We’ve looked at why now is a good time to address legal services spend (down economy, rising unemployment) and how to approach it (alternatives to the billable hour). Now, it’s time to push firms to reduce charges, boost efficiency, and in some instances, stop placing junior staffers on your accounts. All of this can be accomplished through strategic sourcing or direct negotiations.

All legal categories are not created equally, so you must choose your battles wisely to minimize the risk of increased legal exposure, spiraling costs or service level disruptions. Those are the very concerns that have made legal services spend a “sacred cow” for so long. So please…don’t reinforce that perception with an ill conceived attack on the wrong categories. It’s all about timing, so let’s look at the lay of the land in some of the major legal services categories and the best strategies for each:

• Corporate work (M&A, finance, commercial real estate & securitization): With work slowing considerably in many of these areas, this is perhaps the hottest area to pursue. The banking buyouts and failures have slowed deals considerably, as companies fear financial uncertainty and the potential to lose underwriting opportunities. So there will be increasing competition for your business among firms and - assuming your company’s activity in these areas is also relatively slow - less risk from shifting business to a new firm. Expect the areas of employment, banking and commercial construction/real estate to be the focus. And remember it’s a “buyer’s market”, so now is the time to secure alternative billing models that fit your goals.
• Labor and employment disputes: Terminations are up almost 8%. So we can expect an uptick in activity in this field, meaning labor lawyers may be in short supply and cost saving may be hard to come by. That’s not to say you can’t address spend in this area by addressing the billable hour cost model, but activity in this area may make securing a new firm difficult for your HR and legal departments to swallow. Keep in mind that the firms working in this area are still likely facing financial challenges. Typically, most large firms do not specialize in just one practice area and thus are feeling the effects of slow business despite strength in bankruptcy or regulatory work. Even in the case of bankruptcy, firms are cross leveling resources rather than hiring. So, even firms you utilize for “hot categories” should be willing to play ball.
• Litigation: In many ways, litigation is recession proof. When times are bad, businesses stop making payments or otherwise meeting their contractual obligations, and provide increased incentive to file suit. Great litigators that you can trust are important, so if you have one, you’re not likely to part ways. But it’s a great time to approach your counsel with alternative billing models. For example, consider separating billing rates for pre-trial and trial work in order to prevent costs from spiraling out of control before an end is even on the horizon. Since a great deal of the pre-trial work is done by lower level staff, and not the hot-shot litigator who attracted you to that firm, why pay senior partner hourly rates before you have to?
• Regulatory: Driven by the new Presidential administration and expected regulatory changes, health care, antitrust, labor/employment, and environmental law will likely be impacted. Depending on your industry and supply chain, these new regulations may or may not be top of mind. If they are, now is most likely a time you’ll want to stick with a firm you trust. But…please address the hourly billing model before research on any new, relevant regulations begins or you may wind up paying senior partner rates for junior associates’ and paralegals’ time.
• Bankruptcy: Firms are actually increasing staffing levels to meet demand, or more likely replicating resources. Hiring trends and the data support my belief that bankruptcy/workouts will be busy areas in 2009. As reported by the Administrative Office of the U.S. Courts, bankruptcy filings exceeded 900K in 2008, up 29% versus the same period in 2007. During this period, Chapter 7 filings were up 40%, Chapter 11 filings were up 49%, and Chapter 13 filings were up 14%. Therefore from a spend management perspective, the shortage of talent and the activity in this practice area make bankruptcy legal spend a challenging category to address right now. Best to stay with a firm that you trust in this area than change horses mid-stream. But as with labor law, bankruptcy is likely not the firm’s only line of business. So, you are still in a great position to address the billing model, since the firms may very well be struggling with it’s other practice areas.

Keep in mind that there’s a geographic aspect to these opportunities as well. Regional market conditions will have an effect on local firms. For instance in Los Angeles, commercial litigation, patent litigation, and labor/employment work is performing very well while real estate and finance are still very slow. Conversely in Texas commercial litigation is very slow. For the most part the trends hold true across the country (as we are all experiencing the same economic climate) but some areas are more pronounced.

The key here is to start the conversation. Clients are in a position to call the shots in ways that were unthinkable a few years ago - regardless of practice area. This is evident by the layoffs across the country, salaries are being rolled back, and summer internships are being canceled. Firms are hungry. Partners are under more pressure to stay busy and generate revenue to justify their value. In some firms the partners are moving away from business development to billing hours that would normally be an associate’s responsibility. The business development is just not sufficient. The only exception is bankruptcy work in some markets (NYC), but this is usually one aspect of a firm and only one portion of an organization’s service requests and can often be addressed by looking at Legal spend holistically and not piecemeal. Firms will be aggressive in a “hot area” to capture as much of it as possible to compensate for the loss of the real cash cow - Corporate work. Bankruptcy and regulation are not the rainmakers that M&A and real estate were.

Cost savings for legal spend are out there and now’s an excellent time to finally…FINALLY…address this sacred cow.

Nick Cherrone is a Category Manager for business services in Ariba’s Global Services Organization. Nick has several years of sourcing experience with General Electric and as a logistics officer for the US Army. Nick is currently working towards his certification as a purchasing manager (C.P.M) from the Institute for Supply Management.