A study of 200 American law firms revealed that 64% of respondents believe that the legal landscape went through a fundamental shift during the recent recession 1. The two most notable changes were a decline in hourly billing rate growth and the increasing use of alternative billing structures 2. Approximately 85% of clients requested discounts. Companies that spent up to $500,000 with a particular firm paid a blended average rate (all positions) of $255/hour while those that spent $5-10 million who failed to leverage their spend paid nearly twice as much, at $477/hour. All summed up: The legal community is validating for us that Legal is a category that should be "in bounds" vs. "out of bounds" for sourcing organizations. An alternative approach for managing and leveraging enterprise-wide spend is within your reach.
Similar to the early thinking that information technology and marketing spend could not be impacted by a sourcing process, Legal has also been considered sacred. Although I do not consider a legal service a commodity, the myth that legal is different is just that, a myth. Like other complex spend categories, it is paramount to understand the requirements, dependencies, cost structure and the environment in which the services are used. Due to the fact that many organizations have chosen to informally outsource a large percentage of their legal counsel, the dependency on outside counsel has become increasingly important. However, like all significant outsourcing relationships, a formal process should be developed to effectively and efficiently manage these key relationships.
In preparing for that first conversation with the General Counsel make sure you have done your homework. Using the 80/20 rule, understand the landscape, get smart on the subject matter and develop an approach for selling your value proposition.
Understand the Landscape
- Do the firms serve a unique geography?
- Do the firms operate in a niche legal practice area market (Washington DC, New York) with typically higher prices?
- Are there certain firms handling sensitive matters that should be eliminated from the process? (Note: changing firms prior to completion of a matter is not recommended)
- What relative complexity of work do the firms typically do? (commodity, standard, or specialized)
Develop a Preliminary Negotiation Strategy
- Preferred Provider Program
- Hourly rate structure per timekeeper, per type of practice, per region
- Volume Price Agreement (VPA)
- Payment terms
- Agreement with internal Billing Guidelines
Developing a well-designed, fact-based approach for reviewing Legal spend can be very beneficial to an organization. Outcomes will include a consolidation and optimization of the number of firms used, an ability to leverage spend across the enterprise, standardized rates (by timekeeper, region, type of practice), documented processes for engaging preferred firms for service, improved billing guidelines for invoice audit accuracy and complete transparency and visibility into all legal spend. As a colleague of mine once said, "sourcing is a team sport." So be collaborative with your internal Legal group, as well as firms that would be considered preferred providers. Do not attempt this project in a silo because you will fail. Working together to develop a sound strategy (sourcing, implementing, monitoring and improving) can produce sustainable savings averaging of 7-10%.
1 American Lawyer's 2010 Survey of Leaders of Am Law 200 firms
2 2010 Law Firm Billing Survey