June 23, 2006
RFP's: Why They Can Work for You and Client, p. LB 4, LB 5
Lori Brazier and Richard Stock
In a recent survey of law department costs for a cross-section of Canadian corporations, 100% of the general counsel reported a concern with rising legal costs. Most are happy with the talent offered by their preferred law firms, but all have objectives for cost containment.
Corporations are reticent to adopt alternatives to hourly-based billing for fear of compromising the quality of legal work. They are hesitant to disturb an otherwise strong relationship with their law firms. For those reasons, pricing discussions are limited to discounts and rate caps.
However, these partial measures do not address the possibilities of improving productivity and limiting the volumes of legal work so that the corporation can achieve some predictability and certainty over legal costs.
Case plans and budgets are every lawyer’s Achilles heel. Lawyers are not trained in project planning and fee estimating. There is always a fear of making a commitment that cannot be honoured.
The result is always a ” guesstimate “ of the time required to complete particular phases and tasks. General counsel view such budgets as unreliable because the final fee bears little resemblance to the original estimate. Yet there is much more frequency in Requests for Proposals for legal services than was seen 5 years ago.
The time has come for law firms and important purchasers of legal services to embrace new ways of working together. Like recipes and golf games, the key lies in finding the right combination of measures to achieve remarkable results and rewards that are fair for both sides.
The current way of doing business is fraught with inefficiencies. Yet, if adjusted, there are immediate savings for the client and improved profitability for the law firm. There are two important types of inefficiencies: 1) teams that are too large, resulting in a proliferation of hours and 2) inadequate direction of associates, paralegals and students.
Proliferation stems from: 1) insufficient planning and management of workflow at the outset, and 2) a lack of available associates and paralegals to assist from start to finish. A recent review of billing practices over a period of 24 months on a handful of financing and securities matters in one firm revealed that 7 lawyers accounted for roughly 80% of some 5 000 hours of the legal work, another 40 lawyers and several dozen articling students contributed 20% of the hours. The additional time required for briefing and instructing associates and students drives up the overall volume of hours.
A lack of clear direction to associates, paralegals and students and the failure to set targets for the time required to complete the assigned tasks can also elevate the volume of hours. Professionals are always well-intentioned and do whatever they think it takes.
The risk is that the extra effort may exceed the value to the client. The client either accepts that cost, or the law firm absorbs a portion when the hours are written down. In both cases, no one wins. Delegation of tasks that may be beyond the capability of a particular associate, paralegal or student without adequate guidance will also sustain the volume of hours.
Prerequisites to Successful Partnering
Given the effort involved in creating and sustaining these types of arrangements, one must determine whether the volume of legal work that the company refers to law firms is sufficient to warrant a change in the business model. A few “winning conditions” must exist.
The company must have an ongoing demand for legal services of defined types and complexities over a period of at least two, and preferably three, years. Annual fixed fee arrangements typically require blocks of legal work with a value of $500,000 or more.
However, there is precedent for negotiating fixed fee arrangements on specific matters requiring as little as 25 hours of legal work. In these cases, the company and law firm agree upon a fee for each phase of the work, with change order provisions in the event of unforeseen developments.
Another key prerequisite for a successful arrangement is mutual trust. Partnering requires the client to abandon the micro-management of specific matters, and measurable commitment by the firm to achieve the client’s business goals.
The capacity to gather and analyze relevant data is also critical. Without this, the client and the firm are unable to decide if the alternative approach to billing will deliver good financial value.
The data (volumes, complexity, type of law, staffing profiles) are required in order to understand the true cost of legal services, to negotiate alternative fee structures, and to agree upon expectations from the law firm for service and results.
The solution is three-fold: 1) the introduction of task-based project management techniques, 2) co-operation and trust on the part of both the corporation and the law firm, and 3) willingness to innovate and accept a degree of risk. Two examples of innovative approaches follow.
A professional liability insurer recently identified a need for tools to assist its claims analysts in evaluating legal budgets and in establishing appropriate expense reserves. The solution was to develop benchmark case plans / budgets for five levels / categories of complexity for litigation matters.
A preferred staffing profile was identified for each category, along with a target number of hours for each phase of litigation, based on historical averages. Reserves for each phase were then set for each plan, unless the responsible lawyer offered a business case for a different number of hours. The insurer and its law firms worked together to ensure that the tools were useful and realistic.
The benchmarks were then reviewed and updated annually to ensure that they reflected actual averages. A number of law firms had already moved to a pricing model based on a fixed fee, thereby diminishing the temptation to not manage workflow efficiently.
Using a similar prospective approach to case planning, one municipality abandoned hourly-based billing for legal services regarding six contested developer applications as well as for its Official Plan review process. The firm chosen to handle the various matters prepared detailed budgets estimating the number of hours for each phase ( investigation / assessment / development; pleadings and motions; hearing preparation and attendance ) distributed across the lawyer and paraprofessional team members for each matter. This allowed the firm and the City Solicitor to agree upon a fee for each phase, supplemented with a change order mechanism when unforeseen developments occur.
The resulting predictability about the ultimate cost of these matters won kudos from city council. The law firm has worked to plan, and has remained within budget on completed matters. City staff have applauded the quality of work and service provided by the law firm.
Keeping the lid on legal costs requires law firms to better plan and manage legal work. There is evidence that it is possible to do so and at the same time increase profitability for the firm.