Traditional legal panels cannot be strategic for three reasons. First, hourly-based fees mitigate against the client’s objectives. Second, companies rarely commit to a volume of work over time. Third, hourly fees make it difficult to target innovation.
The 8 critical elements for non-hourly pricing are: solid historical data; scoping the demand for legal services; a clear strategy for the preferred way to retain counsel; a well-designed RFP; a well-configured alternate fee arrangement; two rounds of fee discussions with preferred law firms; ad a master agreement with each firm that goes far beyond billing guidelines.

Our survey of 50 matter budgets from 20 law firms revealed that 80 % of the firms did not have standards and templates for budgeting complex matters in several specialties. Detailed matter budgets set out the hours for individual timekeepers by phase and task. They also set out the planning assumptions as well as a probability, expressed as a percentage, for each assumption. Law departments should master legal project planning and budgeting.

The 8 critical elements for non-hourly pricing are: solid historical data about law firm staffing ratios and geographic distributions for each legal specialty; a 3 to 5-year forecast of the demand for legal services; a clear strategy on the best way to source and retain external counsel; a carefully designed RFP covering qualitative and financial elements; pricing, including non-hourly pricing, building on blended rates to achieve optimal staffing; a first round of pricing negotiations designed to customize initial pricing; a second round of negotiations to finalize pricing and operating protocols; and a master agreement with law firms covering service delivery, pricing and innovation.

Law departments must be the ones to initiate the replacement of hourly-based fees with alternative fee arrangements (AFAs). Some AFA designs target cost certainty while others lean toward improving efficiency. The article offers two scenarios that are compared with traditional hourly fees. The Productivity Improvement AFA shares risk and reward with law firms while targeting a 10% reduction in total legal spend.

There are 5 impediments to modernizing the corporate law department’s relationship with law firms. These are a lack of clear, written strategy by the CLO, setting out preferred relationship with firms; not enough proficiency in influencing the causes and sources of work coming into the law department; deficiencies in the organization, resources and operating practices of law department; poor mastery of alternative fee arrangements, applied to complex work; and no detailed plan to make overcoming these barriers a priority.