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CCCA_V4No2_Dept-Performance-FIN.qxd:CCCA_V1No2_Dept-MgLaw-V1.qxd 4/29/10 3:56 PM Page 10 Performance In The Law Department Changing the business model for legal services The conversation law departments must have about value. By Richard G. Stock aw departments are under Lincreased pressure to reduce their operating costs even when the com- pany is doing well financially. The response is to focus on the easiest target — the cost of external counsel, and the first reflex is to focus on hourly rates. Very few law firms with more than 50 lawyers derive more than 10 per cent of negotiate dis- their revenues from a single client year counts on fees, and 40 per after year.And that is not because compa- cent pay full retail; nies are spreading their work around. A • only 30 per cent use matter budgeting recent Canadian survey shows that 55 per It is time for and require detailed fee estimates by cent of companies use only one or two law department leaders to matter from their law firms; firms for 80 per cent of their work and conduct a reality check on their • only 31 per cent have agreed-upon another 36.5 per cent use only three to efforts to mitigate the cost of legal servic- service levels; five firms. More than 90 per cent of com- es. Consider the following: • 28 per cent use non-hourly billing some panies rely on a handful of firms. • only 32 per cent of law departments of the time (that percentage is increasing We know that rates are not a factor in have run a formal procurement process rapidly, but fully 90 per cent of the legal the selection of a law firm,that 60 per cent to select their law firms. Fewer than half work is still billed on a variation of the of companies do not have written terms of of these will run a similar process to hourly rate. engagement with their primary firms and renew agreements within 5 years; It takes time and some money for a law that no more than 60 per cent of compa- • for the most part, law departments do department to do all the right things to nies plan to review their working arrange- not know how many hours of legal manage the costs of legal services. Many ments with their law firms in the next two work they have purchased by category law departments do not believe that the years. This is hardly a movement toward of legal work in the last three years. pain will be worth the gain. Others are across-the-board cost reduction by com- They do not forecast their demand very concerned that procurement process- panies and conveys a mixed message to using the number of hours by legal spe- es, project / matter management practices, law firms. cialty and they do not rely on grada- and discussions about rates are antithetical The cost of services does not factor into tions in complexity of legal work for to relationship-based, collegial legal serv- the selection of law firms and in the planning and management purposes; ices. Still others are too busy to make the assignment of work between firms. This • there are no recognized “optimal” time. For the most part, the available tools only tends to be addressed after the work staffing configurations for law firms to and processes are too unfamiliar for law has begun or after it is completed. That use for given categories of work and departments to use. General counsel then makes it difficult to successfully challenge certainly none are discussed with their default to traditional arrangements with the hourly-based model of pricing legal law firms. Everything is free form. their primary firms. services — now 45 years old — and annu- Corporate counsel associations could do al rate increases in the face of increased much to fill this void; Value and innovation in pricing ISTOCKPHOTO demand and difficult economic times. • only 60 per cent of law departments Legal departments must become engaged 10 CCCA Canadian Corporate Counsel Association SUMMER 2010