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  Billing Practice Alternatives

Author: Richard Stock - Lexpert (Vol 9, No 4) February 2008

Much has been written in the last 15 years about alternative billing practices for legal services, and generally about the rising costs of legal services in North America and Europe. Banks, insurance companies and a good number of multinationals have worked diligently to introduce measures to better predict and mitigate the costs of legal services.

Beginning with volume discounts, then insourcing with the growth of law departments, followed by competitive processes such as requests for proposals and on-line auctions, many measures have yielded significant savings in the face of escalating costs. Yet other companies have relied on third party bill auditors to receive, filter and process legal invoices for payment in the hope that important savings of time and money could be harvested. A brave few companies have set aside micro-management of the law firm in favor of more collaborative processes. They have moved beyond purchaser-vendor arrangements with a short list of preferred firms to balanced partnering arrangements.

Too many law departments fail to invest the time and skill needed to monitor and improve the economic performance of their arrangements with their primary law firms. Larger law departments will authorize many of their lawyers to retain outside counsel, usually within the framework of a multi-year agreement. Invariably, there are billing guidelines in place, with little change from the versions that existed 10 and 15 years ago. Most of these guidelines are woefully inadequate when it comes to dealing with delegation of work by their law firms, leaving it to the senior partner to determine the appropriate level of experience for the matter.

Most are silent on what should be done to reduce the number of hours per matter or to stabilize rates from one year to the next. Few have gone as far as Wal-Marts November 2007 declaration off a moratorium on across the board rate increases for 2008. Extaordinarily busy in-house counsel and a robust demand for experienced law firm partners and for enough associates to do the job do not create the winning conditions for the reduction of total legal spend once the 10% volume discounts are in place.

Fewer than 1 in 25 corporate law departments call for detailed matter budgets at the task level (see UTBMS at www.ledes.org). Many corporate counsel lack the experience and the confidence to negotiate a detailed budget with a senior law firm partner or COO - and many senior partners would rather run a complex legal transaction or case in court for a client than prepare a matter budget. More often than not, fundamental project and resource management skills are absent in both inside and outside counsel. Easier to say that the file is likely to cost between $45K and $55K and get on with it. But the results are never the same.

Enough of rolling the rock up the hill of legal costs and then starting all over again. Here is what one company did to fast forward to a more cost-effective arrangement with its preferred firms. Some 40 firms were delivering 65,000 hours a year from 20 states. Most legal specialties were represented even though 55 per cent of the hours covered most types of litigation. Good discount arrangements were in place but with no more than 10 of the firms even though the company had been through tough times. Moreover, everyone was enduring a long payment cycle for its legal bills partially due to its use of a third party bill auditing vendor for all except its non-transactional work.

A preliminary analysis revealed that further savings of 24 per cent of projected legal spend were possible across a three year period provided the company introduced a broad range of measures at the same time. Over a period of 5 months in 2007, they were able to

build a 3-year history of their usage patterns in all areas of law by having each law firm categorize 100% of their billed hours by specialty, by region of the country, and by experience level for each fee earner;
calculate the weighted rate after discounts for each year of reference for each firm and type of work;
prepare an RFP, analyze the proposals and negotiate 40 month agreements with 9 law firms for most of the 65,000 hours per year;
eliminate the payment of all office related disbursements and agree on a fixed monthly amount for fees payable at the start of the month before the work began for an anticipated range of hours;
introduce review and adjustment mechanisms to accommodate important deviations in the complexity mix and volumes of work;
introduce pricing incentives for efficiency, delegation and innovative business practices by the law firm; and
use matter budgeting for all matters requiring 50 or more hours to complete.

Overall, the architecture and operating protocols of these arrangements are strong yet flexible enough to handle the changing business priorities of the company and the economic realities of law firm markets. Still, the financial success of the arrangements does depend on several controllable factors once everything is signed. These include

quarterly monitoring the number of files or matters with fewer than 50 hours and those with more than 50
quarterly reviews of each matter where a request was made to revise the original approved estimate
an understanding of the variances to planned volumes for each quarter and across the duration of the partnering agreement for each category of work
a program for compliance with preferred staffing profiles by type and complexity of work to understand legitimate variances from plans

Because much can happen during the life of a 40 month agreement, comprehensive reviews make sense at regular intervals - in this case at the 18 and 36 month milestones. Briefing documents are prepared for use by in-house counsel responsible to manage the relationship with one of the firms. These are designed to support conversation dealing with the need to revise (or not) regular, monthly payments because of changes in the volumes or complexity of the work. Other internal analyses needed by the law department should deal with aberrations and trends affecting the integrity or goals of its partnering agreements.

A few companies have found it useful to convene their primary firms as a group to discuss the successes and challenges to improve the partnering arrangements. Is all of this worth the effort? Best practices and internal audit departments suggest that improvements should be continuous and material. On the one hand, there is less administrative down time in the law department and in the firm in dealing with legal bills. But on the other hand, more time must be invested to prepare matter budgets and for the quarterly and interval reviews. The first year is always labor-intensive if the company and its law firms are to do business differently enough to have an impact on the cost-effectiveness of their arrangements. The devil is in the details.

   
 
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