The LVN Council of Luminaries is comprised of veteran thought leaders and pioneers in the business of law community. The objective behind assembling this group is to establish a brain trust of recognized, experienced and progressive leaders who can help interpret developments in the market, provide advice on how to successfully approach and navigate challenges, predict future trends and changes to prepare for, and to participate in targeted special projects to benefit the legal industry as a whole.
The below meeting was conducted primarily with the Council Of Luminaries CLIENT-SIDE group.
Moving Beyond the Billable Hour
Luminary 1 – I’m interested in figuring out how to move beyond the billable hour. Not what I would call some of the softer AFAs, which are really just different packaging. But really moving away toward value-based pricing. Particularly how firms can make that happen. I worry that without enough clients pushing for this, firms will continue as they are. The biggest problem is that they will bill every minute they can, until we push back.
Luminary 2 – We’ve had a few arrangements that have been in place for a long time. For over 5 years we’ve had a few monthly “all you can eat” arrangements. Those are for what we consider to be quick hits that don’t turn into their own matters. Our attorneys can contact those firms as much as they want within scope. We do get shadow billing and sometimes we make out, sometimes the firm does. But at the end of the year the we always do better. And that seems to work. We are always looking out for other subject areas where we can do this. We just put out an RFP, but firms were resistant, so we killed the idea as we didn’t think it ended up making sense.
Beyond that, the litigation side is easier. We’ve done a pretty good job there, but outside of litigation I’m constantly pushing our department to identify projects that lend themselves to AFAs. We have asked firms to do some as a project-based fee. I have no idea if we found the right numbers; we struggle with that. On some of these, I can’t imagine that the firm is taking a huge hit, but they are not making a killing.
Luminary 2 – These firms do a lot of business for us. This is a bit of a loss leader for them. So in these situation, I don’t feel sorry for the firm. Its much more about relationship building.
Luminary 3 – There’s a fundamental disconnect in the understanding of flat fees. Once we establish the fee is fair based on a set of tasks—and the easiest place is in litigation, oddly enough—the ball is in the firm’s court from a profitability standpoint. If a firm can build a better mousetrap, and they’ve retained some efficient senior associates, who can get a lot done for a lower cost to the firm, then good for the firm. And that’s the bridge that’s difficult for the clients to cross. Shadow bills can cause buyer’s remorse. We don’t believe in them.
Market-Based Rates
Luminary 3 - In terms of validating those numbers. The devils in the details. How do you know that an acquisition of a midsized company should cost X. For us it’s intertwined with our procurement. We take it to market and find out. Qualified firms provide competitive proposals. We have a database we can reference as well, so if we can’t validate by competitive bidding we can look at previous work we’ve done, we have some idea. Based on that, we pay a certain amount for fact depositions; if a firm wants more, they have to explain why it’s more than our benchmark says it should be.
The upside for firms, is that they don’t have to make sure they don’t get their shadow bills up. The ball is placed squarely in their court to do good work, but they get a profitability prize in the end as well.
Luminary 2 – We don’t do the shadow billing in other AFAs, it’s only in these small “all you can eat” retainers. Our challenge is in the non-litigation piece. I’ve got a department that sometimes says, “we need to use this firm.” So it’s uphill challenge to do a competitive bid.
Luminary 3 – We have sold the GC to say we are going to do this. There has to be a willingness to shift culture. If you’re truly going to move away from billable hour, there has to be a willingness to change the culture internally.
Luminary 2 – Are you putting everything out to bid?
Luminary 3 – Everything above a pretty low threshold. There are a few exceptions granted by the GC (but he doesn’t like to grant them), but the proposals are still based on task-based assumptions. So even if it is not a competitive bid, we are getting to the number based on reviewing similar matters from the past.
Luminary 4 – Do we really need a critical mass of clients to affect change?
Luminary 3 – Firms can do this. They will hem and haw about “this transaction from back 2009 that went so crazy and what if it’s like it…” But they can do it. There isn’t a practice area where we don’t have flat fees. There’s a reason why they have a project management. function. And a reason why they have a pricing function. We should not be reluctant – the firms can handle it.
Luminary 2 – We had one where the firm came back completely flummoxed about the idea. I really wanted them to come up with something.
Luminary 1 - I’m not saying it has to be an organized thing. But the more we spread it, the better we’re going to be. We have been out front. For example, with e-billing. We didn’t care that no other client was asking for it. We told our firms it’s the future and we may be the first they have to do this for, but we’re certainly not going to be the last.
Monthly Flat Fee Plans
Luminary 1 - Clients need to be confident and bold and know they can do it. I tell them we’re out in front, but also that I’m hearing that our firms are now going to other clients and offering AFAs. We will only see movement if it’s what the clients demand. Our GC has bought in. They do not want to make exceptions. And we don’t do shadow billing. But we don’t do the competitive bidding. If we have a matter it usually needs to get started asap. So instead we set and lock the flat fee for 6- or 12-month periods.
We’ll do our internal work and send it to firms, reach agreement by end of the year. But how do we check that? How do you measure and value legal services outside of the time it takes to do the work? Firms are not pricing outside of billable hour. We are doing that.
Luminary 3 – I don’t think firms do this well enough. Where they are working with clients that are progressive – and then take those ideas and pitch them to other clients.
Luminary 2 – With those broad flat fee arrangements, do you – and we do – we have to bill out to different cost centers? Are you basing on prior year spend?
Luminary 1 – We do allocate back to the business centers. Accounting didn’t allow us to do it on prior year spend, because if 20% maybe went to one business last year, it doesn’t mean it will be the same this year. Instead, we make the firms estimate what they expect the matter to cost under regular rates and compare that to the monthly fees. We also use that to get a sense on how well the firm did, but it’s mostly for reallocations back to the business.
Luminary 2 – Do firms ever come and say that the work you sent is wholly outside and isn’t part of the retainer?
Luminary 1 – Of course they do. But we set the terms at the outset and we know these things will come up. Our starting point is always that it’s part of the retainer. We see how things play out over the course of the period, or period over period. It often nets out. We’ve found the same firms tend to take on the unanticipated work, so next year we’ll develop a back-end bonus program, so we can reward firms and still stay within budgets.
Luminary 3 – Firms are very willing to tell you when something is out of scope, but they very rarely come and tell us that there is something they assumed they’d have to do but didn’t and offer to lower the price. The few firms that have done so have endeared themselves to us.
Luminary 1 – You have to change their thinking – if a big piece comes in late, you can point out that much of it will be in subsequent periods. Or will it be something that grows – then they can get an increase in subsequent periods.
Willingness to Move Work
Luminary 1 - You have to be willing to walk. Our relationships are quite sticky and our lawyers often don’t want to move work. So we are looking for how to make it easier to move work. We need to make sure we have multiple options for every different area.
Luminary 3 – How sticky are your relationships with firms? And have you worked to make them a bit less sticky so you can move work if you need to.
Luminary 5 – We have some firms where I worry about that stickiness. We work with like four firms where if something were to happen to those relationships I might not know where to get that work done. Often people make decisions based on relationships, which causes a lot of problems.
We have a new GC, which is willing to stand firmer and not allow the exceptions. But they do under the mantra of “not want to get in the way of anyone doing their work,” so we are also building a larger panel, so that our people have enough options – they don’t have to move off list. Sometimes the firms are sticky because they have relationships with law dept leaders. It can seem like those firms are the “blessed” firm.
Luminary 3 – You can’t really look bad if you hire the general counsel’s mentor.
Luminary 5 – Though more focus on budgets has caused us to get unstuck from those types of relationships. Also, the more we filter up diversity metrics the more people have been willing to walk away for that reason. But we want to build a list of firms that can rely on what we need, so we can shed our reliance on certain firms.
Luminary 1 – We had more that 100 firms on our panel in the past. We are now around 60 And all 60 work on a flat fee. These firms handle 84% of our global legal spend.
Luminary 2 – Something like 85% of our spend is within our top 20 firms, so this feels doable to me. They seem to be the same year over year. So maybe it’s not quite as daunting as it seems.
Luminary 1 – We are looking to cut the long tail within the panel. We want to have bigger relationships with broader firms that can provide service in multiple areas.
More Detail on Monthly Flat Fees
Luminary 4 – With those monthly flat fees, do you expect them to do any work that you throw their way? Even if it’s in a practice area that’s not the work they would typically do?
Luminary 1 – Yes.
Luminary 3 – This causes firms to look at the relationship at an enterprise level. Not just “we do lit work,” but “how can I grow this? How can I bring in say my employment lawyers? It incentivizes firms to look at your business needs.
Luminary 5 – It’s also beneficial to the firm; it makes it easier for the firm to say what the value is of being on the panel. If they see it as set revenue that they know will come in, they may considerer that it’s not about profitability, but predictability. And they can use it as a basis for the firm’s financial model.
Luminary 2 – Also it’s an investment. If a firm brings in other groups, they will take a hit at first under a flat fee. But it can grow.
Luminary 5 – Sometimes it’s important to help a firm understand that there’s value to steady income.
Luminary 3 – It depends on if you want bigger, strategic relationships vs. working with more different firms. But you know you have a strong relationship when someone comes and says “I can’t help you with that. You have to find someone else.
Luminary 6 – I think there is something fundamental at the business side of law firm, that is a big impediment: Origination credit. The whole thing is counterproductive. The Big 4 are better at cross-selling. But that’s a problem, too. One of the greatest threats to some of the programs I’ve built is when a random consultant or accounting firm talks to one of the senior executives. If law firms would figure this out, they could apply the pressure like the Big 4 do.