Learn more about law firm panel best practices in Part 2 of this three-part series on cost savings
We know cost savings and legal spend management are top on the list of priorities for legal departments. Continuing our three-part article series covering key cost-saving strategies that legal departments should be looking at to protect the bottom line, in this second article you’ll learn about best practices for panel management, rate negotiations and RFPs. During our recent webinar, Basha Rubin, Co-Founder and CEO at Priori, Stephanie Wilkins, Editor-in-Chief at Legaltech News, and Carol Hopperton, Legal Chief of Staff at Vonage, provided insight into the potential impact of these strategies for members of in-house legal departments, including in-house lawyers and legal operations professionals. (You can also read Part 1 on staffing and work assessment and Part 3 on ALSPs, legal marketplaces and legal technology.)
Panel or Firm Management
Most in-house lawyers and legal operations professionals are familiar with the concept of panel or firm management. Panels are groups of designated law firms used by legal departments for matters not handled in-house. The panel management process usually happens when a legal department picks a group of law firms based on factors including practice, expertise, expense level or size. Once the list has been narrowed, the legal department sends the preponderance of their work to those firms, giving the company more negotiating power because of the volume of work being sent to the preferred firms.
Panel or firm management or consolidation is the process of analyzing law firms and their results with the end goal of creating a “preferred” or consolidated list, often via an RFP process. Although it is often discussed as a way to achieve cost savings, in practice consolidation is one of the more underutilized cost-saving measures. According to the Thomson Reuters 2022 Law Department Operations Index, only 4-6% of legal departments rank panel programs as a cost control priority.
While panels are more commonly used by larger companies, smaller companies can and do also have success with the practice. Some things to consider when looking at panel consolidation include:
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Measuring a baseline – Many companies already send much of their work to certain firms by practice area. Create a baseline by understanding what your company is already doing and evaluating whether there is value to eke out through consolidation.
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Creating tiers – The most expensive firms for the highest risk, highest complexity work, and other firms for lower complexity work.
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Examining practice areas – Consolidating to one or two firms instead of five for a particular practice area not only has obvious benefits for cost savings through negotiating better deals, but also means that the firms are more knowledgeable about your department because they are spending more time on your legal matters.
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Vetting smaller firms – Using smaller firms can be seen as quite time-consuming, and one way to overcome that is by creating a vetted panel. Rubin notes that a number of leading technology companies are going this route.
Rate Negotiations and Alternative Fee Arrangements (AFAs)
Another important strategy for cost-savings is rate negotiations, particularly considering alternatives to the dominant hourly rate. There are many different types of alternative fee arrangements (AFAs) that legal departments can propose to reduce the cost paid for a project or relationship with a law firm. These include:
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Fixed – A flat fee for work for a defined duration.
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Capped – The work is billed hourly, but there is a cap to the amount the department will pay for the agreed upon work.
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Contingency – The client pays the firm a percentage of the resulting pay-out or recovery from the case.
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Success/performance – The fee is paid based on achieving an agreed upon result.
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Collared – Often used for unpredictable situations, if hours are below an agreed upon number, the savings are shared between the department and firm. If they are above, the firm receives a percentage of the rate.
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Blended – The legal department pays one rate for services from multiple attorneys that would usually bill at different rates.
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Subscription – The firm provides services at a flat fee assessed on a regular basis (e.g., monthly).
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Phased – Usually for larger projects, the project is split into phases and fees are agreed upon for each phase.
Nonetheless, the vast majority of billings are still done on an hourly-rate basis. According to the Thomson Reuters 2022 State of Corporate Law Departments report, 75% of matters and up to 80% of total billings were hourly, which means that AFAs represented between 20-25% of billings.
Looking at those statistics, there is often opportunity for legal departments to improve cost savings with more strategic use of AFAs. Taking advantage of this means implementing best practices regarding rate negotiations within your organization. Legal departments should:
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Benchmark your rates – Comparing your rates against industry benchmarks gives you a sense of what others are paying for the same work in the same practice areas. There are a number of software tools you can use to do this automatically, or you can do it on your own through information provided by sources like The American Lawyer’s AmLaw 100 reports. Being aware of where you stand can give you a great opportunity to negotiate.
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Maintain and enforce e-billing guidelines – Agreed upon e-billing guidelines set expectations for your firms about what will and will not be accepted (i.e., the number of attorneys billing on calls). Many companies have e-billing guidelines but don’t enforce them. Not enforcing e-billing guidelines is like throwing money out the window, and there are now technology solutions, such as AI review software, that can help you do this automatically.
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Implement regular rate and performance reviews – “We have a lot of clients doing rate reviews but not as many doing comprehensive and structured performance reviews,” says Rubin. Before a law firm asks for a 25% increase in their rate, it’s helpful to have a conversation to discuss their performance. It can be a powerful negotiation tool and it also helps you reward firms that are doing the best work for your department.
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Test AFAs – Try different kinds of AFAs and combine the experiment with shadow billing for at least year one to measure the outcome and adjust in a way that makes sense for your legal team. AFAs aren’t a panacea and sometimes may even be worse for an in-house team. Testing them with shadow billing helps you find out whether they’re worth it for your company.
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Consider early pay discounts – Many legal departments are using this simple strategy, and it allows them to negotiate for smaller discounts off rates by paying by a certain date. If your accounts payable team can approve payments quickly, it’s an easy cost savings win.
Requests for Proposals (RFPs)
Another important aspect of panel consolidation is the use of requests for proposals (RFPs). RFPs are questionnaires provided by companies to law firms and/or ALSPs to gather information for a legal engagement or panel participation.
Their use is far from standardized across legal departments. The Blickstein Group’s 2022 Law Department Operations Survey found that only 7.9% of legal departments use them for the majority of matters and that a little more than a third (36.8%) use them for matters that meet a certain criteria, such as expected cost. This makes sense, because RFPs can be a lot of work—particularly for law firms but also for the legal departments issuing them—and they don’t always make sense for lower value projects.
However, when used appropriately, RFPs can provide a lot of cost-saving benefits: They allow legal departments to compare law firms across a wide range of axes, and receive the best price possible by doing things like implementing reverse auctions. For matters that your organization decides to use RFPs for, here are some things you’ll want to keep in mind:
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Include a detailed budget (if applicable), selection criteria, timeline, goals, metrics, scope of work and deliverables.
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Minimize the number of questions and number of firms (the RFP process can be labor intensive for firms and the more you respect their time, the more likely they are to continue to diligently respond to your requests).
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Provide feedback to firms about why they were not selected (similar to the above point, spending time on an RFP only to hear nothing can be demoralizing to a law firm and offering feedback about the decision can go a long way).
When looking at these strategies and considering implementation, it’s important to remember that change management is a difficult process that requires careful management to succeed. The most effective departments take stock of their data and prioritize and measure the impact of all initiatives. When you do this, you not only increase your likelihood of success, but you also make it easier to make the business case for your decisions and, most importantly, show cost savings.
Interested in how Priori Marketplace or our outside counsel decision-making platform, Scout, can play a role in your cost-saving strategies? Start a free RFP on Marketplace today and receive a curated list of providers with no obligations, or schedule a demo of Scout.
