The hourly rate is fast becoming an anachronism and firms must heed client warnings and foster more flexible solutions, say general counsel
The response to last week’s news story trailing the results of the exclusive in-house research contained in today’s The Lawyer Global Litigation Top 50 highlights the ongoing row about litigation fees.
“Litigation lawyers have been milking clients for years and running up unnecessary costs in cases – a clear conflict of interest between acting in their clients’ best interests and maximising their fee income at every stage,” said one commenter on TheLawyer.com. “Any attempt to claim otherwise is surely only from worried litigators that the
gravy train is over.”
As another put it: “The ‘how long is a piece of string’ line is wearing a little thin. The signals to the market are clear: large corporate buyers of legal services understandably expect price certainty from their providers, who need to respond by accepting responsibility for their quotes and sharing some risk. There is also the small matter of costs budgeting being imposed by the courts. With all of the ‘can’t do’ messages coming from the market, it is little surprise that the growth in in-house legal teams, at the expense of private practice, continues apace.”
These comments neatly sum up how things now stand for many firms. Continue to overcharge – or at least be perceived to be overcharging or failing to provide certainty over their bills – and clients will either go elsewhere or, increasingly, look to handle the work themselves.
If you don’t believe us, read what Shell’s general counsel Peter Rees QC has to say on the subject.
“If you look at most corporations these days, litigation and compliance is the biggest risk,” Rees said in last month’s profile piece (The Lawyer, 4 November).
Consequently, he added, there is a trend among big corporations to appoint litigators in-house, a move that has helped the company reduce its external legal spend by 50 per cent in the past six years.
“We’re not going to hand work over – we say ‘this is our deal and our case – you have to work with us’.”
Clients in mind
Comments and trends such as this explain why this year in The Lawyer Global Litigation Top 50 we have focused more than ever before on the financial needs of the client when it comes to major litigation.
As our research shows, when it comes to the all-important costs of fighting legal battles, those needs can be condensed into a single word: flexibility.
“In my experience, clients don’t mind paying for the best frontline team,” argues Weight Watchers International vice-president and assistant general counsel Richard Reade. “However, clients baulk at having to pay top whack for support staff – trainees and assistants especially – facilities such as copying and post, and ‘over-lawyering’ in any way. My pet hate is being given chapter and verse on something – in written form – when I only requested bullet points. Any efficiency in process that a firm brings me is greeted warmly. For example, the use of legal process outsourcers (LPOs), which often is not just a case of getting a cheaper rate somewhere else but part of a disaggregation of processes as part of a wider efficiency exercise. There’s also the use of business process outsourcing, such as offshoring secretarial work to a cheaper jurisdiction using digital dictation.”
When it comes to alternative fee arrangements (AFAs) Reade admits he is “suspicious that unless we have a right of audit, whatever arrangement we reach with the law firm is going to be under their control”.
Nevertheless, he reveals he is “full of admiration” for fellow general counsel who have done innovative things in this area.
“My focus on overheads is largely due to wanting win-win arrangements whereby I save costs but law firms make a decent profit,” adds Reade. “I’m then more likely to get a good service, proper partner attention and the ‘A Team’.”
The Lawyer’s story last week generated such a vociferous response because it highlighted just some of the results of this year’s in-house research.
Among those highlights is that external law firms regularly underestimate litigation costs by as much as 100 per cent.
Indeed, general counsel and other leading in-house lawyers claim that even experienced law firms are often woefully inept at forecasting litigation costs, with the average disparity between budget and final bill being about 40 per cent.
More worrying is that 14 per cent of in-house lawyer respondents said that in the past 12 months the widest divergence between forecast budget and final bill was between 80 and 100 per cent.
One in-house lawyer sounded a warning bell for private practice, claiming that a “reckoning” was coming.
Commenting on The Lawyer’s recent reports that average partner hourly rates at magic circle firms had reached £850, the lawyer claimed hourly rates would eventually be refused. “Fee rates cannot continue to escalate,” he added. “There are other choices.”
The Lawyer’s in-house research sought to highlight those choices. Indeed, it sets the tone for much of the findings of The Lawyer’s litigation survey of leading in-house law departments on both sides of the Atlantic.
Nearly half the respondents rated their litigation law firms as providing somewhere between fair and very poor value for money.
And while many of those commenting on value – 38 per cent – said the litigation rates they paid were essentially fair and some 52 per cent said they received good value, a hard core of 8 per cent said their external litigation firms were providing poor or very poor value.
Law firms also appear to be reluctant to hear the warning bell about AFAs – or if they do hear clients’ pleas, many are ignoring them.
The survey showed that 41 per cent of in-house lawyers said that none of their external firms had offered an alternative billing structure – other than a crude discount on hourly rates – for a piece of litigation in the past 12 months. Only 15 per cent of respondents said they had been offered an alternative billing structure on all their litigation matters in the same period.
The phrase ‘must try harder’ springs to mind.
The survey responses also show that the preferred alternative of in-house lawyers is fixed fees by project, with 53 per cent backing that model. That was followed by 41 per cent plumping for fixed fees by project milestone.
Damages-based and conditional fee agreements were the models most disliked by in-house counsel, with 63 per cent and 46 per cent respectively saying they would never use that payment model.
Apart from alternative billing deals, another recent – and some would suggest, fashionable – method of slashing litigation costs has been for in-house counsel to instruct ‘law factories’ in developing world jurisdictions – more politely known as LPOs.
Some 69 per cent of the in-house lawyers responding to the survey said they had used LPO services for an element of their litigation matters in the past year.
Clearly, disaggregation, better use of technology and more flexibility in AFAs are here to stay.
Sponsor’s comment: A reckoning is coming
Many general counsel see change on the horizon, yet nearly half of those interviewed were satisfied with the ‘good value’ offered by litigators – a great result, surely. Good litigators clearly do a valuable job for general counsel and are greatly appreciated but listen to the increasing minority.
We global 50 litigators must continue to deliver the great results clients want but with the greater transparency and certainty the voluble minority
of general counsel seek. They demand not only a clear strategy and clever tactics, but also: a reliable costs budget/fixed fees, cashflow forecasts, milestone reporting and project management, appropriate resourcing (including legal process outsourcing (LPO)), process, systemisation, automation and commoditisation, and hedging of costs and risk.
The Lawyer survey shows we have not yet got all that right. Plainly, we must protect clients’ rights and promote their interests within the law to the utmost of our ability, but we must also devote our energy only to those facets of work that demand our intellect and experience; we must leave the ‘heavy lifting’ to others better qualified to provide administrative, volume and repetitive tasks more cost-effectively.
The survey results – and our clients – tell us they want litigation without “surprises”. We are comfortable with fixed fees, conditional fee agreements, discounted CFAs, damages-based agreements, after-the-event insurance and litigation funding, all enabling service with flexible fee arrangements that suit the needs of the case, but even with such flexibility we tend to transfer risk rather than manage it.
We must go further; as the survey says, some “law firms take some of the risk along with us”. We must manage the transferred risk by introducing processes and systems aligned with technology to change the way we work to enable us to get some skin in the game.
The process mappers, software designers, resource managers, LPO houses and other solutions providers are busy transferring their skills from other sectors to help the legal industry face its biggest change since the typewriter replaced the quill pen.
Designing a leaner, better value, high-quality litigation service for our clients is an exciting and challenging task and this survey shows client appetite for this is growing – “change is on the way”.
Nigel Kissack, head of commercial litigation, Irwin Mitchell LLP