For most of my professional life, I have helped small and mid-sized law firms take advantage of their professional opportunities and overcome their challenges. Now that I have a team of bright young people that bring fresh perspectives to our work, I realize that often, what I see as a need to adapt (change and stress), they see as normal and no big deal.
We have the good fortune of working with some of the most talented, honest and hard-working lawyers and staff in the legal industry. They take ownership of client problems and aggressively advocate on their behalf. To outsiders, it may appear many law firms just work out issues between wealthy institutions, but much of what our clients do eventually impacts real people.
The legal industry is often maligned from the perception that they mostly care about billing and profit. Of course, there are stories about lawyer overreach, questionable billing practices, and outright greed, but we rarely, if ever, encounter these behaviors in our work. We see an overwhelming majority of lawyers who care deeply about the quality of services they provide, the results they achieve, and the cost benefit if the services they provide.
Legal cost control
With the advent of super powerful software tools, clients can control their legal spend to the point it becomes counterproductive. For example, short term cost control and task level management can diminish the professional nature of the relationship and even accountability for final results. Is this an adaptability issue or is it a permanent diminution of quality? If clients are adjusting their expectations and redefining quality as part of the bargain, does it even matter?
Insurance defense cost control
Some of the most aggressive cost control and case management approaches are found in the insurance defense services area. Insurance companies are sophisticated, high volume purchasers of legal services; so it makes sense they would want to control legal spend. These companies regularly balance risk/reward decisions, and while a lawyer may think a case is worth the costs of litigation, their clients often disagree. Lawyers must also put themselves in the clients' place to appreciate how their approach to a case might differ if they were underwriting the cost of the litigation and potential downside risk.
It is obvious by their behavior that many companies believe the relationship that develops between their claims management personnel and outside counsel can sometimes blur the cost-benefit relationship and cause accountability to slip. Most companies have litigation management departments and derivative bill review functions who are policy and procedure driven. Clearly, these companies believe it is beneficial to take a large portion of the legal spending decisions out of the direct control of claims personnel.
Due to this separation of powers, claims management personnel and their outside lawyers are often limited in their ability to properly manage the long term outcome of a case. All too often it seems litigation management guidelines, which are beneficial and necessary to a point, become hard and fast rules that suggest the outcome of a case is secondary. When the legal relationship is overmanaged, clients are often deprived of the experience and training of their counsel.
Effects of overburdensome cost control
Perhaps this is just an intermediate step in a grand transformation. I can only imagine how it looked to the owner of a small hardware store when big box stores opened up down the street or how hard it is to deal with the competitive advantage of a massively powerful internet buying site. It is possible that everyone could benefit if we redefine what is important in the legal services space. But until that time, here are a few of the detrimental effects on the talent pool for insurance defense lawyers.
- Loss of passion for the work
- Lack of skilled trial lawyers
- Reduced competition resulting in insufficient quality choices in the market
- Reduced emphasis on insurance defense
- Defense lawyers who move to the plaintiff side
- Built-in advantages for plaintiff lawyers
- Reduced service for insureds
- Insufficient training and development
- Unmotivated lawyers who remain in the practice
Additionally, many good lawyers are aging and have grown tired of the micromanagement, insufficient respect and relative compensation. Some of these lawyers will continue to adapt, But due to all the counterproductive factors involved, many experienced and talented attorneys do not want to practice insurance defense.
Eventually, insurance companies will either pay more for the best lawyers or accept the consequences of a “pay for what you get” market place.
Is there a grand plan?
If the ultimate industry strategy for many cases is to achieve an acceptable average result obtained through using advanced automation processes (AI, Apps, Data Collection, and Algorithms), then, theoretically, the need for certain types of talent is diminished. In practical terms, legal training would shift from the interpersonal, talent-based aspects of advocacy to learning the tools and processes for achieving the desired predetermined results (feeding the algorithm). Pricing models can also evolve to a more uniform approach and away from hourly based approaches, ending the need for bill review.
Many strategies don’t implement as radical transformative processes; instead, they happen over a period. Proving whether a course of action is beneficial typically requires significant data presented in a uniform way. Companies with many outside counsel relationships will likely have a tougher time aggregating data due to insufficient consistency from one firm to the next.
One likely evolutionary step, who some think is already happening, is to further consolidate work among a relatively few larger firms. Applied blindly, the need to accommodate data collection could outweigh selecting a law firm on traditional, sought-after qualifications.
To preserve a robust supply chain that includes all sized firms, the insurance industry or company could create or adopt a universal case management application (App) for use by outside legal counsel that would satisfy data collection and analysis needs while preserving access to the best legal talent.
Case management and execution could also improve and create new value. To an extent, the bill review companies can provide uniform data across large industry sample sets now, but these data are limited to analysis after an event has occurred. Predictive data will add more value.
How should law firms proceed?
Law firms could also assess market trends and develop responsive Apps that could deliver cost efficiencies, satisfy data collection needs, and create margin without raising the price, but that would require significant investment in innovation. If lawyers are tired of the micro-management, relentless bill audit, and shrinking margins, then creating alternatives is a potential solution.
In the meantime, large law firm management teams already operating in the space might employ a strategy of amassing as much of their insurance client’s or industry’s demand as possible and once the market supply is diminished, raise rates. If clients are complicit in this strategy for their own reasons they may want to jump off at the raise rates part but may find themselves with reduced supply choices.
What can small law firms do?
- Case management systems (better tools and processes)
Large law firms will suffer with long term pricing strategies that depress current profits so nothing is a foregone conclusion. Smaller law firms can still fight for position in this space by employing readily available technologies (case management systems) to satisfy the need for better information and by redesigning their cost structures to operate effectively at more competitive rates.
At a minimum, small firms should be proactive in providing clients with the following statistics using varied measurement periods to indicate trends.
- Average Days Files are Open
- Average Age of Open Files
- Number of Cases Resolved (relevant period by case type)
- Average Age of Closed Files (historical performance measurement)
- Average Timekeepers Per File
- Average Legal Fee by Case Type
Clients who receive these data will not only feel more confident in their buying decision, but will also likely share additional insights into their litigation management strategy. These new insights could provide clues about how to create future advantages.
- Recruiting and training associates (better suited people)
Finding and retaining the right talent is difficult in any practice area. Typical recruiting criteria include law school, class rank, and special distinctions. Lateral hires are mostly about experience and track record. The interview process is normally a shuttle between offices or a group interview mostly focused on likability and whether the candidate seems smart. Rarely is there an in-depth discussion of day to day work-life, daily stressors, and emotional suitability for the position.
Smaller firms do not have the luxury of hiring several associates in the hopes of finding one or two that succeed in the long term. Smaller firms should develop role specific criteria that consider, for example, the ability to juggle multiple priorities, flexibility, tolerance for repetitive tasks, ability to consistently follow rules and procedures, strong communication skills, and a willingness to embrace new technologies might outweigh some traditional qualitative factors.
- Adjust compensation plans (aligning compensation and incentives with market factors)
Most firms either reward performance using billable hours, billings or collections (we will not address originations now). Rarely do we encounter any incentives for case management excellence, client reporting and communication, or guideline compliance. Firms who keep these statistics can reward and encourage efficient case handling, client care, and guideline compliance. Lawyers who are compensated for litigation management factors are more likely to excel in the insurance defense practice area, which should reduce turnover and improve client satisfaction.
- Distributed staffing (redesigning cost structures)
Rarely do law firms operating in the insurance defense market compete on investments in office space and furnishings. They also do not compete on large pools of centrally located staff. Smaller firms should consider a branch/distributed office approach to mitigate travel time billing restrictions and to offer a more complete solution to clients. Larger central offices are no longer necessary to effectively serve clients and smaller firms can place staff geographically.
What about plaintiff lawyers?
Interestingly, the plaintiff’s bar continues to get its act together and providing non-proprietary (available to anyone who wants to subscribe) case management tools like Litify and GrowPath, which were both developed by successful trial lawyers, and access to capital through collaborative case funding, savvy plaintiff-oriented banks, and private capital sources.
All these actions plus the aversion to litigation in the insurance industry adds up to an advantage for trial lawyers.
External factors can accelerate the pace of change. For example, the global economic crisis of 2007/2008 had insurance companies taking an extremely hard line with their outside counsel. Rate reductions, freezes, slow pay, discounts for timely payment, and further pulling back from expensive litigation all happened at a rapid pace. These actions, however, sought to simply control cost and squeeze as much from their law firms as possible.
Law firms for the most part accepted the new terms without response. This climate has continued mostly unchecked, except that the long term damage to the market, which we discussed earlier, continues to occur. If there is a grand strategy, now is a good time to start rolling it out.
Advice for insurance defense lawyers
If you are a lawyer operating in this space and struggling to find satisfaction in your work, here are some options:
- Learn to adapt
- Embrace the stability and predictive nature of your work and express your creativity elsewhere
- Double down on service and quality for those clients measure and value it
- Build a better mousetrap (innovate)
- Limit the amount of insurance defense work you do
- Work toward moving up the client value chain - seek higher risk/reward work
- Create an exit strategy
If you are a new or young lawyer, you may not have these issues or you are well conditioned to the work. You may see opportunities in the volume-oriented nature of the work and have found ways to make the work profitable. My suggestion is you keep a close eye on your skill development and advocacy skills.
Bright and passionate lawyers have a lot to offer the world even if the algorithm does not always value it.
PerformLaw works with small to mid-sized law firms from all over the world. Our vast experience and objective advice helps firms to overcome business challenges so they can focus on the work they do best.