13 th Annual ISM Services Conference Phoenix, AZ Buying the Law. Dr. Silvia Hodges Fordham Law School TyMetrix Legal Analytics December 7, 2012

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1 13 th Annual ISM Services Conference Phoenix, AZ Buying the Law See Clearly. Act Decisively. Dr. Silvia Hodges Fordham Law School TyMetrix Legal Analytics December 7, 2012

2 Were billing rates in 2011 higher or lower than in 2007? 2

3 How does spending more with a law firm affect a client s rates? 3

4 What actually drives rates?

5 FACT IS: Over the past 10 years, the hourly fee for a major US law firm lawyer rose by more than 65%, faster than any other economic indicator Spending more with a particular firm often yielded higher rates, not more favorable rates Of the five main drivers of rate increase, geography is a bigger influence than experience TyMetrix Legal Analytics Real Rate Report

6 Rates rise through recession From the TyMetrix Legal Analytics/Corporate Executive Board, 2012 Real Rate Report

7 Rates rise by role

8 2007 Partner Associate Paralega Others Firm Size Category l % 29% 9% 2% % 42% 15% 2% % 37% 16% 11% % 49% 12% 12% % 52% 11% 4% Unknown 42% 38% 15% 4% 2011 Partner Associate Paralega Others Firm Size Category l % 37% 9% 0% % 38% 15% 2% % 38% 12% 4% % 52% 9% 4% % 45% 8% 3% Unknown 46% 38% 14% 3% Law Firms are allocat ing work up

9 A segmented market Bespoke $400 - $1,000 per hour $175 - $350 per hour Evergreen Commodity $25 to $100 per hour

10 Demand in the market remains flat: Highly competitive marketplace LegalVIEW Demand Index /2006 3/2006 5/2006 7/2006 9/ /2006 1/2007 3/2007 5/2007 7/2007 9/ /2007 1/2008 3/2008 5/2008 7/2008 9/ /2008 1/2009 3/2009 5/2009 7/2009 9/ /2009 1/2010 3/2010 5/2010 7/2010 9/ /2010 1/2011 3/2011 5/2011 7/2011 9/ /2011

11 Strategic Procurement 1980s Procuring of engineering & architectural services 1990s Reverse auctions 2000s Procuring of marketing services Convergence trend Procuring of accounting services DuPont Legal Model + Legal Operations Professionals 2010s Offshore services centers Real Rate Report TM AFAs ACC Value Challenge Chief Procurement Officers Procuring of legal services

12 How mid-sized companies in Europe select and review their legal services providers (for LexisNexis) How U.S. companies select International Outside Counsel (for ALM) How mediumsize companies buy legal services/ Winning business from medium-sized businesses (PhD/for Ark Group) Insight from Germany s top corporates on improving service and value delivery in the legal profession (for NISUS) The influence of procurement on the purchasing of legal services (with ISM & APS) Purchasing studies

13 (1) Choice of legal service provider tier ( objective ) Type, scope, scale, and importance of the matter for the client? Market position? Value proposition? Benefit sought? (2) Choice of individual lawyer within tier ( subjective ) Personality, chemistry, relationship, trust & WOM (word of mouth)

14 In the case of [our company s] bankruptcy [we want a]: Top firm! For debt collection: Not. There are many levels. You need to chose the expertise you need (MC7).

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19 40% 35% 30% 25% What percentage of an organization s legal services budget do procurement departments purchase? 20% 15% 10% 5% 0% Up to 10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70% 71-80% 81-90% Over 90% All

20 GCs still determine which firms are short-listed (=limited list of firms considered) Senior executive management (e.g.ceo or board) GC/Head of legal department Business management (e.g. division head or business unit manager) In-house lawyer (other than GC/head of legal department) Head of procurement

21 GCs still make the final decision Senior executive management (e.g.ceo or board) GC/Head of legal department Head of procurement

22 Procurement and in-house lawyers collaborate We are a service provider to the in-house legal department We are colleagues - our mandate comes directly from executive management We collaborate (e.g., cross-functional teams)

23 What value does procurement add? Cost reduction: We study the cost drivers of the 3 big cost drivers: discovery, depositions, and filing of motions. Negotiation: Procurement people look at it [sourcing] differently, they ask different questions [than in-house lawyers would]. Typically, they ask tougher questions [than lawyers] and negotiate tougher. Improve efficiency: It [procurement] is there to make the process better.

24 A low price isn t that much more important for procurement than for in-house lawyers More important Same Less important

25 Critical selection factor for selecting law firms: Experience with similar matters Services excellence Less important factors: The (lowest) price Industry rankings

26 I look for subject matter expertise. I want them to show me that they can handle this type of contract, and that they guarantee me a quick turn-around. Firms need to be open to budget. There s still a big disconnect between [what] the firm [sells] and what the law department expects. Firms need to get good at it. Much better, in fact. Right now, most firms are not good. We want lawyers to be cost conscious. We do a lot of cost controlling, look at fee structures, have caps for different types of activities.

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28 What helps you source legal services: Proper History. Gather five years of rates on all your key firms and fee earners Proper Data. Gather data points on firms and fee earners that are essential to effective comparisons and negotiations: evaluations of rate information, outcome, staffing of matters Proper Perspective. Gather and measure historic cost of like matters Proper Benchmarks. Compare your rates and fee arrangements to industry benchmarks

29 What your legal departments measure: Legal spend month over month Amount of Invoices Flagged vs. Submitted by Vendor Matter spend by duration Legal spend breakdown by practice area Open to close ratio month over month Top cases by spend Top vendors by spend Law department budget to actual Billed rate by role year over year Practice area blended rate year over year Total spend by vendor Rate review & comparison Top firms by evaluation Ratio of low to high severity cases % of matters with budget % of matters with assessment % of matters with status updates % of matters handled via AFAs Firm staffing profile Partner hours by litigation phase

30 Lit Sample Data For Illustrative Purposes

31 Who is the most/least expensive? Denver 100-Lawyer Firm 5 Years Experience Associate Employment Law New York 1,000-Lawyer Firm 2 Years Experience Associate Employment Law Minneapolis 300-Lawyer Firm 20 Years Experience Partner Litigation From the TyMetrix/Corporate Executive Board 2012 Real Rate Report 31

32 Estimate a lawyer s rate: Real Rate Report Regression model Law Firm Size + + Tier 1 Market Partner + Experience Status + +/- Practice Area Base $15 Per 100 Lawyers $16 1 $95 $34 per 10 years +$99 (Finance) -$15 (Litigation) $15 1 Source: 2012 Real Rate Report n = 15,353 Lawyers From the CT TyMetrix/Corporate Executive Board 2012 Real Rate Report 32

33 Who is the most/least expensive? Denver 100-Lawyer Firm 5 Years Experience Associate Employment Law New York 1,000-Lawyer Firm 2 Years Experience Associate Employment Law Minneapolis 300-Lawyer Firm 20 Years Experience Partner Litigation From the TyMetrix/Corporate Executive Board 2012 Real Rate Report 33

34 She is! Base $151 Denver +$ Lawyer Firm +$ 15 5 Years Experience + $ 17 Associate + $ 0 Employment Law + $ 0 Base $151 New York +$161 1,000-Lawyer Firm +$150 2 Years Experience +$ 7 Associate +$ 0 Employment Law +$ 0 Base $151 Minneapolis +$ Lawyer Firm +$ Years Experience +$ 68 Partner +$ 95 Litigation -$ 15 TOTAL $183/hour TOTAL $469/hour TOTAL $344/hour From the TyMetrix/Corporate Executive Board 2012 Real Rate Report 34

35 There s an APP for that 35

36 download RateDriver App for free 36

37 (1) Choice of legal service provider tier ( objective ) Can Type, you/your scope, scale, firm do and the importance work? of the matter for the We do client? our due Market diligence position? on you. Value proposition? Benefit sought? (2) Choice of firm individual within lawyer tier ( metrics-driven ) within tier ( subjective ) Does Personality, working chemistry, with you relationship, make good business trust sense? We & WOM look at (word your of numbers, mouth) our numbers, your competitors numbers, compare and benchmark.

38 If you come to my office or call my phone, I'm billing time. If you stop me at parties to whine and moan, I m billing time. If I think of you when I am all alone, I'm billing time. If you're late for appointments, I will be waiting and billing time (The Bar & Grill Singers)

39 Dr. Silvia Hodges (646) LinkedIn: Silvia Hodges Blog: silviahodges.com