How Clients Are Evaluating Pricing Today

Law departments continue to evaluate law firm pricing, seeking additional cost savings while ensuring that firms are providing value for the price they are paid. What has changed is that these evaluations now “drill down” to deeper and more fundamental levels of the pricing process: Law departments are looking not only at the bottom line price, but also at the components that contribute to that bottom line. Law firm administrators can use the same type of analysis and information to guide pricing and matter management, and therefore demonstrate their firms' commitment to providing value and efficiency.

The Three Bs

Some of the major sources of information used by law departments to analyze what they pay their outside law firms are benchmarks, budgets, and billing data.

Benchmarks

Law departments are constantly looking for benchmarks against which they can assess what they pay in legal fees. From professional organizations, commercial sources, and internal data, law departments are obtaining industry, matter type, and geographically specific benchmarks and/or establishing their own internal benchmarks. For example, The Corporate Executive Board Company and CT TyMetrix, Inc., have recently released “The 2010 Real Rate Report': An Analysis of Law Firm Rates, Trends, and Practices,” which identifies trends in major U.S. law firm rates by role (partner, associate, paralegal), practice area, law firm size, and region. Benchmarks can provide a starting reference point for the evaluation of law firm pricing.

Budgets

Law departments' analyses of fees do not end with benchmarks. Most clients now require outside counsel to submit budgets for specific matters or groups of matters. These budgets, often using the company's template, can serve a variety of purposes for the law department. One obvious objective is to estimate the department's outside counsel spend. Budgets can also be used as matter management tools. But budgets also can provide essential information for pricing, especially when analyzed in concert with the other data sources discussed here.

Billing Data

Most major corporations and many smaller ones now have e-billing systems in place. These systems provide a wealth of data that allow law departments to analyze spending patterns, as well as useful historic context to evaluate fees. Even companies that don't have e-billing can manually perform the same analysis of their non-automated bills.

Using the Three Bs for Better Bottom Lines

When reviewed and analyzed together, the “three Bs” ' benchmarks, budgets, and billing ' are powerful tools that help law departments ensure they are getting the best “bang for the buck” from their outside counsel. Law firm administrators can encourage the use of the firm's own historic billing information and budgets to support pricing, and encourage open communication with clients about how pricing is developed.

Fees

Law departments are closely examining not only the fees themselves, but also how those fees are derived. Ultimately, clients want to ensure that their outside firms are using the most appropriate resource, at the most appropriate cost, for a given task. Law departments are looking at how law firms staff their work on a consolidated firm-wide basis and for specific matters. They are also looking at patterns and consistency in the effort used for various tasks. And they are studying historic billing rates looking for rate trends, comparing those with other similarly sized, similarly focused firms in the same geographic area and looking for opportunities to request discounts or caps. Instead of a “business as usual” approach, law firm administrators who want to help their clients in these efforts can take the client's perspective and guide partners to staff matters in the most efficient, cost-effective way and make sure their rates compare favorably with other comparable firms in the area doing comparable work.

Expenses

Expenses continue to come under careful review. Many clients are now disallowing all “soft” expenses such as photocopy, fax, printing, telephone usage, and online research. Clients are frustrated when their expense guidelines are not followed, and law firm administrators would do well to ensure that charged expenses not only comply with client guidelines but also are necessary to the work and are not a cost of the law firm doing business. Law departments are also evaluating expenses as a percentage of fees or hours to determine if a firm is becoming more or less efficient over time and to compare expense spending across law firms.

Alternative Fees

Finally, the trend continues toward alternative fee arrangements. Clients recognize and value law firms that offer alternative fees and manage them well. Some law departments are using the data from their analyses of benchmarks, budgets, and billing history as a baseline to affirmatively propose fixed fees or other alternative fee arrangements for individual matters, categories of matters, or in some cases for all work done by the firm. Clients are increasingly asking firms to put a portion of the fees at risk dependent on successful outcomes. They are also leveraging payment terms as a negotiating factor of the fee arrangement. Sophisticated law firms are using the same information (budgets, billing, benchmarks) to proactively present alternative fee arrangements, before the clients make the request. (See B. Baccus and F.L. Hirschberg, “Alternative Fee Arrangements: Meeting the Client's Needs While Maintaining Profitability,” Accounting and Financial Planning for Law Firms, v. 23 no. 6 (June 2010), and M. Kudel and J. Cussons, “Information: The Key to Successful Law Firm Management,” Accounting and Financial Planning for Law Firms, v. 23 no. 10 (October 2010), for discussions of alternative fee arrangements and the variables that drive law firm profitability.)

Conclusion

Law departments remain very cost- and value-conscious and are carefully scrutinizing law firm invoices and proposed budgets. With a better understanding of the nature of that scrutiny, law firms need not wait for their clients to request accommodation; firms can use their clients' perspective to look at the staffing and rate trends for the matters they handle, and take proactive steps to demonstrate their efforts to provide the most value for the fees clients pay.

Bret Baccus, a member of this newsletter's Board of Editors, and Matthew Schuetz are both Directors in Huron Consulting Group's Legal Consulting practice. Huron Legal provides advisory and business services to assist law departments and law firms to enhance organizational effectiveness and reduce legal spend. Huron Legal advises on and implements strategy, organizational design and development, outside counsel management, operational efficiency, and discovery solutions, and provides services relating to the management of matters, contracts, documents, records, digital evidence and e-discovery. Baccus can be contacted at [email protected] and Schuetz can be contacted at [email protected].

Law departments continue to evaluate law firm pricing, seeking additional cost savings while ensuring that firms are providing value for the price they are paid. What has changed is that these evaluations now “drill down” to deeper and more fundamental levels of the pricing process: Law departments are looking not only at the bottom line price, but also at the components that contribute to that bottom line. Law firm administrators can use the same type of analysis and information to guide pricing and matter management, and therefore demonstrate their firms' commitment to providing value and efficiency.

The Three Bs

Some of the major sources of information used by law departments to analyze what they pay their outside law firms are benchmarks, budgets, and billing data.

Benchmarks

Law departments are constantly looking for benchmarks against which they can assess what they pay in legal fees. From professional organizations, commercial sources, and internal data, law departments are obtaining industry, matter type, and geographically specific benchmarks and/or establishing their own internal benchmarks. For example, The Corporate Executive Board Company and CT TyMetrix, Inc., have recently released “The 2010 Real Rate Report': An Analysis of Law Firm Rates, Trends, and Practices,” which identifies trends in major U.S. law firm rates by role (partner, associate, paralegal), practice area, law firm size, and region. Benchmarks can provide a starting reference point for the evaluation of law firm pricing.

Budgets

Law departments' analyses of fees do not end with benchmarks. Most clients now require outside counsel to submit budgets for specific matters or groups of matters. These budgets, often using the company's template, can serve a variety of purposes for the law department. One obvious objective is to estimate the department's outside counsel spend. Budgets can also be used as matter management tools. But budgets also can provide essential information for pricing, especially when analyzed in concert with the other data sources discussed here.

Billing Data

Most major corporations and many smaller ones now have e-billing systems in place. These systems provide a wealth of data that allow law departments to analyze spending patterns, as well as useful historic context to evaluate fees. Even companies that don't have e-billing can manually perform the same analysis of their non-automated bills.

Using the Three Bs for Better Bottom Lines

When reviewed and analyzed together, the “three Bs” ' benchmarks, budgets, and billing ' are powerful tools that help law departments ensure they are getting the best “bang for the buck” from their outside counsel. Law firm administrators can encourage the use of the firm's own historic billing information and budgets to support pricing, and encourage open communication with clients about how pricing is developed.

Fees

Law departments are closely examining not only the fees themselves, but also how those fees are derived. Ultimately, clients want to ensure that their outside firms are using the most appropriate resource, at the most appropriate cost, for a given task. Law departments are looking at how law firms staff their work on a consolidated firm-wide basis and for specific matters. They are also looking at patterns and consistency in the effort used for various tasks. And they are studying historic billing rates looking for rate trends, comparing those with other similarly sized, similarly focused firms in the same geographic area and looking for opportunities to request discounts or caps. Instead of a “business as usual” approach, law firm administrators who want to help their clients in these efforts can take the client's perspective and guide partners to staff matters in the most efficient, cost-effective way and make sure their rates compare favorably with other comparable firms in the area doing comparable work.

Expenses

Expenses continue to come under careful review. Many clients are now disallowing all “soft” expenses such as photocopy, fax, printing, telephone usage, and online research. Clients are frustrated when their expense guidelines are not followed, and law firm administrators would do well to ensure that charged expenses not only comply with client guidelines but also are necessary to the work and are not a cost of the law firm doing business. Law departments are also evaluating expenses as a percentage of fees or hours to determine if a firm is becoming more or less efficient over time and to compare expense spending across law firms.

Alternative Fees

Finally, the trend continues toward alternative fee arrangements. Clients recognize and value law firms that offer alternative fees and manage them well. Some law departments are using the data from their analyses of benchmarks, budgets, and billing history as a baseline to affirmatively propose fixed fees or other alternative fee arrangements for individual matters, categories of matters, or in some cases for all work done by the firm. Clients are increasingly asking firms to put a portion of the fees at risk dependent on successful outcomes. They are also leveraging payment terms as a negotiating factor of the fee arrangement. Sophisticated law firms are using the same information (budgets, billing, benchmarks) to proactively present alternative fee arrangements, before the clients make the request. (See B. Baccus and F.L. Hirschberg, “Alternative Fee Arrangements: Meeting the Client's Needs While Maintaining Profitability,” Accounting and Financial Planning for Law Firms, v. 23 no. 6 (June 2010), and M. Kudel and J. Cussons, “Information: The Key to Successful Law Firm Management,” Accounting and Financial Planning for Law Firms, v. 23 no. 10 (October 2010), for discussions of alternative fee arrangements and the variables that drive law firm profitability.)

Conclusion

Law departments remain very cost- and value-conscious and are carefully scrutinizing law firm invoices and proposed budgets. With a better understanding of the nature of that scrutiny, law firms need not wait for their clients to request accommodation; firms can use their clients' perspective to look at the staffing and rate trends for the matters they handle, and take proactive steps to demonstrate their efforts to provide the most value for the fees clients pay.

Bret Baccus, a member of this newsletter's Board of Editors, and Matthew Schuetz are both Directors in Huron Consulting Group's Legal Consulting practice. Huron Legal provides advisory and business services to assist law departments and law firms to enhance organizational effectiveness and reduce legal spend. Huron Legal advises on and implements strategy, organizational design and development, outside counsel management, operational efficiency, and discovery solutions, and provides services relating to the management of matters, contracts, documents, records, digital evidence and e-discovery. Baccus can be contacted at [email protected] and Schuetz can be contacted at [email protected].