Survey Says ...
Author: Richard Stock - Lexpert, February 2016 at pg 66
Altman Weil's flash survey of CLOs offers a useful look at trends that will shape the year.
EVERY YEAR, I like to look at the findings from Altman Weil's flash survey of chief legal officers (www.altmanweil.com/clo2015). It has been published for the past 15 years and includes demographic and budgetary data for the 258 participants. I rely less on the survey for trends because the mix of companies and industries changes each year. Instead, the results are a useful snapshot to compare one's own experience and plans for 2016.
About 60 per cent of GCs expect to increase external legal spend in 2016, a figure down from 80 per cent last year. Those that are planning to reduce external legal fees say that in-sourcing is a big factor in cost reduction. This is nothing new, given that the fully loaded cost of inside counsel is about 45 per cent of the cost of using a law firm. A more promising development is the introduction of protocols that mitigate and better channel the demand for legal services from internal clients. An intelligent legal and business risk assessment normally underpins initiatives to make clients more self-sufficient. Reducing the dependency on legal counsel frees up the law department for higher-value work.
Efficiency improvements are a never-ending quest for law departments. Ninety per cent of general counsel pursue these every year. The configuration of law departments is changing, with a greater proportion of experienced counsel and a larger number of paralegals. Many law departments are finding that there is insufficient return on investment to house a collection of commercial legal generalists in the department for day-to-day operational support of business units.
Collaboration technologies take much of the guesswork out of the contract preparation process for clients and escalate the exceptions to the law department. More importantly, technologies improve turnaround for clients who are always overdue with their own work. Law departments will need to acquire process-improvement skills or else partner with law firms that have proven track records doing this with significant clients.
Altman Weil's survey findings on cost control were traditional and disappointing for the lack of innovation among participants. In-sourcing, contract lawyers and other non-legal service providers carried the day, along with bigger discounts. Alternative fee arrangements, especially those with a performance-based component, were not highly regarded. This can be attributed to a low appetite to share risk and reward with law firms and a basic lack of familiarity about how best to link metrics, performance and legal fees.
I found the part of the survey dealing with "inside-outside" relationships to be the most interesting. The top three reported service improvements and innovation for external counsel are all focused on "the money": greater cost reduction, improved budget forecasting and non-hourly pricing.
The survey goes on to ask GCs how serious they think law firms are about changing their service-delivery models. The median rating was only a three. Similarly, general counsel rated the amount of corporate pressure on law firms to change their service-delivery models as only six.
Both law departments and their law firms readily agree that legal fees should be performance-based — at least in part. Law firms reward their lawyers for performance and companies do the same with theirs. The anachronism that is the hourly fee hangs on like the drug-resistant superbug. My experience suggests that it is wrong to grade the seriousness of law firms to enter into performance-based fee arrangements so low. Perhaps firms are not prepared to change their overall business model, but that does not stop individual companies from requesting and securing an alternative fee arrangement for a significant matter or for a book of business.
The real obstacle to change is the law department itself. Internal counsel have little expertise in defining and measuring performance for complex and regular work. Typical performance categories should be service, costs, results and innovation. Upon probing, one uncovers the range of “reasons” for the current state of affairs: there is no corporate pressure to change; doing legal work takes precedence; and “we have better discounts than ever before.”
By taking the first step, law departments can save years of waiting in line for their law firms to introduce legal process improvements, project and matter budgeting, collaboration technologies and fee arrangements that stimulate investments to save time and money.
The best law firms already offer these capabilities to their leading clients. General counsel have only to do a bit of homework, formally structure the changes they want, and introduce the enabling fee arrangement. Many law firms will respond well, if not enthusiastically, to the opportunity.