A few weeks ago, in concert with Sandpiper Partners, LexisNexis Redwood Analytics hosted a Law Firm Pricing conference in Washington, D.C. Russ Haskin, our Director of Consulting Services, served as moderator for the half-day session that pulled together a panel representing law firm financial experts and partners, as well as general counsel from large companies.
The combined law firm-and-corporate counsel panels were outstanding. Focused on legal service pricing, particularly alternative fee agreements (AFAs), it helped to have perspectives covering both sides of the discussion, to get the full picture. Economic concerns have increased for all parties; and the pricing pressures that every law firm feels are matched by budget control expectations hitting the corporate ranks.
Here are some highlights captured during the conference, as well as some other conversations. These observations don’t have the weight of statistical validity, but still represent the current state in our industry. Today I’ll start with what I heard from the corporate participants, and then in a few days I’ll post the observations from the law firms’ perspectives. It helps to understand what’s going on with both sides at the negotiating table.
Corporate Pricing Perspectives and Pointers: 2013
- There is a lot of corporate budget pressure on law departments. One anecdote I heard: A General Counsel referenced sitting at a table with the CEO and 20 peers last year. As they went around the table, each peer agreed to cut their operating budgets 10-20%. The GC was unable to even provide a budget, let alone commit to cuts, and had to admit to his peers that rates might actually increase, requiring his budget to rise. That “politically damaging” situation reinforces the reality that his law department was a cost, not profit center, and made him look divorced from the reality of budget cuts facing his company.
- Corporate initiatives, fostered by six sigma initiatives, seek to minimize variations, increase predictability, and improve quality and performance. These often magnify the problems that law departments face. GCs increasingly are voicing the opinion that historical hourly billing models encourage law firm inefficiency. These GCs then feel compelled in negotiations to increasingly use RFPs, and involve Procurement, to force law firms to handle routine matters more efficiently. They believe that, with increased experience in routine matters, efforts (and bills) should decrease, but see firms continue to raise rates year over year. (Shouldn’t you be more efficient at your 1000th routine employment litigation matter than you were for your first?)
- GCs believe some firms “over-work” their matters to cover any possible risk. While that’s necessary in “bet the company” litigation and selected M&A work, there should be reasonable and “good enough” alternatives available for routine legal work. Attorneys at law firms frequently state ethical obligations to provide water-tight coverage, regardless of cost. But GC’s are increasingly asking outside counsel to factor in “appropriate” effort, and to discuss risk versus pricing considerations. Firms should proactively ask about pricing concerns and acceptable risk, and guide clients in understanding tradeoffs that affect how a matter might be addressed. This can foster tighter partnership, and align GCs and law firms in a commonly shared goal.
- Some GCs have been shifting their legal spend in ways firms won’t appreciate, by staffing up in-house counsel. The GC then has increased choice in price and risk.
- Large corporations, global companies, and even government agencies are facing increased regulatory oversight, often tied to global anti-bribery regulations. That puts agreements with their partners and vendors – including law firms – under more scrutiny. In regulated industries, auditors can request oversight of all business and fee agreements, to ensure the partner selected best meets business needs at the best price. The GC may need to be able to document in detail why a specific law firm was selected as the best business choice.
- Customer service and communication need work. This was cited as a key driver of value, and a differentiator. A surprising number of clients complain the only routine communication they receive from their law firms is the bill, which is often larger than expected. One GC privately shared that she valued LexisNexis CourtLink alerts to monitor progress on matters being litigated; she couldn’t count on firms to effectively provide regular updates, or cover court date schedules and timely wins/loss updates – especially if the firm lost the case. Worse yet is getting no news because of no action on a case.
- If an existing outside counsel is asked to bid on an RFP, it may be a sign of failure in pricing or service. GCs maintain that they dislike scoping and writing RFPs, and assessing the proposal responses. Even with Procurement Department help, this represents lost time and aggravation. Sometimes RFPs were cited as a last resort to force an incumbent firm to reconsider the way they price and service, and to force the current firm doing the work to look for efficiencies and improvements.
- There is a pressing need for law firms to reexamine their value propositions to make certain they highlight their operational advantages as an incumbent. From the GCs perspective, switching law firms is inefficient and costly. Incumbent firms (should) have deep knowledge of the client’s business, industry and clients. Incumbent firms have also operationalized the fee agreement; it takes a new firm several months to internalize a fee agreement and figure out how to communicate and exchange information well. Incumbent firms have efficiencies such as knowing all the contacts, and how they relate to the matters. Even when turned over in a file transfer, it takes a new firm months to move from constantly referencing a file to knowing the information. Regardless of how efficient the turnover is, it takes a lot of time to understand the people, facts and details associated with each matter. All these elements are inherent economic benefits an incumbent firm can claim and offer … if they communicate it as part of their value proposition.
In a few days, I’ll post the Law Firm viewpoints I gathered along the way.