Law firms and the legal departments they service are way too comfortable to implement alternative fee arrangements, writes Angela Priestley
For all the recent talk about alternative fee arrangements, it seems that the Global Financial Crisis may not have provided the catalyst of change that some may have expected.
According to the ACLA/CLANZ Legal Department Benchmarking Report 2010 released earlier this month - which surveyed around 150 companies and government agencies to benchmark legal department practices - just four per cent of respondents consider hourly-billing as the best means to price legal services.
Despite this, most Australian and New Zealand respondents reported that the good majority of their legal work is still based on standard hourly rates.
Consultant Richard Stock, a report sponsor who was recently in Australia to present the findings to legal departments, believes that while general counsel and law firms might be overwhelmingly in favour of introducing alternative fee arrangements, they are too comfortable to shake up their relationships to do so.
As such, innovation between law firms and their clients takes time. "It [the comfortable relationship] impacts service delivery and the introduction of technology, project management and pricing," says Stock. "All those areas are very slow [to change] because the players are accustomed to a certain way of doing things. It's not because one resists the other at all."
It seems legal departments are also happy to concentrate their legal spend, indicating that they are comfortable in using one or two law firms for the bulk of their work. According to the Benchmarking report, while Australian/New Zealand respondents reported they use on average five to nine law firms, most legal departments still rely on only one or two law firms for around 85 per cent of their work.
Meanwhile, legal departments are simply too busy to initiate change in the way they pay for legal services.
The report found that respondents listed time pressures and resourcing as significant challenges, with those surveyed indicating that managing workloads is their most pressing issue - well ahead of cost savings.
"What we've found about the last two years is that the pace of work is accelerating," says Stock. "People don't have time to breathe. It's not foremost on their priority list to think about alternative fees - or even to save money. The foremost priority is to survive."
However, Stock believes that strong relationships with law firms - if nurtured effectively - can facilitate change, should both parties be willing to put in the level of work that's involved.
"First, legal departments have to come up with accurate forecasts of how much legal work they are going to need, how much specialisation they are going to need, what level of complexity, for how many hours, for how many years and from which part of their organisations," says Stock. "That's a lot of detail, using a lot of variables."
Law firms can help with such variables, says Stock. They can provide their clients with the tools and information clients will more than likely not have available - like billing systems and detailed sub analysis on matter management.
Such help will also go much further than the provision of alternative fee options in assisting legal departments. The information will provide essential management tools that may also assist legal departments in deciding whether or not to outsource legal work, how to reconfigure their legal spend, how to decide how many firms to use and how to internally resource accordingly.
Stock points to the provision of detailed matter budgets and project management as necessary for deploying alternative fee arrangements - especially if such arrangements involve complex litigation work.
Still, the ACLA/CLANZ report finds that only 24 per cent of general counsel are always seeking even just basic matter budgets from law firms.
But Stock believes that with some global law firms exploring project managements skills, enhanced matter management and how they can better scope out their work, it's only a matter of time before clients here in Australia catch on to the need for detailed analysis and project management on their matters.
"Legal departments here that use law firms that have global clients are getting a taste of this, they may only be five percent of all the legal work that gets structured like this, but they are seeing that it is very sophisticated," says Stock
"In two years, I think you'll have half a dozen firms being able to do this very well and very convincingly here."
That may just be enough motivation to shake up those comfortable relationships.
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