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.

The article is a commentary on Quovant’s white paper “Legal Spend and Matter Management”. Four basic ideas are put forward: timekeeper authorizations, billing guidelines, alternative fee arrangements, and objective and subjective reviews of invoices. Catalyst Consulting suggests additional and more robust measures that step away from hourly rates for individual timekeepers; rely on the introduction of formal Records of Instructions; detailed legal project plans and budgets for individual matters; and fee arrangements that provide incentives to law firms for productivity, performance and innovation.

Successfully reducing legal spend in 2019 cannot take the form of a race to the bottom of the barrel for lower hourly rates. Seven critical steps are described: Secure 2 years’ worth of detailed data from law firms; prepare a multi-year forecast of requirements for external counsel; innovate in configuring primary and other firms by region with longer-term commitments; ensure Legal and Procurement professionals are proficient in non-hourly arrangements; apply optimal staffing patterns to individual matters; evaluate firms every 6 months against 4 KPIs; and have the CLO sign-off on a written project plan to implement the 6 previous steps.

Corporate clients should systematically request detailed matter budgets with the planning assumptions and hours by phase and task for each fee earner when the file is likely to exceed 50 hours. This is good, basic practice management.

The article suggests that putting more eggs in fewer legal baskets and making long term commitments of work to law firms makes it possible to introduce fixed fees for portfolios of work. It also removes barriers to introducing key performance indicators and to truly innovating in legal service delivery.

A survey of 153 legal sourcing professionals by the Buying Legal Council leads to four questions. How do the savings get measured? To what extent is the entire portfolio of legal work scoped and then sourced on a non-hourly basis? Is the company able to evaluate law firm practice patterns as a way to select the best AFA? To what extent is complex, strategic work subject to the legal sourcing process?

Leverage is central to law firm profitability. Most levels of lawyers can delegate 20% of their work to less senior lawyers or to paralegals. Delegation should be optimal, not optional. Turnaround time, knowledge transfer, and stable legal teams are influenced by proper delegation. Failure to delegate tasks is a much more widespread challenge in legal departments since counsel usually does more than 90% of the work on a file. General counsel must monitor file count, file complexity, and cycle times against objectives.

Most law departments do not possess the information or analyze the data that they have to leverage law firm capabilities. The result is a default to retail hourly pricing and the usual discounts for volume.
Too few firms have robust templates for matter plans and budgets. Planning assumptions and a percentage certainty by phase and task are the exception.
When asked, law firms always meet the challenge to produce data about practice patterns, to generate robust matter plans and budgets, and to accelerate the introduction of alternative fee arrangements.