“Tepid,” “flat-ish,” “volatile”: that’s how The American Lawyer described Big Law profitability, suggesting a potentially challenging 2024 for outside counsel.
Harbor’s recent Law Department Survey found that a resounding 80% of law departments expected demand for legal services to increase – but amid persistent economic uncertainty, just 22% of in-house teams said they planned to ramp up their use of outside counsel.
Understandably, then, law departments’ top two focus areas for outside counsel management are “cost control” and “firm use/selection.” The good news is they’re seeking out innovative ways to accomplish that – including data-driven approaches as well as creative ways to improve collaboration across entire law firm panels.
“Organizations are trying to have more command over the firms they’re using, and using data to examine rate benchmarks, for instance, can help them navigate these negotiations,” says Stacie Neeter, Managing Director at Harbor.
Here’s a brief snapshot of what law departments and outside counsel should know, based on the latest Law Firm Benchmarking Survey from Harbor.
How law departments are controlling spend
Law departments are undertaking numerous management initiatives to lower outside counsel spend, including:
- Stricter guidelines. Sixty percent of survey respondents told us they were engaging in tougher enforcement of outside counsel billing guidelines, more than any other management initiative; this tactic was also tied for the second-highest ranked ROI initiative, after keeping more work in-house. Over half (52%) said they were implementing measures for internal counsel to monitor, track, and adhere to established guidelines on the use of outside counsel. These include approval processes for when and how outside counsel are used, as well as guidance on which firms are preferred for certain types of work.
- Alternative fee arrangements (AFAs). Unsurprisingly given the above focus, 51% also said they were using alternative fee agreements, and 29% are planning to and/or in progress with optimizing such agreements. The most popular AFAs include fixed fee-per-matter arrangements (47%), flat fees (21%), and volume discounts (18%). Yet, importantly, the use of AFAs continues to represent less than a quarter of outside counsel spending—and reaps only 6% in median savings.
- Data analytics. A fast-emerging focus area is the use of data analytics to support business decisions: nearly four in 10 law departments have implemented such an initiative, while another 43% are planning to in some regard—more than any other action we asked about. This coincides with several new technologies in the space that can offer robust data visualizations, matter management modules, and more.
According to Neeter, these tools are not only being used to identify preferred provider panels, but increasingly for RFPs, both for single-matter and portfolio work. This approach provides a prism into case strategy and also results in cost savings, particularly when reverse auctions are leveraged with these tools. Not surprisingly, the use of competitive bidding and RFPs for individual matters or portfolios was tied for the second-highest ROI initiative.
Neeter is also increasingly seeing corporate law departments bring their law firms together in outside counsel summits, which can help them learn more about the company’s business and legal strategy while building valuable relationships with one another. Diversity is another important focus, with many corporations soliciting and monitoring diversity data when choosing their outside counsel.
And while savings from law firm convergence and preferred provider panels continue to play a vital role in outside counsel management, Neeter suggests we may start to see something of a paradigm shift in that respect.
“It used to be that most outside counsel management programs were in some way about consolidating firms to achieve buying power,” she says. “But in-house teams are increasingly looking to ensure proper expertise across practice areas and identifying other ways to effect change, for instance by bringing in a more data and process-oriented approach, leveraging technology, identifying lower cost firms, and seeking out other value adds, such as secondees, free trainings, newsletters, and other relationship-building exercises.”
Looking ahead
All told, what matters most in outside counsel selection continues to be attorney expertise and institutional knowledge of the organization. That might still come from Big Law: only 18% of law departments have reduced the use of such firms, even as 41% have also increased the use of regional or boutique firms.
In-house teams, meanwhile, should do their best to leverage data-focused processes (e.g., RFP tools) to help them in negotiations and optimize their outside counsel structures in 2024 and beyond.
As Jaime Woltjen, Director, Strategy + Transformation, Harbor, puts it:
"Law departments are closely scrutinizing law firm billing and annual rate reviews, and instructing their teams to be more cautious in how they use outside counsel. The pressure on law firms, then, is to optimize billing practices and pricing while continuing to explore ways to demonstrate unique value to their clients."
- Outside counsel management
- Cost & spend management
- Innovation