Four Smart Questions
Author: Richard Stock - Lexpert, Vol 12, No 8, July-August 2011
A few weeks ago, I was asked four questions by the Associate General Counsel of a national bank. He had taken the time to consult his colleagues in the law department with the goal of learning more about progressive practices in working with primary law firms.
He began by asking what strategies work when aiming to reduce legal spend on M&A matters and on litigation matters. This will be a serious challenge over the next 3 years as hourly rates appear to be increasing by 5 % to 8 % per year. Demand for legal services is up, especially in the resource-based sector of the economy. Without some movement away from straight hourly billing, one can only mitigate increases to total legal spend but not reduce it much from the current baseline.
The law department must become much more explicit and formal in scoping the work to be done and in the expected outcomes when briefing the firm. The same is true in identifying the criteria for changes to the scope of work. Both the company and the law firm should become proficient in and committed to the use of legal project management tools on all matters of medium and significant complexity. For organizations with lots of M&A or litigation activity, it is worth it to look at the last 20 matters by type and complexity to examine staffing patterns, that is to say the distribution of hours by experience level. This can be done collaboratively with primary firms. Isolating cost-effective patterns gives the company and the firm specific objectives for resource allocation in the future. Finally, some companies build performance fees into the pricing architecture to stimulate early completion of the matter. The most progressive arrangements reward a successful outcome as well as efficiency.
The second question was whether alternative fee arrangements (AFAs) “impact on quality or timeliness of service”. There is no universal definition of quality in legal services, but given the reference to timeliness of service in this case, one can assume that quality refers to outcomes. Corporate counsel frequently worry that by discounting the hourly or blended rate too much, they will get the “B” team and that their matter will go to the back of the line. I believe the answer varies with the AFA. In my view, hourly and final fees do not influence service and results unless they are part of a multi-year commitment for other work. Otherwise put, a law firm will not compromise its professional and business reputation because the fee is too low. So no, the results will not be diminished. Properly scoping expectations for outcomes and schedules when retaining the firm is the way to go. It is not the fee arrangement that will mitigate service levels but rather the fact that firms are increasingly busy. An AFA with a significant portion, say 15 % to 20 %, for performance can improve and therefore affect quality and timeliness.
Perhaps the third question was wishful thinking. If a firm still records time on a matter where it is billing with an AFA, it still tends to think of the difference as a discount or value lost. How does one disconnect the law firm perception of value from billable hours? My response is that it is the client’s definition and perception of value that counts. It is an open market out there and law firms are businesses. However, the law firm business model and its culture is complex. Yes, it is hourly, but it is also professional and collegial. No firm will agree to an AFA if it doe not see enough financial value. Fixed fees, caps and flat fees are by far the dominant AFA. They can reward efficiency but do nothing to recognize results. In that way, they are like the hourly rate. It really is up to the client to find a way, probably with a hybrid arrangement like a base fee – success fee arrangement, to recognize the value provided by the firm. That value needs to be defined and directly linked to fees (See Law Department Management column (The Hybrid Fee Arrangement) in the January 2011 issue of Lexpert).
The last question was a good one. Apart from saving money, what are the indirect benefits of AFAs? Not all AFAs are designed to save money. There are circumstances where exceptional performance will generate an extraordinary fee that clients will gladly pay. There are other benefits which can be secured with fee arrangements, even hourly fees. These include better balanced legal teams, improved effectiveness and predictable pricing. Still, saying all this does not make it so. Fewer than 20 % of legal departments today prepare a written scope of engagement for their matters that is coupled with planning assumptions and the hours and fees for each task in a matter. Law firms have the capacity to prepare this information and will do so when asked. The time has not yet arrived when legal project management is the standard operating protocol for law departments. The best reason to migrate, if not to accelerate the move, to legal project management is that it is a prerequisite to AFAs that make sense. Applying legal project management to complex and unique matters offers cost predictability by phase. It relies on solid communication about assumptions and changes at key intervals. And, for the first time, it becomes possible to reward specific outcomes and behaviours in the delivery of legal services.