Fees are increasing. Why, and how can in-house teams manage?
Corporate counsel are seeing rates for their external providers increase. There are numerous potential reasons for this, and also a handful of ways that law departments can respond.
When asked if they have noticed fees from external legal service providers having gone up in recent times, one general counsel — who asked to remain anonymous — said they have indeed increased, in the vicinity of 10-40 per cent, depending on whether it is a junior lawyer or partner completing the work.
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Sydney Fish Markets GC Michael Guilday has also seen increases.
He noted that while his perspective is more a qualitative judgement on the state of affairs, he has seen his company’s budget for external legal fees “increase significantly”.
“While hourly rates themselves appear to have increased only marginally, bills on a range of matters seem to have been getting even larger over time, and more frequently than not exceed initial estimates quite significantly,” he said.
Cleveland & Co APAC managing director Andrew Goldstein said that his business’ experience is that fee rises amount to approximately 5 per cent.
Law firms, he said, are “looking to push aggressive rate increases in 2022, taking advantage of a climate in which surging demand for corporate work in particular has stretched them thin”, as compared to the two previous years, in which such rises did not occur.
Private practice salaries
One potential factor in driving up fees, the anonymous GC espoused, is higher salaries in firms.
“We are reading of the incredibly strong salaries [and profits that] equity partners of law firms have been taking home in the last two years, so one can only assume that part of this is funded by hefty fee increases,” they hypothesised.
“I had an international law firm that I use raise their legal fees during the middle of COVID-19 lockdowns without any explanation. I found this questionable, given people were mandated to work from home, so one would assume operational costs in a law firm would have reduced as a result, and noting many companies were seeking job support assistance from the government, and rent relief at that time, so many corporate clients would have really felt the impact of legal fee increases (I know we did).
“Interestingly, this firm had relocated to very high-end premises in the Sydney CBD just before the March 2020 lockdown, so the almost parallel increase in fees did not sit too well.
“I appreciate that legal fees incorporate operational costs, but I don’t want it to be so obvious that I am paying for high end offices and services — I should be paying for quality legal advice and support.”
Burgess Paluch Legal Recruitment director Paul Burgess supported the idea that higher wages are leading to rising rates.
“While increased costs for firms across the board are playing a role in higher charge out rates, the main cost for law firms remains the wages of their employed solicitors. With salaries rising significantly for lawyers in the last 12 months, firms have increased budgets to cover those costs, driving up the end cost to consumers,” he advised.
“Also, with high utilisation rates for firms, and the inability to hire on demand, firms are now able to be more targeted in the work they undertake, and prioritise work for higher fee-paying clients.”
Another reason for rising rates, Mr Guilday identified, is the upping of society’s risk profile in the wake of a global pandemic.
“I believe we are, on a range of measures, becoming much more risk [averse]. For example, extensive government interventions and regulatory measures aimed at stemming the effects of COVID-19 have forced all of us to place an increased focus on health and safety risks, not just in the workplace but in relation to everything that we do,” he outlined.
“We also appear to be becoming more risk averse in relation to a range of new and emerging matters, for example climate change. In turn, this has led to an increased need for us to use and rely on external law firms as a way of assisting in navigating a more complex operating environment and in mitigating the associated risks.”
This apparent change in risk profiles has led, Mr Guilday surmised, for in-house legal roles to evolve.
“Previously, I tended to focus a large part of my effort on mitigating regulatory risks and financial risks, but I am now increasingly expected to advise on a range of non-regulatory and non-financial matters such as emerging environmental, social and governance risks,” he outlined.
“Although in-house lawyers are, in my view, uniquely well placed to advise on these types of things given their broad stakeholder management skills, we do need to bear in mind that these fields are not the exclusive domain of lawyers.”
Consequential challenges for law departments
The age of coronavirus, the anonymous GC reflected, has forced in-house legal teams to become leaner and drive further savings in corporate expense lines.
“Coupled with increased law firm fees, this places pressure on in-house lawyers to do more with less which inevitably means working longer hours to do more work internally,” they said.
“The saying work smarter, not harder sometimes doesn’t ring true, and literally working longer hours to do more of the work internally is the answer, particularly for smaller organisations with small legal teams or a sole in-house counsel.”
Mr Goldstein recalled being told by some clients that the resulting need to try to keep up with day-to-day challenges is “like drinking from a fire hose”.
“Even the most profitable businesses don’t have unlimited legal budgets, and in larger businesses, there is a balance to be struck between fixed-headcount teams and external service providers like law-firms and alternative providers like ourselves,” he said.
“We are seeing in-house teams looking for maximum value from their service providers, leveraging providers who can provide multi-disciplinary teams across multiple jurisdictions at a lower cost than any traditional law firm. We are also seeing high demand for ongoing legal servicing and support.
“Historically, the larger firms have been set up to deal with specific one-off issues, deals and transactions, rather than to provide consistent ongoing support.”
Moving away from time-based fees
The problem with traditional time-based fee models, Mr Guilday explained, is that they appear to incentivise external lawyers to pad out their work by spending time working on things that may not, in an objective sense, be considered strictly necessary.
This means that, he said, in the context of time-based billing, “I am constantly on the lookout for services being provided which do not represent real value for money”.
“Unfortunately, law firms, and in particular BigLaw, appear somewhat reluctant or perhaps are not properly incentivised to abandon the time-based billing approach.
“In my view, they also need to grasp a better understanding of the role and capabilities of their in-house lawyer clients to ensure that when working alongside them they are not double handling the service being provided, a common complaint of the end user,” he posited.
“In response, I believe that the in-house community should adopt a much stronger stance in advocating against outdated time-based fees structures and, in particular, instances of actual or suspected overcharging.”
Mr Guilday added that he also believes that in-house lawyers need to push more forcefully and frequently for alternative models that are more reflective of the value of the work performed, for example, fixed fee and/or risk-sharing structures.
“Fortunately, there now appears to be some useful tech solutions which purport to make the task of managing, tracking and interrogating external legal spend easier for in-house lawyers,” he noted.
Lower margin providers, Mr Goldstein submitted, allow for lower fees than the traditional law firms and therefore provide a great opportunity for in-house teams to manage legal spend.
Utilising legal services panel arrangements, he said, through which “the ask is for a relationship partner, discounts on all fees, access to additional services (like CPD and other training), and secondee arrangements”, should be explored.
“Clients are looking to manage ‘bill-shock’, and are often asking their firms to compete for work at the beginning of a matter or transaction, and also seek to lock in fixed prices for matters. We think that clients are well served by having a mixture of tactical and strategic options in their legal servicing kit-bag, and we think a must-have is access to a team which really knows their business, risk appetites and their culture,” he proclaimed.
“The worst time to set up those working relationships is when you are already drowning, and your time to really evaluate is compromised. It can be done (and it is), but it’s much better if you can set up your service providers up-front, and be ready for those peak periods, projects and major transactions ahead of when they inevitably land.”
Exercising control where possible
In the face of such pressures, general counsel and their teams can only control what they can control, said the anonymous GC.
“I can’t control law firm fee increases but I can control how I react and respond to such increases — I become even more judicious in what work I brief out, I become more demanding of fixed fee arrangements and fee caps and I start looking at cheaper options for managing low value non-strategic generic legal work,” they espoused.
“Changes include using smaller firms, briefing the bar directly (junior barrister fees are cheaper than most partner fees at law firms), providing tools to the commercial clients to do the work themselves or just not doing the work at all and have the company absorb the (low) risk in this regard.”
No end in sight
For the anonymous GC, increases to law firm fees will continue, especially given inflation and cost of living increases.
“I think law firms know their high-end larger corporate clients can and will absorb such increases even if they are not happy about it and the reality is firms are willing to lose their smaller clients as a result and for the reward the increased fees bring,” they predicted.
“Some would call this greedy, others consider it just the cost of doing business. It’s all about perspective.”
Choosing new firms?
Mr Guilday said that he has “somewhat naively attempted” to presume that the dominance of BigLaw firms will decline in the face of increasing competition from multidisciplinary professional services firms and alternative legal service providers — many of whom, he noted, seem to adopt a more flexible approach to fee structures.
“But, to date, this prediction has turned out to be incorrect,” he said.
“While BigLaw continues to thrive and has a lock on certain high-value specialists and complex work, I think it will be difficult for any real change to take place.”
However, such a prediction may not be far from the mark.
Mr Goldstein observed that clients are “exhausted by the slow briefing and instruction process that is currently the most common way of giving instructions”.
“It involves the initial query, then often several backward and forward iterations to identify the tasks and scope, the issuing of an estimate and finally, sometimes weeks after the initial contact, the work actually starts,” he argued.
Ultimately, Mr Guilday mused, in-house lawyers tend to have a pretty good gut feel for whether external legal are reasonable or not.
“Indeed, this is likely to be a key reason for them having been hired in the first place,” he said.
“My advice is that if external lawyer’s fees don’t feel right, then simply vote with your feet and seek out another provider.
“There are many to choose from and, despite what many people say, no law firm is irreplaceable. I find this to be a much more effective lever to use in managing costs than spending countless hours squabbling over individual time entries and the nature of work performed.”