Sourcing Legal Spend: Q&A on Alternative Fee Arrangements, Creative Sourcing, Technology, and More

As one of the more strategic and often high-dollar services categories companies procure, third-party legal spend is getting more attention these days – from CFOs, from heads of procurement, and of course, from general counsels. But legal spend can be highly complicated – far more so than other categories of professional services (e.g., management consulting, audit, internal audit, etc.) To cut through the noise, Spend Matters had a virtual sit down with Procurian legal procurement expert Stephen Rauf to explore a variety of trends and strategies in the legal sourcing market. Stephen is author of the recent Procurian paper, How to Bring Down the Gavel on Legal Fees: Three Key Pillars to Managing Legal Fees, Driving Better Outcomes at Lower Costs.

For the first installment in this interview, see: Sourcing Legal Spend: Q&A on Strategies, Tactics and Trends.The second installment can be found here: Sourcing Legal Spend: Q&A on the Dangers of Blended Rates, Pfizer’s Best Practices and More.

Spend Matters: What are some popular alternative fee arrangements in the market today? What are some of the more creative approaches you have seen?

Stephen Rauf: For areas of law like non-contentious intellectual property, employment, immigration, corporate securities and governance, and the like – fixed fees are very popular because these matter types can be more routine, repeatable, and predictable in the grand scheme of legal matters. For mergers and acquisitions, the use of “busted deal” provisions, where the law firm accepts a significantly lower fee if the deal does not close, are increasing popular.

The more creative approaches we have seen include providing bonuses to the law firms. After all, it is much easier to convince a firm to accept a penalty if there is the possibility for a reward. The key to alternative fee arrangements is they have to be: (i) fair to both parties, (ii) easy to construct/measure, and (iii) provide relief to either party in the event that assumptions materially change. With the right incentives in place, alternative fee arrangements (AFAs) can bring out the creative sides of both parties, resulting in innovative ways to achieve the best outcomes, with fee structures that satisfy both parties.

Spend Matters: What technologies are getting the most attention today? Which ones should get the most attention?

Stephen Rauf: The companies that have yet to adopt e-billing and matter management are taking the opportunity to do so. These systems provide a value platform to start collecting meaningful data for use in building spend management strategies. Additionally, the employment of e-Discovery technologies are really catching on and proving to be major cost savings drivers. It’s a great example of applying technology that’s proven—at least as a first pass review and analysis—to perform the job more quickly, and with higher accuracy than manual document review, for example.

Spend Matters: What are ways of quantifying the benefits of innovative techniques? Which typically provide the largest return on investment?

Stephen Rauf: It’s hard to answer a question that broad with a single answer, but if you look at e-Discovery as one example, we’ve seen instances where applying e-Discovery shortens the cycle time for document review and analysis at a cost of 30% less than manual document review. In the case of AFAs, we’ve seen legal departments achieve savings of 10-20% without compromising quality or relationships.

Spend Matters: Ideally, what role can a third-party advisor play on helping manage legal costs?

Stephen Rauf: A third party can offer an unencumbered view into costs. A good one can perform analysis on (i) the company’s spend profile and challenges, (ii) market intelligence including best-in-class AFA techniques and supply market dynamics, and (iii) benchmarking of rates and fees at a granular level. Then, at the intersection of these three key components, they can construct legal spend sourcing strategies that deliver impactful results. And the best third-party advisors can do all of the above while preserving relationships and the prestige of the legal profession.

Stephen Rauf is the Legal Services Tower Lead at Procurian. He provides advice to clients and constructs commercial arrangements that are equitable to both the client and the law firm. Spend Matters would like to extend a thank you for taking the time to share his thoughts on legal sourcing.

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