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  The Quest for Cost-Effective Counsel

Author: Richard Stock - CCCA Magazine (Winter 2011, Vol 5, No 4)

    31 % require a regular use of matter budget

  • 31 % define the areas for use of firms
  • 36 % are fixed term agreements
  • 55 % stipulate no rate change without approval
  • 72 % call for a regular use of fee estimate

CCCA’s annual conference was held in Halifax, NS this past August. I joined speakers from AON, Fasken Martineau, Royal Bank of Canada, and the Human Rights Commission for a half-day session – Litigation on a Budget. The focus was on managing the case, the cost and external counsel. With 40 corporate counsel in attendance, I was anxious to see how much progress there had been on the economic points over the last 15 years.

Concerns for Corporate Counsel

The trade literature reports a number of concerns that legal departments have about external counsel. These include containing total legal spend, when to use alternative fee arrangements (AFAs), and how best measure the value of external counsel. Orrick, Harrington & Sutcliffe have 1 100 lawyers in 22 offices. The firm’s Chief Client Services Officer believes that "if you’re thinking about cost certainty, aligned interests, the value of risk avoidance, and the value of hiring external counsel who thoroughly understand your business – AFAs are fabulous."

Participants in the Halifax session were surveyed about the extent to which their companies use non-hourly (fixed or results-based) pricing when retaining external counsel. Not much changed in 10 years with the average for non-hourly pricing stuck at 10 %. Interestingly, 100 % of the participants said there was no likelihood they would move significantly away from hourly-based fees by the end of 2012.

There is a "fear of the unknown" at play. Most corporate counsel would rather pay more for external counsel because of the predictability that comes with an hourly rate – albeit a rate that increases each year. When asked what type of non-hourly fee held the greatest interest, fixed and flat fees, not results-based fees, came out ahead by far. There is neither the experience nor the appetite to innovate with non-hourly pricing. There is a concern that one might end up paying more than with a straight hourly arrangement.

Let’s look at the evidence. One 2010 survey of 145 companies found that larger legal departments face significantly more pressure to reduce costs. Some 84 % of all departments reported pressure to reduce external counsel costs. Yet, in the last 2 years, 40 % of the same legal departments achieved little or no reductions. 18 % achieved a 6 % – 10 % reduction in costs, and the others achieved more than 10 % in reductions.

Quality vs. Costs

With the exception of very routine work, it is rare to see rates and costs in the top 5 criteria for selecting a law firm. Expertise, service levels, and experience in the industry sector rank ahead. Yet, the 2010 survey reported that only 10 % consider their lead law firms to be clearly better than the nearest and best competitor. This explains why law firms work so hard to develop and maintain relationships with their clients. Only 15 % of legal work in the market is price-sensitive and less than 5 % is expertise sensitive. “I hire the lawyer, not the firm” goes the refrain.

Most companies report that 5 or fewer firms do 80 % of their legal work. There are rarely any concerns about the quality of the firms doing the work. In most cases, 1 – 3 firms do 80 % – 90 % of the volume. But, things got very informal from this point on. Our own survey of legal departments report that written terms of engagement with law firms (when they exist at all) tend to have the following profile

    31 % require a regular use of matter budget

  • 31 % define the areas for use of firms
  • 36 % are fixed term agreements
  • 55 % stipulate no rate change without approval
  • 72 % call for a regular use of fee estimate

Legal departments have a lot of ground to cover, given the fairly loose approach to terms of engagement, before AFAs are even considered.

Matter Budgets

The 2009 ACC-Serengeti survey conducted by Serengeti’s Rob Thomas and reported at CCCA’s 2009 Spring Conference reported that only 30.8 % of companies required detailed matter budgets from their preferred counsel. We found that when it comes to matter budget accuracy, corporate counsel found that 60 % come within budget more often than not, 26 % said their firms did so consistently, and only 1 % reported their firms were always on or below budget. Small wonder that the Halifax conference participants expressed a uniform interest in learning much more about the mechanics of legal project management (LPM).

I surveyed CCCA conference participants on this last year, specifically on the use of matter budgeting applied to complex legal work. Some 68.5 % said they did this only occasionally, 14.3 % half the time, and 17.2 % said they almost always require detailed matter budgeting for complex matters.

Matter budgets should be sufficiently detailed to look at the proposed distribution of work across partners, associates and paralegals for each task in a complex matter. Delegation and teamwork are far more effective in controlling the cost of a matter than a 10 % discount on the hourly rate. And, of course, looking at the proposed number of hours for each task helps keep the lid on costs. Firms should be prepared to give their planning assumptions and the degree of probability for the resources assigned to each task within a phase of legal work. A number of progressive law firms have been doing this for a couple of years now. Nothing wrong with buying a re-configured legal team from your preferred law firms rather than the classic open-ended arrangement with the relationship partner.

Barriers to Change

There a few barriers to ensuring external counsel are used cost-effectively. These are lack of experience in detailed matter budgeting, in measuring value and in AFAs. Corporate counsel have not been prepared to invest the time and resources to change the paradigm. Here are 8 action steps.

1. Set a goal to reduce total legal spend by 10 % through in-sourcing, bundling routine work for fixed fees, set rates and partner / non-partner ratios and by re-configuring law firm work teams.

2. Consider concentrating 80 % – 90 % of external legal work with 2 law firms for maximum relationship, professional and economic benefit.

3. Move beyond creating a panel list to making commitments to law firms for planned, multi-year configuration and volume of work. The commitments are not guarantees, but should be relied upon for planning and pricing purposes by the department and its law firms. When law firms can count on you, then can often offer further relationship improvements, value-added benefits, and savings.

4. Tell your primary firms what they will be evaluated against. Discuss the results with them quarterly. What gets measured gets done. Monitor and celebrate improvements.

5. Prepare multi-year terms of engagement with your primary firms. These should cover capabilities, performance standards, work type, volumes, price and non-chargeable services. They should also set out what the firms should expect from the legal department. Obtain sample terms of engagement from other legal departments.

6. Increase use of fixed fee arrangements by matter or by phase of matter to help control external legal costs.

7. Require detailed matter budgets. A total maximum cost per matter does not allow an analysis of the proposed distribution of work within a firm. If based on hourly rates, budgets should show the number of hours by fee earner for all matters with more than 25 planned hours. For alternative billing, seek budgets (or fixed price quotes) for all matters anticipated to exceed $ 10 000.

8. Persuade your primary firms to adopt LPM methodologies for all complex legal work. Ask to see their technology and learn about its coverage and content.

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