Working with Corporate Clients in the New Legal Landscape

Vol. 31 No. 3

By

Alan Nathanson is CEO of Align Matters, provider of secure, cloud-based predictive planning and management for legal matters.

In 2009 Amy Shulman, general counsel for Pfizer, Inc., required a handful of law firms to abandon the billable hour and insisted that their lawyers find new ways to assess the value of their work. She created the Pfizer Legal Alliance, which assigned its law firms a portfolio of litigation cases at a flat annual fee. The date is important. The global financial crisis had caused the bottom to fall out of the demand for legal services. As firms were letting go legions of lawyers, the legal industry transformed into a buyer’s market. Pfizer is only one example of the countless companies worldwide that were suddenly empowered to demand their outside law firms reduce costs and deliver business value for every legal issue.

Today, cost is not the only criteria clients have when selecting outside counsel. They also have choice. Only a few years ago, in-house counsel had just two modes of operation: Send non-standard work to their preferred law firms and retain the remaining work for their relatively small internal departments. For sole practitioners as well as partners in large law firms, the requirement to win work was straightforward: Build a relationship and remain in good standing with key in-house lawyers.

Now in-house counsel have multiple options. They can outsource, co-source, offshore, or unbundle. They can use project-based high-tech firms or technologies that minimize or eliminate lawyers. And they have access to free or low-cost, high-value web-based legal content. The flexibility to parcel out tasks rather than matters has opened new options for in-house legal departments when selecting for the right resource for any given job:

  • Unbundle. A matter can be broken into component parts and assigned according to the best resources for each part.
  • Outsource. A new breed of legal vendors in the United States provides project-based expert resources for specific tasks, allowing legal departments to define and pay only for what they need.
  • Co-source. The work of a very large task can be split between two or more parties—whether as a mix of in-house and outsource firms, two or more outsource firms, or some other combination.
  • High-tech law firms. These firms are loose organizations that deliver services by leveraging state-of-the-art technologies. Their costs are low because they need neither office space nor full-time staff, allowing them to take on complete matters or specific tasks, or to work with other teams in co-source arrangements.
  • Offshore. Work can be outsourced to significantly cheaper resources in another country. Large document review, for example, is frequently offshored.
  • Lawyer-free legal technologies. New technologies can perform certain types of work more accurately, significantly faster, and at much lower cost than a small army of lawyers. E-discovery is an example of this kind of technology.
  • Free or nearly free web-based legal content. Web-based legal content started out as highly beneficial to consumers. The first successful use of this technology was web-based wills and trusts. Web-based legal content has subsequently exploded, much of it posted by top-tier law firms giving away core documentation to demonstrate their expertise and lure clients.

At the same time, in-house legal departments have expanded in size and expertise, making it increasingly feasible to retain the work in-house.

More Data, Greater Scrutiny

Solos and partners in large firms are coming to terms with the fact that the manner in which matters are assigned and managed has fundamentally changed. As fee delivery demands and service options gain traction, they are concerned that in-house counsel may be weighing selection factors outside their control. I am often asked, “Do institutional clients maintain a history of costs for similar matters? Do they compare my rates against an industry benchmark? Can my client compare my time estimates against the time other firms take to deliver the same type of matter? Do they analyze my billing history to compare my estimates against the final budget?” Although a few in-house legal departments have partial data, they all want detailed, real-time data that will allow them to make and manage legal purchasing decisions similar to the way in which their companies make other business decisions.

New technologies automate detailed, comparative data that enables fast, high-value decision making, allowing in-house counsel and executives to choose the right team for the right task and choose the team that has a history of delivering predictable budgets and expected business outcomes.

The good news is that the data is also available to outside lawyers and firms, setting the stage for an unprecedented collaboration. The bad news is that without these data, outside lawyers are effectively pitching in the dark and face the consequences of exposing their work practices in hourly billing. Companies now have the data to question every line item in a bill, potentially making it an ever-more-painful thorn in the side of solos and large firm partners, as well as reducing outside counsel profits. Extrapolating billing analysis from a range of law firms, it is evident that mid- to large-sized law firms write off an average of 20 percent of the time their lawyers submit on hourly based invoices. For any other business this would be tantamount to a 20 percent discount across its product line.

Changing Costs, Changing Demand

The change in the demand for legal cost analysis did not suddenly occur overnight. Before the great recession of 2008, the majority of matter budgets doubled, tripled, or worse and were paid in full with little impact on the relationship between in-house legal departments and outside counsel. Clayton Christensen, a Harvard professor, observed in 2004 that, “Law firms are among the most profitable and least risky businesses in the world. The profit margins of the top 100 U.S. law firms are at least twice those of America’s largest publicly traded corporations” (“Transforming Legal Services,” Clayton M. Christensen and Scott D. Anthony, tinyurl.com/lbh5xpj).

Six years later, the Association of Corporate Counsel (ACC) noted, “Over the past ten years, overall costs to U.S. companies rose 20 percent, while legal costs rose 75 percent” (“ACC Value Challenge: Guide to Value-Based Fees,” Association of Corporate Counsel, tinyurl.com/pqc8a65). It is difficult to validate this statement because viable legal cost data is not consistently tracked. Christensen based his findings on research that likely was derived in part from the self-reported responses to surveys from major law firms who benefit most when declaring the highest profits. The ACC assumption is, however, in line with other anecdotal reports that estimate that annual worldwide legal costs in 2000 were approximately $50 billion. Today, they have climbed above $400 billion. What is the cause of this dramatic rise?

In 2000, when costs had been growing robustly for many years, in-house counsel ascribed cost increases to business growth and therefore saw them as out of their control. They noted that business growth was inevitably accompanied by increased legal transactions, disputes, regulatory requirements, and risks. But only an infinitesimal fraction of businesses grew at the feverish pace of legal cost increases. By the time the ACC issued its Value Challenge in 2010, it had become clear that the root cause of mushrooming legal costs was uncontrolled and unpredictable matter budgets. In an attempt to get costs under control, in-house departments brought in consultants and billing analysis software to comb through the minutia of hourly billing, providing a road map for analysis and a stick to keep outside counsel in line. Notably, nothing in legal invoicing analyzes the value to the business of the time billed.

It is not surprising that a growing number of solos and partners in large firms worldwide today feel that they are under a billing microscope. Winning the right to represent a client on a matter involves “the cost discussion,” which is likely to include discounts, budget predictability, and billing guidelines. Having won the work, counsel then learn that the detailed billing narrative for every tenth of an hour is subject to review and demand for alteration. Outside lawyers sense that their clients know more about them and their firms than they do. In fact, as matter budgets continue to spiral out of control, the burden falls on in-house lawyers, who spend more than 25 percent of their time managing law firms and billing.

Legal Planning versus Other Planning

The clear reason that costs are skyrocketing is that it is difficult to budget a legal matter. Lawyers have been asked to rely on their hunches to estimate budgets and then to make promises based on these assumptions. Other industries budget their projects first by detailing their objectives and requirements in a project plan. The project plan is the road map that guides and coordinates the work of all the project’s teams. It provides everyone the tools to deliver the project on budget and on schedule. Companies then collect and share “best practice” information to benchmark budgets, schedules, and outcomes.

Is legal work inherently different? The answer I get when I pose this question is that so much is unknown at the onset of a matter that legal work cannot be reduced to a project plan. Lawyers must constantly respond to new issues and the tactical moves from the other side. The resulting assumption is that a detailed legal project plan and budget quickly becomes irrelevant. But is this different from any other complex project?

Other industries understand that every project will encounter unforeseen issues and requirements. Knowing that the end project will be different from what it looked like at the beginning does not nullify planning or the validity of the original budget. Instead, other industries plan and budget what they know, allow a limited contingency for small variations, and deal with large and small changes with formal scope change agreements. Not only do scope changes provide the tools to revise the plan and budget, they also communicate the change to the entire team. Scope changes also enable industry learning. They provide a growing body of knowledge, allowing the budgeting and planning of new projects to build in and prepare for the “likely to happen” requirements. The result is that project plans and budgets become increasingly viable, empowering companies to confidently budget big expenditures for important projects with a clear picture of the final outcome and delivery date.

The Problem with Hourly Billing Data

Recent technologies attempted to extract hourly billing data to reconstruct the matter into a project plan. These tools recognize the difficulty lawyers have in planning the matter at the beginning and attempt to reengineer the project plan by analyzing hourly billing. Essentially, by annotating their completed work in hourly billing, lawyers define the project plan backward.

Lawyers dislike the hourly billing process. Every legal professional who works on the matter must find the time to reconstruct their work from several days or even weeks earlier. In analyzing the results, recent technologies found two significant drawbacks that nullified the value in recreating viable work data. First, there is no consistency in how lawyers define their work, not only across law firms, but even within the same firm. Second, lawyers use shortcuts and abbreviations to save time. The most common shortcut is “same as.” Lawyers see their own work sequentially in billing software. “Same as” refers back to an earlier date that they can see on their screen. The invoice, however, assembles the entire team’s work into an invoice, scrambling repeated “same as” annotations, many pointing to the same date across the bill. Without the person to translate the annotations, the results are, from the computer’s point of view, inconsistent and random and therefore of limited value.

Lacking plans and the ability to track the factors that cause changes to matters means that solving today’s guesswork is beyond simply saying “cut the costs.” The industry challenges, organizational programs, armies of consultants, and technologies that have been thrown at this problem clearly demonstrate that holding only one side accountable for managing costs goes nowhere: Matter budgets continue on an uncontrolled upward spiral, as does the frustration of limited business value.

Aligning Law Firms and their Clients

The first requirement in solving this is to stop all argument about divergent profit and business goals. Attempting to align a law firm’s basis of profitability with a corporation’s and asking outside lawyers to consider their client’s need to cut costs and deliver business value has produced limited results.

The only common factor that the business and their outside law firm have is the matter. By focusing solely on the matter, all the parties are able to shut out the noise of competing and contradictory business models. It facilitates collaboration between legal departments and law firms and brings them to the same side of the table to agree on and work toward explicitly shared goals, and to intelligently manage costs.

The various attempts to bring project planning to legal work resulted in these two universes (corporate legal departments and law firms) managing anticipated plans and budgets independently of one another, with different systems and different philosophical or “cultural” underpinnings, and misaligned outcomes. Project plans only work when all teams agree on the objective and collaborate transparently on the same plan.

The technologies that enable joint legal predictive project planning are now mature. It is no longer necessary to ask each team to independently manage costs and communicate with the other teams. Instead, the new joint legal project plan provides the means for all the teams to transparently do all the required work and collaborate in real time.

Working together on the same matter project plan manages costs and delivers business value.

Only a few years ago, it was not possible to achieve this requirement. The big change has been a robust and secure Internet cloud. Moving joint legal project management to the cloud benefits all. And because the cloud eliminates costly internal technology and support, every type and size of team, from the sole practitioner to the global law firm, from the one-lawyer legal department to the multi-hundred, global legal department, is finally on the same playing field. The only valid question today is, “Are you the right and the best team for this matter?” If you are a solo with unique expertise, you compete equally with name-brand, international law firms. If you are a small law firm outside the Unites States, the secure, cloud-based legal project plan makes you an ideal candidate to deliver the best results on an international matter.

All parties benefit from joint project planning. Individual lawyers are freed from much of today’s administrative work, allowing them to focus on what they do best. Outside law firms no longer pitch in the dark because they know what their clients expect, relieving them of the burden of writing down lawyer time and giving away significant margins. In-house law departments gain control of every matter, with the means to monitor and hold outside counsel accountable while eliminating the 25-plus hours a month their senior lawyers spend on managing budgets and outside law firms.

Joint predictive planning technology is changing the hit-and-miss, aim-in-the-dark history into a matter-based approach that aligns everyone around business value generation, and where data and analytics benefit the client and the law firm.


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