The risk/reward ratio for law firms and top legal decision makers has just made its biggest change in 8 years. Your client’s concern about risk is soaring to levels not seen since the last economic crisis. In this context, it is not surprising to see top attorney rates hit new highs and associate salaries jump. More risk means more clients are willing to pay more for safety. And this means more reward for law firms.
You can read about the underlying risks and rewards below:
1. Client See Risk Return to 2008 Levels
Threats from risk are back with a vengeance. Clients place their priority on risk management at 2008 levels—when they reached an all-time high. Global reach, new technologies, complex supply chains, new regulatory decisions, regulations and investor scrutiny all drive heightened risk. The last time concern over risk hit current levels was just before the market crash, credit crunch and 30% cuts to outside counsel spending in the 1st quarter of 2009.
In 2015, GCs* tell us risk management surged to become the second biggest goal for top legal decision makers, up from a lowly number 4 in 2014 (and 2013 and 2012).
The heightened concern over risk, combined with the institutional memory of the 2008 economic crisis and the large perceived cost of failure, is creating a robust market for preventive strategies and strategic planning.
2. Monster Global M&A Work Is Here to Stay—So Is Middle Market M&A
Global economies make it almost impossible for the largest companies in the world to drive organic growth. This compels global companies to make big acquisitions to drive growth. These monster acquisitions create economies of scale and favored market positions for the acquirers which all serve to drive their stock prices higher.
The insatiable appetite for corporate growth is driving middle market M&A as large companies add product lines, technology, market access and talent.
3. Associate Salaries Showing Froth
Starting salaries for associates just hit $180,000 while the top attorneys now command $2,000 an hour. Any market where starting salaries and record-setting rates make the headlines is either amazingly robust or in a bubble. Clients will learn about the bull market in associate salaries from their law firm relationship partners, or as they receive the new bills—if they don’t learn from the headlines first.
This will invite new cost pressure for the firms not handling global deals or delivering the most complex work. Clients have proven they will pay top dollar for the most complex work. The rates for the remaining work will suffer as they subsidize the premium work.
The firms who can package these higher rates into alternative fee structures will likely escape the rate pressure.
4. High-End Litigation Is Going Global
Product failures (think Takata airbags) and global investigations (Volkswagen) are giving us a preview of what the global market for litigation will look like. We are witnessing the advent of cross-border cases which will grow into a large segment of the market. The combination of large companies rolling out products on a global scale, bigger supply chains who supply more parts and play a bigger role, and the embedded technology which works most of the time (and fails spectacularly when it doesn’t) is bringing many countries into product liability, labeling and performance standard legal issues. In addition, Latin America and the EU are slowly developing vehicles to allow class action or equivalent law suits in these regions of the world. These suits are large, piggyback each other, and spread.
5. Strategic Planning and Proactive Strategies Enter the General Counsel’s Office
Large-scale risk, expected increases in these risks and pressure to deliver business value are driving a small and growing movement to adopt formal strategic planning. The leading GCs are looking forward and incorporating all the relevant factors including: business unit plans and preferences, predicting the nature and extent of litigation they will face and designing strategies to mobilize large teams—including outside law firms—to be able to handle large-scale deals or investigations should they arise.
Law firms will want to be part of this strategic planning team. The planning process will identify known risk, potential outcomes and action. This strategic thinking process is where clients will decide which law firms to use if something big happens.
Note to law firms: this hiring decision is being made well before any specific need. The law firms who win this work will be talking to their clients about their business and risk—and offer suggestions to advance client thinking without ever being asked.
Finding the Reward in the Risk (and the Trend)
Unlike the ominous signs posed 8 years ago, you can find reward in these risks and market changes. Your clients are the most concerned about risk as they have been in almost a decade and are taking active steps to manage these risks. You can make yourself part of your client’s risk management team or watch some other law firm take the role. The window of opportunity will close and the firms who help clients now will be the ones who worry the least about passing along the new record rates for associates.
*Based on BTI research conducted between March 2015 and September 2015. BTI conducted more than 300 independent, individual interviews with CLOs and General Counsel at Fortune 1000 companies and large organizations.