This is an edited version of Stop the Clock?, a research report on value and fees in legal services produced by the Commerce & Industry Group and accountants and business advisers BDO Stoy Hayward




Concern about the fees charged by law firms is nothing new. But recently, the level of concern has increased significantly.
With hourly rates at their highest levels ever, many in-house counsel say the bills bear little relation to the value provided. At the same time, they are under pressure from within to cut the cost of legal advice.



Many in-house counsel are keen to engineer a new way of working. The Commerce & Industry Group established a focus group to explore charging and teamed up with BDO Stoy Hayward. The study included a survey of almost 200 in-house counsel, round-table discussions and interviews.



‘In-house counsel continue to become increasingly sophisticated buyers,’ says Deepak Malhotra, general counsel for Western Europe and corporate legal at brewer InBev, who leads the focus group. There is no ‘one-size-fits-all’ approach, ‘but the in-house counsel involved are keen to examine current billing practices, to see what best practice does exist, and then to share it. There is no easy answer... and much of what exists works well. However, there is a growing sense of urgency for new charging models, greater dialogue on value and more innovative practices.’



The potential benefits are clear. Cisco recently negotiated a 10% cost reduction with one US firm by talking about how the two could cut costs by working together better. ‘We’re not trying to destroy their business model,’ says Richard Given, a Cisco legal director, ‘but rather we want to find new ways to align interests…. so that there are mutual incentives for efficiency.’ The review showed the firm was billing for time that required no legal expertise. The two agreed that Cisco would do more of this work – enough to enable the firm to commit to the 10% cut with confidence. A service level agreement says that if Cisco does not perform the work it has promised to do, it must compensate the firm.



More widely, believes Mr Given, linking costs to value will require a change of attitude by firms. To maximise their own profits, they should take into account the changing needs of customers, in the understanding that as their customers prosper, so will they.



But the burden of change does not fall solely on the firms, says Mr Given. In-house counsel must change too. ‘[Clients] don’t understand that in order to make value billing work, you both have to buy into it and you both have to behave.’ Often, he says, in-house counsel try to keep the work inside their own team, but then realise they cannot do it and throw it to the firm with little preparation and poor instructions. The result is that both in-house counsel and firm resort to hourly billing.



Our research shows how ingrained the hourly billing model is. It accounted for two-thirds of the total annual legal spend of our respondents. Nearly half of respondents were dissatisfied with hourly bills. But respondents agreed that hourly billing has some strengths. Half believed it was simple and measurable. It also enabled them to compare costs and break bills down. To a lesser extent, it provided a degree of transparency. But one in ten said hourly billing had no strengths at all.



In the meantime, in-house counsel at our focus groups talked about how they were turning to smaller or regional firms as a way of keeping costs down.



Some organisations are bringing in their procurement departments. At Dell, this is now mandatory on higher-spend relationships, with only limited exceptions, says in-house counsel Bruce Macmillan. Legal still negotiates and agrees its budget with the finance function and management, but the procurement department helps ensure suppliers represent a reasonable use of Dell’s resources.



‘The procurement function helps me to define what is best value (but not always cheapest) and helps the business to understand impartially the value that I’m getting,’ says Mr Macmillan. It can also force any variance from best value – in terms of fees or billing practices – to be justified and not only in comparison with rivals, but also other consulting service providers.



One result is that Dell asks some firms to bill on a daily or half-daily rate for some of their work. This can offer better value and also means that ‘the bills look more familiar in terms of structure and content to people who are more used to dealing with other kinds of adviser’, he says.



This scrutiny by finance and procurement teams also raises the bar that suppliers need to get over in terms of billing practice. ‘One of the biggest pieces of value a firm can deliver for me is to provide accurate estimates, accurate daily rates and clear billing narratives, with no silly extraneous items and no surprises – they need to get their paperwork right first time,’ Mr Macmillan says.



Trying alternatives

Two out of three in-house counsel have engaged a firm on a fixed-fee basis, and two out of five have used capped fees. When used, these billing models accounted for 31% and 20% of legal spend respectively. Conditional fees were used by 13% of in-house counsel (16% of legal spend). On a scale of one to five, fixed fees achieved the highest satisfaction level (3.96), with capped fees close behind (3.8). Both rated higher than hourly billing, but neither statistic is a resounding endorsement.



In fact, the survey showed that in-house counsel do not want to replace hourly billing with any single alternative. Fixed fees was ranked as the best substitute by only one-fifth of respondents. Of those who had used fixed fees, only one in four would choose it as the single alternative. Likewise, capped fees or value-based fees were chosen by just one in ten. ‘Hourly fees remain easier,’ said one in-house counsel. ‘There’s not one solution that can be adapted to all types of work.’



There was more enthusiasm for a flexible menu of billing options. Just under half (47%) said this would best meet their needs; but that percentage is hardly a ringing endorsement either. In practice, in-house counsel often defaulted to hourly billing because they needed to move quickly.



So what is the best way forward? It is clear that many in-house counsel are concerned about the value they receive. Some have used alternatives to hourly billing to see if a different charging model can align fees more closely with value, but experiences have been mixed. Perhaps the answer lies elsewhere?



One route many in-house counsel adopt is to challenge the bill when it arrives – or ‘to negotiate value after the event’. Others would rather establish a clearer link between fees and value from the start.



Understanding value

Any negotiation over value begs the question: what is value? In-house counsel’s understanding of what value means in this context varies. Some talked in terms of value for money. They wanted firms to stop charging for costs that, in their view, added no value. Other in-house counsel talked about value in a broader sense. They felt there was often no necessary link between the time a firm spent on an assignment and the value of that work to the client.



Defining value is not easy. ‘Value is ultimately about meeting the needs and expectations of customers (that is, in-house counsel),’ says Mr Malhotra. ‘But it is a two-way process and we should also recognise that billing and its correlation to value is just one aspect. Often, fees and value are linked to the quality of instructions.’



‘Firms find it difficult to contemplate charging less than they would on hourly rates, and they find it difficult to explore the corollary of that – which is that sometimes they would be able to charge more,’ says Richard Tapp, director of legal services at Carillion. A solid majority of in-house counsel (68%) said they would be willing to pay higher fees for valuable work if they were charged less for lower-value work. Only 4% disagreed strongly. Value-based billing does not suit every kind of legal work, however.



Nearly two-thirds (65%) of respondents said they would like to discuss the possibility of value-based billing. Some firms are keen to embrace change and have been proactive in discussing fees and innovative ways of charging. But there is a problem. If in-house counsel and firms are to explore a new approach to billing, they will have to do so in a climate of trust and, for some in-house counsel, that trust is lacking.



Others have managed to create better relationships. ‘Hourly billing is difficult, but that is where the value of having a good relationship comes in,’ says Maxine Chow, in-house counsel at scientific analysis company LGC. ‘If they understand your business, they will also understand what you really thought was the right value for the work, so it’s much easier to have that conversation about value without falling out. It’s about having a good client partner who communicates well with you and understands your business, your constraints and your goals. But this is a two-way relationship, in which both parties have to be candid and realistic about what they want, how long it will take, who will do it, and what it will cost.’



When the relationship has broken down, billing is only one of the reasons, she believes. ‘Really it will have been because we were not impressed by the service or we were not well understood by the people we worked with. If their bills were cheaper, would I still go back to them? No.’



Nearly all (92%) of the respondents asked for an estimate before starting work, but fewer than 25% said the estimates were ‘usually in line’ with the final cost. The majority (68%) said that the final cost was only ‘sometimes in line’. Close to one in ten indicated that this never happened. Eight out of ten of the bills that missed the estimate were at least 10% higher than the expected figure.



This needs improvement. With in-house counsel needing to provide detailed and accurate estimates internally for budget purposes, firms’ inability to stick within estimates is potentially damaging. Much of this comes back to communication; the scope of work does change and estimates may need to be revised, but this should be done after open and timely communication and not in retrospect.



Seeking improvements

In-house counsel are keen to make existing billing models work better. They want to develop best-practice guidance on billing areas such as estimation methodologies and post-invoice fee negotiations.



Insurance company manager Thomas Miller is trialling an e-billing system, where firms submit their bills in a standard format with a code assigned to every cost. That makes it easier to analyse a bill and to compare costs between firms. Mark Holford, the company’s group director of service, plans to use billing data with discretion to begin with, as the company has long-standing relationships with its firms. But over time, he will use it to challenge major issues. The company does already negotiate down bills that it thinks are too high, ‘but it can be a bit hit and miss, because we don’t always know whether we are challenging the right things in the right way’.



But reducing unnecessary billing is not the main reason for investing in the system. ‘The real long-term goal for us is to make sure that the right amount of money is being spent on each law suit,’ he says. ‘I don’t think traditionally either we or the firms have focused enough on the balance between the fees and limiting the amount of money that we are liable to pay out.’ Mr Holford hopes the system will lead to a ‘no surprises’ culture, where the company can better estimate its legal costs and the claims themselves.



In the meantime, Cisco’s Mr Given says hourly billing will become even less attractive as in-house counsel become more sophisticated. While 20 years ago, in-house counsel were just a conduit for private practice lawyers to deliver the real legal services, they are now a key part of the executive team. ‘We are a cost centre,’ he says, ‘and are expected to be as efficient as anyone else.’



There will always be some firms working on an hourly basis, says Mr Given, but over time ‘the business model will change and firms will focus more on adding value’. If billing does move on to that more subjective basis, how will in-house counsel decide what they ought to pay? ‘It’s also the other way around,’ he says. ‘It’s for firms to work out what their USP is and to put a value on it. I’m not going to say it will be easy, but it will be increasingly hard to ignore as an issue – it’s not going to go away.’



l To read the full version of Stop the Clock?, go to the website www.cigroup.org.uk