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  Negotiating Long-Term Fees

Author:  Richard G. Stock    Lexpert:  July / August 2005 at p. 103

There are always new lessons to be learned from law firms as they try to grow or keep market share with existing clients. At the beginning of a review process, companies do not spend much time focusing on the relative cost of legal services. Hourly rates are poor indicators and capping them seems to contribute little to managing “total legal spend.” Nevertheless, comprehensive programs to predict and manage total legal expenses are being launched every month. Such initiatives are now regularly part of programs to reduce overall corporate operating expenditures, and the law department is no longer exempted from participating.

In the last six months, we had the opportunity to work with two national companies to help them analyze their legal expenditures and then to devise a series of steps to quickly manage and materially reduce their costs. One was retaining ± $ 25 M / year of litigation counsel across Canada and had recently seen its list of firms more than double due to corporate mergers. The other had a longstanding list of 30 firms doing high-end legal work, covering M&A, corporate, general commercial, litigation, IP, competition, regulatory and labor / employment activity across the country. Legal fees were in the tens of millions and poised to grow because of business activity.

Both companies had spent a lot of time trimming their lists of preferred counsel based on qualitative criteria. The capabilities of the remaining firms and the very strong relationships with lawyers made the remainder of the assessment process all the more difficult, given that proposals had been received in response to a formal sourcing (RFP) process. For these reasons, it was time for a more detailed, focused “negotiating” program with each of the successful firms.

One company wanted a 2-year arrangement with its fifteen (15) firms, down by half of the original number, because it wanted to re-assess the terms of engagement in the near future. The other company wanted a 3-year agreement with all of its firms, but a very special partnering agreement with its premier four firms to better innovate quickly and then to leverage the results with other firms in three years. Both companies targeted over 20% in savings from projected legal spend. It was a challenge to project work volumes because of strong in-house capabilities, expanding regional markets, and a natural aversion to overstating the commitments to firms. In the end, volumes were produced, averaged across the duration of the reference period, and shared with the firms.

Law Firm Responses

Most of the projected savings, in fact, about one-half of the savings, will come from greatly improved delegation of legal work to more junior partners, associates and paralegals. This amounts to about 20% better delegation than the profile from the last five years. The demographics of Canadian law firms make this essential but quite difficult to realize because many relationship partners see their practices re-structured.

It is easier to accept changes like these when the firm is offered larger volumes to compensate for the otherwise reduced activity levels of key individuals. Some firms seemed sceptical about the use of their paralegals. Others argued that their work complexity almost always required 25 years of experience, or the efficiency that invariably makes up for the higher rates of partners. In the end, market pressures and plain speaking corporate counsel persuaded everyone that the new arrangements would be win-win all around.

Negotiation Strategies

Perhaps the term “negotiation” is too strong when it comes to discussion of fees. However, meetings with 20 law firms to discuss tens of millions of dollars in legal fees, and then to make commitments for two and three years did ultimately bring the discussion around to costs. Several techniques appealed to firms. They include:

  • a blended rate to cover all complexities of work across most files for the reference period. This reduced the amount of project planning and became an incentive for maximum delegation to qualified team members;
  • the use of lawyers from a second office of one firm as members of integrated teams. This allowed a firm to average down its overall rate from the more expensive cities and to share a client across its offices; and
  • “free hours” rather than hourly discounts, provided the company met increased thresholds for work volumes.

Follow-up

Both law firms and their clients must be committed to 90-day monitoring of the terms of engagement for comprehensive partnering agreements. It isn't complex to do, but it does take discipline. The results can be significant.

     
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