Across corporations, legal services remain one of the most elusive procurement categories. This challenge is often rooted in a perception that typical procurement strategies do not apply to a category where long-term partnerships are of the utmost importance. A value-based approach with an emphasis on results as well as rates can help mitigate these concerns and gain the advocacy of corporate legal departments. Although alternative fee arrangement only accounted for less than 25% of big firms’ revenues in 2012, there is definitive transition in the direction of these agreements, particularly as law firms come under increased cost pressure in a more competitive, post-recession environment.
There is a clear trend away from the hourly bill rate in the legal services industry. This antiquated model is difficult to track and creates inherently misaligned incentives between client and customer. Value delivered through alternative fee arrangements is now at the forefront of progressive legal sourcing initiatives. These arrangements can take various forms depending on the client industry, practice area, and matter. Some of the most common approaches are outlined below:
- Risk Collar – applicable across practice areas, this approach allows for sharing in overruns as well as savings within a predetermined budget.
- Blended Hourly Rates – also applicable across practice areas, this structure establishes a fixed hourly rate for a particular matter regardless of resource type, encouraging the legal firms to optimize internal work allocation and thus enable cost predictability and stability for the customer.
- Holdback/Success Fee – most common in litigation, this strategy utilizes aggressively discounted hourly rates with a true-up at the end based on pre-defined results.
- Flat Fees – flat fee arrangements can most commonly be found in the intellectual property space, but the concept of a predefined price for a predefined result is becoming more common across practice areas.
- Aborted Transaction Discount – primarily applicable in M&A, a law firm provides a discount on their accrued fees if a deal does not close.
Another key component of a value-based approach is decoupling the highly strategic legal functions that have an impact on the competitive position of an organization from transactional legal work. If accurate volume estimates can be established, transactional work such as patent filing can easily be brought under a fixed fee arrangement or even potentially outsourced to a low cost, offshore firm. In doing so, it is important for procurement organizations to have a strong grasp on historical spending patterns to ensure that the transition drives measurable savings.
The same rigor and discipline procurement applies to spend management throughout a corporation is also applicable in the legal space. The fundamental approach, analytics, and strategies that a procurement team brings to the table can be augmented by knowledge of category specific trends and alternative billing structures focused on measuring value. Building trust with a legal department is a progressive process that must be grounded in a respect for the critical function this department provides. Once this trust is established, a collaborative partnership between procurement and legal has been shown to deliver sustainable benefits for process and savings.
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- Joel Johnson, GEP