In-house counsel at multinational corporations are increasingly relying on legal benchmarking data when selecting and instructing law firms. Thomson Reuters highlights some best practice tips and risks to avoid when using benchmarking data to reduce external legal spend.
There are numerous benefits to corporate counsel having access to reliable benchmarking data on outside counsel fees, but the data must be used with care to ensure all ensuing legal work is managed efficiently and effectively. An assessment of the pros and cons of using benchmarking data to reduce outside counsel fees can help in-house counsel to ensure they receive value for money.
Pros
1. Access to transparent and competitive rates
Benchmarking data provides a valuable guide to the range of hourly rates that in-house legal departments can expect to pay for different types of legal work in each jurisdiction. It can also show whether certain law firms have quoted higher or lower hourly fees for similar types of work over the past year and whether any variations may be due to the client organisation’s size.
This can help corporate counsel to determine whether they are being charged fair and competitive rates by outside counsel. In-house counsel can then leverage the benchmarking data to negotiate fee discounts on hourly rates by preferred external counsel and to inform negotiations on alternative fee arrangements (AFAs) such as fixed fees, flat fees and fee caps.
The benchmarking data can also be used to demonstrate to senior management that the legal department’s cost control mechanisms are effective and that projected legal spend is within the average industry range.
2. Analysis of trends in law firm fees
Leading benchmarking tools such as Legal Tracker provide customised and automated infographics to help in-house counsel review average partner rates at different law firms, filtered by practice area and jurisdiction. Custom charts can also show the percentage increase or decrease in average billing rates at shortlisted law firm compared to the previous year, which can highlight any quarterly or annual fee spikes that may affect longer term instructions.
Another benefit of these benchmarking tools is that they can show shortlisted law firms’ average quarterly spend to budget over the past two years, along with the percentage change year-on-year. This can provide a valuable indication of whether outside counsel have adequate budgeting and legal project management (LPM) capabilities and if they are likely to keep within or exceed agreed legal budgets.
3. Stimulus of legal process improvements
Costs pressure on hourly fees can be a strong incentive for law firms to take creative approaches to improving the efficiency and effectiveness of their legal work. This may include adopting legal process improvements (LPIs) to reduce layering and duplication of efforts that can result in unnecessarily high legal bills.
Some forward-thinking law firms are also investing in document automation tools such as HighQ to speed up legal processes and reduce the risk of human error in contract creation.
Cons
1. Lower quality and prioritisation
Benchmarking data can be a valuable resource for negotiating discounts on legal fees, but it is important to remember that law firms also need to maintain profitability. External counsel will inevitably prioritise spending time, energy and resources on work from their highest-paying clients. Senior billing partners may push more lower-priced work down to junior legal staff, who may take longer to complete tasks and produce lower quality work that needs to be checked and corrected for potential errors and oversights.
Corporate counsel seeking to reduce law firm fees for novel, complex or high-stakes deals or cases should consider whether the cost savings are worth the possible lower investment of time, effort and resources by outside counsel. Routine matters may be better suited to costs pressure than, for example, responses to regulatory investigations into suspected anti-money laundering (AML) compliance breaches, which could lead to significant reputational damage and regulatory fines for the company.
2. Lack of innovation
In-house counsel can gain greater predictability on fees and quality by requiring law firms to comply with key metrics stipulated in outside counsel guidelines (OCGs) that draw on benchmarking data. However, this approach may result in fee earners being more focused on getting legal tasks done within the specified parameters than on thinking ‘outside the box’. This could lead to missed opportunities for outside counsel to identify innovative legal solutions that could provide greater cost savings and benefits to in-house legal departments and their organisations in the longer term.
3. No correlation to effectiveness
Benchmarking data on legal fees provides a valuable overview of the range of market rates in each practice area and how far law firms have kept within budget. However, a lack of context on that data can present a false picture on the effectiveness of the legal advice provided, such as whether an early settlement was achieved to enable the fee earner to prioritise new high-value work from another client.
Industry data on the average hourly rate also does not show how efficient outside counsel are or how far fee earners have met client expectations about quality, value and effectiveness. Benchmarking data should therefore be reviewed alongside independent resources such as legal directories as part of efforts to make informed decisions about the potential value for money from outside counsel’s quoted fees.
4. Hidden cost of bundled value-added services
Benchmarking data on law firm fees doesn’t show the hidden value of free services that are often provided by outside counsel as sweeteners for appointment to corporate legal panels. For example, some law firms offer legal departments free training to support continuing professional development (CPD) or provide access to machine-learning technology that can rapidly speed up due diligence processes.
It is worth considering whether shortlisted law firms have the resources to not only handle the work required but also to meet the legal department’s wider needs. Boutique law firms may charge lower fees and provide more technology-based efficiencies, but may not have the internal resources that large law firms do to rapidly provide bespoke briefings on the implications of regulatory developments.
Pay for what you value
Benchmarking data on outside counsel fees is a valuable reference tool that can increase market competitiveness and lead to greater value for money from corporate legal budgets. This can, in turn, push law firms to identify new approaches for improving legal processes and leveraging technological innovations to increase matter efficiency and effectiveness.
However, information on market rates should be used as a reference tool for screening law firms rather than in isolation when choosing legal representation. Other factors to consider include outside counsel’s experience and success rates in similar types of work and the matter’s risk level for the business.
The strength of the legal department’s relationship with the law firm and the availability of the senior billing partner to respond to urgent queries should also be factored into the equation. Finally, it is important to assess the value of free resources and services that are bundled into law firm fees and to determine whether the legal department could do without these or source alternatives at a lower price.
Key takeaway: Consider what you value most and then refer to the legal benchmarking data alongside other leading information resources to ensure you make a balanced decision in selecting and instructing outside counsel.
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