In a separate post, I explained why hourly rates remain important, even in a world moving toward more alternative fee arrangements. One reason is that while hourly work might not always be optimal, many of the downsides flow not from the hourly nature of the agreement but from failure to follow best practices with respect to how that work is managed.
Indeed, many corporate law departments are not following these practices, and some of them are even operating according to what I would call “worst practices.” Here are some of the worst “worst practices” that result in hourly work getting a worse rap than it sometimes deserves:
Lackadaisical matter budgeting. I have consulted with dozens of CLDs and remain awestruck by the fact that most matters are still not budgeted. Even worse, CLDs often use matter budgets not to control costs but to unwittingly train their law firms that budgets are not “real,” will not be enforced, and do not need to be respected (data from Altman Weil indicate that 62% of CLDs do not enforce matter budgets—see p. 41 of this report). Many of these same CLDs condemn hourly work for not being cost-effective and put AFAs forward as the answer to all their problems. However, neither AFAs nor hourly budgeted matters work when CLDs don’t hold law firms to the deals they agreed to.
Failure to appreciate the effect of SEM. Although CLDs sincerely want to control costs, law firms have more skin in the game. This is because, ultimately, CLDs are playing with SEM—somebody else’s money. It is not as if general counsel are risking their own personal funds in pricing negotiations—they are only risking the money of their client, often a corporation so large that a few million dollars lost is, statistically speaking, little more than a rounding error. Law firm partners, on the other hand, are literally playing with their own money, which means a crafty approach to pricing can net them thousands if not millions in additional take-home pay. Consistent with that incentive, they have often made significant investments in pricing tools and expertise that CLDs have not.
While some CLDs are becoming more sophisticated, most of them remain behind their law firms. In fact, many CLDs sheepishly ask law firms to do pricing analysis for them, unaware that this is potentially like Little Red Riding Hood asking the Big Bad Wolf the best way to grandma’s house. CLDs who want to be confident of getting the best deal have to go to bat for more budget to hire the best people and also have to recognize it is their job to be good stewards of client money—not the job of their law firms.
Letting the folks who negotiate rates be the same folks who played nine holes with outside counsel last weekend. In a recent, informal survey I performed of CLDs, 27% of respondents said their organization had no centralized rate management process or strategy but allowed individual in-house counsel to negotiate rates with outside counsel unilaterally. This “good cop/bad good cop” rate management process, although designed by CLDs, seems as if it might have been designed by law firms. In-house attorneys with power to agree to rates have to work closely with outside counsel, and counsel has often made significant investment in that relationship in the form of golf outings, fancy dinners, and fine bottles of wine. A skilled third-party rate manager, on the other hand, can negotiate from a more detached position and achieve better results, without undue interference with the attorney/client relationship.
Lack of “real” benchmark comparisons. Many CLDs do not do any meaningful rate benchmarking at all, except to “benchmark” the rates they’ve agreed to against outside counsel’s stated “rack rates”—which typically exist only to show artificial discounts when compared to the eventually agreed-to rates. Other CLDs are a bit more scientific and benchmark proposed rates against rates they have paid for similar work in the past.
Trouble is, as discussed above, historical rates are arrived at through deeply flawed processes that favor law firms. That is benchmarking against failure, and while benchmarking against failure can make you look good, the only thing that is going to show you what is possible if you apply yourself is benchmarking against success. CLDs who want to do better in this area should check out products like ELM Solutions’ Real Rate Report, along with benchmarking features built into Passport® and LegalVIEW® Dashboards.
By avoiding these “worst practices” and using the best available tools and processes to manage legal spend, CLDs can ensure they get great value from their outside counsel, even when billing hourly.