Legal Billing Trends & Strategies

Legal Billing Trends & Strategies September 10 11, 2012 Thomas Strouse LexisNexis Corporate Counsel Solutions

Agenda Introduction / Overview Part 1. Billing Change Factors Part 2. Billing Trends Part 3. Billing Strategies Conclusion 1

Introduction The purpose of this session is to: Communicate the changes taking place with billing practices in the legal industry from the perspective of the Corporate Legal Department Identify billing trends impacting both billing practices and software tools Legal Billing Trends & Strategies Provide strategies for law firms to succeed in this changing environment 2

Introduction Change in Relationships between Corporate Law Departments & Outside Counsel: Relationships between law firms and their clients are critical. In recent years many of these ties have frayed or dissipated as values have changed. Clients have: Pared back their roster of Outside Counsel firms Shifted work to smaller competitors or even outsourced to virtual firms Demand discounts of their existing outside counsel relationships Change in the Way Billing is Done: Much of the change focuses on the hourly rate system of billing. Many corporate attorneys advocate: Replace with Alternative Fee Arrangements (AFA s) which are based on metrics other than the number of hours worked. Require steep discounts on hourly rates or even freeze rate increases due to the recent economic climate. 3

Introduction Historical Perspective: Changes have occurred in the past and new changes are taking place now. Prior to 1960 s almost all work was performed with fixed fees either through a single charge, or a monthly/annual retainer fee. By the 1980 s the industry became almost exclusively hourly billing. It is often noted that the legal industry is resistant to change and slow to adopt a new approach. 4

Introduction Let s look at this issue in 3 parts: 1. Billing Change Factors What pressures are motivating these changes? 2. Billing Trends What are the tools and AFA trends that are emerging? 3. Billing Strategies How can firms better operate and even thrive in this environment? 5

Part 1 Billing Change Factors Billing Trends Billing Strategies Change Factors Economic climate has created a buyers market for legal services and a need for Legal Spend Reduction Increased pressure on legal departments for legal spend Predictability Better value for legal services sought through Risk Sharing 6

Part 1 Billing Change Factors 7

Part 1 Billing Change Factors 8

Part 1. Billing Change Factors 9

Part 1. Billing Change Factors 10

Part 1 Billing Change Factors Legal Spend Predictability Duane Morris chairman John Soroko, said Clients are migrating from certainty of rate to certainty of total cost. Many CounselLink clients maintain that while spend is an issue, predictability and certainty of cost are in some cases a greater driver for billing practice changes. Shared Risk Clients do not want to bear all the risk and want fee arrangements that cause the firm to share in the risk. Certain AFA s can redistribute the risk between client and law firm. 11

Part 1. Billing Change Factors 12

Part 1. Billing Change Factors Nearly 70% of large organizations use some form of alternative billing Fewer than 15% of outside counsel fees are paid under non standard arrangements Litigation paves the way for alternative billing * BTI Consulting Groups 7th annual survey of legal services 13

Part 2 Billing Change Factors Billing Trends Billing Strategies Software Tools & Alternative Fee Arrangements New tools are emerging to help corporate law departments manage, forecast, reduce legal spend. New fee arrangements are introduced to improve legal service value and encourage predictability in cost. Better value for legal services sought through risk sharing 14

Part 2. Billing Trends Reevaluating Fee Structures for Outside Counsel 62% discounting fees 50% fixed fees for specific tasks 38% fixed fees for entire matters 37% freezing outside counsel rates 64% other alternative fee arrangements Improving Technology 34% instituting electronic billing requirements to outside counsel 51% implementing document management systems 34% implementing matter management systems 30% implementing reporting tools Reducing Costs 59% enforcing billing guidelines with law firms 61% utilizing technology like video conferencing to hold meetings 30% working with company s procurement department to reduce costs *Successful Strategies for Increasing the Value of Law Departments, ALM and LexisNexis, 2010 15

Part 2. Billing Trends Clients are investing in technology in order to maximize savings, predictability & efficiency in their legal spend. 1. Client Matter Management Software Features Robust reporting tools (Helps identify fair Fixed Fee Arrangements) Collaborative Budgeting & Accruals features Collaborative Staffing List 2. Client E Billing Software Features Rule based electronic billing guidelines enforcement Budget & Staffing enforcement Support for wide range of AFA s 16

Part 2. Billing Trends What types of Alternative Fees are being used? A majority of respondents use at least one alternative fee model *Inside Counsel and Blickstein Group The Third Law Department Operations Survey, Dec 2010 17

Part 2. Billing Trends Realities of Alternative Fee Arrangements 1. AFA s do not necessarily lower costs. In a recent survey, 63% of respondents said the reason for AFA s is lower costs.* In Fulbright & Jaworski LLP s Fourth Annual Litigation Trends Survey, nearly half of respondents said they paid the same for cases with fixed fees than on an hourly basis. In the U.K. where fixed fees are more common respondents paid more. 2. Both hourly billing and AFA s can reward inefficiency but in different ways: With hourly billing the risk is that firms spend too many hours on the matter whereas with fixed fees they might spend too few hours. 3. AFA s will not necessarily be easier or without added effort on the part of both corporate counsel and law firms. Clients will monitor whether firm is devoting correct time on matter or appropriate level of attorneys. They could also require additional budget details from the firm or staffing lists and timesheets. *Pam Easton, US Companies Experiencing New Litigation Wave, Anticipate More to Come in 2010, 11 No. 25 18

Part 2. Billing Trends What impedes the use of Alternative Fees? Unpredictable nature of matter activity tops list. *Inside Counsel and Blickstein Group The Third Law Department Operations Survey, Dec 2010 19

Part 2. Billing Trends Outside legal budgets aren t changing for most companies. They are doing more with the same or less. *Successful Strategies for Increasing the Value of Law Departments, ALM and LexisNexis, 2010 20

Part 3 Billing Change Factors Billing Trends Billing Strategies Pro active Steps to Success Recognize Law Firm Challenges Initiate AFA steps to success when it is right for: The Matter The Client The Law Firm Implement pro active steps to insure your firm is competitive and aligned with your clients objectives. 21

Part 3. Billing Strategies Recognize Law Firm Challenges 1. Pricing by alternative arrangement is not in most firms comfort zone Lack of project management skills Lack of pricing experience Lack of historical information to use for benchmarking Inexact science, can t completely reduce risk 2. Shift in demand curve; leverage is with the clients Increased usage of RFP s; price becoming a factor in choosing counsel Increased demand in better value/service require changes in practice ` 22

Part 3. Billing Strategies Steps to Success with AFA s A successful approach to AFA s requires the firm to first understand what the client wants 3 most common issues with Billable Hour Pricing 1. Frustration in lack of predictability in legal fees 2. Frustration over lack of perceived value 3. Escalating costs year over year Client communication is the single most important factor in successfully implementing AFAs As client relationships improve, the risk involved with AFAs becomes mitigated Clients, like law firms, are in various stages of preparedness, providing them options is the best way to be successful 23

Part 3. Billing Strategies Key steps for initiating and implementing alternative fee arrangements It must work for the Law Firm It must work for the Client It must be right for the Matter 24

Part 3. Billing Strategies 1. It must be right for the Matter Best when client has large number of similar but separate cases Easier for client and law firm to have confidence in level of effort. What is the driving motivation? Is it high stakes litigation matter? Is Cost savings or certainty valued? 3. It must work for the Law Firm Recognize the risk involved: A fixed fee matter could result in working more hours and becomes unprofitable Do your own research and develop tracking systems internally so that you are armed with similar data as your clients. Is this a case where we can reasonably estimate level of effort? Is this a case where maximum effort is needed? Or is this a case where the firm should be incentivized to economize the effort? 2. It must work for the Client Understand client s motivation Cost certainty? Savings? A blend? Client should have adequate data on similar cases in order to have a fair estimate Diversify portfolio of AFA cases to control risks involved. Train partners to communicate effectively with clients about AFA s so that it works for the matter, client and law firm. Important for client and law firm to understand at the outset that when using fixed fee or other AFA s, there will be some cases where the case settles easily and other times not. AFA s shouldn t be used if the client or firm is going to seek a renegotiation each time this happens. 25

Part 3. Billing Strategies Success Factors Trust is key the demand for legal services will increase. Client motivation cost certainty or price? These are not the same thing. Sometimes, the billable hour is the best arrangement. With proper understanding of margins and reasonable assurance of scope, you are indifferent to the pricing arrangement. Start somewhere. Only experience will increase a firm s competence. 26

Thank You! 27