Law firms sharpen up as recession cuts legal sector to size

Published March 22nd, 2010 - 09:55 GMT

A new report warns law firms that they need to modernise or lose out as a major power shift is taking place in favour of the in-house client.  The report, which canvassed the opinions of 130 General Counsel and 80 law firm partners around the world, reveals that 78% believe that the recession will have a lasting impact on the profession, and that value and efficiency are now the non-negotiable attributes a client looks for in a legal partner.

The report – ‘Law firm of the 21st century – The clients’ revolution’ - commissioned by international law firm Eversheds, also reveals that the recession has had a major impact on how ‘magic circle’ law firms are viewed, with just over half (51%) of clients and 46% of partners citing the term as defunct.  When asked if this revision, to the traditional law firm hierarchy would be a welcome development for the market, an overwhelming 94% of clients and 81% of partners agreed. 

While the recession has proved to be a key catalyst for this change, the report also highlights several other factors that have contributed.  The primary factor identified by over a third (37%) of all respondents was globalisation, particularly the move to the East, with many international law firm leaders, as with other business sectors, considering moving their headquarters from the West to the East.

An additional driver for change is the increasing status and professionalism of the in-house lawyer (35%).  Three-quarters (74%) of General Counsel said they now occupied a far more senior commercial advisory role in their companies compared to before the recession, with 55% assuming more responsibility for corporate governance. 

Commenting on the findings, Chris Jobson, managing partner at Eversheds Middle East, said:

“When we conducted our first report into the legal sector – ‘The 21st Century Law Firm’ – two years ago, we found that many law firm partners were resistant to change, despite their clients asking for it. For example, two years ago, only 22% of clients and 48% of partners saw value billing as a trend for the future.  Now, 86% of clients and 88% of partners say they often or sometimes use value billing.

“As well as globalisation and the increased use of technology to deliver efficiency, the key change is the shift in power to the client, which is largely due to in-house counsel taking a more important commercial role within their companies.  This will prove to be a real shake down for the legal sector and its workings, and law firms will need to really to prove their worth as in house teams expand their expertise.”

The report also tracks the demise of the hourly rate, which is now seen as just one tool among many. While many law firm partners are adapting to change, particularly in the area of alternative billing structures and added-value offerings – 63% of clients reported seeing better value for money since the recession started through add-ons such as free-of-charge secondees – many are still not delivering what their clients want.  Two-thirds of General Counsel have demanded lower fee rates from their external lawyers, and 47% of partners recognise that this is their clients’ number one priority.  However, only 25% of partners are actually delivering reduced rates.

Chris Jobson continues: 

“Law firms need to demonstrate where they can add real value to a client’s in house team – 87% of clients now say that value-added services such as secondees or free access to knowledge management resources are a crucial factor in their decision to instruct external law firms.

“The change that was predicted to take place over the next 10 years is here now, and it will be those firms who respond to the trends identified in the report who will see the real benefits.”

Richard Given, Legal Director, Emerging Markets, at Cisco, adds:
“Law firms need to make sure they listen to their customers, understand their needs and recognise that change will happen.  Firms cannot go on believing that the hourly rate is still an acceptable way of billing; the market is at a tipping point, and it is those who can address the change that will be the ‘next generation’.”

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