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Comment: Is the legal industry about personal relationships or B2B relationships? We’re about to find out

By Nathan Cemenska

Calling the legal industry “relationship-based” is cliché, but that’s because it’s true. Historically, legal has been characterized by “A2A” relationships (attorney to attorney)—where individual inside counsel “hire the lawyer, not the firm.”  They hire partners they know, like and trust, often without considering or even necessarily understanding the strengths of the larger organization. However, the legal industry has been pushing for a more B2B approach that focuses on what law firms have to offer as institutions, regardless of individual “star” personalities, who tend to come and go.

Who will win this tug of war? We’re about to find out. I recently analyzed six years of billing data from the Wolters Kluwer ELM Solutions LegalVIEW® Data Warehouse and uncovered several interesting findings. Chief among them was the fact that 16 percent of outside counsel relationships that existed in 2019 were put “on hold” through all of 2020. Some industry observers now believe 2021 will unleash a lot of pent-up demand, flooding firms with work. But will it flood back to the original firms, or will corporate legal departments (CLDs) seize a convenient opportunity to quietly replace some of their old A2A providers with other, typically larger firms with a more B2B mentality? Interestingly, recent data suggests the latter.

Both A2A and B2B approaches have their beauty. The A2A approach lets in-house counsel hire people they already know and trust. Even though this selection process may seem a little cozy, it probably does help outcomes when there is a pre-established sense of being on the same team. If sourcing strategies rely too much on a B2B model, relationships with outside counsel could start to feel forced and impair communication or even legal outcomes.

A too-institutional approach may also cause unintended consequences. Law firm partners often have a “portable book of business” to take to another firm if they aren’t happy with their current one. If law firm leadership pressures top rainmakers to appease clients with a hardline B2B approach, some of those rainmakers will go across the street to a firm that remains more A2A. Too much meddling could even cause a domino effect, in which the departure of a few key rainmakers incents others to leave, lest they wind up having to carry the rest of the firm.

But the B2B approach has its upsides. First, legal sourcing should fit the actual client’s (the corporation) needs, not the pseudo-client (in-house counsel). In-house counsel has many personal biases that could impair the quality of representation. They tend to hire friends from their old firms, who often reciprocate with expensive dinners, speaking engagements in fabulous locations, and golf outings that may be interpreted as a not-so-subtle form of influence. The B2B approach tries to minimize these interpersonal factors.

Another risk is inside counsel hiring the biggest, most expensive law firm in the world for work that could have been done by a more affordable one.  This has a reputational benefit for inside counsel who, no matter how poorly the matter goes, can always pull the BigLaw card:  “Nobody ever got fired for hiring IBM.”  The B2B approach tries to curb this sort of behavior by sourcing work to firms that are appropriate for the level of risk.

The B2B approach also looks at the whole relationship rather than just the personal one. In the A2A approach, many CLDs have relationships with large firms with a wide range of talent in many areas. Often, these CLDs are oblivious to their firms’ capabilities except the ones they have personally experienced. In law firms, relationship partners sometimes neglect to advertise their organization’s other strengths:  They either don’t get how B2B relationships work, or fear introducing clients to their colleagues will lead to their colleagues taking over the relationship. The result:  The pie doesn’t expand, institutional knowledge doesn’t grow, volume discounts aren’t had, and the CLD has to manage a raft of tiny relationships when a few big ones would have done.

Due to COVID-19, 2020 was an anomaly, and it may not resemble the future at all. However, if it does, the industry may head in a more B2B direction. My LegalVIEW analysis indicated that the top 10 Am Law firms and the Am Law 21-50, to a lesser extent, expanded their market share (see chart below, but note that this data skews towards the large end of the CLD market).

The growth is only a point or two in absolute terms, but in terms of percentage growth over market share from the previous year, it is significant. It may reflect a move to B2B firms, which often have to be bigger to have the administrative and technological wherewithal to get and maintain clients on a B2B level. If indeed CLDs have begun buying based on B2B criteria, the move to bigger firms could continue indefinitely.

In the end, the B2B method may win not necessarily because it is the best approach but because it is the only one. Increasingly, companies are putting controls around the kinds of suppliers they will use, including suppliers to CLDs. For instance, many financial institutions require their law firms to meet strict information security requirements that many small and even midsize firms do not meet.  Similarly, some CLDs are adopting strict diversity requirements that will make many firms ineligible as vendors.

None of this means that personal relationships will become irrelevant.  Where two firms are roughly equivalent on an institutional level—as the future players may have to be, to survive—there will be little to distinguish them except for those personal relationships.  But if your firm doesn’t meet those threshold requirements, you’re out—even if you just played nine holes with inside counsel last Sunday.

About the author: Nathan Cemenska, JD/MBA, is the Director of Legal Operations and Industry Insights at Wolters Kluwer’s ELM Solutions. He previously worked in management consultancy helping GCs improve law department performance and has prior experience as a legal operations business analyst.