The economic impact of Covid-19 will lead to UK and European corporates reviewing how they get the best return from their spend on legal advice. However, new research by Thomson Reuters shows that even before the pandemic hit, the balance of spending had been shifting in favour of in-house legal teams.
What can law firms do to prove their worth with a client and win business? Our research, based on 578 interviews with general counsel and 2,000 senior decision-makers globally, suggests that law firms should focus on winning higher-value cross-border work and develop ways of serving clients enabled with technology to offer the best chance of improving revenues.
Corporates in continental Europe allocate an average of 47% of their budget to external legal services compared with 60% in the UK. And the picture does not look to be improving, with only a net 2% of European corporates planning to increase external spending (29% of corporate legal departments planned to increase spend at the end of 2019, while 27% planned to reduce external spend).
In recent years, law firms have also had to contend with increasing competition for budget from a new wave of alternative legal service providers (ALSPs), which are able to offer highly specialised services.
ALSPs now account for 7% of legal spend among corporates in continental Europe, slightly higher than the 6% global average. Although these numbers are still relatively low, previous Thomson Reuters research showed that ALSPs have been growing by 12.9% a year.
ALSPs are businesses that provide legal services. At ALSPs, lawyers typically work alongside legal technologists, analysts and project managers to provide highly specialised services to support clients. An ALSP can range in size from a small, exclusively tech-focused start-up to one of the Big Four consulting firms. ALSPs are often used to support compliance work, contract and document reviews, due diligence, regulatory response work, and litigation and investigation support.
Despite the high brand recognition enjoyed by the Big Four in the wider business community, the Thomson Reuters study shows that their reputation for legal expertise is still lower than that of major law firms.
Part of the appeal of ALSPs among corporates is their use of technology to deliver services more efficiently. Continuing their commitment to technology can help law firms catch up and keep up with tech-first competitors.
Given the interdependency of many European economies, there is high demand for cross-border work on the continent. Our research found that 87% of legal buyers based in Europe require international legal services, which is above the global average.
International work also accounts for almost half of the total spend on outside counsel of the average multinational company, well above the global average. This presents a clear opportunity to law firms that operate in multiple jurisdictions, or that manage close international networks of ‘best friend’ firms they work with routinely. To carry out this work successfully, law firms need to have an understanding of local markets to make sure they can meet client expectations. Despite Brexit, the research suggests that UK firms should continue to build expertise in managing cross-border work, including how they manage matters and collaborate on work with other lawyers and law firms in other jurisdictions.
Law firms worried about the economic impact of Covid-19 in reducing billable hours can take some comfort from our research, which found that international legal work is less likely than local work to undergo cuts.
Firms that want to expand into new markets and jurisdictions should ensure that they tailor their offerings to stand out from competitors. For example, US firms operating in Europe have made strong inroads in the M&A and general corporate sectors, which account for 49% of hours worked by US firms in the region.
With many corporates forced to contend with a tough economy, law firms should consider looking at their pricing in relation to competitors to ensure they are offering the best value proposition. Over the last decade, law firms have shown greater flexibility in this area through alternative fee arrangements (AFAs), rather than relying solely on hourly billing rates. AFAs, such as fixed or capped fees, provide clients with greater predictability on costs, enabling them to plan budgets more effectively.
If AFAs on cross-border work become increasingly expected as part of the proposition offered to win higher-value cross-border mandates, this may favour global firms with international offices over independent law firms that choose to operate through ‘best friend’ networks.
The economic damage wrought by coronavirus and the prospect of further Brexit upheaval mean the challenges of 2020 are not going to disappear in the first half of 2021. However, there is optimism for growth in the law firm sector. By proving their worth in terms of multinational expertise and strengthening their value proposition through attractive pricing, improved services, investment in technology and the way law firms collaborate across borders to serve clients, law firms can emerge from the current crisis in a stronger position.
This article was originally published by the Law Society Gazette.