This is an interesting moment for buyers of legal services. The recent economic downturn was unusual, bringing with it a decline in both transactional activity and litigation. This "double dip" in demand for legal services created significant excess capacity in the largest US and UK law firms. Although law firms engaged in unprecedented layoffs of non-lawyer staff, associates, and even partners, most seemed reluctant to cut as deeply as similarly situated companies in other industries might have. The prolonged non-recovery has aggravated the situation, and by most accounts, utilization numbers at many firms remain low.
Many clients used the downturn to gain some concessions from their outside counsel. Whether simply by making some tough demands of their existing counsel or by putting their work out to bid, clients have sought to reverse the trend of years and years of steadily increasing hourly rates. But the error that many have and continue to commit is using their leverage to get discounts in hourly rates instead of seeking more effective and durable changes in the model under which they buy legal services.
About the only good thing about negotiating hourly rate discounts is that it's easy and requires little or no preparation. (You ask, and by and large, you receive.) The problems, however, are many:
- Discounts in the hourly rate may not actually save you money this year. The time and materials billing model is a price times quantity model. If you lower the price without controlling the quantity, you may not actually spend less. And given how little control you have been able to exert over how long lawyers labor over your transactions, disputes, and other matters, you would need to be at least a bit skeptical about how efficient counsel will be when working at a discount, or how willing they will be to write off some of their own inefficiencies, as many have routinely done in the past.
- Discounts in the hourly rate today may not save you money next year either. Eventually, supply and demand will come back into balance, either because business will pick up or because law firms will truly right-size. If the discount you obtained was premised solely on their being under-utilized, that leverage, and your ability to sustain your discount, will disappear sooner than you might expect.
- The process by which you obtain your discount damages the lawyer-client relationship. Reflect on your own experience: counsel quotes you their rate card; you object, probably exaggerating a bit for effect, and ask for a bigger discount than you expect to get; they say they can't possibly do that, but perhaps they could come down a little; you tell them that's not nearly enough and make some vague threats about taking your business elsewhere; they offer to move a bit more; you either accept, or iterate through this dance for another round or two. At the end of it, you have achieved some kind of a rate discount but are left wondering whether you could have done a bit better. Both of you have learned not to trust the first thing the other one says and that to get at "the real answer," you have to be stubborn and pushy. Do you really want to buy legal services like you do a used car? Do you really want to be "in trenches" during a tough deal or lawsuit wondering about whether your lawyer resents the discount you extracted?
Instead, use your leverage to drive more lasting changes in how you work with counsel, which won't evaporate along with their excess capacity and don't necessarily cut directly into their profit margins.
- Insist on better project management. There is no reason, other than lack of investment in the skills and the tools, that legal matters cannot be managed more effectively, using the same techniques that are used for complex projects elsewhere in the modern corporation.
- Insist on assigning the right resources to the right job. Engage your preferred outside firms in a process to define what tasks should be done by in-house staff, by partners, associates, or paralegals at the firm, or by outside resources such as legal process outsourcers, and which tasks could perhaps be dispensed with altogether or made more efficient through the use of better technology.
- Get creative about fee arrangements. There is no reason for all legal services to be delivered on a time and materials basis. Sure, some work is hard to scope out and estimate in advance. But there are plenty of projects that you and your law firms have done enough times that you can up with pretty good estimates. Consider doing those on a fixed fee basis, or creating incentives for efficiency by sharing some of the overruns or savings. Look for ways to tie legal fees to the logic and value of the business those services support.
You can save money on legal fees, feel like you and your outside counsel are on the same side, and use the possibly fleeting leverage you have today to drive some changes that will be harder to reverse than discounts to the hourly rate. Who knows, you might even help them modernize in ways that will mean they will be around to serve you for the longer term.
- Danny Ertel, Partner at Vantage Partners