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  New Ways to Keep Client
Costs Down

Author: Richard Stock - Lexpert (October 2006 at p. 106)

It is almost impossible to “beat the clock”. Or so it seems from the findings of 40 hours of recent interviews with partners and associates in four Canadian and U.S. law firms. The challenge in each case was to persuade law firms that a lower weighted rate for a given volume of work could translate into greater profitability for the law firm and reduce costs for clients. Few were prepared to accept such a hypothesis because all quickly equated a higher hourly rate with greater profits. Typically, they didn't want to turn their minds to expense reductions, leverage and new volume (hour) thresholds as significant contributors to profitability for a law firm and to cost reductions for clients.

Some 407 in-house counsel and 131 law firms recently responded to InsideCounsel’s 17th Annual Survey of General Counsel. The findings claimed that “most of the friction between law firms and their in-house counsel can be traced back to costs.” Indeed, when it comes to financial matters, the perspectives of the two groups could hardly be more different. 52% of in-house counsel identified “reduce costs” as the most important thing law firms could do to improve their relationship with their legal department. But only 9% of law firms cited this as the key improvement. About 74% of law firms claim they are actively seeking ways to reduce their costs but 71% of in-house counsel disagree.

It should come as no surprise that corporate and government law departments are resorting to strategic procurement initiatives, convergence, in-sourcing and changes to internal workflow and risk management protocols to contain legal costs. Matter budgeting and tighter reporting protocols by law firms also help reduce the number of hours for those law departments that take the time to use these tools.

Yet many law firms seem busier than ever, unit prices are escalating at 5% to 8% each year in most parts of the country, and everything legal is more complex and urgent than ever before. This is the paradox which general counsel and their law firms must address.

There are three “case studies” that shed some light on the intractability of conflicting business imperatives. The first is a law firm which has supported a large insurance defense practice for many years. The insurer had a long history of suppressing hourly rates for all of its firms to the point where these are now 40 % below local rates for other forms of litigation in the same reference market. Associates see acceptance of work from this client as limiting their income levels and career advancement. Partners were questioning the profitability of the client, despite the fact that more than 25,000 hours of work were available each year.

After considerable analysis and debate, a five part plan emerged. The plan relied heavily on a reduction in the amount of partner time for many tasks on files, a 30% increase in the total annual volumes of work from the client as a way to reach critical activity thresholds for associates, less use of senior associates given their high cost and low rates, and a much greater use of paralegals.

The firm also decided to launch a technology/paperless initiative to reduce secretarial support ratios by 50%. Financial simulations show a 50% improvement in the profitability of this client once all the measures are in place within 12 months. A combination of increased volumes, targeted leverage and expense reduction was the solution despite a rate increase of less than 5% per year.

The second case also involves litigation, but in the professional liability field. Again the volumes for the firm were large at over 35,000 hours per year, and the corporate client was using no other law firm for this type of work. The firm produced very good results and delivered top notch service. The issue was that the client’s business environment was quickly becoming more litigious and much more complex.

For this reason, the cost of the legal portfolio was ballooning and projections saw no downturn in the mid-term. The pressure to design an innovative cost management program was mounting.

Once again, the solution challenged the law firm’s culture and business model. Moreover, the client was persuaded to change its risk/reward model as well. The four-part plan consisted of a reduction in the use of certain partners with especially high hourly rates whose practices were less than 20% dedicated to this client. Other measures included an increase in the use of soon-to-be partners to ensure succession, the expansion of a legal team from the firm’s second office where rates were lower, and robust case budgeting methodologies coupled with a 10% “collar” on the targeted number of hours each year. This last measure served as an incentive for the client to accurately forecast demand and for the law firm to complete each case effectively but with the fewest number of hours possible.

The third situation consisted of a small company active in the oil and gas sector in both the U.S. and Canada. The volumes of activity were less but intellectual property and corporate securities formed a large part of the legal portfolio. Issues with supply contracts and competitive markets in the U.S. gave rise to litigation that spanned several states. Despite a buoyant energy market, the company was determined to reduce its legal costs from projected levels over a three-year period. The company began by issuing a request for proposals to its qualified firms in Canada and the U.S. The specifications outlined the type, complexity and planned volumes of legal work for each year. It suggested a preferred configuration of legal/paralegal teams for each specialty. The total convergence of law firms resulted in a blended hourly rate locked in for 3 years. Finally, the two chosen firms demonstrated significant capability in estimating and managing legal budgets.

Each of the measures described in the case studies has significant precedent and none is particularly innovative. However, it is the customization of the combinations and a serious commitment by the law firms and by their clients to follow through that delivers cost reduction in the range of an impressive 25%.

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