Legal costs too high say clients
Legal costs too high say clients
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An extensive new report finds that the best way for law firms to improve working relationships with their top organisational clients is to be more concerned with costs.
The ACLA/CLANZ Legal Department Benchmarking Report 2008 delivers the results of a survey of more than 125 companies and government agencies that together spend over a billion dollars on lawyers each year. The report was commissioned by the Australian Corporate Lawyers Association (ACLA) and Corporate Lawyers Association of New Zealand (CLANZ).
Accurate estimates optional
“It’s hardly surprising that costs are amongst clients’ top concerns”, says former CLANZ president Ron Pol, whose professional services company Team Factors conducted the survey, “but it’s not just the size of legal fees; the way that lawyers communicate costs – and the timely reporting of unexpected overruns – seems to be a big part of the issue.”
The general counsel of some of Australasia’s biggest organisations, with some of the largest teams of lawyers and sophisticated legal procurement systems, reported that when they asked law firms for fee estimates, the final cost was consistently on or below budget just 2% of the time. Only a third (33%) reported that law firms met budget more than half the time.
Get more commercial, say clients
Despite many of these organisations spending tens of millions of dollars on legal fees each year, the report also points to the importance of lawyers trying to better understand their client’s needs. For New Zealand legal departments this issue pushed cost concerns into second position.
“The message is clear,” says Pol, “Optimal outcomes and value for money are more important than hourly rates; but overall the commerciality of legal advice, as viewed by the client, is critical.”
Hourly rate alternatives?
The dominant method by which lawyers have billed clients for the past few decades – hourly rates – also came under the spotlight.
Only 3% of legal heads considered billing by the hour the best basis for pricing legal services. Although there was widespread concern about hourly billing, there seemed no clear consensus on the level of intensity of such concerns. Fifty-two percent considered hourly billing to be merely ‘generally appropriate’ yet ‘not ideal’. Another 38% expressed more serious concerns; they regarded hourly billing as ‘not very appropriate’, as ‘rewarding inefficiency and providing no incentive for success, or ‘not at all appropriate’ and ‘totally outmoded – try to avoid whenever possible.’
In-house growth to affect law firms
Particularly in a slowing economy, the confluence of factors outlined in the report could have a dampening impact on some lawyers’ businesses. For others, the findings represent an opportunity to deliver legal services in ways more likely to resonate with some of the biggest clients in Australia and New Zealand.
Some of the risks and opportunities highlighted include:
• Finding good outside lawyers was not regarded as a pressing issue facing any legal department, but the need to reduce outside legal costs featured consistently as one of the top priorities.
• Within the next two years 62% of some of Australasia’s largest clients anticipate reviewing which law firms they use; three quarters of these expect to review firms in the next 12 months.
• Although law firms and their clients value long-standing relationships, only 21% of some of the largest organisational clients considered their lead law firm ‘clearly better’ than its nearest and best competitor; most of these clients believe that other firms could do most of their legal work equally as well as their lead law firm.
• Nearly three quarters of respondents (71%) reported no significant barriers in terminating their relationship with their lead firm if they chose to do so. Only about 10% considered that their investment in their lead firm and the costs of shifting were too large to allow change without considerable difficulty. Another 19% said it would be quite difficult or costly to switch firms.
• For most respondents there is a gap – sometimes a considerable gap – between the hourly cost of in-house counsel and law firm rates. The median fully-loaded in-house counsel hourly cost based on total hours worked was A$149 in Australia and just NZ$81 in New Zealand. Even on a ‘chargeable hours’ basis similar to law firm measures, the median hourly cost of in-house counsel was A$222 and NZ$121 in Australia and New Zealand respectively; considerably lower than the top rates paid to law firms - sometimes more than $600 per hour.
“Little wonder”, says Peter Turner, chief executive of the Australian Corporate Lawyers Association, “that not a single respondent reported anticipating even a moderate reduction in the size of their legal department over the next two years.”
“This is a timely reminder to law firms”, adds Richard Stock, founding partner of Catalyst Consulting. “There is a continued likelihood of legal department growth, particularly in Australia, where 65% expect their legal departments to expand over the next two years.”
“There is also evidence that the mix of legal work in some areas seems to be shifting” says Stock. “Some work traditionally viewed as almost the exclusive domain of law firms is, in some areas, being performed in-house. This suggests that if clients believe that law firms are not fully engaging with them to manage costs, and if legal departments continue growing, it’s not simply a case of lost revenue for law firms; some of the best work might go in-house for good.”