Discounts: It's like putting off necessary surgery
“I’ve talked to many in-house counsels who say, ‘I just make a phone call, and I get a discount.’ Law firms are doing something that car companies did about a year ago, with the employee discount pricing. It becomes a frenzy of discounting.”
Although you suggest that hourly billing law firms which discount will merely increase the number of billed hours to prop up their bottom lines, there is no evidence to suggest AFA firms will not act in other ways to promote their bottom lines as well. Is there some reason to believe that AFA firms/lawyers are less profit driven than hourly billing firms? No. Does anyone really believe that AFA law firms are more altruistic and benevolent with their revenues than hourly billing firms? Of course not. For AFA to work, the law firms must make money, and at the same time the corporate client must benefit.
An item from February 11, 2010 by Zach Lowe in AmLawDaily titled “Emerging Trends in Law Firm Litigation? “ (found at http://bit.ly/dxRx6d) referred to instances of lawsuits being filed by AFA law firms against their clients because of disagreements on the scope of the AFA in which the law firms felt they were entitled to a greater monetary recovery than the corporate client felt was appropriate. The article quotes a New York attorney who said “we may see more of these sorts of fights between firms and clients because alternative fee arrangements are ‘not as simple as contingency fee or time-based fee arrangements.’†Certainly, this suggests that AFA firms expect significant revenue production from their new agreements not based on hourly billing, and AFA does not guarantee outside counsel and in-house counsel will agree on how much is an appropriate recovery.
Additionally, the suspicion persists that AFA firms will actually do less work of value on AFA files so they can handle more matters, which is just another way of saying a discounted hourly billing firm will increase the number of hours billed on a file.
The way to prevent either of these two scenarios (AFA firms giving less attention to files and hourly billing firms “churning†a file) from occurring is for in house counsel to carefully scrutinize the work being done by their law firms and to foster a strong relationship with the firms based on value. An hourly billing law firm which attempts to increase the number of hours billed can be promptly brought back into line if the client closely reviews the bill and indicates that the billing suggests work was performed without value. In all instances, corporate clients should have billing guidelines which restrict the opportunity for overbilling to occur, at a discounted or full rate, such as not permitting some types of work done (or a number of hours performed on those types of work) without client authorization. If a corporate client is willing to properly monitor its lawyers, AND also receives a discount from the law firm, there is no reason why the client cannot reduce its overall outside counsel expenses and receive value.
Similarly, corporate clients must be willing to work closely with an AFA law firm to ensure the lawyers are giving a matter the attention it deserves. It does a client no good to get a lower legal bill if it is later discovered that a much better result could have been obtained. Further, the addition of success or efficiency incentives might not sufficiently affect the law firms’ actions, but without proper monitoring by the client, that would also be discovered too late.
E. Leigh Dance posted a very interesting item on February 10, 2010 titled “Four More Ways to Work Together to Improve the Value of Legal Services†(found at http://bit.ly/aKYyUE) based on information conveyed at the December, 2009 General Counsel Roundtable discussion. She noted as follows:
“I was interested that corporate law departments' primary issues all revolve around better collaboration with outside counsel. This is certainly not research, but the consistency of responses is notable. The General Counsels' top issue (of 9 we suggested), by a narrow margin, was:"working with outside counsel for improved value and results." This was followed closely by 3 other issues, all tieing for 2nd most important: obtaining skilled legal coverage in growing/emerging markets; demonstrating value to the business, defending budgets; controls, monitoring and reporting for compliance.â€
These results indicate to me that although GC’s believe overall expenses are very important, they want good value from outside counsel. There is absolutely no reason why close relationships with hourly billing lawyers cannot be at least as “valuable†to corporate clients as value obtained from AFA firms so long as the clients stay actively involved with their lawyers. If an hourly billing based firm is willing to give a discount, and the correct amount of legal work is accomplished (i.e., no churning), the result will be reduced costs and increased value to the client. The key to all of this, however, is effective involvement of the client — for both AFA and hourly billing.
Steve Pietrick
Chicago, Illinois
