Priori recently sat down with Ken Callander, Managing Principal of Value Strategies, as part of our interview series for CLOC 2018, about how he helps legal departments ace their legal operations using value-based fee arrangements
What does your company Value Strategies do?
We work with corporate legal departments on legal operations, and by legal operations, I mean technology, process, budgets and staffing for legal teams. My main focus is on fee arrangements and moving my clients off hourly rates onto value-based fee arrangements. I have a number of clients that we've moved completely off hourly rates across all practice areas and by doing so, my clients save on average between 20 and 40 percent on their total legal spend. If you're spending $100 million on legal, those are really big numbers. And not only do my clients save those kinds of dollars, but they also get the predictability in their budgeting process that they don't have now. General counsels don't get a pass anymore on their budgets. But outside of discounts, they don't really know how to reduce outside legal spend or how to get any sort of predictability. So this does that for them. This also eliminates invoice reviews by in-house teams. That's a hidden benefit because a lot of my clients spend 10 to 15 percent of their time reviewing outside counsel invoices. They're no longer having to do that and they can spend more time on more substantive legal work. So, as a whole, value-based fee arrangements make a huge impact on these corporate clients.
So what do you think the future is for hourly pay in the legal industry?
Hourly pay will always be there, but the bar is rising in terms of the complexity of work that can demand an hourly rate. Hourly rates for very complex, high-value advice such as structured finance or complex mergers, may stay around. But that’s not the case for lower level work, so now you're seeing some of these alternative legal service providers coming in and taking over. They started with doc review but now they're moving to contract review, immigration, employment, patent prosecution, trademark and real estate. As these practice areas slowly get devoured it's taken more and more away from the firm's that are doing that bread and butter work on an hourly rate. If you look at other professional service industries out there like management consulting or accounting, they moved off hourly rates 20 years ago. It's interesting that law firms are one of the only businesses left doing work on hourly rates. Even my plumber the other day gave me a fixed fee to replace a water heater!
Having worked in a law firm as an executive, I understand law firm economics. Law firms are really interesting in the sense that they're one of the only businesses that actually limit their upside revenue potential. If a law firm gets 100% utilization and 100% realization out of their attorneys, that's the maximum revenue that they can get. What other businesses out there put a cap on their revenue? None. But that's what law firms do because of the model they use. So where's this going to go? I think the writing's on the wall for hourly rates. People have been talking about the demise of the hourly rate for twenty years, but I think now with it being a buyer’s market, clients are really pushing for their law firms to get off hourly rates and move to other types of fee arrangements that give them more predictability and forces the firms to be more efficient. Firms that work on an hourly rate have no incentive to be efficient. In fact, they are incentivized to be inefficient. Moving to value-based fee arrangements where the fee is based upon the value of the matter itself, the type of matter, the jurisdiction, results and the type of firm that you want to use makes a lot more sense. Many of my general counsels recognize that the current model is not sustainable with some firms hitting two thousand dollars an hour. Where does this go? To five thousand or ten thousand an hour? With most of my clients, the general counsels want to move away from hourly rates, but they don't know how to value alternative fee arrangements. And because they don't know how to value them they're not able to determine whether or not an alternative fee from a law firm is a good deal. They just go back to hourly rates because it's what they know.
You talk about law firms capping their possible upside, so why do you think more haven't gone to that model?
Management consulting and accounting have gone in that direction. If you go to McKinsey or Bain and you're doing an acquisition integration, they'll come in and say it's four million dollars. All their consultants are paid salaries and bonuses. They're not paid by the hour. The problem law firms have is that almost all are compensated based on our hourly models. Therefore, it's hard for them to make that change because law firms are basically houses of cards -- they're based on confidence. They have no assets except their books of business. If you start playing with a compensation model or trying to change it, lawyers will just move to another firm. This makes it really hard for them to change.
There are a number of new firms cropping up now that don't have hourly rates at all. And they pay the partners base salaries and then they just share in the profits of firm at the end, which is similar to in-house attorneys. In-house attorneys do whatever it takes - whether it means working weekends or nights - to get the work done. And they're very efficient at getting the work done. An efficient work process is not the case for most law firms.
What would you say that your company Value Strategy has aced in the last 12 months?
I save my clients tens of millions of dollars and I've increased their virtual headcount by 10 to 20%. I have one client that spends a billion dollars a year in legal. 20% of a billion is a really big number. In addition, my clients now pay more for results and less for effort. I'm not a lawyer. I'm a business person who was at Hewlett-Packard for 26 years and then helped to run a law firm as an executive and CMO, and so I got involved on both sides of it, which is really helpful for what I do now. I help my clients restructure their fee arrangements and negotiate them with their outside counsel so they can be successful going forward.
From your perspective as someone with your background and expertise, what have you been most surprised by in the evolution and emergence of legal operations as a field?
I think one of the things that I've been surprised about is the amount of legal tech that has come online in the last three to four years. The explosion of companies in the legal tech space has been amazing. Originally you just saw e-discovery and e-billing vendors, but now it's incredible the amount of legal tech that's currently available and being developed. And it's a surprise to me how quickly people have jumped on board, which I think is great for legal operations.