How NOT to Manage Hourly Matters

Note: This post originally appeared on the Wolters Kluwer ELM Solutions blog on 11-12-2019. Link here: https://www.wolterskluwer.com/en/solutions/enterprise-legal-management/legalview-analytics/legalview-insights

How NOT to Manage Hourly Matters

In a separate post, I explained why hourly rates remain important even in a world moving towards more alternative fee arrangements. One reason is that while hourly work might not always be optimal, many of the downsides flow not from the hourly nature of the agreement, but from failure to follow best practices with respect to how that work is managed.

In fact, not only do many CLD’s not follow best practices in managing hourly work, they actually follow what I call “worst practices."? Here are some of the worst that result in hourly work getting a bad rap it doesn't always deserve:

Lackadaisical matter budgeting.?I have consulted with dozens of CLD’s, and remain awestruck by the fact that not only are many matters not budgeted—most aren’t. ?Furthermore, CLD’s appear to be using matter budgets not to control costs but to unwittingly train their law firms that budgets are not “real,” will not be enforced, and do not need to be respected (data from Altman Weil indicate that 62% of CLD’s do not enforce matter budgets—see p. 41 of this report).?Many of these are the same CLD’s who condemn hourly work for not being cost effective and pedestalize AFA’s as the answer to all their problems, apparently unaware that many kinds of AFA’s—such as fee caps—are little more than glorified budgets.?The problem here isn’t hourly arrangements but inconsistency between official policy and actual practice. If you put a stop sign in the middle of town that never gets enforced, people start to ignore it. Likewise, law firms will understandably view budgets an afterthought if experience has taught them that budgets are merely aspirational and won't be enforced.

Failure to compensate for the S.E.M. effect.?Although CLD’s sincerely want to control costs, most of them care less about cost control than law firms care about increasing profits.?This is because, ultimately, CLD’s are playing with SEM—somebody else’s money.?It is not as if general counsel are risking their own personal funds in pricing negotiations—they are only risking the money of their client, often a corporation so large that a few million dollars lost is, statistically speaking, little more than a rounding error.?Law firm partners, on the other hand, are literally playing with their own money, which means a crafty approach to pricing can net them thousands or even hundreds of thousands in additional take-home pay.?This is why many BigLaw firms employ pricing directors who have years of experience doing nothing except figuring out ways to improve revenue and profitability.?Some of these people are paid $300k or more per year and earn that salary many times over.?While some of the more sophisticated CLD’s are poaching this talent to play defense, for the most part they are not paying the kind of money necessary to match law firms in sophistication.?A nontrivial number actually ask law firms to do pricing analysis for them, when the risks of not doing their own math should be obvious.?CLD’s who want to be confident of getting the best deal have to go to bat for more budget to hire the best pricing talent and also have to recognize it is their job to be good stewards of client money—not the job of their law firms. Law firms' job is to increase revenue and profits for law firms.

Letting the folks who negotiate rates be the same folks who played nine holes with outside counsel last weekend.?In a recent, informal survey I performed of Wolters Kluwer ELM Solutions clients, 27% of respondents said their organization had no centralized rate management process or strategy, but allowed individual in-house counsel to negotiate rates with outside counsel unilaterally.?This “good cop/bad good cop” rate management process, although designed by CLD’s, seems more like a process designed by and for the benefit of law firms.?Surprising to no one, the “good cops” in question have often been wined and dined with golf outings, football tickets, fancy meals and other goodies that law firms foist upon them in a neverending parade of business development efforts. This is clearly a situation where price negotiations should be led not by inside counsel, but by legal operations, procurement, or another neutral third-party who does not have to work with outside counsel on actual legal work and who therefore can maintain a more arms-length approach in negotiations. The problem with doing it the other way should be obvious.

Irrational rate benchmarks.?Many CLD’s do not do any meaningful rate benchmarking at all, except to “benchmark” the rates they’ve agreed to against outside counsel “rack rates”—made-up rates that, a cynic would say, law firms inflate to give CLD’s a fig leaf they can use to internally justify the rates they just got sold.?Other CLDs are a bit more scientific and benchmark proposed rates against rates they have paid for similar work in the past.?Trouble is, as discussed above, historical rates are arrived at through deeply flawed processes that favor law firms.?Bottom line:?While benchmarking yourself against failure might feel good, benchmarking against success is the only thing that is going to show you what is possible if you apply yourself.?CLD’s who want to do better in this area should check out products like ELM Solutions Real Rate Report, which has been the industry's leading source of rate benchmarking for over a decade.