Paying the Right Price
Author: Richard Stock - Lexpert, February 2012, Vol 13, No.4
In early December, I had the opportunity to lead on a series of three-hour seminars discussing the price paid for external counsel. The seminars were organized in collaboration with the Canadian Corporate Counsel Association, and some 50 corporate counsel from four provinces were there, along with a few law firms and a cross-section of public-sector legal departments.
The first order of business was to find out whether organizations were actually applying any significant pressure on legal departments to reduce their external legal spend. The answer, as it turns out, was not really. While general counsel are expected to manage within their budgets, almost none said that those budgets were smaller than in previous years. Otherwise put, legal spend must be managed smartly, but there is not much evidence of cost-reduction initiatives out there.
Another topic of discussion revolved around whether preparing formal requests for proposals (RFP) for legal services is a mainstream way to manage legal spend. Again, not really. While our surveys show that only 17 per cent of legal departments believe that their lead law firm is significantly more capable than its nearest competitor, there is no interest in a competitive process for professional services in order to “save a few dollars.” In fact, the minimum threshold to look at an RFP process, and perhaps at alternative fee arrangements, typically exceeds 20 per cent in savings. The in-house team, in other words, prefers to not upset the working relationships with its primary law firms.
The seminar laid out five steps that legal departments can use in order to arrive at the right price for external counsel. The first, if it has not already been done, consists of collecting data for preparing a multi-year forecast of legal counsel requirements. General counsel should ask the company’s law firms, as well as the legal department, to provide information on the type and quantity (hours) used for the three most recent years. This is a straightforward undertaking with the right tools in place. Baseline data on the number of matters, complexity levels, fees and practice patterns can readily be secured from law firms within three weeks.
The second step is to prepare the forecast. It should estimate the number of matters and their complexity for each legal specialization for three years. It should then estimate the number of hours that all matters are likely to require. And, finally, the estimate should be tailored to the jurisdiction in which the services will be needed. Outside of annual budgets for total spend, almost no legal departments prepare this type of detailed demand forecast.
The third step is to fine-tune historical practice patterns for each type of legal work. Most legal departments have enough experience to be able to suggest more cost-effective delegation within their law firm teams. Sometimes, this is done in conversation with the responsible partner and other times a request for proposal can be used. In both cases, though, the new arrangements should be reduced to writing and drafted by the legal department rather than by the law firms.
The fourth step is to link the planned requirements and preferred practice patterns to pricing. This is where science meets art. Blended hourly rates can be quite effective when the volumes of work are large enough, spread across many matters and stretched out over several years. Introducing thresholds and strong methodologies for detailed matter budgeting and legal project management contributes to more predictability in the number of hours. In turn, that allows fixed and capped fees to be introduced for certain types of matters and phases of matters. Both the legal department and the law firm need to acquire new capabilities and tools to manage the volume of work and alternative fee arrangements effectively. This done, general counsel should negotiate a discounted fee to reflect the volume of work for and the duration of the arrangement with the law firm.
The last step is to find a way to define the value provided by the law firm to the company. It is important to move beyond generalities and overall satisfaction. That means specific performance indicators need to be introduced in agreement with the firm. Some of these will be based on results, others on service and still others on efficient resource management. These should be weighted so that part of the legal fee can be reserved for performance.
Again, the value proposition and related fees should be documented. It is a solid step towards paying the right price for external counsel.