February 27, 2015
The Revenue Threat to Defense Lawyers
The business model for defense lawyers is changing as personal relationships give way to sophisticated management programs at clients.
Thousands of insurance defense law firms across the country have built a steady business over the years by defending the claims of insurance carriers and self-insured clients.
The traditional business model for defense lawyers is undergoing significant change, however, as the personal client relationships that served as the foundation for many law firms are giving way to highly sophisticated litigation management programs maintained by carriers.
This article will explore the risks faced by insurance defense law firms in today’s competitive market, as well as risk management actions that can be taken to protect the law firm’s revenue base.
By way of background, it is important to understand that insurance defense law firms must typically be approved in advance by the litigation manager of an insurance carrier before they are assigned any cases. Getting on a “panel” of approved outside counsel can be a difficult process for two primary reasons. First, the market for panel positions is intensely competitive. Secondly, it is not easy for a law firm to determine who is in charge of a panel to get the initial introduction.
Panels of interest to a law firm will vary with the firm’s areas of expertise. Many law firms concentrate their practice in certain types of cases, like the defense of auto injury, inland marine, premises liability, product liability or professional liability. Other firms take more of a full-service approach by handling cases across a wide range of practice areas.
On the carrier side, multiple panels might be managed by a single gatekeeper or could each have a separate panel manager. The litigation management chain of command within an insurance carrier or self-insured varies from firm to firm, adding complexity to the law firm’s business development process.
While rates paid in the insurance defense market can be significantly less than a law firm’s “retail” rates, the attraction is in the high case volume that can result once a law firm gets named to an insurance panel as approved defense counsel.
Insurance defense law firms that have been approved as panel counsel for multiple insurance companies can inadvertently find that their revenue base is threatened by a shrinking number of insurance accounts over time. In the section that follows, we will address the primary revenue risks facing insurance defense law firms.
The Imperative of Client Diversification
Insurance is about risk management, specifically the process of identifying, assessing and quantifying risk. Attorneys practicing in the area of insurance defense may find it beneficial to apply some risk assessment principles to the business development efforts within their own law firms.
There are three primary practice management mistakes that managing partners make, as outlined below. The solution is to establish a business development process that seeks to reduce the risk associated with unexpected account loss.
Risk #1: Too Many Eggs in One Basket
A leading risk facing insurance defense law firms is that a small number of clients can represent a large portion of the firm’s revenue base. In fact, many law firms (large and small) rely on three to five primary insurance clients to generate the majority of their revenue stream. While reliance on a handful of clients is a common situation early in any law firm’s lifecycle, the lack of client diversity puts the long-term viability of a firm in great danger.
There is no hard and fast rule regarding the number of clients needed for the long-term success of a law firm. Rather, the managing partner should start to worry when the loss of any single client would put the firm at a serious financial disadvantage. For many firms, this might be when one client starts to approach 15% to 20% of total revenue.
While the loss of any client is not desirable, an account that represents only 5% of total revenue presumably can be offset relatively easily by the inflow of other small accounts.
A long-term negotiated agreement with one primary client can look appealing initially but suddenly turns into a major risk factor when the viability of the account comes into question.
Risk #2: Failure to Recognize Changing Dynamics Within the Insurance Market
The times they are a-changin, as Bob Dylan warned in his well-known ballad. Listed below are several real-world examples where insurance defense managing partners either lost or risked losing a major insurance account.
The Industry Consolidation Scenario
“We were the lead insurance defense law firm in our state for a respected insurance company,” a managing partner for a Midwest law firm recalls. “Suddenly, without any advance notice, our insurance client was acquired by a larger insurance company. Not only did we lose the work, but many of the claims managers at our insurance client lost their jobs in the post-merger consolidation.”
The “Out for Bid” Scenario
“After its founding, our law firm grew extremely rapidly in response to the needs of our primary client,” a founding member of a Southeastern law firm reports. “We opened new offices and added attorneys simply to keep up with the client’s case load. The quality and pricing for our legal services was widely acclaimed, but a new vice president of claims brought in by the insurance carrier after a reorganization decided that he wanted to put our work out for bid. We eventually retained our work, fortunately, but it was a hard-fought RFP process.”
The Attrition Scenario
“Our insurance defense practice has a 20-year history of success,” explains the managing partner of a six-attorney firm who spends his work day as one of the lead litigators. “Over the years, however, I did not have the time to develop new business while also serving the needs of current clients. We found ourselves overly reliant on one client, and without the benefit of an established business development process.”
The “No One Told Me” Scenario
“I suddenly noticed that we were not receiving the same level of incoming cases,” reports a practice group chair with a long history of providing specialized legal services to one of the country’s leading banks. “In researching the problem, not even our internal contacts could tell us who was now responsible for panel appointment decisions. It took many days to identify the bank’s panel manager and realize that they had decided to favor regional law firms over single-location firms like ours. We ultimately got back on the panel, but it was a very nerve-wracking process.”
Insurance defense law firms also face more routine risks, including:
- Departure of a partner who leaves with her book of business
- Retirement of a founding member who served as the primary rainmaker
- Insurance clients that decide to hire more in-house attorneys
- Centralization of the insurer’s litigation management team
Risk #3: Lack of Time to Expand the Book of Business
Once approved as outside panel counsel, law firms frequently enjoy a steady stream of cases that arrive at their doorstep with little additional business development effort.
Of course, panel members must perform satisfactorily, maintain good relations, be available around-the-clock for the infrequent (one hopes) emergency and offer billing rates that are attractive to the insurance company.
The challenge is that existing clients, particularly large accounts, can easily consume all available capacity within a law firm, leaving little time for courting new clients.
It is indeed a juggling act to manage the day-to-day requirements of meeting court deadlines and responding to client requests, while also trying to devote time to business development.
Looking at the risks, however, it may be easier to make time for marketing after considering what would happen if you lost one of your largest clients. The loss of a major account could result in lay-offs, as well as possible difficulty making lease and other overhead payments. In an extreme case, a law firm may need to quickly affiliate with another firm, thereby losing its independent status.
Minimize Revenue Risk With a Law Firm Marketing Committee
Insurance defense law firms or practice groups that plan for long-term success may find it helpful to create a marketing committee responsible for establishing panel counsel relationships among a broader range of insurance companies and other entities.
Marketing committee members can address issues like:
- Where to expand geographically. This can be a difficult question, because it may involve an acquisition or opening an office.
- Development of new insurance defense skill sets. A firm that handles auto cases may want to expand into related forms of transportation, like trucking, railroads or aviation.
- Exploration of adjacent market segments. Staying with auto for the moment, law firms could try to create business opportunities with fleet managers or delivery services.
- Growth in the self-insured market. Many large retail, municipal or corporate accounts self-insure up to a certain level (known as “self-insured retentions”).
The time to start looking for more clients is now! Attracting a new account takes time, so it is advisable to work on business expansion while the firm has a satisfactory level of business already in place.
The best defense is a good offense. Paying close attention to existing clients, while maintaining an active business development process, is an effective way to minimize revenue risk in the insurance defense sector.
Start early. Marketing for insurance defense success is a long-term process that benefits from a continuous focus on business development campaigns.