Striking a New Bargain
Author: Richard Stock -
Lexpert, Vol. 15, No. 1 (October 2013)
THE PURSUIT by corporate counsel for predictability in pricing of legal services, or lack thereof, will continue to leave a lot of money on the table for the next five to 10 years. Over the past decade, the very slight rise in alternative fee arrangements can be largely attributed to the introduction of fixed fees and capped fees for matters and for phases of more complex files. Performance- and outcome-based fees, meanwhile, are negligible as a proportion of all fees billed in the Canadian market.
In other words, in-house counsel are not demanding matter budgets broken down by phase and task together with the underlying planning assumptions and probability estimates. Even though law firms have the tools in place to prepare such estimates, partners are not inclined to use them unless requested by a client. And the client prefers to be busy with other priorities.
I have been discussing this state of affairs with corporate counsel over the past three months. The Canadian Bar Association's June 2013 report The Future of Legal Services in Canada: Trends and Issues states that “clients are expecting greater transparency and predictability for pricing of services. They expect lawyers to operate more like a business, with justifiable costs incorporated into predictable pricing structures.... There appears to be discordance between the perceived value of services by clients and their costs.”
Corporate counsel are reluctant to be rigorous about requesting detailed budgets from their law firms - especially for complex and unique work. Even when such a budget is generated with enough detail, there is insufficient analysis and engagement by the client to challenge the figures and their assumptions.
Here are several areas to look for: the number of hours to carry out specific tasks, the extent of delegation of enough tasks to the appropriate experience level of associate and paralegal, the annual escalation of rates by year of call, and increases for "inflation." Taken together, these factors will add 25 per cent to the cost of a non-routine matter - until adjustments are made.
Unless corporate and institutional clients become proficient in discussing plans and budgets for complex transactions, litigation and regulatory work, it will be business as usual for another 10 years. Large legal departments - those spending more than $1 million in legal fees each year - should have advanced skills in legal project management and detailed matter budgeting. Many, but not all, law firms will respond constructively to such initiatives. In a few cases, firms see these as competitive advantages over their more conservative competitors.
On the other hand, I am amazed to see how some firms still charge full hourly rates for travelling time, and doing so while charging the same client for the work being done while travelling to the client site - a good definition of double-dipping. In one case, travel time exceeded $30,000 over the life of the file. In this era of globalization, where clients can and must be sourced everywhere, surely some travel is part of business life. Clients retaining counsel should ensure that such practices are revealed, if not discontinued.
Is there really competition between firms for work? Relationships between law firms and their top corporate and institutional clients are strong for many good reasons. Our research shows that clients will pay up to 20 per cent more for all but routine legal work before they consider switching to that firm's nearest competitor. In most surveys, costs rank no higher than the fourth or fifth most important criterion when selecting external counsel.
Some years ago, one of the big Canadian banks introduced a policy of securing two proposals/estimates from its list of preferred firms whenever a matter was likely to cost more than $50,000. The results were savings and cost-effective performance that did not sour working relationships. In another case, one general counsel told his primary firm in each jurisdiction that the work was theirs to lose and then introduced a number of conditions, operating practices and pricing arrangements that were “well received.”
It has been a few years since the tools to anticipate legal costs became available. Delayed or partial action by corporate and institutional clients is expensive. Failure by legal departments to strike a new bargain with preferred firms reinforces the classic law firm business model, as firms take on national and international scale.