core competency for financial services firms. It encompasses a firm鈥檚 knowledge of what data or records it has, why it has them, and where they are. It also covers keeping those records secure and unaltered. Without a comprehensive and robust approach to recordkeeping and an associated data governance plan, firms will simply not be able to either fulfil or show evidence that they have met compliance obligations.

Firms are utterly reliant on their records to be able to act on everything from responding to regulators鈥� requests for information, meeting reporting requirements (internally as well as externally), investigating a complaint, keeping sensitive customer information secure, to undertaking supervision and surveillance.

Trade surveillance failures聽

In March, the U.S. Office of the Comptroller of the Currency (OCC) and the U.S. Federal Reserve Board a combined total of $348.2 million for 鈥渄eficiencies in its trade surveillance program鈥� and 鈥渁n inadequate program to monitor firm and client trading activities for market misconduct.鈥�

The OCC鈥檚 and the noted that the firm鈥檚 trade surveillance program was found to have operated with 鈥済aps in venue coverage and without adequate data controls required to maintain an effective program.鈥� As a result, the firm failed to oversee billions of instances of trading activity on at least 30 global trading venues.

As part of the findings, the OCC made a key point of the need for the firm to implement robust data governance as part of swathe of required corrective actions. Critically, the firm will not be able to on-board new trading venues unless or until the examiner-in-charge provides the firm with a prior written determination of no supervisory objection. Other corrective actions included requiring the firm to form a Compliance Committee to manage the corrective actions and conduct a look-back review of the data deficiencies. Also, the OCC imposed a series of specific responsibilities on the firm鈥檚 board for the oversight of the remediation.

As a root cause, the trade surveillance failures were due to a lack of upstream recordkeeping and data capture. Without the source records, the firm was incapable of undertaking the required trade surveillance.

Personal liability for bank CEO

In January, the UK鈥檚 Prudential Regulation Authority (PRA) 拢118,808 for breaching three PRA Conduct Rules. The PRA found that the former CEO failed both to act with due skill, care, and diligence, and to take reasonable steps to ensure that the bank had adequate systems and controls in keeping with PRA recordkeeping requirements. As part of the settlement, the former CEO attested that he will not re-enter the UK financial services field 鈥� a de facto ban.

The personal liability enforcement action follows, the PRA鈥檚 sanction that was in April 2023, in which it was censured for wide-ranging significant regulatory failings, including, for the first time, failure to capture and retain WhatsApp messages. The seriousness of the breaches justified a fine of more than 拢8.51 million. However, since the bank is winding-down its operations, the PRA imposed a public censure as a warning shot to the financial services industry more broadly.

The importance of recordkeeping was reiterated by the regulator making plain that inadequate recordkeeping hinders a firm鈥榮 ability to prudently manage risk, and also hinders the PRA鈥檚 ability to investigate that firm. Specifically, the bank was found to have not adopted or implemented any policies and procedures in relation to the retention of business-related correspondence and records. It consequently had no formal recordkeeping policies or procedures in place to manage or retain electronic messages such as WhatsApp messages or iMessages.

The PRA was clear that a CEO has a 鈥渃rucial role鈥� to play in ensuring their firm meets the standards expected of it and requires the relevant individual to exercise sound judgment. The standard required of the CEO as Senior Management Function 1 (SMF 1) 鈥渨as consequently more exacting than for the Firm鈥檚 other SMFs and Employees.鈥�

Other incidents

In March 2024, the Financial Industry Regulatory Authority (FINRA) in the same group $150,000 each for failing to establish and maintain a supervisory system, including written supervisory procedures that are reasonably designed to safeguard customer records and information.

The capability to keep records and data secure and unaltered is another aspect of recordkeeping and one which firms need to ensure is fully embedded in all of their business activities.

Also in March, the U.S. Commodity Futures Trading Commission (CFTC) fined another two firms for off-channel communications. A $6 million, and an $1 million for failing to maintain and preserve records. The orders found that both firms failed to stop employees 鈥� including those at senior levels 鈥� from communicating by using unapproved communication methods, including messages sent by personal text.

Each order further finds that the firm-wide use of unapproved communication methods violated each firm鈥檚 internal policies and procedures, which generally prohibited business-related communication over unapproved methods. Both firms were among by the U.S. Securities and Exchange Commission for, again, the use of off-channel and unpreserved communications. The additional penalties add to the $2.6 billion already levied for failures to maintain and preserve electronic communications 鈥� another crystal-clear reminder of the continuing regulatory focus on recordkeeping.

Recordkeeping as core competency

All aspects of recordkeeping are an expected core competency for financial services firms. Only with a complete, native context, secure, but accessible data set can firms begin to fulfil all relevant compliance obligations but also gather insightful strategic management information.

Recordkeeping and the associated required data governance can only begin with the upstream capture and retention of all relevant records and data points. Indeed, only with recordkeeping robustly in place up-front, can downstream compliance and security activities be comprehensively assured.

Yet for all the talk around increasing collaboration and institutionalizing client relationships, many law firms largely miss the mark in building effective cross-functional teams. Indeed, there are several key points that are most frequently absent from the discourse around collaboration in law firms.

Strong collaboration can increase your share of client business

Client institutionalization is the degree to which a client is integrated into a law firm’s services, culture, and network. Client institutionalization matters because it leads to higher client loyalty, retention, and satisfaction. Most importantly, it increases the share of wallet that a client spends with a specific firm.

Collaboration is the most powerful driver of client institutionalization. According to 成人VR视频’ research, clients who identify collaborative teams within an outside law firm spend an average of 56% of their wallet at that firm 鈥� more than twice the average share of spend received by the firms that clients use the most.

Inherently, most law firm leaders 鈥� and lawyers themselves 鈥� understand that working together across the firm to better meet client needs will also build stronger and more lasting relationships. However, because the benefits of collaboration are intuitive and there鈥檚 a built-in desire to leverage collaboration, firms tend to neglect addressing exactly how they plan to collaborate.

Increased collaboration requires structural & cultural change

Collaboration is an intentional effort that law firms need to make. Without an intentional approach to collaboration, most firms end up with social collaboration 鈥� or an environment of collegiality in which lawyers enjoy working with other people in the firm, but don鈥檛 do so in a manner that seeks to grow client relationships.

So, why don鈥檛 lawyers collaborate organically? There are two main types of barriers to collaboration: structural and cultural.

Structural barriers

Structural barriers are those that relate to the physical or organizational aspects of the firm that hinder collaboration, such as geographical or technological challenges could impede working together. For example, lawyers who work in different offices or regions may have less opportunities to interact and build relationships with each other and may face challenges in coordinating and communicating across time zones.

Further, lawyers who lack the tech tools or platforms to facilitate collaboration 鈥� such as knowledge management systems, project management software, or video conferencing 鈥� may find it harder to share information, expertise, and feedback with their colleagues.

Yet for all the talk around increasing collaboration and institutionalizing client relationships, many law firms largely miss the mark in building effective cross-functional teams.

To overcome these structural barriers, law firms need to invest in the infrastructure and technology resources that enable collaboration. Indeed, many law firms that have stronger levels of collaboration have invested in technology that supports collaboration, such as client relationship management software, internal knowledge management systems, and well-organized intranets. These technologies can help lawyers access and share information, communicate, and coordinate with their colleagues, thereby delivering more efficient and consistent service to their clients.

Also, many law firms would greatly benefit from a more formal mechanism to bring their lawyers together from across disciplines. Lawyers naturally tap into others with similar expertise when they need additional support on matters and are less likely to look across practice areas and work types. By developing industry sector teams or key client teams, law firms can provide a structure for all their lawyers to develop a deeper understanding of clients’ specific needs, identify opportunities for cross-selling, and leverage the collective expertise and experience of the firm.

Cultural barriers

Cultural barriers are those challenges that relate to the attitudes or behaviors that lawyers have towards collaboration, including selfishness or individualism and a lack of trust in the process.

Many lawyers may prioritize their own interests or goals over those of the firm, especially in situations in which they may perceive that a shared approach may threaten their autonomy or compensation. Further, a lawyer鈥檚 reputation is of utmost importance and handing a client over to another lawyer with whom they are unfamiliar can be daunting. Fear of another lawyer delivering inconsistent quality or service is one of the most common barriers preventing collaboration.

Overcoming these sensitive cultural barriers, especially if they鈥檝e unfortunately become the default attitude in a firm, is likely to be met with resistance by some of the firm鈥檚 lawyers and staff. However, there are solutions to this problem, such as financial incentivization, which aligns compensation and reward systems with collaborative activities, such as cross-selling, referrals, or teamwork.

Law firms also need to foster trust throughout their workforce by showing consistency. Indeed, as with many of the approaches already discussed, those law firms more effective at delivering a consistent quality of advice and service do so through formal initiatives, such as instituting client service standards and monitoring perceptions of consistency through client feedback programs.

Collaboration is an individual and firmwide effort

Even when firms build in better mechanisms to support collaboration, the reality is some individuals are less inclined to collaborate than others. Only about one-third of lawyers are high collaborators 鈥� those who are substantively more inclined to work with other lawyers across their practice and with lawyers in other practices, according to 成人VR视频 Institute鈥檚 research.

Those who don鈥檛 enjoy collaboration often can鈥檛 easily be forced to do it well. Leaning into those who are naturally inclined can both support efforts at client institutionalization while ultimately laying the groundwork for more satisfied lawyers.

To overcome these structural barriers, law firms need to invest in the infrastructure and technology resources that enable collaboration.

Firms should conduct an assessment of their lawyers to help identify which are more naturally inclined to collaborate and find out what they like about working in this way. Then, firms should identify those lawyers who enjoy the level of freedom and independence the firm provides, because they are likely not best suited to lead client teams and are less likely to enjoy collaboration. Instead, firms should place those who share a positive view of collaborative or cooperative work within the firm in that role.

When lawyers can work in a way that suits their natural preferences 鈥� whether more collaborative or more independent 鈥� they鈥檒l ultimately be more satisfied. To find out this information, firms should query their lawyers to better understand which barriers most are impeding their ability to collaborate and solutions.

For example, if a lack of trust seems prevalent among a firm鈥檚 lawyers, it should consider conducting a client feedback study to assess consistency in service and quality, thereby building its lawyers鈥� confidence in each other. Or, if understanding a firm鈥檚 resources is a challenge, firms could build educational programs and technology solutions that help their lawyers better understand and tap into colleagues鈥� expertise.

As seen, there are several important methods by which law firms can leverage data and other solutions to help overcome structural and cultural barriers to collaboration, ultimately supporting those strategies that could then drive the firm toward better performance.

You can explore what metrics are alongside key benchmarking data.

The challenges posed by considerable distances and time zone disparities in cross-continental operations are undeniable. Before the COVID-19 pandemic, cost reduction efforts led many companies to seek suppliers in distant destinations, with Asia being one of the most attractive hubs. However, global supply chain disruptions originating from the pandemic were proof that these challenges can end up negatively impacting the efficiency of production processes. With nearshoring, businesses aim to mitigate these issues by bringing outsourced production centers closer together, thereby enhancing collaboration and addressing logistical obstacles much easier.

There has been a clear and growing trend of companies nearshoring their manufacturing operations to Mexico. A recent study from the Mexican Institute of Competitiveness found that linked to the relocation of supply chains in Mexico grew 47% during the first three quarters of 2023. For Asian companies, Mexico has become a very interesting alternative and a way to avoid the geopolitical conflict between the United States and China. 聽have already established themselves in Mexico, with those of Chinese origin having the greatest presence. Further, experts anticipate these numbers will increase in the coming years, predicting that Mexico has the potential to attract due to this phenomenon.

The impact of nearshoring

Not surprisingly, nearshoring has introduced both challenges and opportunities for law firms in Mexico. Most of the businesses that come to Mexico to embrace nearshoring are foreign companies that in some cases are not completely aware of the country鈥檚 legislation, culture, and business dynamics, explains , a legal expert in competition, antitrust, and international trade. This provides a great opportunity for lawyers to help clients navigate their nearshoring projects successfully within the legal landscape.

According to Garza, clients are coming in different shapes and sizes. Clients and their projects are unique, each with a different scope, industry, project stage, and market objectives. Therefore, lawyers advising these types of companies need to understand that there isn’t a one-size-fits-all template or framework that can be applied universally, and instead they must approach each project on an individualized basis with custom-made solutions.

The need to collaborate

In the context of nearshoring, legal guidance requires strong teamwork between legal practitioners with experience in different fields and practice areas. Garza describes how several legal practice areas have been the busiest, due mostly to legal work around the relocation of supply chains. Additionally, she considers the coordination among these practice area lawyers to be fundamental in order to serve companies in the best possible way:

Corporate 鈥� It is common that one of the first steps in these types of projects is to establish a legal entity. Lawyers need to inform their clients about the various types of companies that may be incorporated in Mexico, along with the rights and regulations that are involved. Selecting the correct corporate structure is a key factor for creating a successful business in Mexico.

International trade 鈥� Mexico is party to many free trade agreements (FTA), and it also offers diverse manufacturing and export promotion programs with interesting and attractive benefits for investors. In addition, if companies wish to export their final goods into the US or Canada, it is crucial that their businesses operate within the regulatory framework of USMCA 鈥� the trade agreement between the US, Mexico, and Canada 鈥� which has stronger terms compared to the NAFTA. Understanding how these treaties and programs apply to a client can make their operational processes more efficient and reduce significant costs.

Labor 鈥� Most of the projects that embrace nearshoring involve manufacturing, which of course, is known for being labor intensive. Given this, foreign businesses need to be aware of every aspect of Mexican labor law, including Social Security rules, profit-sharing, employee benefits, working hours, minimum wage payments, issues with unions, a ban on outsourcing, workers housing fund, and others.

Real estate 鈥� With 32 states in Mexico, each having distinct legislation and tax incentives to attract investment, the selection process for the project鈥檚 location becomes pivotal. Also, consideration of geographical factors, infrastructure, and availability of resources, such as water and energy, holds significance as well. Following the decision on a project’s location, conducting proper due diligence becomes imperative to ensure that the intended land acquisition adheres to the necessary legal permits for purchase or lease. Otherwise, an evaluation may be necessary to determine the steps required to meet these conditions.

Tax 鈥� This aspect becomes fundamental in order to determine the level of profitability for a project. Lawyers can play a significant role in designing optimal fiscal schemes that comply with Mexican tax laws and benefit from certain double-taxation agreements.

Compliance 鈥� Due to the nature of nearshoring, compliance extends beyond adherence to the company鈥檚 governance guidelines and rulings, and domestic laws; it involves aligning with the regulations of the countries encompassed within the entire supply chain and the FTAs involved. This entails monitoring the journey of raw materials and final products manufactured in the project, from their origin to their eventual destination.

Environmental, social & governance (ESG) 鈥� Comprehensive legal advice on nearshoring projects also must include guiding companies through the best international practices in ESG matters.

Foreign firms have come to Mexico to establish factories for decades; however, the projects coming in this new wave demand more complex and sophisticated solutions. These projects need to be integrated into global or regional value chains, and it is typical for the manufactured products in Mexico to be exported and commercialized elsewhere. Therefore, lawyers need to supervise every stage in the product supply chain and verify that the complete operational process aligns with the laws of the all the countries involved, including those of the final market.

Garza said that, in order for these projects to be successful, joint efforts from different practice areas and jurisdictions are indispensable. Lawyers have to transcend the mere comprehension of the Mexican legal framework and work with lawyers in other parts of the world. Additionally, they should take into consideration fast-changing global trends, technological advancements, and of course, the rise of artificial intelligence.

Looking ahead

The coming months are critical for law firms to leverage this nearshoring phenomenon by specializing further, coordinating efforts, and adopting an international perspective. The role of lawyers is not only to provide legal advice but to fortify incoming companies in all aspects, fostering a welcoming and well-advised environment for their ambitious business goals.

The recent development of nearshoring, accelerated by the COVID-19 pandemic and disruptions in global supply chains, demands a proactive approach from law practitioners. The legal community in Mexico stands at the forefront of this transformative trend, sensing legal needs and preparing to navigate the complexities of nearshoring while contributing to the creation of successful and sustainable supply chains.

I鈥檝e written before about the conundrum of lawyer productivity as a measure of inputs rather than outputs, which is a more typical view of productivity among businesses. Now, however, the advent of generative artificial intelligence (Gen AI) and its myriad potential implications for how legal work is done, requires a reexamination of the definition of lawyer productivity.

In the most recent Report on the State of the US Legal Market, we looked at a more discrete measure of lawyer productivity than has been featured in past reports. Rather than looking at lawyer productivity as a measure of hours per lawyer per month, we instead showed a metric called average daily demand 鈥� essentially, the average number of hours put into billing by the average lawyer on a daily basis. By this measure, no segment of law firms we鈥檝e tracked managed to even match, let alone surpass, the average daily demand figure for 2022, and each law firm segment was dramatically behind their 2021 figures.

With the potential benefits that Gen AI may hold for improving work efficiency, particularly around more repetitive tasks, the question arises: Might 2021 have been the last peak for the billable hour as a key metric?

To be sure, there has been a plethora of pieces in the legal press (including on this blog) over the years predicting the 鈥渄eath of the billable hour.鈥� I鈥檓 not so much talking about the billable hour鈥檚 demise as its relegation.

The full impact of Gen AI remains to be seen, but given the number of proponents and innovators driving it forward, the idea that it will have little to no impact on the delivery of legal services seems unlikely. While Gen AI may never replace an experienced attorney鈥檚 judgment in negotiating a transaction or drafting a legal pleading, it will almost certainly replace hours that lawyers currently dedicate to tasks like research, cite checking, and perhaps even brainstorming to a certain extent.

Replacing rote tasks

These types of innovations aren鈥檛 new. When I was a clerk at the Minnesota Court of Appeals, standard practice was for all cite checks to be done in the books in the law library, a painfully time-consuming process. Today, every lawyer has access to tools right in their word processing software that will perform the same cite-checking tasks instantaneously. Technology has essentially fully replaced an essential but low-value task. Examining a typical lawyer鈥檚 workday today, it is not hard to compile a list of other potential tasks, both legal and administrative, that are ripe for the same sort of replacement.

While increasingly disallowed by clients鈥� own outside counsel guidelines, rote tasks still account for an appreciable portion of the average lawyer鈥檚 billable hours, particularly for associates. As those tasks are replaced by AI-driven innovation, the hours will similarly disappear. So, this raises another question: Will lawyers be able to find new tasks to fill those now-vacant hours, thereby buoying the current productivity metric, or will the market need to look for an alternative metric to more accurately capture the legal work being completed?

Shifting the concept of productivity towards tasks-completed and away from a reliance on hours-entered seems appropriate, if not overdue. Certainly, some types of work and even some matter types like litigation will still be largely viewed through the lens of hours worked. Even within those categories, however, there will be examples of work that will be more properly valued by the fact that such tasks were completed, rather than by how long it took to complete them.

The myopic view of attorney productivity as solely a function of hours-input needs to be revisited. It likely will not be replaced by one single metric, but rather by a combination of metrics that more accurately reflect the actual work being done. Time spent arguing in court or negotiating a deal will continue to be valuable in its own right, of course; but in contrast, time spent drafting or proofing documents will likely diminish as AI steps up to take on more of a role.

And ultimately, the better measure for a lawyer will become not how much time was spent doing a task, but rather, how much the lawyer鈥檚 efforts contributed to the prosperity of the firm and the benefit of the client. Exactly what metrics should take the place of today鈥檚 measure of productivity is likely something we鈥檒l be exploring much more throughout 2024.

At the same time, both tax & accounting and legal services providers have a ways to go in executing their own internal ESG strategies, even as client demand for this information through the procurement process is exploding. Indeed, I constantly have to remind firms that their own house has to be in order, because one of the first questions a prospective client is going to ask is, 鈥淲hat are you doing for ESG within your own firm, if you are here to advise me?鈥�

The good news is that tax & accounting and law firms already have experience to lean on as they create a holistic ESG strategy. Indeed, clients have been asking for firms鈥� demographic data around diversity, equity & inclusion (DEI) for at least the last five years. In fact, DEI information is a major portion of the social or S part of ESG; and the expertise among accountants and CPAs involves many areas of the governance or G, it鈥檚 easy to see how the creation of a comprehensive ESG strategy is not as daunting as it seems.

Areas of priority to create a holistic ESG strategy

The two most urgent areas of focus for both law firms and tax & accounting firms in this area are: i) formalizing a material assessment, and ii) calculating greenhouse gas emissions (also referred to as carbon emissions) when they are assessing their gaps in client service offerings and consolidating existing activities around ESG issues into a complete strategy.

Identifying material issues 鈥� A materiality assessment exercise involves collecting feedback on material issues across all a firm鈥檚 stakeholders 鈥� including future, current, and past partners; associates and business services staff; clients; charitable organizations; and suppliers. Going through this process helps the firm identify the issues of greatest importance that should be prioritized for the firm鈥檚 own ESG strategy.

Carbon emissions calculations 鈥� Often, the biggest area of priority for tax & accounting and legal services providers is the environmental or E part of the equation. More specifically, calculating carbon emissions is the most urgent task, and it does involve some effort. The graphic below shows the typical sources of carbon emissions for tax & accounting and law firms.

Challenges may slow positioning

The process of creating and executing an ESG strategy does not come without its challenges, of course. One of the main challenges that I see often as part of the governance part is the partnership business model. Partnerships in general are very lax when it comes to governance because often, partnership relationships get in the way of the creation and execution of proper procedures and policies.

Another barrier to progress is that the necessity to create an internal strategy may not seem urgent to internal leaders because in the grand scheme of things, the carbon footprint of accounting and legal firms is small when compared to other industries, such as transportation companies and manufacturing.

To get around this perception, I often highlight that the expectations of clients 鈥� especially those who use the greenhouse gas protocol, which is the go-to methodology for companies in calculating greenhouse gas emissions 鈥� is that all businesses should seek to reduce their fair share of carbon. For example, an accounting firm and a manufacturing company are expected to reduce their carbon footprints by 90% in order to get to net zero, no matter their baseline 鈥� 90% is still 90%.

Challenges around varying preferences of generations among employees and the political environment in the United States are two additional barriers to progress that firms currently are facing. Younger workers may see ESG and reducing a firm鈥檚 carbon footprint as a huge business opportunity and a great goal to pursue as part of the firm鈥檚 larger commitment to healthy communities and habitats. The older worker cohort, by comparison, may lack the same enthusiasm.

Regarding the political environment, all firms should be cautious in the language that is used to pursue or explain ESG goals, making sure the goals are perceived as a framework to consider business risk and opportunity 鈥� not positioned as an ideology. A year ago, this was not a major concern.

On the horizon

The momentum for ESG will only accelerate despite the current headwinds. Indeed, client expectations about firms鈥� ESG strategies are currently much more strident in the United Kingdom and European Union because of pending disclosure requirements. For example, a client has to report on the carbon footprints of its suppliers, which is referred to as Scope 3, to meet regulatory requirements in certain jurisdictions.

While the U.S. Securities and Exchange Commission鈥檚 proposed rules to require companies to collect and report their suppliers鈥� carbon information are not yet finalized, disclosure of Scope 3 carbon emissions is already a mainstream expectation of many stakeholders. Indeed, the U.S. rules are almost irrelevant for virtually all global companies because such disclosure is already required in the E.U. and the U.K. For example, law firms tax & accounting firms that advise or provide services to multinational clients will be required to calculate and share their own carbon footprint as a supplier to these major public companies.

The accounting and legal professions are in a unique position to do something positive about the challenges we are facing in society 鈥� everything from the climate problem to governance issues to data collection, data security, and more. These are the professionals who have the skills, the talent, the expertise, and the connections to address these problems; but they have to walk their talk. And that means focusing on creating and executing their own internal ESG strategy with just as much enthusiasm as they put into going after the tremendous business opportunities of ESG advisory work.

While 2023 seemed to be off to a strong start, the collapse of several regional banks, continuing war in the Ukraine, and the uncertainty wrought by rising interest rates have both clients and law firms a bit uncertain about the direction of economic trends. It鈥檚 not clear where overall demand will come in for the first quarter; and while expenses continue to increase, they are offset somewhat by rising rates that firms are able to charge. This heady mix makes continued revenue growth even more important.

On the client side, demand for legal services is projected to remain strong 鈥� 41% of clients say they plan to increase legal spending this year, and only 20% expect legal spending to decline. Clients are also looking for legal advice to be delivered in combination with significant industry and sector knowledge, noting that advice presented along with commercial context has more worth than that same advice presented in a vacuum.

Law firms鈥� marketing & business development teams, of course, play a significant role in turning these projections into actual revenue. But much of marketing & business development was turned upside down by the pandemic. With the temporary loss of in-person marketing channels such as events, many marketing & business development teams were forced to experiment with new types of digital outreach, and they are now in a position to better compare their effectiveness.

On average, law firms are allocating 1% to 2% of revenues to marketing & business development budgets. CMOs are right to wonder if that鈥檚 adequate. Along with those budgets come admonitions to get creative and of course, do more with less, even though live events 鈥� generally quite expensive 鈥� are coming back into the marketing mix.

Balancing the short- and long-term

To meet that mandate, CMOs need to narrow their focus to those initiatives most directly aligned with their firms鈥� strategic aims. Those aims, of course, need to reflect client priorities: the type of work clients need done, how they want advice delivered, and which geographies are most active, for starters.

The firm鈥檚 strategic aims also need to be informed by market insights. A data-driven approach, or even a data-informed one, helps reduce internal debate. Strong, reliable data that comes directly from clients helps teams focus and move ahead. Equally important, it prevents them from using resources on initiatives that may not have much impact.

Responding to clients鈥� legal needs requires a two-step approach. First are clients鈥� immediate needs, which our data identifies as most urgent in the regulatory, legal & employment, and litigation practice areas.

While firms are handling urgent client requests, they must also be laying the tracks to support clients鈥� future needs. That way, when clients are ready to address, for example, data privacy head-on, firms will already have the right legal team with the right relationship at the ready. Right now, clients鈥� longer-term needs appear to be in areas of regulation, data privacy, cybersecurity risk, and environmental, social, and governance (ESG) issues.

Balancing clients鈥� short- and long-term priorities requires a balancing act of its own on the part of CMOs, who often are all too aware that they can鈥檛 do everything at once. Yet, no matter how urgent or busy short-term needs seem, it鈥檚 imperative to carve out the time to look at longer-term client priorities.

The increasing profile of marketing & business development

Other members of firm leadership seem better positioned than ever to help CMOs perform this balancing act. Those in leadership roles in marketing & business development report that the firm leadership is working together better than ever, which makes it easier for leadership to support other functions, including marketing & business development.

In addition, CMOs say that the value of marketing & business development is now better understood by law firm leadership. CMOs are spending less time convincing lawyers of the value of brand strategy, for example, or defining the importance of marketing to law firms.

CMOs are also starting a bit of a reckoning over their data strategy 鈥� or lack thereof. They鈥檙e understanding the importance of client data, especially client feedback, client insights, and the priorities that are on their clients鈥� horizons. CMOs also believe there might be valuable insights within their firms鈥� own datasets; but they also understand that their firms might not have the skills to unlock those insights. Clearly, they see that there is a skills gap when it comes to data analysis. And without the ability to mine the most important insights, they鈥檙e concerned about getting bogged down in data without taking effective action 鈥� the dreaded analysis paralysis.

CMOs, like their clients, are being asked to do two things at once: grow the current business, and transform their efforts to better capture new business over an indefinite time period. Yet growth and transformation require different skills. Growth often requires intensifying existing efforts for bigger results 鈥� and is all about faster, bigger, more. Transformation is a different beast entirely, requiring reflection and iteration.

Law firm CMOs seem well-prepared to do both, and equally importantly, firm leadership seems to understand the urgent need to support them in this critical task.

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As part of our ongoing series on client listening best practices, we recently spoke to a senior client development manager at an Am Law 100 law firm who initiated an incredibly effective and now global client listening program at their firm. Their insight into what made the program a success demonstrates some of the best practices for those law firm leaders just getting started in this area.

We鈥檙e often told by those firms that attempt to establish such client listening or feedback programs that one of the most common barriers is of course buy-in across the firm. In fact, the client development manager to whom we spoke said her firm had exactly that problem to overcome 鈥� some partners and key account managers simply didn鈥檛 want to participate.

So, the manager attempted to solve this problem by starting small. First, the client development manager created pilot initiatives with those colleagues who were more capable of seeing the value from the outset in order to 鈥渂uild up some familiarity around the firm of doing formal client feedback and also build a great set of data that we could benchmark ourselves against in the future.鈥� The team鈥檚 pilot initiatives spanned different offices and practice groups across the firm with key clients that were interviewed by the marketing & business development team, which had already undergone professional interview training with our consulting team.

To ensure further buy-in and engagement with stakeholders at the firm there were many more steps involved to this firm鈥檚 success, the manger noted. Here are some of the key ones:

Branding

鈥淲hat we really tried to do at the outset was first and foremost raise awareness of the program. We started out by giving the program its own name, [and] we talked about it at our practice meetings, partner conferences, and regional meetings.鈥�

The firm ensured that everyone was unified, through clear and consistent communication around the purpose of the client feedback program, what it would deliver, and the positive impact it would have across the firm. When partners care about and believe in an initiative, they are understandably more motivated to want to participate.

Success stories

鈥淲e also really tried to identify, in that pilot process, early success stories, so that we could showcase them around the firm and build-up lawyers who were champions of why we were doing this and the value that we get out of doing independent client feedback.鈥�

By weaving in early success stories into their communications with partners, the firm encouraged good behavior through engagement and solidified the program鈥檚 credibility with return-on-investment examples. Openly sharing these successes can also help everyone visualize what is involved and combat some of the pushback questions that client feedback teams might receive.

Champions

鈥淧ilots allowed us to really use those as opportunities to build up partner champions鈥� partner champions that could be advocates for the value of doing feedback.鈥�

If done well, partner champions offer client feedback programs multiple benefits from engaging, motivating, and inspiring people around them to participate 鈥渢o connecting different teams and departments and bringing the whole firm together.鈥� Ultimately, these champions will help influence the client listening policies and goals and build trust around the program.

Clear actions

鈥淲e focused on talking about the results and what we were getting out of the feedback around the firm, what should we be doing to respond on an individual client relationship level, but also looking at the aggregated results of the many hundreds of interviews. What are clients telling us and how can we address areas for improvement more efficiently? And [how can we] make clear recommendations to our lawyers on how to act on that feedback.鈥�

Gathering effective client feedback is one thing, but closing the feedback loop and converting results into action is another skill entirely. By developing an effective assessment process, the firm allowed for concentration on timely customer pain points, and developed a strategy focused on improving the client journey. Ultimately, this is what allowed the team to expand their research at a firmwide-level, beyond the pilot initiatives.

Purposeful strategy

鈥淲e really tried to help all our stakeholders see the value, [and] we worked with our regional heads and practice heads to build it into their strategic plans. We didn鈥檛 want this to be a forced top-down thing 鈥� having leadership buy-in, having it tied to broader strategic goals as a firm, and talking about it regularly were keys to getting this feedback.鈥�

Client listening should be a strategic priority and managed as a strategic initiative with full and visible support from leadership. Developing synergy between programs and strategies from the outset will help achieve this.

Done well, client feedback interviews generate reliable, tangible data that can enable strategic business decisions to be made with greater confidence. But clear and consistent communication, across all levels of the firm 鈥� especially around the investment needed to stimulate change and further strengthen client relationships 鈥� is critical to the success of client listening programs.

You can learn how to help your firm better determine strategy and demonstrate its value through the .

As the recently published聽2023 Report on the State of the Legal Market suggests, to lead successfully through periods of uncertainty requires leaders to embrace somewhat different priorities and be willing to experiment with new ways of doing things. During the most recent Insight Council roundtable, held earlier this year, 40 Managing Partners from law firms described how they are addressing the challenges that are arising from an uncertain market.

Talent concerns

Despite the headlines that speak of lawyer layoffs, law firm headcount was up substantially over the past two years, but so too are direct expenses which were up an average of 15.4% since Q1 2020 and 10.1% since just last year, according to the Legal Market Report. Firms therefore have more lawyers, with each one costing firms substantially more. With turnover also returning to average pre-pandemic levels you can see why firms may be making targeted headcount adjustments.

However, this dynamic has affected every firm differently, and as a result many firms have been proactively addressing these sharp rises in expenses by using tried and true strategies like prepaying what they can and restarting tactics that are designed to monitor expenses closely, so as to know exactly when to adjust to the market.

Our roundtable attendees said they were very optimistic, and many talked about relying on the strength of the firm鈥檚 culture to bring its people together by, for example, using a 鈥淲e are in this together鈥� message to build resilience and strength from within. Amplifying this message in their communications has been key for firms, but promoting transparency also has ensured that engagement levels with their people have remained high.

Sharing regular market conditions and presenting more of the firm鈥檚 financial outlook and what it means for their partnership, associates, and staff members has also become important. And being explicit about what the firm needs to do to weather the potential economic downturn has strengthened this collaborative culture at this time as well.

Rates strong, realization receding

One area that roundtable members identified as a development to which they are paying close attention is how quickly clients are paying their bills, which appeared to slow for many firms as clients seemed to have the desire to hold on to their money. Collected realization against worked rates appears to be sliding, which is an uncharacteristic pattern; fortunately, however, many felt that realization was still strong, but that clients were just paying slower鈥� for now. Most roundtable members said they felt that realization remains stable.

In order to stay ahead of any unexpected delays, it鈥檚 important for firms not to lose focus on billings and collections 鈥� monitoring is key here, but the roundtable members also highlighted the importance of keeping up ongoing conversations with partners and clients. With clients becoming much more selective looking at the value behind the brand 鈥� indeed, nearly 50% of clients have substantially adjusted their roster of outside law firms over the past year 鈥� it has become more important for firms to understand their clients鈥� most pressing challenges and goals. This is especially critical so firms can not only tailor their offering specifically to clients鈥� needs, but also discuss expectations of their client service and billing.

If clients feel and believe the firms鈥� work is valuable and important, they will be more likely to pay, so it鈥檚 important to set out expectations at the beginning of a matter. Better understanding on both sides over what various markets are experiencing will not only help forecast financials but will also help anticipate and prepare the client and the firm for what may lie ahead.

Buyer sentiment remains positive

The Legal Market Report also showed that 41% of clients said they expect their legal spend to increase in the coming year, compared to just 19% that said they expect it to decrease. When looking at this trend on a quarterly basis year-on-year, we see that clients鈥� anticipated spending typically drops towards the end of the calendar year. In 2022, however, the drop in net spend optimism occurred in Q3 rather than Q4, as traditionally seen. It is likely that this movement demonstrates a preventative attitude on account of concern over a global recession. But the fact that this downward trend hasn鈥檛 continued into Q4 of 2022 suggests that there remains plenty of opportunities for law firms to compete for work in the global marketplace.

However, it has been nearly 15 years since the last Global Financial Recession and many law firms鈥� leadership committees have not led their teams through rocky markets and increasing expenses. This presents a unique challenge 鈥� one part of which is making sure everyone is aligned on strategy even as it shifts in real time. As a result, some firms are bringing in experts to help learn from the past and advise on what is happening in the market today so they can best navigate during these uncertain times.

In general, the common theme we heard from the Managing Partners at the roundtable was how important it is for law firms to have a solid and focused core strategy yet be able to adapt as the environment changes to sustain competitive advantage. We know from the Legal Market Report that the market has softened, and expenses have sharply risen; and because of that, many firms are revaluating their strategy to keep pace with the times.

The leaders who manage to keep their strategic focus during this uncertain time will have a much higher likelihood of coming out the other side in a stronger position, prepared to deal with any market fluctuations.

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