External Legal Spend Management – Controlling “Rate Creep”

Background

It would be a safe bet to assume that almost every in-house lawyer and CFO in the country expresses concern about managing external legal spend. A material amount of effort is spent with external legal service providers about managing rising legal costs. However, typically this focuses solely on the current rate structure being offered. This is only one part of a well defined legal services delivery platform. In addition to articulating the current fee structure, an intentional approach to fee reviews is necessary to effectively manage the effect of “rate creep” (the year over year increase of fees without justification). Regardless of the amount of effort, time and creative thinking put forth, even the most innovative structure is susceptible to erosion from rate creep if the legal services purchaser does not think beyond the current year’s procurement of services when structuring their approach to external counsel management.

The Challenge

Those responsible for managing legal spend within an organization are often tasked with, at a bare minimum, maintaining a static legal spend. However, year over year it is common for notices of fee increases to be delivered by external counsel. In an environment of increasing costs, what are some watch-outs and best practices around managing rate creep?

Choose the Right Metric

As cautioned in previous articles, legal departments need to be careful about the metrics selected for pursuit so as to avoid the perils of tunnel vision. Total dollars spent, while important, is only a part of the picture. Often overlooked is the quantum of services received for the dollars spent. One way to look at this would be to measure the purchasing power of the legal department by looking at the effective cost per hour of services received, and to examine this over several fiscal years. Delving further into the details, a legal team can start to review the effective cost per hour of services across different categories of work, provinces, law firms, etc. Trends showing significant upward increases, and differences in the effective cost of services provided by law firms (or quite often by departments within the same law firm), should be examined.

The Importance of Looking at the Entire Legal Services Platform

Having completed the above, it can be readily apparent whether the purchasing power of the legal department is eroding. Focusing solely on the total amount of external legal spend can easily mask concerning micro trends. For example, if the legal team spent the same on external counsel this year, but received only 90% of the total legal services, then it could be facing an erosion in purchasing power. In much the same way, looking at legal services overall rather than by category of work can also result in trends being missed.

In addition to reviewing previous and current year’s spend, forward looking planning is also required. Otherwise, it is difficult to purposely and systemically manage rate creep. A well defined legal services platform should help protect against the risk of purchasing power erosion by defining clear processes around requests for increases in fees, and by carefully framing the manner in which the conversation will occur.

Best Practices

In my view, best practices to manage escalating external legal costs include the following:

1. Implement written retainer agreements with all firms.
2. As a schedule to the agreement, include the names of each lawyer (or for large delivery platforms, at the very least the category/level of lawyer) who is expected to work on the account and their fee structure.
3. Implement in writing, preferably in the retainer agreement, clear processes around requests for increases in fees.
4. Set clear deadlines by which such requests must be made. For example, consider requiring all requests to be made at least 60 days prior to the company’s new fiscal year. This will allow in-house counsel to manage and budget costs more accurately at the outset of each new fiscal year, without having to account for fluctuating mid-year rates.
5. Develop a template to be completed by firms requesting increases in fees that will be attached to a formal retainer agreement amendment. Use this template as an opportunity to frame the nature of the conversation that will occur. This can include a requirement, in table format, that the following be clearly shown:
   1. Each lawyer (or category/level of lawyer) at the firm who is expected to be working on the account over the upcoming year;
   2. Each lawyer’s current fee;
   3. Each lawyer’s requested amended fee; and
   4. The amount of the increase requested, expressed as a percentage.

The last point is one of the most important aspects, in my view, of managing against rate creep. Right from the start it frames the nature of the conversation that will occur between the legal department and the external service provider. The law firm’s relationship partner will need to turn their mind specifically to the optics of the percentage increase that is being requested. An increase from $300 to $325 per hour may not seem unreasonable at first glance, but when expressed in writing as an increase of 8.3%, the nature of the conversation can change.

Concluding Thoughts

Management of external legal spend needs to be done holistically, with a view to the entire platform and not just the aggregate dollars spent. While there are many good reasons why the cost of services from a particular lawyer or firm should increase, too often a blanket approach is taken that is out of touch with perceived improvements in efficiency, skills or service. It is up to General Counsels and CFOs to be judicious with their organization’s dollars and to hold legal service providers accountable.

The thoughts, ideas and views expressed in this article are that of the author. This article was written in the spirit of contributing to the advancement of Corporate Counsel and the organizations they serve. You are invited to connect with Tyler Langdon via the hyperlink on his name, above.