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How to bring down the gavel on legal fees - Accenture

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Procurement Category:
Corporate Services—Legal
How to bring down the
gavel on legal fees
How to Bring Down the Gavel
on Legal Fees
There is little doubt that fees paid to law
firms comprise a large portion of overall
corporate spending, but despite being a
notable area of expenditure, the process
for procuring legal services within most
companies is broken.
Luckily, there has never been a better
time to take a fresh look at how your
organization purchases legal services.
Consider these recent marketplace
developments:
• TransGas
filed suit against DLA Piper
(the largest law firm in the world by
revenues in 2012) claiming that it had
grossly padded its bills.
• Steven
Harper, a former prominent
partner in Kirkland & Ellis’ litigation
practice, released a book titled, The
Lawyer Bubble: A Profession in Crisis,
outlining the looming demise of the
legal marketplace with arguments
rooted in empirical data.
These two headlines alone are enough
to make even the most apprehensive
legal department reconsider partnering
with their procurement teams to effect
change. Yet, few corporations are applying
a pragmatic sourcing discipline to legal
services for fear of impacting long-lasting,
trusted and coveted relationships. Legal
complexity and specialization are both on
the rise and the evolving market affords
more power to buyers to potentially
secure higher quality, more specialized
legal services at more competitive pricing.
Recent news suggests that the incidence
of overbilling is high and the “time-andmaterials” structure of most legal services
relationships is highly opaque to corporate
clients, leaving them to wonder whether
they have been billed appropriately and
charged competitive rates.
With legal needs becoming increasingly
specialized, and with significant changes
in market dynamics, organizations have
new incentives to tackle legal spend with
more rigor.
2
Why is managing legal fees so
complicated?
Corporations have been reluctant
to treat legal spend like other spend
categories for a number of reasons. To
start with, the need for legal services
is highly unpredictable, which makes
budgeting and management difficult.
Meanwhile, legal complexity is on the
rise, as indicated by the emergence of
highly specialized needs, and changing
requirements and regulations. For
instance, in the financial, banking and
insurance sectors, compliance, audit and
investigation work is increasing due to
new (and constantly evolving) regulations.
For corporations with considerable assets
in intellectual property (patents), or in
IP-heavy industries like high-tech and
pharmaceuticals, non-practicing entities
or “patent trolls” are of concern, not
to mention active patent enforcement
activity by individual companies (the
Apple/Samsung saga is one of many such
actions). Additionally, large corporate
merger and acquisition activity is
rebounding, with many transactions
taking new, more complicated forms
than in recent years. With requirements
for increased specialization within the
legal profession coming from so many
areas, it is not practical to broadly create
a “one size fits all” approach for sourcing
legal services.
Perhaps one of the largest barriers to
aggressively tackling legal expenditures
is that failure is not an option. The
relationships formed between corporate
attorneys and outside firms often span
multiple decades, forged on a foundation
of trust. A corporate general counsel will
be reluctant to risk having procurement
staff compromise these working
relationships as this is an area where
mistakes could be extremely damaging
and costly.
In some cases, this risk aversion by
organizations combined with their need to
have access to the broadest and deepest
set of legal expertise leads them to rely on
global, marquee-name firms. These legal
firms are perceived as low-risk because
they offer one-stop access to the broadest
range of expertise, and may be willing
to enter into new commercial structures
like offering discounts or blended rates.
Without careful consideration, however,
this approach may actually raise legal fees
and lower quality.
What is the solution?
To better control legal spend, we
recommend focusing on three
opportunity areas to drive the most value
and the best outcomes:
1. Strategic approach: Given the rise of
specialization, consider the benefits
of both a best-of-breed portfolio
approach and a one-stop-shop model.
2. Alternative fee arrangements:
Consider new alternative fee
arrangement (AFA) models to drive
value-based outcomes, not just
hourly rates.
3. Innovative techniques: Finally, look to
new or unlikely areas for opportunities
to add innovation while containing
costs such as: e-Discovery (an enabler
to quickly triage and review massive
amounts of documents for discovery
during litigation), litigation support
services, and technology/automation
systems (such as electronic billing and
matter management systems) to help
get the legal staff back to practicing
the law, not reviewing and assessing
legal bills.
Let’s explore each of these concepts in
greater detail.
1. Strategy: Convergence or
non-convergence?
All too often corporate services executive
teams and their procurement counterparts
assume that consolidation of a vendor
base yields meaningful savings. But this
is not always the case within legal. To
better understand this perspective, we
need to appreciate legal departments (and
law firms) for what they are: collections
of highly specialized lawyers, each of
whom looks after specific practice areas
and infrequently overlaps with his or her
counterparts. In this context, it is entirely
reasonable to assume that this culture
will produce multiple specialized fields
within corporate legal departments. Thus,
each department maintains its own roster
of multiple, preferred law firms to meet
specific needs.
While concentrating the entire legal
spend with a few big name firms is
possible, it should not be automatically
assumed this is the best strategy to
balance price and service.
Consider the following illustration:
Approach
Benefits
Risks
• Big name cachet
• Multi-practice full-service firms are large,
• Single relationship (fewer firms to manage)
costly and command a price premium
• Fewer partners, billing contacts and in• Level of expertise may not match that of
voices, leading to measureable decrease in
specialized boutique firms
time spent managing outside counsel
• Risk that firms will use junior staff to
• Increased volume discounts
manage costs, potentially impacting quality
• Fragmentation; more relationships
Specialization/Boutique: Award • Specialization; unparalleled expertise
• Higher levels of efficiency in areas of
to manage
matters by type to firms with
expertise
• Smaller dollar volume of spend provides less
core competency in that specific
incentive for firms to offer preferential pricing
genre of law.
Convergence: Centralizing as
much work as possible with as
few firms as possible. Necessitates
use of large, full-service firms.
Source: Accenture.
3
It is important to consider these factors
when developing an overall plan, keeping in
mind that the best strategy could involve a
hybrid or combination of both approaches
for example, centralize routine matter
types with a full service firm(s) and award
specialized matters to boutique firms.
2. Value size your commercial
arrangements
It usually surprises most executives
to learn that legal services are largely
contracted on a time-and-materials,
hourly rate basis. Accordingly, great
emphasis is given to the reasonability
of each attorney’s hourly rate and the
time it takes to complete any given
task. Complete cost risk resides with the
in-house attorney who must scrutinize
monthly invoices and use best judgment
to evaluate the reasonableness of each
charge. Seldom does the in-house
attorney question law firm invoices for
fear of upsetting the firm, disrupting a
relationship or creating the appearance of
accusing the firm of inefficiency.
Now consider the system of alternative
fee arrangements. By definition, an
alternative fee arrangement (AFA) is
any commercial structure for legal
services that is not billable on a perhour basis. Examples include fixed fees,
contingency fees and retainers. While
the use of AFAs is on the rise, they have
been characterized as being challenging
to develop, implement and manage.
However, if employed successfully, AFAs
can be a huge benefit to both the client
and the law firm. AFAs allow the law
firm and client to share the financial risk
of a particular matter. From the client
perspective, AFAs create greater incentive
for the law firm to efficiently staff and
manage a matter. From the law firm
perspective, the AFA creates a predicable
revenue stream and makes billing and
operations more efficient. Finally, simply
engaging in AFA discussions provides an
opportunity for both the client and the
law firm to introduce innovation and
creativity into the process of trying to
mutually achieve the best outcome.
Beware of blended rates: As a first
attempt of implementing an AFA, too
often we see clients who have negotiated
a favorable blended hourly rate that
replaces the disparate rates of multiple
timekeepers who have logged time
against a particular matter. Sure, on the
surface a US$500 per hour rate seems
relatively inexpensive for a top-tier
major metropolitan law firm versus a
partner rate of US$900 or more. However,
blended rates are not effective in aligning
incentives, and there is the risk that
the law firm will funnel work that was
previously handled by senior staff to more
junior resources. The internal cost to the
firm decreases and it gives them work on
which to train their junior-level staff. As
a result, clients can expect an elongated
schedule (it would often take a junior
associate many more hours to produce
what the senior partner could in a fraction
of time), more billed hours, and a final
work product that may be of lower quality.
The shortcomings of blended rates are
clear: they are still based on the hours
incurred, do not transfer a meaningful
portion of cost risk to the law firm and
thus do not qualify as a true AFA. This is
not to state that blended rates are to be
avoided, but rather just a caution. The
adoption of a blended rate is a first step
toward progressing beyond the billable
hour and transferring some staffing
utilization responsibility to the law firm.
They are indeed a useful alternative and
can be rewarding to both the firm and
client if managed properly.
To create sustainable, value-based
cost models, the use of AFAs should be
assessed for application at the onset of
any legal purchase.
3. Innovation: look in unlikely places
often go below the radar but can deliver
substantial value. These services are
often opportunities where the lower
risk of change offers the chance to
“cut teeth” before gaining entry to the
more coveted legal spend areas. In the
case of e-Discovery, the continued and
exponential growth of electronically
stored information, along with the
necessity to query and produce relevant
documents during litigation, has supported
this booming industry. Corporate law
departments have found that technology
tools, such as predictive coding and
technology assisted review, curtail costs
during discovery and help corporate law
departments uncover better information
much earlier in the case as compared to
traditional manual approaches.
E-billing and matter management
technologies also present valuable
benefits that corporate law departments
continue to capitalize on. Streamlined
invoicing processes have allowed manual
bill reviewers (both legal assistants and
lawyers) to free up time to concentrate
on more meaningful work. Additionally,
the systematic application of billing
policies to incoming invoices is handled
by the software itself, which leads to
uniform enforcement of permissible
billing practices and often yields write
downs on bills. The matter management
aspect of these technologies provides a
platform for attorneys to administer their
caseloads more efficiently, collaborate
with outside counsel and create a
meaningful repository of historical
information for future purposes. Finally,
the integrated reporting capability
provides actionable reporting for the
general counsel to use, and provides a
platform to manage the legal function
more cohesively and strategically.
Beyond law firms themselves, there
are usually other legal services on
the periphery that contribute to
legal department expenditures. For
example, think of e-Discovery, litigation
support, systems (e-Billing and matter
management) and similar services that
4
Conclusion
Strategically sourcing legal services can be extremely
rewarding with the potential to meaningfully reduce legal
expenses while driving better outcomes and efficiency for
the organization. Leading organizations are seizing the
opportunity to review their arrangements with law firms and
legal service providers to cut costs and effectively manage
legal requirements amid rising legal complexities.
5
About Accenture
Authors
Accenture is a global management
consulting, technology services and
outsourcing company, with more than
293,000 people serving clients in
more than 120 countries.
Combining unparalleled experience,
comprehensive capabilities across
all industries and business functions,
and extensive research on the world’s
most successful companies, Accenture
collaborates with clients to help them
become highperformance businesses
and governments. The company
generated net revenues of US$28.6
billion for the fiscal year ended
Aug. 31, 2013. Its home page is
www.accenture.com.
Stephen Rauf
Global Tower Lead - Legal Services
stephen.rauf@accenture.com
Copyright В© 2014 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
Mark Hillman
Head, Market Insights & Analysis
mark.h.hillman@accenture.com
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