A timebomb waiting to explode

January 1, 2005

Last month the Legal Director Benchmarker survey revealed clients’ growing concern over the levels of fees charged by law firms. It is time, writes Paul Gilbert, for in-house lawyers to get a better deal for their business.

Client concern over law firm fees is deep-rooted and heartfelt. We are at the beginning of what must become a fundamental shift from outdated and outmoded billing practices. It is time for in-house lawyers to get a better deal for their businesses.

No-one could have failed to notice the press coverage giving to the seemingly routine hikes in salary for trainees, newly-qualified lawyers, assistants and partners.

The firms blame increased competition for top talent, but although partners’ profits appear to be protected from such competitive forces, corporate clients are not. Competition has resulted in higher fees.

Call me old fashioned, but I thought competition was supposed to result in a better, more keenly priced service, where the client was the winner, not the loser.

There comes a point when a service is just too expensive. Corporate clients are used to having buying power with suppliers and negotiating deals on equipment, information technology and stationery. When the supplier becomes too expensive the decision is either not to buy or to source the materials from elsewhere.

In-house lawyers know the pressures their companies face. To be competitive, it is imperative to remove waste from every process and cut costs where it is possible to save money and maintain the service. But when it comes to buying legal services, the same rules have not applied – until now.

Nearly all law firms have taken significant steps to be more client-friendly, to try to offer added value and to look at creating long-term relationships for the mutual benefit of all concerned.

But, in almost all cases, the basis of charging is still hourly rates, which is the root of client dissatisfaction. Hourly rates can be acceptable on a pragmatic basis, when the overall billing is within bounds acceptable to the client. The concept, though, if flawed and when the billing appears to go beyond reasonable bounds, those flaws are glaringly obvious.

Hourly billing:

  • is perceived to encourage and reward inefficiency and delay;
  • does not reward added value, commercial advice or a speedy response;
  • discourages commitment to timescales or to budgets;
  • ensure control is with the law firm, not the client;
  • destabilises relationships;
  • ensures that risk on timing, cost and outcome can be passed to the client.

Hourly rates are embedded in the culture of the profession. They are almost the only basis on which law firms manage the success and profitability of their product. To increase profitability, fee earners must either work more billable time or bill for more time. It is a self-imposed constraint and results in overworked staff, inefficient service delivery and higher bills to the client.

Although law firms, in terms of profit say they have never had it so good, this model is a timebomb. And if it explodes, law firms will feel the blast more than most.

That cultural change is necessary should not put us off. It is in everyone’s self-interest to find more effective ways to reward our law firms and to free them and their clients from the tyranny of hourly rates.

We need models that reward efficiency, commerciality and speed – where risk is shared, timings agreed and budgets managed in a predictable, businesslike manner.

Although it may seem obvious, experience suggests that law firms rarely put themselves in the position of their corporate clients to see how it is from the other side.

In-house lawyers know businesses function effectively if they are able to predict expense – when costs will be incurred and how much. Uncertainty is potentially damaging and always irritating. Businesses like to work with suppliers which empathise with their needs and which are prepared to share risk. Businesses generally reward suppliers for efficiency, speed and added value.

Nothing in the way law firms operate presents an appealing customer proposition. This is nothing to do with their expertise or creativity, which is second to none when it comes to giving advice. But is law firms ever wondered why business people do not like them, the answer is, to recoin a phrase, “It is the hourly rates, stupid”.

It would be great to think law firms were planning far-reaching initiatives to alter their charging structures. They need new channels of distribution, to harness technology, to be truly innovative and to reward staff for more than working longer hours. They need to adapt their expertise as problem-solvers into being imaginative about sharing risk. They need to capture historical data to predict costs, time and results and so commoditise their product.

My fear is that inertia will rule. Why change when clients pay and profits are so good? Why change when new trainees are groomed each year to replace the tired, the old and the burnt out? Why change when competitive forces cannot penetrate the bubble surrounding the empires?

Why indeed? Because we all know empires fall and bubbles burst.

There is much more money to be made if law firms get this right. It will be better for the firms, their staff and their clients. But I suspect it will have to be in-house lawyers who make them see how important it is to change.

In-house lawyers must put pressure on external advisers to adapt. They owe it to their employers to ensure value and risk are essential components in their supplier relationships. Individually and collectively, it will be the in-house community that must persuade.

The best solutions are those worked out collaboratively between the client and the law firm to satisfy all interests imaginatively and for the long-term.

Don’t get me wrong, I do not necessarily want law firms to make less money. I would be delighted to see them become more successful if it means a fairer deal for those who pay the bills.

During the past 10 years, we have seen the rise and rise of in-house counsel. They are spokespeople for the profession and commerce. They have the most significant buying power in the country, possibly in Europe. We have seen the creation of panels of law firms and modest innovations around training and sharing of resources – now we need another change.

There are a significant number of high-profile corporate clients who have a considerable annual legal spend. Whether their panels are already established, or whether they are to embark on new beauty parades, more time has to be spent on relationship management.

But what can clients that do not have clout with their legal advisers do? They may get further than they think.

First, the argument is clear – the results are going to be better for the firm and the client. Why should a law firm not be prepared to listen?

Hourly rates are the worst symptom of a failing business model. In-house counsel must take the lead. This is a wonderful creative opportunity to find different methods of distribution, which can only result in firms becoming the preferred supplier.

But this must happen now. In-house lawyers know their companies are dissatisfied with the cost of legal advice and they know that many of their businesses operate the sorts of systems and processes that law firms might learn from.

It would be a great advertisement for the profession if resources were combined to find better was for lawyers to serve clients.

This issue must be at the top of the agenda. In-house lawyers have a duty to get the best deal for their employers. Law firms should have a commitment to innovation and attaining world-class customer care.

In-house lawyers undoubtedly have the experience and expertise to help shape the future of legal services in this country.

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