Mar 10, 2011
Law departments are becoming more sophisticated in their efforts to evaluate outside counsel pricing and fee arrangements and most recognize that this involves more than simply pressuring existing counsel to maintain or lower their hourly billing rates. But what factors should a law department consider when evaluating, managing, and negotiating these arrangements? This article contains a list of ten practical suggestions for truly effective management of outside counsel spend.
1. Choose the right firm for the work and desired outcome.
Many law departments use preferred provider plans, competitive bidding processes, or other means to attempt to control outside counsel spend. A fundamental issue that can be overlooked in some formal structures, however, is the importance of choosing the firm that provides the right value for the work to be done and the desired outcome. There are many issues that may go into this choice. The primary consideration is the risk or value of the work and how it aligns with the company’s business priorities. Contributing to that consideration are the nature of the work, the firm’s experience with that type of work and with the client, whether the work is unique or likely to recur, whether the matter is strictly local or has more global implications, or whether a quick settlement is targeted, to name a few. Even if a firm’s rates seem reasonable, the final overall cost may be too high if it is not the right firm for the work. This may occur, for example, if the firm bills too many hours because of inexperience in the area, staffs the matter inappropriately for the work, or achieves an expensive or otherwise undesired outcome.
2. Establish a baseline budget.
Most law departments now require outside counsel to submit budgets for some specific matters or groups of matters. A well-crafted budget is not simply an administrative exercise, but is an effective management and cost-control tool. Budgets, often using the company’s template, can serve a variety of purposes for the law department. One obvious objective is to estimate the department’s outside counsel spend. Budgets can also provide essential information for pricing, especially when analyzed in concert with historic billing data. Budgets that identify the planned tasks, staffing, and time to be spent on the work allow the law department to assess whether there is an appropriate allotment of funds and to model how different staffing and task allotment will affect fees.
3. Leverage resources efficiently.
The budget can illustrate whether the law firm plans to use its resources efficiently, and can raise red flags about work that should be handled elsewhere. Law departments can control fees by prioritizing specific types of tasks by their strategic value to the matter and determining the appropriate level resource to handle those tasks. For example, is a law firm partner’s expertise needed? Or will an associate or paralegal, an internal resource, or a non-attorney outside vendor do the work? Once this is determined, reach an agreement with outside counsel at the outset of the engagement regarding the quantity or types of work that should be done based on its criticality (e.g., number of experts to be deposed) and who will do the work, and regarding what work should be “unbundled” and assigned to alternative resources such as outside vendors, sent offshore, or even handled internally by non-lawyers.
4. Pay the right price for the services provided.
Equally important to ensuring that the right resource is doing the work is making sure that the right price is being paid for that work. Some law departments focus their attention on junior associates’ time, for example, taking the hard line of specifically prohibiting the use of unseasoned attorneys on their matters or requiring that new attorneys be billed at paralegal rates. You should know (and agree with) what work junior associates are doing, how long it takes them, and how much you are being charged for their time. This scrutiny should not be limited to junior associates, however. The right total price for a task should match that task’s value, regardless of who is performing it. Reviewing and analyzing weighted average billing rates (WABR) for tasks and phases of the engagement can help assess whether the appropriate effort is being given to specific tasks.
5. Validate pricing using benchmarks.
Benchmarks can serve as a preliminary validation of rates, allowing law departments to see if, on a macro basis, they are paying rates consistent with their peers. For example, The Corporate Executive Board Company and CT TyMetrix, Inc., recently released “The 2010 Real Rate Report ™: An Analysis of Law Firm Rates, Trends, and Practices,” (http://www.realratereport.com/about.php) which identifies trends in major U.S. law firm rates by role (partner, associate, paralegal), practice area, law firm size, and region. The “IMPACT™ Benchmarking Survey Report” (or contact Joy Saphla) conducted by Huron Legal in partnership with The General Counsel Forum in the fall of 2010 addresses, among other things, practice area benchmarks by size, spend and WABRs.
6. Review historic and current billing data for trends in pricing.
While benchmarking can provide an overall idea of whether a law department is paying rates commensurate with its peers, the department’s own historic billing data can be analyzed to provide company-specific information. Comparative review of this data can highlight disproportionate or inconsistent rate increases over time and can flag staffing or time anomalies. E-billing systems provide a wealth of current and historic data that can easily be manipulated to analyze spending patterns and evaluate fees, but organizations without e-billing systems can perform the same analyses.
7. Establish an appropriate fee arrangement.
With an understanding of the optimal use of resources and with the data obtained from budgets, benchmarks, and historic billing, law departments have the necessary tools to negotiate fee arrangements appropriate for the law department’s goals and for each matter or group of matters. The type of arrangement the law department chooses may depend on what the law department most wants to drive: cost, performance, or a combination of both. For example, fixed fee arrangements provide the most predictable pricing. Fixed fees can be particularly appropriate for repetitive work or commodity work, but need not be limited to these as long as sufficient data is available to arrive at a reasonable fee. Contingency fee or other risk sharing arrangements may incentivize performance. Traditional hourly billing may be more desirable for untested areas or for high risk/high value matters where a conservative approach is warranted.
8. Manage outside counsel expenses.
Expenses are a component of pricing that law departments continue to review carefully. Many law departments allow only expenses that are necessary to work and disallow any routine cost of the law firm doing business. An increasing number of companies are disallowing expenses such as photocopy, fax, printing, telephone usage, and online research, and some are capping expenses. Some law departments are also evaluating expenses as a percentage of fees or hours to determine if a firm is becoming more or less efficient over time and are comparing law firms’ overall cost, not just the fees associated with time.
9. Update and strengthen all outside counsel guidelines.
If it hasn’t been done recently, it is time to review and update outside counsel guidelines. Outside counsel guidelines should address all aspects of the representation. Robust guidelines address fees, expenses, hours, and who does the work – all the considerations discussed above. For example, guidelines may address which tasks are appropriate, and who (what level resource) is authorized to perform those tasks.
10. Regularly review and measure the effectiveness of your outside counsel management program.
Guidelines, budgets, and other aspects of an outside counsel program are meaningless if they are not managed. Formal processes are necessary to efficiently manage outside counsel, to enforce outside counsel guidelines, and to manage budget compliance. To be effective, these processes should routinely check billing against budgets and also against the guidelines for staffing, timekeepers, and task codes. Technology can facilitate and support these processes. E-billing systems using standard UTBMS codes provide a great deal of reporting functionality. Most e-billing systems allow the establishment of standard invoice “rules” that correspond with the law department’s billing guidelines. Regular, periodic budget management reports such as variance reports and specific matter reports are also important management tools that can be automated and tied to e-billing systems.
Effective outside counsel pricing and spend control involves much more than simply designating hourly rates. It can be affected by a variety of factors, including how and by whom the work is done. Fee arrangements beyond traditional hourly billing, while becoming more common, are still not the norm. The saying that “information is power” holds true -- the ten practical suggestions discussed above will allow law departments to gain a better understanding of the fees they pay and the components of those fees so that that they can choose wisely and negotiate the best fee arrangements and pricing.