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  Changing the Business Model for Legal Services

Author: Richard Stock - CCCA Magazine, Vol 4, No 2 (Summer 2010)

Adapted from: The 2009-2010 Lexpert/CCCA Corporate Counsel Directory and Yearbook, pg 95

Law departments are under increased pressure to reduce their operating costs even when the company is doing well financially. The response is to focus on the easiest target - the cost of external counsel, and the first reflex is to focus on hourly rates.

Very few law firms with more than 50 lawyers derive more than 10 per cent of their revenues from a single client year after year. And that is not because companies are spreading their work around. A recent Canadian survey shows that 55 per cent of companies use only 1 or 2 firms for 80 per cent of their work and another 36.5 per cent use only three to five firms. More than 90 per cent of companies rely on a handful of firms.

We know that rates are not a factor in the selection of a law firm, that 60 per cent of companies do not have written terms of engagement with their primary firms and that no more than 60 per cent of companies plan to review their working arrangements with their law firms in the next two years. This is hardly a movement towards across-the-board cost reduction by companies and conveys a mixed message to law firms.

The cost of services does not factor into the selection of law firms and in the assignment of work between firms. This only tends to be addressed after the work has begun or after it is completed. That makes it difficult to successfully challenge the hourly-based model of pricing legal services - now 45 years old - and annual rate increases in the face of increased demand and difficult economic times.

It is time for law department leaders to conduct a reality check on their efforts to mitigate the cost of legal services. Consider the following:

  • only 32 per cent of law departments have run a formal procurement process to select their law firms. Fewer than half of these will run a similar process to renew agreements within 5 years;

  • for the most part, law departments do not know how many hours of legal work they have purchased by category of legal work in the last 3 years. They do not forecast their demand using the number of hours by legal specialty and they do not rely on gradations in complexity of legal work for planning and management purposes;

  • there are no recognized "optimal" staffing configurations for law firms to use for given categories of work and certainly none are discussed with their law firms. Everything is free form. Corporate Counsel Associations could do much to fill this void;

  • only 60 per cent of law departments negotiate discounts on fees, and 40 per cent pay full retail;

  • only 30 per cent use matter budgeting and require detailed fee estimates by matter from their law firms;

  • only 31 per cent have agreed-upon service levels; and

  • 28 per cent use non-hourly billing some of the time ( that percentage is increasing rapidly, but fully 90 per cent of the legal work is still billed on a variation of the hourly rate.

It takes time and some money for a law department to do all the right things to manage the costs of legal services. Many law departments do not believe that the pain will be worth the gain. Others are very concerned that procurement processes, project / matter management practices, and discussions about rates are antithetical to relationship-based, collegial legal services. Still others are too busy to make the time. For the most part, the available tools and processes are too unfamiliar for law departments to use. General Counsel then default to traditional arrangements with their primary firms

Value and innovation in pricing

Legal departments must become engaged in defining what their company expects in "value" from their law firms. Without these "devils in the details," all of this will be yet another passing theoretical exercise and the cynics and sceptics will be right again. General Counsel should consider the answers to the following questions when planning a review of their relationships with external counsel.

  1. Are you willing to end relationships with “legacy” firms if they don’t make changes to become more efficient or to provide more “value-driven” services in the future?
  2. Describe briefly how you judge value in your outside counsel?
  3. What describes and distinguishes those outside counsel who provide a high degree of value?
  4. Have you communicated to your outside counsel any suggestions for increasing value?
  5. Have you changed the way that you manage outside counsel?
  6. Are you willing to insist that your law firms propose alternative fee arrangements with incentives for productivity and for success?

Getting started now

In order for the value proposition to work in any environment, there must be a long-term commitment from the company and its law firms which is built on trust and shared expectations. My 30 years of experience in retaining counsel, managing a national law firm, and then advising legal departments and law firms has taught me that there is a minimum of working components to building a sustainable relationship between legal departments and their law firms.

  1. What does the global economic climate do to the department's priorities for the next 24 months?
  2. How will the legal department's contribution to corporate priorities be measured this year and in 2011?
  3. Rapidly increasing workloads for corporate counsel are predicted for the next 2 years. What won't get done? What is the impact on attrition in the law department?
  4. There is more pressure for faster turnaround. What measures are being considered to meet this challenge?
  5. How will you reconcile the pressure to reduce legal expenses with items one to four?

Nonetheless, there remains the financial side of redefining the value proposition with law firms. After the volume discount has been attained, in many cases years ago, how else are costs to be reduced? Some advocate that change will only happen if the general counsel is prepared to understand and challenge the law firm business model.

It becomes possible to tilt the hourly billing model in favour of the corporate client when the general counsel chooses to retain balanced teams of lawyers with a strong presence of associates and a healthy delegation of challenging work. Detailed matter budgeting for each fee earner, coupled with a single blended rate for the team are a good start to paying the right price. Making commitments for threshold volumes of work over two to three years will provide another incentive to the firms to build teams and keep their members engaged. In a few cases, it is also possible to introduce results-based billing for transactional work and defence litigation. General counsel have to engage in conversation with their primary firms about pricing that is not a variation of hourly billing.

Few have the appetite and the time to do this. And yet, it is alternative pricing that is the key to addressing attrition and leverage issues. The economy and its effect on companies everywhere should spur corporate counsel to secure better value from their preferred firms.

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