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GCs Crave Fee Transparency To Ease Budget Pressure

By Andrew Strickler

Law360, New York (November 19, 2013, 8:50 PM ET) -- General counsel are facing greater pressure than ever to justify their budgets to company brass, but they're not just looking for discounts. Increasingly, what clients need is a peek behind the curtain at exactly how outside counsel set their rates, use their time and staff client matters.

“This isn’t about running around looking for the cheapest price,” said Connie Brenton, chief of staff and director of legal operations at storage and data management solutions provider NetApp Inc. "The goal is to obtain value through efficiencies."

The push toward pricing transparency over straight reductions was apparent in legal consultant firm Altman Weil Inc.'s 2013 survey of chief legal officers, which showed a shifting focus toward budget forecasting.

 When asked to choose a pricing scenario for all matters other than bet-the-company issues, more than 34 percent of law department heads chose pricing transparency as the preferred approach when working with outside counsel. An additional third chose guaranteed pricing.

Less than 10 percent put lowest cost as the priority. About one in five said value-based pricing, with a variable cost dependent on outcome, was the preferred scenario.

“If a rate discount is the only thing offered, law departments will certainly take it, but chief legal officers are saying what they really want is predictability and control,” the report says.

Toby Brown, director of strategic pricing and analytics at Akin Gump Strauss Hauer & Feld LLP, said the shift represents an opportunity for responsive firms to tackle a client’s legal concerns as well as in-house counsel's concerns about explaining to CEOs and board members exactly how they're reaching savings.  

“There is pressure on the GCs to meet these sorts of pressures and demand ... and to demonstrate how they came to a cost savings, but they don’t always come forward with that explicit understanding or communication,” Brown said.

A classic example, he said, is the client who negotiates a fixed fee or other alternative fee arrangement and then additionally asks for a “ghost bill” reflecting billable hours as a second layer of information that can be used internally.

In other cases, in-house counsel are under the gun to show how they’re getting more legal service for the same dollar across many different kinds of matters, or matching savings found in different parts of the business. Corporate unit leads may even have bonuses tied to profit-and-loss numbers, adding a layer to company politics about who is saving money and how.  

“One of my go-to questions with clients is: 'A year from now, what will fee success look like for you?'” Brown said. “What that question requires them to think about is: 'What’s the best story a year from now I could tell the CEO?'”

Texas attorney Shawn Shearer, a former senior counsel with 7-Eleven, put a more defensive spin on the prioritization of pricing information over the bottom line, calling detailed fee data “ammunition” against assaults on law department budgets.

The ability to describe exactly how a discount was found, whether through an alternative fee arrangement or an off-the-top discount, “gives you what you need to answer the next [legal department] budget cut request,” Shearer said. “You need to know how you got where you are so the next time around, you can say, ‘We did this and this to cut costs, and I don’t think we can do more without negative consequences.’”

In last year’s Altman Weil CLO survey, improved budget forecasting lagged behind greater cost reductions in corporate counsel's preferred improvements among outside firms.

More than 200 chief legal officers who participated in the 2013 survey also indicated a shift of work in-house, with 29 percent reporting they plan to decrease their use of outside counsel — nearly double the number looking for more outside counsel service. Reflecting these shifts, 47 percent of the corporate law departments reported that they decreased their outside counsel budget this year. 

Shearer and others said the pressure to demonstrate how savings are found waxes and wanes with the fortunes of the particular business. The level of sophistication of other company executives about the vicissitudes of litigation, transactions and other outside legal costs also plays a big role.

“The law department is in a unique spot because no one ever sees your successes unless it’s a big litigation win or something like that. No one knows if you’ve negotiated yourself out of a problem two years down the road,” he said. “When you walk into a meeting with non-lawyer executives and they’re asking how the law department is going to continue to make cost reductions, you better be well armed with the facts.”

Russ Dempsey, chief legal officer and senior vice president for Ohio-based United Retirement Plan Consultants, said he typically uses outside counsel fee data as part of “after action” law department assessments. But he agreed that such information was also useful for addressing “unreasonable” expectations for legal spending predictability.

“I think there is a recent trend of legal being viewed as just another business function ... and responsible for controlling risk and managing expenses,” he said.

Drawing on the increasing availability of firm pricing data from companies like Sky Analytics, Brenton said, she recently helped start a series of meetings with BigLaw firms and other in-house legal operations executives to "start a more transparent conversation" about how outside and inside counsel set prices and utilize resources. The firms she works with vary in their responsiveness when asked how they calculate AFAs and staff matters, she said.

"Predictability is important, but there are many ways to achieve it, and I think there should be more transparency about how matters are resourced," she said. "We would like to know more about what metrics are important to them so that we can collaborate and align with our values."

--Additional reporting by Linda Chiem. Editing by Jeremy Barker and Philip Shea.

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