Talent & ESG top concerns as firms find new ways of working

As more organizations and their outside counsel focus on environmental, social, and corporate governance (ESG) issues, one thing becomes clear: ESG is intertwined with many of the topics law firm leaders are confronting today.

In categorizing interview responses, we identified a topic we termed structural pillars, which included responses that went to foundational elements of how law firms are structured and operate. These pillars were also viewed as a key way to engender a sense of belonging among lawyers and staff. And closely tied to that sense of belonging for many attorneys is an understanding of the purpose of the firm, which, as defined in this context, extends far beyond simply serving clients. Instead, purpose incorporates the values and priorities for which the firm stands and how those attributes are expressed outwardly.

ESG is intertwined with many of the topics law firm leaders are confronting today.

Particularly among associates, a firm’s purpose goes beyond whether they feel they belong at a given law firm, and instead may determine whether they want to work for that firm in the first place. For these associates, firms need to create a clear sense and statement of purpose, conveying this in such a way that the associates feel they can identify with where the firm stands. This generation of associates believe they can and should hold their leaders to account for consistency between espoused ESG policies and the day-to-day decisions made in advising clients and indeed, which clients and matters to accept. This difference in generational perspective has led at least one firm to establish a “Millennial Board” comprising the younger generation with the explicit remit to advise the firm’s leadership on all ESG issues.

In this way, ESG interrelates not only with the structural pillars of the firm, but with key aspects of the firm’s talent management strategy and culture as well. In fact, it is almost difficult to discern where discussions around ESG issues stop and other topics begin.

ESG as a client issue 

As regulatory and market pressure around ESG priorities continues to mount for firms’ corporate clients, they are in turn growing increasingly concerned about how their vendors — including their outside counsel — are prioritizing ESG within their own businesses.

Obviously, this has created an emphasis for law firms to prioritize improving their ESG standing, and to do so quickly. These increasing ESG considerations have led firms to undertake much deeper levels of discussion around which clients they want to represent and which they may wish to avoid. These discussions may focus on individual clients, or may even involve entire industries and sectors in which the firm may wish to either highlight or avoid involvement.

Law firms are also seeing ESG as a potential area for business development as well. Areas such as green bonds, regulatory compliance, and ESG-based litigation are obvious areas for law firms looking to expand their practice area offerings. Many are also looking to create teams that are specifically tasked with helping guide clients’ own ESG priorities, seeking to deepen the relationship between client and firm by stepping beyond a reactive model of representation.

We’ve already addressed some of the cultural questions firms are dealing with related to attorney recruitment and retention and defining purpose, as well as touching on the difficulty of maintaining culture in a remote environment. However, the latter topic merits further attention.

The majority of US law firm leaders interviewed stated that they are looking to rebuild their firm culture throughout 2022, and this is likely true for many law firms across the globe that have been struggling with promoting their culture within remote working environments.

Returning to in-person work might be necessary to rebuilding culture, but it is not likely to be sufficient by itself.

Many firm leaders have spoken about the loss of workplace culture during the pandemic as “missing the glue” that holds their firms together, with some describing it as a loss of a “sense of family.” An interesting, but otherwise unanswered question for many of these firms is “how many partners or associates might we lose that have never actually set foot in one of our offices?”

While most leaders view a return to in-person working as a necessary component of reinvigorating culture, they do not believe that returning to the office will alone be sufficient to accomplish the goal. Leaders spoke of the need to be more proactive about fostering culture while being mindful of the communications they are putting forward, both in word and action.

As part of this cultural reinvigoration effort, there is a need to understand the new normal. While this often-overused phrase remains poorly defined, normal seems to be a shifting paradigm that is highly variable from firm to firm. Still, any effort to re-spark culture within a firm will likely involve concerted efforts to understand where the firm and its partners, associates, and staff are in terms of comfort and mindset, perhaps even on an individual level, and crafting a new cultural norm that attempts to bring all of those realities into line.

After a rapid shift to remote work that many would have considered impossible just a few years ago, many law firms now are questioning what else they might be capable of accomplishing and how they can best provide legal services going forward.

This deep thought brings up questions around a firm’s need for physical space, and whether potential options such as hotel working, open office concepts to allow greater collaboration, downsizing to a smaller retail office footprint, or other such alternatives might be worthwhile to pursue. Regardless of the choice made, the physical space of the law firm has the potential to impact both how the firm works and the culture it creates.

Similarly, many attorneys have expressed a desire for less travel. This too will impact how the firm interacts both internally and with clients. Fewer trips to firm offices have the potential to alter how inter-office relationships are grown and maintained, and less travel to client sites can similarly impact how the lawyers working on matters interact with their legal counterparts in-house.

Many of the biggest questions pertaining to new ways of working relate to technology

However, many of the biggest questions pertaining to new ways of working relate to technology. First, many firm leaders said they see a big issue with the uptake of new technology, something that lawyers have been historically somewhat slow to adopt. However, research from the Thomson Reuters Institute has shown that lack of access to new technology and training on how to use it can actually be one of the key reasons for this slow adoption.2 Were law firms to offer improved training and demonstrations on how to access any new technology and make it a seamless part of already familiar workflows, it could go a long way toward improving tech adoption.

At the same time, technology is not seen as reducing law firm headcount. Rather, it is perceived more as a way of reducing otherwise burdensome but relatively menial tasks. However, some aspects of work that can otherwise be seen as low-level have historically provided important training grounds for associates. And as that low-level work becomes increasingly automated, it can create an experience gap for junior associates that also would need to be filled.

2.  https://www.thomsonreuters.com/en-us/posts/legal/stand-out-lawyers-report-2021/

Many of those law firm leaders interviewed who discussed technology did not discuss particularly robust or complex technology stacks, focusing instead on more basic tech frameworks. In fact, it was more common to hear about tech tools like pagination software than about cutting-edge AI-enhanced technology. Some of this may be due to the fact that much of the AI-dependent technology that law firms have implemented features AI that’s so seamlessly integrated that firm leaders do not necessarily think of it as an AI-powered solution at all. Perhaps more troubling, some firm leaders continue to think of many tech tools as “nice to have” rather than “have to have”, indicating a mindset that may lead to problems.

As an example of this mindset, interview subjects provided quite mixed results over how important is innovation within the law firm, or even how to define it. In contrast, some firms have begun to work on internal innovation challenges as a way to spark new ideas and create a sense of ownership over both the project outcome and the firm at large, or even have started to look into partnering with law schools to set up innovation labs to explore new solutions to problems that are not so set in law firms’ traditional “way we’ve always done things” mindset.

The wide-ranging, open-ended interviews conducted for this report focused surprisingly little on clients themselves.

The pandemic also served as catalyst for much innovation within law firms. Tools like e-signatures, virtual meeting software, remote collaboration platforms, work allocation tools and client portals, although not unheard of before the pandemic, have become nearly universal among today’s large law firms. And clients have responded positively to these changes.

Given that, it may be surprising to find that throughout these wide-ranging, open-ended interviews, law firm leaders actually focused relatively little on clients themselves. This is likely a testament to buoyant demand and the large number of critical internal issues law firm leaders must confront today. However, firm leaders must be cautious to not lose focus on external forces while addressing internal challenges.

Firm leaders discussed some frustrations with their existing clients, particularly related to a perceived unwillingness on the part of clients to adopt fixed or alternative pricing arrangements. Many firms have spent considerable money and effort in building up more robust pricing and legal project management teams, creating sometimes fierce competition for these sought-after roles. Yet despite these efforts, alternative fee arrangements (AFAs) have remained fairly consistent at roughly 20% of law firm revenues.

To be sure, some firms outperform this metric, and some clients have placed a special focus on eliminating the billable hour from most if not all of their matters. But firm leaders report that clients remain more likely to accept either traditional hourly arrangements with discounts or budget caps applied. Neither of these arrangements could be considered particularly innovative, of course, nor do they encourage efficiency or investment in improved service delivery. An increased use of AFAs could help to inspire greater innovation around delivery of legal services and how firms get work done because the impetus would be placed on the output of the matter, rather than the hourly input.

There is a growing interest among many firms to offer consulting-type services, more akin to those traditionally offered by McKinsey or Gartner.

Further, many firms are also re-evaluating how they offer services to their clients and what services they want to offer. There is a growing interest among many firms to offer consulting-type services, more akin to those traditionally offered by McKinsey or Gartner. Indeed, some global law firms already are viewing themselves as competitors in this space, while other firms are relying on other professional expertise in the technology area. These offerings include such activities as legal tech evaluation or implementation to help clients determine which potential tech solutions might address identified needs, then assisting with the deployment and implementation of the tool. In this way, the law firm can rely on internal tech expertise developed throughout the course of evaluating these solutions for use at the firm as a way of either creating an independent revenue stream for the firm or even providing such a service at no charge to the client.

All of this, however, is subject to disruptions, not just in the legal market but within the economies of individual countries and the global marketplace.

Chief among these potential disruptors are the still-evolving implications of the military action in Ukraine. Ranking right behind the Ukrainian conflict were concerns about rising inflation in many markets around the world.

Increasing inflation could trigger a slowdown of liquidity, drying up much of the transactional work that has been the driver of so much of the growth in the legal market across the globe. Rising inflation could also trigger a slowdown in government-injected capital which also contributed to liquidity throughout much of the past two years. At the same time, government financial authorities in many countries have signaled an increased willingness to take steps to attempt to stem inflationary concerns.

The Federal Reserve in the US has stated it intends to raise base interest rates between four and six times this year, with the base rate rising between 25 and 50 basis points per increase. This, too, would have a dramatic impact on the availability of finance and capital across the market.

Concern over the potential for new COVID-19 variants remains omnipresent, if not as often discussed as in years past. As recently as April 2022, an uptick in cases in China sparked another round of lockdowns and economic disruptions, and similar steps taken in more countries should new variants emerge could spark yet another wave of upheaval.

Looming over all of these concerns is the specter of potential recession or market correction.

Yet all is not bad news for attorneys, even with this long list of potentially derailing influences. As the ebb and flow of the pandemic years has demonstrated repeatedly, people turn to lawyers in times of uncertainty. For many law firms, the economic downturn of the Great Financial Crisis was delayed by as much as a year as demand for law firm services was buoyed by clients seeking help. The same was largely true in the pandemic, as many law firms experienced much more shallow and shorter downturns from the pandemic’s onset. In fact, the legal market was well on its way to recover by Q4 2020, with most firms experiencing banner growth in 2020 and 2021. Any potential derailment in recovery and growth from the influences listed, or those not discussed here, would be likely to create an initial bump in demand for law firm services.

From that point, fortune would favor the firms best positioned to adapt and overcome, leveraging some of the agility learned in early 2020 to create resilient practices to address whatever the key issues of tomorrow may be.

Law firm leaders today have no shortage of pressing considerations with which to contend, many of which strike directly at the potential future viability of the firm, particularly if a firm has difficulty finding, developing, and retaining the next generation of talent it will need to continue to serve its clients.

However, firm leaders must be cautious to not lose sight of other areas which demand attention. In particular, many of those interviewed spent surprisingly little time discussing how their clients have changed or how they intend to further develop and refine the services they offer their clients. Such external considerations may easily fall behind issues such as talent management that loom so heavily in the forefront of law firm management discussions today.

But clients remain the center of the legal industry, and corporate clients are becoming increasingly reliant on their outside counsel to help manage growing matter volumes. At the same time, client expectations for how their work is done are shifting. The top priorities in the eyes of the client – conducting operations efficiently, safeguarding their businesses, and delivering legal work effectively – were hardly mentioned by those interviewed.

There are, however, ways to hopefully address multiple concerns at the same time. Many law firms have adopted “innovation challenges” as a way to both encourage innovation in the delivery of services, while also creating stronger glue to bond their attorneys and staff to the firm by giving them a sense of ownership over the development of their proposed solutions. This report also discussed the use of secondments as a means of developing and retaining talent, which has the added effect of creating a closer bond with clients by integrating more closely into their legal teams.

The impetus may be on firm leaders to look for multi-faceted solutions to complex problems. In terms of potential problems to solve, it is a target-rich environment. However, law firm leaders today are in a relatively advantageous position, having emerged from the depths of the pandemic on relatively solid financial footings, which can provide ample resources with which to explore potential answers to these difficult questions.