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LegalJanuary 13, 2020

Legal operations still has to manage hourly rates

Legal operations folks hate hourly billing, and justifiably so. Hourly billing focuses attention on inputs (hours) rather than outputs (e.g., litigation settlement amounts), requires a huge technological and organizational apparatus to manage, and is so unenjoyable that not a few attorneys have blamed it for causing them to leave the profession altogether. AFAs, most agree, are a better model because they help control costs, incentivize the right behavior and are, at least once an organization becomes proficient, less work to manage. 

However, these points are made so frequently and so vehemently that they seem to have drowned out any conversation about how best to manage those matters that do remain hourly. Indeed, every legal ops conference has at least one obligatory AFA session, but of the two dozen or so conferences I’ve attended, I don’t recall a single presentation about how best to manage hourly rates. The assumption seems to be that since AFAs are better, we don’t need to learn anything about rate management even though the vast majority of organizations are still overwhelmingly hourly and the magical day when they will shift to all AFAs—though always right over the horizon—forever fails to materialize. 

Here are four reasons why that assumption may be unfounded:

1. Tons of AFAs are driven by hourly rates.

Lots of people use the term “AFA” as code for “flat fee”—for an entire matter, phases of matters, or an entire portfolio. However, lots of AFAs are hourly-based. These include fee caps, fee collars, phase caps, and certain holdback arrangements/bonus structures. Some of these may have advantages over models that eschew hourly billing entirely. For instance, I have seen a firm take a flat fee of $65,000 to handle a simple litigation matter, settle it in a week or two with very little work, and laugh all the way to the bank. That sort of windfall doesn’t happen under a fee cap—your risk of cost overruns is controlled, but if the firm settles the matter quickly, they are paid commensurate to effort. 

If you want the option of doing these kinds of AFAs, hourly rates still matter. Failure to negotiate favorable rates introduces the risk of a high cost to value situation whenever you deploy these hourly-based AFA options.

2. Even in the most sophisticated organizations, some amount of work will always be hourly.

The current mentality in many organizations is to just throw your hands up and not even try to control costs in certain types of matters—to more or less let the law firm have their way. Particularly large matters, “bet the company” cases, or matters that are poorly understood or hard to predict often fall into this category. I have seen estimates that approximately 20% of law firm billings are treated this way and basically get a hall pass out of legal ops scrutiny.  

As long as the status quo persists, you will continue to pay for these matters on an hourly basis. However, if you negotiate fair rates with the firm (ideally up front, before your organization lands in hot water and becomes desperate), at least you will mitigate the damage.

3. Hourly might not be so bad, if done well.

Folks love to complain about hourly being a rip-off, but when you start talking to these folks, you might learn that their approach isn’t very thoughtful. Sure, they would probably do better under an AFA arrangement, but the reality is a poorly designed AFA program will sink your financial ship just as quickly as the poorly designed hourly arrangements that these organizations complain are sinking theirs.

This is such a critical point that I am dedicating a separate post to the subject. But, as a teaser, consider the Altman Weil 2018 Chief Legal Officer Survey, which found that 62.3% of corporate law departments that create matter budgets do not enforce them (see p.41). I suspect these are the very same folks who always complain that the billable hour is broken. Maybe it is, but it would be less broken if these people reevaluated their approach.

Corporate law departments that expect to continue doing a large volume of hourly work—which is pretty much all of them—should check out tools like Predictive Insights from Wolters Kluwer’s ELM Solutions, which predicts outside counsel costs and cycle times down to the phase level and can be used to set budgets. They should also check out the LegalVIEW® Real Rate Report and Rate Benchmarking Dashboards, which provide objective, industry-leading rate benchmarking data inside counsel can use to negotiate favorable rates with providers.

4. What if hourly billing is… the future?

AFAs are the future… AFAs are the future… AFAs are the future.

Unless they’re not. Mind you, this isn’t to say that AFAs aren’t better—but maybe they are better in the same way that some people say Apple computers were better than PCs. In other words, they are not compatible with the existing ecosystem and therefore may have little chance of ever becoming the standard.

It might be easier and more productive to build off the ecosystem we have rather than scrap it and start over. Particularly, consider whether hourly data might become more valuable in the new universe we are moving into, where artificial intelligence and machine learning can provide tremendous insight that was previously cost-prohibitive to obtain. CLDs who do everything on a flat fee might not have the opportunity to mine data and streamline operations in this way.

Nathan Cemenska
Director of Legal Operations and Industry Insights

Nathan Cemenska, JD/MBA, is the Director of Legal Operations and Industry Insights at Wolters Kluwer's ELM Solutions.

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