Procurement Category: Corporate Services Legal How to bring down the gavel on legal fees
How to Bring Down the Gavel on Legal Fees There is little doubt that fees paid to law firms comprise a large portion of overall corporate spending, but despite being a notable area of expenditure, the process for procuring legal services within most companies is broken. Luckily, there has never been a better time to take a fresh look at how your organization purchases legal services. Consider these recent marketplace developments: TransGas filed suit against DLA Piper (the largest law firm in the world by revenues in 2012) claiming that it had grossly padded its bills. Steven Harper, a former prominent partner in Kirkland & Ellis litigation practice, released a book titled, The Lawyer Bubble: A Profession in Crisis, outlining the looming demise of the legal marketplace with arguments rooted in empirical data. These two headlines alone are enough to make even the most apprehensive legal department reconsider partnering with their procurement teams to effect change. Yet, few corporations are applying a pragmatic sourcing discipline to legal services for fear of impacting long-lasting, trusted and coveted relationships. Legal complexity and specialization are both on the rise and the evolving market affords more power to buyers to potentially secure higher quality, more specialized legal services at more competitive pricing. Recent news suggests that the incidence of overbilling is high and the time-andmaterials structure of most legal services relationships is highly opaque to corporate clients, leaving them to wonder whether they have been billed appropriately and charged competitive rates. With legal needs becoming increasingly specialized, and with significant changes in market dynamics, organizations have new incentives to tackle legal spend with more rigor. 2
Why is managing legal fees so complicated? Corporations have been reluctant to treat legal spend like other spend categories for a number of reasons. To start with, the need for legal services is highly unpredictable, which makes budgeting and management difficult. Meanwhile, legal complexity is on the rise, as indicated by the emergence of highly specialized needs, and changing requirements and regulations. For instance, in the financial, banking and insurance sectors, compliance, audit and investigation work is increasing due to new (and constantly evolving) regulations. For corporations with considerable assets in intellectual property (patents), or in IP-heavy industries like high-tech and pharmaceuticals, non-practicing entities or patent trolls are of concern, not to mention active patent enforcement activity by individual companies (the Apple/Samsung saga is one of many such actions). Additionally, large corporate merger and acquisition activity is rebounding, with many transactions taking new, more complicated forms than in recent years. With requirements for increased specialization within the legal profession coming from so many areas, it is not practical to broadly create a one size fits all approach for sourcing legal services. Perhaps one of the largest barriers to aggressively tackling legal expenditures is that failure is not an option. The relationships formed between corporate attorneys and outside firms often span multiple decades, forged on a foundation of trust. A corporate general counsel will Consider the following illustration: be reluctant to risk having procurement staff compromise these working relationships as this is an area where mistakes could be extremely damaging and costly. In some cases, this risk aversion by organizations combined with their need to have access to the broadest and deepest set of legal expertise leads them to rely on global, marquee-name firms. These legal firms are perceived as low-risk because they offer one-stop access to the broadest range of expertise, and may be willing to enter into new commercial structures like offering discounts or blended rates. Without careful consideration, however, this approach may actually raise legal fees and lower quality. What is the solution? To better control legal spend, we recommend focusing on three opportunity areas to drive the most value and the best outcomes: 1. Strategic approach: Given the rise of specialization, consider the benefits of both a best-of-breed portfolio approach and a one-stop-shop model. 2. Alternative fee arrangements: Consider new alternative fee arrangement (AFA) models to drive value-based outcomes, not just hourly rates. 3. Innovative techniques: Finally, look to new or unlikely areas for opportunities to add innovation while containing costs such as: e-discovery (an enabler to quickly triage and review massive amounts of documents for discovery during litigation), litigation support services, and technology/automation systems (such as electronic billing and matter management systems) to help get the legal staff back to practicing the law, not reviewing and assessing legal bills. Let s explore each of these concepts in greater detail. 1. Strategy: Convergence or non-convergence? All too often corporate services executive teams and their procurement counterparts assume that consolidation of a vendor base yields meaningful savings. But this is not always the case within legal. To better understand this perspective, we need to appreciate legal departments (and law firms) for what they are: collections of highly specialized lawyers, each of whom looks after specific practice areas and infrequently overlaps with his or her counterparts. In this context, it is entirely reasonable to assume that this culture will produce multiple specialized fields within corporate legal departments. Thus, each department maintains its own roster of multiple, preferred law firms to meet specific needs. While concentrating the entire legal spend with a few big name firms is possible, it should not be automatically assumed this is the best strategy to balance price and service. Approach Benefits Risks Convergence: Centralizing as much work as possible with as few firms as possible. Necessitates use of large, full-service firms. Specialization/Boutique: Award matters by type to firms with core competency in that specific genre of law. Source: Accenture. Big name cachet Single relationship (fewer firms to manage) Fewer partners, billing contacts and invoices, leading to measureable decrease in time spent managing outside counsel Increased volume discounts Specialization; unparalleled expertise Higher levels of efficiency in areas of expertise Multi-practice full-service firms are large, costly and command a price premium Level of expertise may not match that of specialized boutique firms Risk that firms will use junior staff to manage costs, potentially impacting quality Fragmentation; more relationships to manage Smaller dollar volume of spend provides less incentive for firms to offer preferential pricing 3
It is important to consider these factors when developing an overall plan, keeping in mind that the best strategy could involve a hybrid or combination of both approaches for example, centralize routine matter types with a full service firm(s) and award specialized matters to boutique firms. 2. Value size your commercial arrangements It usually surprises most executives to learn that legal services are largely contracted on a time-and-materials, hourly rate basis. Accordingly, great emphasis is given to the reasonability of each attorney s hourly rate and the time it takes to complete any given task. Complete cost risk resides with the in-house attorney who must scrutinize monthly invoices and use best judgment to evaluate the reasonableness of each charge. Seldom does the in-house attorney question law firm invoices for fear of upsetting the firm, disrupting a relationship or creating the appearance of accusing the firm of inefficiency. Now consider the system of alternative fee arrangements. By definition, an alternative fee arrangement (AFA) is any commercial structure for legal services that is not billable on a perhour basis. Examples include fixed fees, contingency fees and retainers. While the use of AFAs is on the rise, they have been characterized as being challenging to develop, implement and manage. However, if employed successfully, AFAs can be a huge benefit to both the client and the law firm. AFAs allow the law firm and client to share the financial risk of a particular matter. From the client perspective, AFAs create greater incentive for the law firm to efficiently staff and manage a matter. From the law firm perspective, the AFA creates a predicable revenue stream and makes billing and operations more efficient. Finally, simply engaging in AFA discussions provides an opportunity for both the client and the law firm to introduce innovation and creativity into the process of trying to mutually achieve the best outcome. Beware of blended rates: As a first attempt of implementing an AFA, too often we see clients who have negotiated a favorable blended hourly rate that replaces the disparate rates of multiple timekeepers who have logged time against a particular matter. Sure, on the surface a US$500 per hour rate seems relatively inexpensive for a top-tier major metropolitan law firm versus a partner rate of US$900 or more. However, blended rates are not effective in aligning incentives, and there is the risk that the law firm will funnel work that was previously handled by senior staff to more junior resources. The internal cost to the firm decreases and it gives them work on which to train their junior-level staff. As a result, clients can expect an elongated schedule (it would often take a junior associate many more hours to produce what the senior partner could in a fraction of time), more billed hours, and a final work product that may be of lower quality. The shortcomings of blended rates are clear: they are still based on the hours incurred, do not transfer a meaningful portion of cost risk to the law firm and thus do not qualify as a true AFA. This is not to state that blended rates are to be avoided, but rather just a caution. The adoption of a blended rate is a first step toward progressing beyond the billable hour and transferring some staffing utilization responsibility to the law firm. They are indeed a useful alternative and can be rewarding to both the firm and client if managed properly. To create sustainable, value-based cost models, the use of AFAs should be assessed for application at the onset of any legal purchase. 3. Innovation: look in unlikely places Beyond law firms themselves, there are usually other legal services on the periphery that contribute to legal department expenditures. For example, think of e-discovery, litigation support, systems (e-billing and matter management) and similar services that often go below the radar but can deliver substantial value. These services are often opportunities where the lower risk of change offers the chance to cut teeth before gaining entry to the more coveted legal spend areas. In the case of e-discovery, the continued and exponential growth of electronically stored information, along with the necessity to query and produce relevant documents during litigation, has supported this booming industry. Corporate law departments have found that technology tools, such as predictive coding and technology assisted review, curtail costs during discovery and help corporate law departments uncover better information much earlier in the case as compared to traditional manual approaches. E-billing and matter management technologies also present valuable benefits that corporate law departments continue to capitalize on. Streamlined invoicing processes have allowed manual bill reviewers (both legal assistants and lawyers) to free up time to concentrate on more meaningful work. Additionally, the systematic application of billing policies to incoming invoices is handled by the software itself, which leads to uniform enforcement of permissible billing practices and often yields write downs on bills. The matter management aspect of these technologies provides a platform for attorneys to administer their caseloads more efficiently, collaborate with outside counsel and create a meaningful repository of historical information for future purposes. Finally, the integrated reporting capability provides actionable reporting for the general counsel to use, and provides a platform to manage the legal function more cohesively and strategically. 4
Conclusion Strategically sourcing legal services can be extremely rewarding with the potential to meaningfully reduce legal expenses while driving better outcomes and efficiency for the organization. Leading organizations are seizing the opportunity to review their arrangements with law firms and legal service providers to cut costs and effectively manage legal requirements amid rising legal complexities. 5
About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 293,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become highperformance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, 2013. Its home page is www.accenture.com. Authors Stephen Rauf Global Tower Lead - Legal Services stephen.rauf@accenture.com Mark Hillman Head, Market Insights & Analysis mark.h.hillman@accenture.com Copyright 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.