However, one key area remains to be explored — specifically, how are clients reacting to these large jumps in hourly rates?

It should be noted from the outset that the fact that rate growth is higher in 2023 than last year surprises basically no one. Nearly every observer of the legal industry knew that the pace of rate growth would accelerate this year, and the only question was, by how much. We now have an indication of that answer, and it’s an appreciable amount.

Gauging client pushback

Many legal market commentators have also been speculating that clients will likely start pushing back more aggressively on rates. This is a nuanced proposition as there are several different ways clients may do this. Let’s explore some of the possibilities.

First, clients may be inclined to ask for larger discounts off published standard rates. In truth, this may or may not be happening, but it’s not particularly germane. Standard rates are the advertised top rates from a law firm, similar to the rack rate on a hotel room — it’s a number they publish, but almost no one actually pays it. The point of trying to increase the discount on standard rates would be to attempt to exert some influence over the actual rates being charged by law firms. Whether clients are requesting larger discounts or not, the fact remains that worked rates still went up by quite a bit. Even if clients are pushing back on standard rates, they are not doing so to a large enough degree to place much of a damper on the growth of agreed-upon rates.

Nearly every observer of the legal industry knew that the pace of rate growth would accelerate this year, and the only question was, by how much. We now have an indication of that answer, and it’s an appreciable amount.

Second, clients may be expressing price sensitivities to their law firms throughout the course of their matters, encouraging firms to increase the amount of the potential fee the firm writes down before the client receives an invoice. There is some evidence that law firms are, in fact, increasing the amount of potential fees they proactively write-down prior to invoicing, which is contributing to the reported decline in realization. Whether this is the result of actual or simply perceived pushback from clients is an open question. It seems more likely that any increase in write-downs is due to perceptions of possible client objections by law firm lawyers rather than anything proactive on the part of clients.

Third, clients may be seeking larger discounts on their invoices, once received. If this were the case, we would see a widening gap between what we call billing realization (the percentage of the agreed rate that’s billed to the client) and collected realization (the percentage of the agreed rate that’s collected from the client). If the gap between these two figures widens, it’s an indication that clients paid a smaller percentage of their invoice. While there is some evidence that the gap between billing and collected realization widened for the quarter, it is difficult to tell at this point if this is the start of a trend or just part of the regular realization cycle.

Finding the value proposition

While there may be additional actions clients could take in reaction to rising rates, there is one that merits particular attention: Clients might just vote with their feet.

An unhappy client has a plethora of potential law firms and alternative legal services providers from which to choose, particularly if the main issue of contention is cost.

At a series of roundtable discussions in which I’ve participated with general counsel this year, I often have heard of concern over the increasing costs of outside counsel at a time when in-house law departments are facing an uptick in their overall matter volumes along with pressure to curtail their budgets — clearly, a difficult conundrum.

For many of these GCs, one option that comes immediately to mind is to shift to lower-cost law firms for some of the legal work needed. This phenomenon of demand mobility is something we explored in our Report on the State of the Legal Market earlier this year, as well as our State of the Corporate Law Department, released in March. Indeed, clients are not shy about discussing their feelings on this among their peers. They will freely discuss not only the fact that they’re doing it, but what types of matters they’re shopping around, how they’re identifying potential new law firms, and even which specific law firms to whom they are giving additional work.

At a time when half of legal service buyers report switching at least some portion of their panel of outside law firms, we are in a time of nearly unprecedented volatility in terms of legal demand shifts. That’s not to say that all work is at risk or that every higher-cost law firm should be worried, however. Another observation I have heard frequently from GCs is that for some firms, cost is no problem because of the value the firm delivers.

Of course, value is a bit of an amorphous term in that its meaning is very much in the eye of the beholder, i.e., the client. But there is some commonality of definition: quality, efficient legal advice that meets the client’s need — without exceeding a reasonable scope — and which recognizes the client’s broader business objectives.

For those law firms that deliver value well, clients will often tell me something along the lines of, “I have no problem with what they charge me, because they’re worth it.”

Such a characterization would be a worthwhile goal for every law firm. Truly understanding what the client values and delivering against that value proposition requires a lot of discussion with and understanding of the client, their goals, and their business. But for those firms that can do it well, it is, perhaps, one of the best ways to ensure the long-term strength of the relationship with the client.

Fears of missing out on opportunities or alienating rainmaking lawyers trap some firms in the ambiguity abyss — that largely undifferentiated position of saying, We are a full-service firm that’s able to meet the complex needs of sophisticated clients.

Our analysis of the last 15 years of law firm brand positioning, recently reviewed alongside law firm financial data, has produced a compelling argument for law firms to build a differentiated approach to the legal market.

A differentiated approach

There are four ways to think about segmenting and differentiating a firm’s approach to the market:

1. 1. 1. Expertise — We are smarter than other firms in this area of law.
      2. Client type — We understand this kind of client better than other firms (e., public vs. private companies, start-up vs. mature companies, etc.)
      3. Geography — We offer strength in a defined geographic region.
      4. Sectors — We can navigate the dynamics of this sector and are well-positioned to serve all client needs in this space.

While law firms need to consider each of these factors as part of their strategic plans, competitive advantages are created when one factor is considered the key strategic priority that then informs the other three. Let’s look at this concept in action.

Case Study 1: A sector-focused approach to the market

Law firm ABC has a clear sector-focused approach to the market and is heavily entrenched in the technology sector — from traditional tech companies to fintech and e-retailers, this firm serves them all.

The good news for Law firm ABC is that their stated strategy is strongly corroborated when looking at our research of more than 2,300 General Counsel and senior corporate law department leaders. (Sadly, this isn’t always the case, which may indicate a poorly executed strategic plan.)

When looking at the types of companies that keep Law firm A top-of-mind, nearly 70% of those senior legal decision-makers are from organizations in a tech-related sector. This, unsurprisingly, also means a large proportion of these companies are based on the West Coast of the United States.

More proof of Law firm ABC’s effectiveness in executing this strategy comes when assessing the firm’s ability to gain access to new work or generate more legal demand.

Our Market Insights team undertook a conversion analysis, which involves looking at what proportion of legal buyer respondents who name a law firm top-of-mind then go on to say that firm is the one they consider hiring for different types of legal work. In other words, how well does a firm convert mindshare into market share.

Law firm ABC is twice as effective at turning awareness in new work with legal buyers in the technology sector compared to all other sectors combined — an impressive proof point that underscores how the firm’s focus in this sector is more than just lip service. And the firm’s financial performance? When looking at demand (billable hours), this firm has nearly 50% higher demand growth than the average firm over a three-year timeframe.

Why differentiation works

Of course, lots of factors go into a law firm’s ultimate success, and brand differentiation is one of the levers that law firms can control. In the case study above, Law firm ABC uses a sector-focused strategy to differentiate itself from other firms in the (extremely crowded) market.

And Law firm ABC is not a one-off example.

Our ongoing research with General Counsel shows that many outside law firms identified by clients as having deep sector knowledge earn, on average, 43% of their clients’ external legal spend — that’s nearly 2.5-times the typical firm.

With lack of time being one of the most pressing issues that General Counsel and other law department decision-makers face, a differentiated brand helps buyers quickly understand how your law firm can help them — rather than trying to figure out if yours would be the right firm to call in a specific situation.

For more on how your firm can differentiate in various ways, check out our latest video, which digs deeper into understanding the various ways firms can differentiate — and measure the success of their approach to the market.

While 2023 seemed to be off to a strong start, the collapse of several regional banks, continuing war in the Ukraine, and the uncertainty wrought by rising interest rates have both clients and law firms a bit uncertain about the direction of economic trends. It’s not clear where overall demand will come in for the first quarter; and while expenses continue to increase, they are offset somewhat by rising rates that firms are able to charge. This heady mix makes continued revenue growth even more important.

On the client side, demand for legal services is projected to remain strong — 41% of clients say they plan to increase legal spending this year, and only 20% expect legal spending to decline. Clients are also looking for legal advice to be delivered in combination with significant industry and sector knowledge, noting that advice presented along with commercial context has more worth than that same advice presented in a vacuum.

Law firms’ marketing & business development teams, of course, play a significant role in turning these projections into actual revenue. But much of marketing & business development was turned upside down by the pandemic. With the temporary loss of in-person marketing channels such as events, many marketing & business development teams were forced to experiment with new types of digital outreach, and they are now in a position to better compare their effectiveness.

On average, law firms are allocating 1% to 2% of revenues to marketing & business development budgets. CMOs are right to wonder if that’s adequate. Along with those budgets come admonitions to get creative and of course, do more with less, even though live events — generally quite expensive — are coming back into the marketing mix.

Balancing the short- and long-term

To meet that mandate, CMOs need to narrow their focus to those initiatives most directly aligned with their firms’ strategic aims. Those aims, of course, need to reflect client priorities: the type of work clients need done, how they want advice delivered, and which geographies are most active, for starters.

The firm’s strategic aims also need to be informed by market insights. A data-driven approach, or even a data-informed one, helps reduce internal debate. Strong, reliable data that comes directly from clients helps teams focus and move ahead. Equally important, it prevents them from using resources on initiatives that may not have much impact.

Responding to clients’ legal needs requires a two-step approach. First are clients’ immediate needs, which our data identifies as most urgent in the regulatory, legal & employment, and litigation practice areas.

While firms are handling urgent client requests, they must also be laying the tracks to support clients’ future needs. That way, when clients are ready to address, for example, data privacy head-on, firms will already have the right legal team with the right relationship at the ready. Right now, clients’ longer-term needs appear to be in areas of regulation, data privacy, cybersecurity risk, and environmental, social, and governance (ESG) issues.

Balancing clients’ short- and long-term priorities requires a balancing act of its own on the part of CMOs, who often are all too aware that they can’t do everything at once. Yet, no matter how urgent or busy short-term needs seem, it’s imperative to carve out the time to look at longer-term client priorities.

The increasing profile of marketing & business development

Other members of firm leadership seem better positioned than ever to help CMOs perform this balancing act. Those in leadership roles in marketing & business development report that the firm leadership is working together better than ever, which makes it easier for leadership to support other functions, including marketing & business development.

In addition, CMOs say that the value of marketing & business development is now better understood by law firm leadership. CMOs are spending less time convincing lawyers of the value of brand strategy, for example, or defining the importance of marketing to law firms.

CMOs are also starting a bit of a reckoning over their data strategy — or lack thereof. They’re understanding the importance of client data, especially client feedback, client insights, and the priorities that are on their clients’ horizons. CMOs also believe there might be valuable insights within their firms’ own datasets; but they also understand that their firms might not have the skills to unlock those insights. Clearly, they see that there is a skills gap when it comes to data analysis. And without the ability to mine the most important insights, they’re concerned about getting bogged down in data without taking effective action — the dreaded analysis paralysis.

CMOs, like their clients, are being asked to do two things at once: grow the current business, and transform their efforts to better capture new business over an indefinite time period. Yet growth and transformation require different skills. Growth often requires intensifying existing efforts for bigger results — and is all about faster, bigger, more. Transformation is a different beast entirely, requiring reflection and iteration.

Law firm CMOs seem well-prepared to do both, and equally importantly, firm leadership seems to understand the urgent need to support them in this critical task.

You can learn how to build a feedback dialogue with your clients that will deliver value and growth, here.

Tanja Podinic, advisor to corporate legal departments and law firms through her firm Digital Legal Ventures and former Global Director of Innovation Programs at Dentons, says she has seen the same issue from the client side. At one general counsel conference she spoke at in March, she explains, only about one-in-five GCs said law firms approached them for feedback following an unsuccessful panel appointment.

Clearly, feedback is something that law firms require, and corporate legal departments would like to receive better service that could arise from feedback. So where is the disconnect?

Understanding the value

Podinic notes that oftentimes, the onus is on the law firms to initiate feedback mechanisms. But in many cases, before law firms have anything to solicit, legal departments themselves need to think more critically about the value they want their law firms to provide first.

“General Counsel are now expected to be strategic business partners to their organization, they have a key role in helping their organization execute on strategy and meet goals. As a result, GCs would benefit from law firms being their strategic business partners in a similar way.” Podinic says. “In order to place that expectation on law firms however, GCs need to be more open about their business priorities to enable law firms to collaborate and deliver value more effectively. This lack of stakeholder alignment results in missed opportunities for both, law firms and their clients.”

She gave an example of a GC looking to appoint a panel of law firms for their corporate litigation matters. Firms focus on what they think is of value to the client — offering discounted legal fees, use of technology, client secondments, etc.

There is a rarely a conversation to establish what the client would value most, what would result in the greatest impact for the client. The GC may need to deliver internal data privacy and cyber security training, could the law firm offer to do this training as a ‘value add’ in exchange for a slightly lower discount on fees? Alternatively, could a law firm leverage its own legal project management team to assist the GC to roll out an internal operations project more effectively? Such creativity requires transparency from both sides, and this is not the norm.

Feedback is another powerful tool that is often not used for fear of criticism. When engaging in feedback, it’s important to pinpoint exactly what expertise the law firm is expected to provide in a matter — both from the law firm perspective and the corporate perspective. “The thing is most law firms don’t really promote themselves in this particular way because it’s not what they are used to and they fear that the result may be negative,” Podinic adds.

“When you receive feedback and the feedback isn’t necessarily positive, you are almost forced to actually change something that you’re doing in order to be able to be successful in the future, or to actually not lose a client.”

Indeed, Podinic explains that while law firms are often asked to be proactive in asking for feedback from their clients, there’s nothing stopping legal departments or general counsel from providing feedback themselves and speaking more clearly about what they desire out of an engagement.

“More beneficial for the GC would be: We complete a really big matter, let’s do a quick assessment of how the law firm did. Whether or not they met our requirements, how were they to deal with? Were they pleasant or did they respond in a timely fashion? These are really basic metrics that can influence whether or not that particular firm is reappointed.”

The benefits of an open conversation

The mutual benefit to both parties is knowing exactly where the relationship stands. If the client experience was a positive one, then both sides will want that to continue. On the other hand, negative feedback from a client to law firm can also provide a necessary impetus for change, Podinic says.

“A GC is unlikely to remove a firm from their panel based on negative feedback, but it could strongly encourage the client relationship partner to improve the service to the client to ensure the relationship continues.”

“I think this may be one of the reasons why law firms are slow to change, there’s no formal feedback loop.”

A formal feedback loop doesn’t necessarily mean a data-heavy feedback loop, although that can certainly be part of the ultimate plan. Podinic notes, however, that especially for law firms first initiating feedback with a particular client, it’s near impossible to develop key performance indicators (KPIs) because the firm doesn’t understand that value the client wants them to bring. As a result, she cautions: “Let’s start small and then get to the specific metrics and the detailed data later.”

And the other key suggestion that Podinic had for beginning a feedback conversation: Be brave.

“Law firms, particularly partners have a hesitancy to ask difficult questions of GCs, and understandably so, they’ve likely fostered this relationship for many years,” she says. “But I think the reality is that open and honest conversations will lead to more satisfied clients, who will retain their existing law firm relationships.”

Reticent law firms may just find their clients are more receptive to having the conversation than they might have believed.

“I don’t think many GCs would make decisions to remove firms from their panel as a result of negative feedback,’” Podinic adds. “It’s less about disruption, and more about stakeholder alignment. Law firms need to get comfortable with the idea that being a client’s strategic business partner may mean they need to change how (and in some cases what) they deliver to their clients. The key is to support clients to achieve their priorities and goals as a business. At the same point in time, GCs also need to be open to this shift. Creativity and transparency, along with meaningful collaboration could unlock value for both, clients, and law firms.”

During a roundtable session at Reuters’ recent Legal Leaders USA event, a large contingent of corporate legal leaders — general counsel, assistant GCs, and legal operations professionals — discussed what they are looking for in terms of new efficiencies and technological solutions within their departments and how more advanced tech tools like ChatGPT and generative artificial intelligence (AI) will impact corporate law.

Indeed, in the Thomson Reuters Institute’s recently published 2023 State of the Corporate Law Department report, corporate law department leaders said their main priorities fall into four categories:

• • • • safeguarding their company from risk;
      • driving the overall success of the business;
      • delivering sound legal advice; and
      • making the best use of limited resources.

While many corporate law departments are experiencing a shift from a focus on efficiency to a focus on protecting the business, the search for efficiencies and the manner in which they can be achieved is still top of mind for many of those in attendance at the Legal Leaders event.

In fact, much of the discussion centered on the latest innovations and technological solutions that are being used across the board. Attendees really wanted to hear from their peers about what tools, processes, or new technologies they were using, why they had chosen those solutions, and — most importantly — what was working as envisioned for the law department?

That achieving greater efficiency was a top priority was not surprising, given that many attendees self-identified as being newer to their roles, with many of them joining as part of their company’s dedicated ramp-up in legal operations. In fact, many of them said they had either just been hired into legal ops within the last year or were themselves creating a legal ops team. In most cases, they had been given a mandate to look for ways to create greater efficiency within the legal function, including identifying ways to automate the department and employ the right legal technology to move the ball forward.

Interestingly, one of the tech solutions most discussed by the group was Contract Lifecycle Management (CLM) systems, a wide-ranging platform that can cover everything from contract automation to intake and process management. Many attendees said it was important to identify what problems your department is trying to solve before trying to implement a CLM system, because the tool isn’t a one-size-fits-all solution, and there’s a lot of functionality that falls under the CLM umbrella.

First, some advised, you need to identify your greatest need; or determine what would be a good challenge to tackle first. Indeed, one participant said their CLM allowed them to move from automating the contract in-take process to then allowing them to serve their internal clients more quickly and track how they were spending their time more effectively. Their CLM system also allowed end-users to delve into a lot of data about what the law department was doing and how it was doing it, ultimately helping them refine their processes.

Adoption & implementation are key

From there, not surprisingly, the group talked about the critical issues of adoption and implementation of new technology and, most importantly, how difficult (or not) it was to drive that change.

One attendee discussed how their team sought to make the department’s new in-take site more user-friendly so internal clients would have an easier time with it. The department also had to make sure that people were aware of this new solution. In fact, showing potential users the clear advantages that the new solution has over the previous way of doing things can make all the difference, the attendee said.

Another participant noted that once the team showed users company-wide that they could click on a pull-down on the CLM platform to access a self-serve non-disclosure agreement form and that they didn’t have to wait three days in queue for one, it became a huge selling point that got people across the company engaged in using the platform.

Once users became aware of the ease-of-use of the new platform, several attendees said it was their experience that people around the company started joining in with other tasks that they found they could now more easily complete. Importantly, attendees agreed, department leaders need to work internally to help any new tech adoption from its onset by demonstrating what’s in it for the end-user and — even more critically — by making the value pitch to management. Both of these strategies are key factors in terms of getting to a point where the new technology is being utilized much more regularly across the company.

The future of legal tech

Not surprisingly, the group also was eager to discuss the impact that ChatGPT and generative AI on legal and what role those advanced tech tools may have in the industry. For instance, recent headlines suggested that 40% of legal jobs could go away because of such technology, and while that seemed to worry many attendees, some were quick to point out that they’ve heard that before. Indeed, several said that other past technologies — such as online legal research, for example — were supposed to have a similar effect on the legal world, but instead, the profession just adapted to these innovations and found they could work faster and more effectively by using them.

Other participants stressed that the human element is still a critical component in legal services. While online legal research made lawyers more efficient at finding primary information, for example, the task still required the application of human judgment and interpretation of what was being viewed.

New technology always allows the industry to take a step forward, many agreed, but often, especially when you’re talking about all things legal, it opens up new questions that need to be answered by experts. And certainly, with generative AI and ChatGPT, there will be all kinds of legal ramifications that need to be contemplated and will impact everything from regulations to corporate policy, leaving lawyers at the forefront to navigate many of those challenges.

Finally, when the group took up the question of what the legal landscape would look like in five years, one legal specialist noted an old saying that holds, “If you can think of it, then it will happen sooner than you think.”

To many discussion participants, that meant that change is coming to the legal profession at a more rapid pace than many industry experts may predict — and legal leaders are going to need to be prepared for it. As one attending legal leader quipped: “Buckle up, because it’s gonna happen!”

One consistently reinforced message from the group involves the interconnectedness of the ever-increasing pain our collective human decisions are putting on the planet and the continued degradation of nature’s ecosystems, which in turn is worsening the negative multiplier effects on the most vulnerable communities around the world. Indeed, the climate crisis is leading to irrevocable harm to the air we breathe, our food supply, and our habitable land, all of which instigates human migration patterns, geopolitical conflicts, and increased spending on reactions to the crises instead of proactive prevention.

The connection between these converging crises and the rise of investor institutional interest in ESG — including around climate transition risk — is clear. “Firms with trillions under management have become too big to let the planet fail,” stated a 2019 Harvard Business Review article. Yet, at the same time, the standing power of the hope and commitment of legal and justice strategists, leaders, and futurists is a fundamental element that’s needed to support the ambitions for positive actions now and in the future.

The legal community plays a pivotal role in the outcome and in transformational governance, a concept defined by the United National Global Compact. For “business to be more accountable, ethical, inclusive, and transparent to drive responsible business conduct, improve ESG performance, and strengthen public institutions, laws, and systems. This means fostering a culture of integrity, fairness, and inclusion beyond legal formality — asking not just what is legal, but what is right,” the Compact states. Indeed, it underpins the UN Sustainable Development Goal 16: Peace, Justice, and Strong Institutions.

Pushing for the need for transformational governance

Law firms’ commitments to their own internal ESG strategies and their own guidance and advice to companies are critical ingredients for transformational governance. For example, Timothy Wilkins, global partner for client sustainability at Freshfields, describes how his firm looks at the role of its lawyers in its holistic ESG strategy. Actions the firm urges lawyers to consider include:

• • • Working responsibly within the firm’s internal operations — seeking net zero and environmental targets, diversity, equity & inclusion (DEI) objectives, and sustainable procurement practices
    • Collaborating for impact — joining leading climate change and DEI initiatives and collaborations with governments on responsible business policy
    • Offering strategic advice and thought leadership — advancing ESG agendas and supporting the transition of business and finance to these goals

In providing strategic guidance to clients, law firms have a central role to play in legal foresight through issue-spotting and horizon-scanning across the four common areas of strategy on which law firms often advise on ESG-related matters: finance, regulation, disputes, and transactions (See Figure 1). In addition, firms’ guidance cuts across a number of corporate clients ESG concerns, opportunities. and issues.

Moreover, investors have been up front about asking for additional information on ESG while receiving many shareholder proposals around many ESG issues, such as those involving executive compensation and climate risk, says Wilkins. In addition, emerging risks continue to show up in the form of strategic litigation from investors and non-governmental organizations (NGOs) that are concerned about pushing a particular issue.

Law firms positioned to play a key role

In fact, the collective experience of providing strategic legal guidance across government, private sector clients, and other public sector institutions covering multiple matters and practice areas — including antitrust, labor & employment, litigation, tax, M&A due diligence, sustainable finance, corporate governance, shareholder activism, and regulatory and compliance disclosure and reporting — leaves firms positioned well to convene multilateral stakeholders to influence transformational governance.

For example, Freshfields was a founding partner among financial institutions, academic institutions, and consumer companies to launch the New York Circular City Initiative in order to drive positive impact and help create an economic system based on the re-use and re-generation of materials or products, especially as a means of continuing production in a sustainable or environmentally friendly way, often referred to as a circular economy. Indeed, 78% of the world’s energy is consumed in cities, particularly in the Global South; and those firm that can strengthened relationships with those clients can make a more positive impact.

The planet, the human race, food systems, and habitats are on the verge of irreversible harm. Whether or not we, as humans, and the instigators of most of the harm meet the moment is yet to be seen. In the meantime, the legal community and especially law firms around the world have the ability and opportunity to lead from a position of strength, now more so than ever in the last 50 years.

Since 2019, compliance has seen a noticeable upward shift among corporate law departments’ strategic focus. While roughly 15% of respondents listed compliance as an area of strategic focus in 2019, that number increased to 22% by the end 2022.

Law departments realize that this shift in mindset does not come without cost. More than one-third (36%) of corporate law departments surveyed for the report say they anticipate increasing their legal spend on regulatory matters in the coming year, compared to just 8% that expect their spend to decrease in that area. The report also details a metric called net spend anticipation (NSA), which reflects the number of respondents expecting a decrease subtracted from those expecting an increase. Regulatory matters saw the highest NSA of any practice reported this year, 10 points higher than the NSA for labor & employment, the next closest practice.

All this suggests that there is a potential boom in regulatory work upon which law firms could capitalize. However, it is very much an open question as to whether law firms are positioned effectively to take advantage of this potential opportunity — or whether corporate clients are even really considering law firms for the work at all.

According to the Alternative Legal Services Providers 2023 report, regulatory risk and compliance services are the top use case that have corporate law departments turning to alternative legal services providers (ALSPs), funneling that work to ALSPs rather than traditional law firms. One-half of corporations surveyed for the ALSP report indicated that they used an ALSP for regulatory risk and compliance services. Indeed, across the globe, use of ALSPs for risk and compliance services was high and seen as likely to grow over the next five years.

Corporate clients are quite clear on why they are choosing ALSPs for regulatory risk and compliance services. A majority of respondents (57%) cited access to specialized expertise as one of the key reasons they use an ALSP for risk and compliance. Clients also look to ALSPs to help drive greater efficiencies and to help free up internal legal teams to work on higher value, more strategic work.

This is not a new finding either, corporate law departments have been citing risk and compliance as a key use case for ALSPs for as long as the report has been produced. Going back to the original ALSP report in 2017, risk and compliance was the top use case for corporate law departments using ALSPs. It has been clear for some time that when it comes to regulatory risk and compliance needs, corporate law departments have a preference for ALSPs.

This creates a potential problem for law firms that are looking to capitalize on any impending surge in regulatory work within corporate law departments. Beyond those corporate clients that already use an ALSP for regulatory work, another 24% expect to be using one within the next five years.

Some law firms are looking to bridge this gap through partnerships with risk and compliance ALSPs, with 52% of law firms reporting that they have created such partnerships. This can certainly help to round out the service offerings a law firm can make to clients, but it necessarily creates a revenue-sharing arrangement that can negatively impact law firm profitability. On the other hand, for law firms that have carefully considered the question, such arrangements may well be the outcome of a calculation that trying to spin up a separate, wholly owned ALSP offering from within the firm would be more difficult and less profitable, so the partnership creates the best potential outcome going forward.

The evidence from the research demonstrates a persistent gap between clients’ desires to use ALSP services for regulatory risk and compliance needs, and law firms’ willingness to create captive ALSP affiliate offerings to address this need.

Even with this being the case, however, relatively few law firms appear poised to take the step to create their own risk and compliance ALSPs as a captive unit. While 21% of law firms responding to the 2023 survey said it was “somewhat likely” that they would create an affiliate risk and compliance offering, only 4% said they “definitely will.” Looking back historically, this number is basically unchanged from the 4% of law firms that said they would likely set up a regulatory risk and compliance ALSP affiliate within the next five years in 2017.

The evidence from the research demonstrates a persistent gap between clients’ desires to use ALSP services for regulatory risk and compliance needs, and law firms’ willingness to create captive ALSP affiliate offerings to address this need — a problem present for half a decade now. Law firm captive ALSPs have been among the fastest growing segments of the ALSPs market for several years; according to the 2023 report, it was the fastest growing segment. The issue is not that law firms do not know how to create profitable captive ALSP offerings with high-growth potential; nor is the issue a lack of demand for ALSP services around risk and compliance. Rather, it appears that law firms are instead choosing to focus their captive ALSP efforts elsewhere, such as in eDiscovery, litigation support, and legal research services.

In a legal marketplace where demand appears to be tightening once again, and where law firms will need to be increasingly competitive in order to capture shifting market share, regulatory risk and compliance is one area where law firms may want to reconsider their go-to-market approach. Despite a high degree of demand, regulatory risk and compliance remains a playing field upon which relatively few law firm competitors aggressively have entered.

However, doing what’s best for our clients, customers, or stakeholders can have many varying shades. Any of us who once sat for the bar exam knows that there is a difference between the right answer and the most right answer. It’s possible to do the right thing, and yet have missed an option that could have been even more right for the client.

I recently experienced this firsthand with a physician, and the experience struck me so much that I felt compelled to write about it.

Finding the more right answer

To perhaps overshare a personal story, I was slated to have surgery this past January — a joint replacement in my neck. It’s not the most significant operation, yet any surgery is significant in its own way. I would have been dealing with several months of rehabilitation and restrictions on my day-to-day life. Most definitely worth it in the right circumstances, but not something a person would undergo casually.

To make a long story short, a couple years of efforts to mitigate the problem had led me to a surgeon. Between my evaluation and the date of surgery, my pain had naturally resolved, and I’d even been able to stop taking my prescribed pain medication. It didn’t really occur to me, however, to ask whether I really still needed the surgery. Of course I did. That’s what the surgeon and I had discussed. That was the plan.

The day of surgery arrived, and I found myself in the pre-operative preparation area. I was less than an hour from proverbially going under the knife when my surgeon stopped in to check on me. “Hi Bill, how are you feeling today?” I fully expected the next statement to be “So here’s what’s happening today,” before he excused himself from the room to prepare for surgery. No one would have blamed him had he done that. It would have been the right thing for him to have done in that situation.

But that’s not what happened. “I’m feeling good,” I said in response to his question. Then he did the unexpected — he asked just a couple more questions. “How is your pain?”

“I’m not really having any pain,” I replied.

“So, the medication is helping?” he asked.

“I haven’t needed to take the medication,” I answered. And suddenly he realized, well before even I did, that there was a more right solution to my problem.

With me ready to go to surgery, my surgeon talked me out of getting the operation. A few more questions led him to the conclusion that there was a better way for him to care for me. And he was absolutely right.

The value of asking

As I’ve reflected on this over the past several weeks, I’ve been tremendously impacted by the power just those few extra questions that he asked had on the situation. He showed a deeper level of concern, got to know me better, and in doing that, was able to do his job better.

I wonder how often we take the time to ask just a couple more questions? Whether we’re in a law firm serving individual consumers or large businesses, or if we’re in-house lawyers serving clients within our company, do we appreciate the power that asking even just a few more questions can have in how we serve our clients?

As lawyers, it can be all too easy for us to assume that our experience provides us with a certain level of insight into our clients’ problems. Indeed, our experience necessarily informs how we serve our clients. But our experience with the legal issues they face does not necessarily provide us insight into how those issues affect them. We only gain that insight by listening to our clients, and the power that asking just a few more questions of our clients can have is easily underappreciated.

Taking just a few extra minutes with your clients to ask one or two seemingly innocuous questions can make all the difference between doing what’s right for your clients and doing what’s most right for them.

Chapman’s ESG program was one of the first of its kind when it was initiated in 2009, but it formalized and expanded over many years. The firm focused its commitment on environmental, sustainability, and green practices, including improving efficiency in office spaces (such as in lighting, energy use, etc.) to the extent possible, reducing paper usage and waste, as well as encouraging recycling and composting.

Today, the firm’s program is officially under the formal name Social Impact and Sustainability Task Force under the leadership of Libit, Chapman’s Sustainability Partner Kristin Parker, and a 21-member cross-section of intergenerational members from practice groups and administrative team members.

Formalizing the firm’s commitment to ESG

Chapman’s ESG program did not emerge externally in terms of its recruiting and retention efforts until 2014 when Libit was promoted to his COO role from his role as a practicing attorney with experience advising corporate boards and executive management on ESG issues. Over the next few years, Libit saw ESG emerging as a more mainstream topic that culminated in 2019 when The Business Roundtable (along with 181 CEO co-signatories) expanded the purpose of corporations to include delivering value to customers, investing in employees, dealing fairly with suppliers, and supporting the communities in which they operate.

To take the firm’s ESG strategy to a new level with a formal consultation of its stakeholders, Chapman hired an advisor in 2019 to conduct a review of the firm’s ESG policies and practices. This advisor also performed an audit of material issues from key stakeholders, which included the following:

Clients — The advisor conducted interviews with some clients to determine the important ESG topics they most cared about.

Community — The firm leaned on its former director of community relations, who previously had served as a local official and then as a state senator, to gather feedback from the local communities in which the firm operates.

Partners — To help solidify the support of the partnership, Libit and the team first earned the approval of the executive committee, which helped to eliminate resistance. In addition, senior firm management laid out how having the ESG program would help the firm and partners’ practices.

Employees — The firm maintained (and continues to maintain) a pulse on material issues of concern to its employees through the firm’s social impact task force, which is made up of intergenerational employees with a mix of lawyers and business professionals.

Once the firm gathered feedback from stakeholders and prioritized the issues, the firm made a decision to use the United Nations Global Compact (UNGC)’s framework from which to evaluate and report progress on the existing goals, align its future ESG commitments, and formally join the UNGC as one of a few of U.S.-based law firms adopting its framework.

This move helped Chapman further define its ESG strategy, including understanding deeply the current landscape of how professional services firms are responding to ESG issues and preparing the firm for the eventuality of scoring by a third-party ESG rating company.

Libit sees the biggest benefit of joining the UNGC being the unification of the firm’s goals using the Compact’s comprehensive platform. It provides a common framework and language in the form of sustainable development goals (SDG) to identify material issues from its stakeholder assessment. Some of these issues include:

• • • SDG 3-Good Health/Well-Being
    • SDG 4-Quality Education
    • SDG 5-Gender Equality
    • SDG 6-Clean Water/Sanitation
    • SDG 7-Affordable/Clean Energy
    • SDG 9-Industry, Innovation/Infrastructure
    • SDG 10-Reduced Inequalities
    • SDG 12-Responsible Consumption/Production
    • SDG 16-Peace/Justice/Strong Institutions

While the firm’s analysis did not include the creation of a formal materiality matrix, Chapman aligned its relevant work with clients and its priorities around its own strategic goals that focused on diversity, equity & inclusion (DEI), environmental, wellness, pro bono, governance, and community support. Libit also noted that adding to the business case for joining the UNGC, a number of the firm’s clients were already signatories of the UNGC.

Indeed, the firm’s participation in the UNGC is the most visible way to demonstrate its sustainability commitments both internally and externally. It is an effective framework for law firms because it is a widely known, recognized, and respected platform; and most, if not all, of the SDGs are achievable individually by law firms themselves, as well as through work with their own clients. In addition, the UNGC offers access to collaboration with a range of stakeholders to share best practices and emerging solutions with all participants.

On the horizon

By any measure, ESG is gaining traction and attention in the U.S., and Libit says that if his experience is any indication, law firms are already beginning to face the reality that client requests for information pertaining to ESG practices, policies, and other benchmarks are coming at an accelerated pace. Chapman desires more transparency from vendors to extend its impact and meet current and expected future reporting requirements, Libit explains, and this is the reason the firm, like its clients, is seeking to use its purchasing power to do good and adopt and update policies and practices to align with evolving industry practices and reporting requirements.

As part of our ongoing series on client listening best practices, we recently spoke to a senior client development manager at an Am Law 100 law firm who initiated an incredibly effective and now global client listening program at their firm. Their insight into what made the program a success demonstrates some of the best practices for those law firm leaders just getting started in this area.

We’re often told by those firms that attempt to establish such client listening or feedback programs that one of the most common barriers is of course buy-in across the firm. In fact, the client development manager to whom we spoke said her firm had exactly that problem to overcome — some partners and key account managers simply didn’t want to participate.

So, the manager attempted to solve this problem by starting small. First, the client development manager created pilot initiatives with those colleagues who were more capable of seeing the value from the outset in order to “build up some familiarity around the firm of doing formal client feedback and also build a great set of data that we could benchmark ourselves against in the future.” The team’s pilot initiatives spanned different offices and practice groups across the firm with key clients that were interviewed by the marketing & business development team, which had already undergone professional interview training with our consulting team.

To ensure further buy-in and engagement with stakeholders at the firm there were many more steps involved to this firm’s success, the manger noted. Here are some of the key ones:

Branding

“What we really tried to do at the outset was first and foremost raise awareness of the program. We started out by giving the program its own name, [and] we talked about it at our practice meetings, partner conferences, and regional meetings.”

The firm ensured that everyone was unified, through clear and consistent communication around the purpose of the client feedback program, what it would deliver, and the positive impact it would have across the firm. When partners care about and believe in an initiative, they are understandably more motivated to want to participate.

Success stories

“We also really tried to identify, in that pilot process, early success stories, so that we could showcase them around the firm and build-up lawyers who were champions of why we were doing this and the value that we get out of doing independent client feedback.”

By weaving in early success stories into their communications with partners, the firm encouraged good behavior through engagement and solidified the program’s credibility with return-on-investment examples. Openly sharing these successes can also help everyone visualize what is involved and combat some of the pushback questions that client feedback teams might receive.

Champions

“Pilots allowed us to really use those as opportunities to build up partner champions… partner champions that could be advocates for the value of doing feedback.”

If done well, partner champions offer client feedback programs multiple benefits from engaging, motivating, and inspiring people around them to participate “to connecting different teams and departments and bringing the whole firm together.” Ultimately, these champions will help influence the client listening policies and goals and build trust around the program.

Clear actions

“We focused on talking about the results and what we were getting out of the feedback around the firm, what should we be doing to respond on an individual client relationship level, but also looking at the aggregated results of the many hundreds of interviews. What are clients telling us and how can we address areas for improvement more efficiently? And [how can we] make clear recommendations to our lawyers on how to act on that feedback.”

Gathering effective client feedback is one thing, but closing the feedback loop and converting results into action is another skill entirely. By developing an effective assessment process, the firm allowed for concentration on timely customer pain points, and developed a strategy focused on improving the client journey. Ultimately, this is what allowed the team to expand their research at a firmwide-level, beyond the pilot initiatives.

Purposeful strategy

“We really tried to help all our stakeholders see the value, [and] we worked with our regional heads and practice heads to build it into their strategic plans. We didn’t want this to be a forced top-down thing — having leadership buy-in, having it tied to broader strategic goals as a firm, and talking about it regularly were keys to getting this feedback.”

Client listening should be a strategic priority and managed as a strategic initiative with full and visible support from leadership. Developing synergy between programs and strategies from the outset will help achieve this.

Done well, client feedback interviews generate reliable, tangible data that can enable strategic business decisions to be made with greater confidence. But clear and consistent communication, across all levels of the firm — especially around the investment needed to stimulate change and further strengthen client relationships — is critical to the success of client listening programs.

You can learn how to help your firm better determine strategy and demonstrate its value through the use of client listening programs here.