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March 14 — As corporate legal departments find more cost-effective ways to farm out their work, law firms should carefully review their billing models, corporate counsel and consultants said March 11 at a conference.
Specifically, they cautioned law firms about raising their billable-hour rates without providing a corresponding benefit and overpricing alternative fee arrangements.
If in-house counsel don't demand that law firms do things differently, the rates are only going to go up, warned Roy Shulman, vice president and chief legal officer, Operations & Systems, at Prudential Financial Inc., speaking at Georgetown University Law Center's Corporate Counsel Institute in Washington.
Legal departments also want law firms to create a business model where there is some cost predictability, HBR Consulting LLC Managing Director Bobbi Basile said. “That call hasn't been answered.”
There has been a lack of awareness over what it takes to deliver legal services, Basile added. The firms are just “throwing in everything but the kitchen sink” to develop their pricing. The result is an inflated, unsubstantiated number, she said.
According to a recent Georgetown University report, law firms have steadily raised their rates over the last 10 years, although the rate of increase has slowed since 2008.
WeddingWire Inc. General Counsel Andrew Olek said that coming from the technology sector, his company is more concerned about value than rates.
“If you're getting the same quality and quantity of work but costs are going up, then your value is going down,” he said. Accordingly, Olek dismissed the common explanations by firms for rate increases, such as the opening of a new office or the addition of new attorneys.
“I don't care about a law firm's business model. I really want value, and so if you're going to raise rates, you should be bringing me something extra,” Olek said.
It’s not the obligation of the client to financially support the business model chosen by the law firm, one audience member said in agreement. “I think it is the obligation of the client to seek the best value they can in the marketplace,” she said.
“I think different firms will make different choices about the way they cultivate the human resources that provide their value,” she continued. “That may mean you might have to charge more for certain services than other firms, but that should be reflected in actual value to the client.”
Shulman said the last place his company considers for its legal work is a large law firm based in a big city, because they have higher rates. Small law firms with expertise are often a little ahead of the curve on being creative in how they bill work, he said. They have to work harder for your business and tend to be really productive and efficient, he added.
The panelist also suggested that law firms haven't fully grasped how to effectively develop alternative fee arrangements. Firms often are taking their billing rate and multiplying it by an estimated number of hours, which really doesn't help, Shulman said.
In the end, the corporate client ends up losing control over the pricing because, if the project goes over the budget, the law firm will just ask for more money, Shulman said. If the matter is settled quickly, then the company is the one left “holding the bag.”
The speakers said that in response to law firms' inability to change how they price their services, corporate legal departments are bringing more work in-house.
“That is a fixed cost to us,” Shulman said. “We can hire superior quality lawyers and have them work in-house and get a lot of production out of them.”
Olek said that his company tries to do as much in-house as possible. “Even when we are going to send something to outside counsel, we try to tee things up and do as much work as we can,” he added. This includes using templates and providing outside counsel with briefings on the status of the company's business, he said.
The panelist also said that law firms are starting to lose out on work to other service providers.
“We have been very conditioned” to thinking that if the work isn't done internally, it must be shipped out to a law firm, Basile said. However, law firms now aren't the only legal services providers available, she said.
To contact the reporter on this story: Michael Greene in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Yin Wilczek at email@example.com
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