Client cost pressures put the squeeze on mid-tier law firms

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The gale-force winds of change that battered Heenan Blaikie have been building for years, as mid-level law firms face intense pressures to cut costs and improve services in a slower market increasingly dominated by bigger, more efficient domestic rivals and a handful of global heavyweights.

The pressure is also coming from below, from small specialist firms operating with much lower overhead and plenty of outsourcing to further slash the costs of providing increasingly commoditized services, such as simple contracts and document searches.

Traditional mid-level law partnerships don't have the capital, resources or management structure to compete, said Colin Cameron, a Vancouver-based management consultant who advises small to mid-size law firms. "You need a very sophisticated, high-end management team and a centralized operation. That's a huge disadvantage for many mid-size firms, when compared to their competition."

Even big firms are hunting for greater efficiencies. Norman Steinberg, chairman of Norton Rose Fulbright Canada, the third-largest legal practice in Canada, said that, while legal spending in Canada has been flat in recent years, his firm has focused on increasing revenue and saving money rather than cutting staff.

The firm has used its purchasing power to negotiate better deals on technology, telecom, travel and insurance. It also has adjusted to demands of some clients for fixed rates rather than hourly billing. "Complacency will kill any business," Mr. Steinberg said.

Survival in the middle of the pack will require leaner, meaner managements capable of weeding out less productive senior lawyers and unprofitable lines of business, as well as responding to demands from clients determined to rein in spiralling legal expenses, industry trend watchers say.

A firm can't have "40 or 100 or 150 partners all having to assist in making decisions, which takes a long time," Mr. Cameron said. "As a result, by the time you decide whether to merge with somebody or make another major decision, it's too late."

Most traditional law firms have been reluctant to hand authority to outsiders, especially if they aren't lawyers, said Mr. Cameron, who is not a lawyer but was the long-time chief operating officer of a Vancouver law firm before opening his consulting practice. "You need someone from outside the industry sometimes to apply management techniques to become more efficient, provide more value to clients and not just be an hourly billing shop."

Tough decisions could be put off as long as the economy was sailing along on the global commodities boom, providing plenty of profit for Canadian law firms. As mergers and IPO business dried up on Bay Street, the lucrative legal action shifted west to the resource sector.

The current bear market for most commodities is now exposing the weaknesses in some firms that didn't show up in high-profit years, said John Brussa, head of the tax group at Burnet Duckworth & Palmer LLP in Calgary.

But BDP and other Calgary-focused firms are different in that their fortunes remain intertwined with the pace of capital flow and mergers and acquisitions in the oil and gas industry. "I don't know if there's been a seismic shift in Calgary," said Mr. Brussa, a long-time BDP partner. "Money is flowing."

Still, he agrees that companies are becoming fussier about their legal bills.

One such cost-conscious company is Healthcare Insurance Reciprocal of Canada (HIROC), which supplies liability insurance to public hospitals and other health-care organizations.

The Toronto company negotiated a deal with Borden Ladner Gervais LLP, its long-time outside lawyers, that has slashed an average of $5-million from annual legal costs that typically run from the low to mid eight figures.

As an insurance provider with plenty of actuarial data, "we have a very good idea of exactly how much legal work we're likely going to require, and that helps us in the calculations [of costs]," said Michael Boyce, vice-president of claims with HIROC.

Armed with that information, the company could go to Borden and offer what amounted to "a continuous cash cow for them. It removes an awful lot of the uncertainty that law firms can experience."

But in exchange, "we insist that they don't overlawyer. The way that they can earn a bit more money is by becoming more efficient," Mr. Boyce said. "What we notice is that you generally get what you pay for. So, if you're paying for billed hours, you're going to get billed hours. I don't really want that. I want results."