Danny Ertel on Legal Fees, Outsourcing, and Legal Process Outsourcing (LPO)

What the business needs to know about the changes in the Law Department

Danny Ertel — Wed, 25 Jul 2012 15:31:00 GMT

A “perfect storm” of globalization, technology changes, and a global recession has significantly shifted the bargaining power between law firms and their large corporate clients.

The rise of new kinds of service providers, both on- and off-shore, has given clients more choices, particularly with respect to the more routine or commoditized aspects of legal work. As they have exercised those choices they have moved some work out of traditional law firms, creating at least a temporary over-capacity at the largest firms.

Technology has played a role in this shift of work, making it easier to unbundle matters and move work around; it has also helped reduce the quantum of work to be done, by enabling smarter searching of documents, more self-service, and even some document assembly. Layered on top of globalization, technology has contributed to the over-capacity problem.

While globalization and technology pressures have been brewing for a while, the prolonged global recession really brought things to a head. Demand for work declined, and the business put ever greater pressure on in-house counsel to reduce costs. As fewer transactions were contemplated, and more commercial disputes were handled in-house, once again, law firms found themselves over-staffed.

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Do you speak AFA? (and if so, is it just talk?)

Danny Ertel — Tue, 17 Jul 2012 18:32:00 GMT

ALM Legal Intelligence, with sponsorship from LexisNexis CounselLink, has just released an interesting new report, “Speaking Different Languages: Alternative Fee Arrangements for Law Firms and Legal Departments.” Although the name seems to imply that law firms and legal departments approach alternative fee arrangements (AFAs) differently, its principal conclusion is that, “if the billable hour is to go the way of the dinosaur, law firms and legal departments alike will have to overcome some significant challenges.” While most survey respondents on both sides of the relationship reported having used AFAs last year, the numbers dropped off significantly when asked whether more than 10% of their legal work “was valued through an arrangement that is not based solely on hourly rates.”

I found it interesting that the biggest obstacles to greater use of AFAs, for both law firms and law departments, had to do with how “comfortable” they and their counterparts were with the billable hour, and the inexperience of law firms in particular with “defining or managing work on an AFA basis.” Comfort with the billable hour is not necessarily a bad thing. Adopting alternatives to the billable hour should presumably only happen as rapidly as lawyers and clients want to move away from it. While some of that comfort comes from simple familiarity with what has been the dominant structure for the payment of legal services for the past 25 years, it also implies insufficient pain or urgency to move away from it.

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Youve decided to outsource, now what?

Danny Ertel — Tue, 10 Jul 2012 15:11:00 GMT

While the legal process outsourcing (LPO) market has not grown as rapidly as some predicted, and there has been at least a partial shake-out and some limited consolidation, it is clear that the practice of outsourcing some lower-value legal processes or tasks is a real, and potentially very effective, tool available to those interested in controlling legal costs. In-house counsel can make use of LPO to reduce outside spend, by requiring outside counsel to unbundle some aspects of their work and to delegate that to lower-cost resources at an LPO provider. The most prevalent example of this is document review as part of pre-trial discovery, especially in the US and the UK, where discovery is a principal driver of litigation costs. To a lesser extent, in-house counsel can also save some money by outsourcing tasks handled internally; given the modest headcount in many in-house legal departments, however, when in-house legal tasks are outsourced, the purpose is often to avoid hiring additional staff or to free up the time of internal teams, rather than to reduce that headcount. The most common examples include contract management and some patent and trademark support.

Law firms are also making use of outsourcing to reduce costs – in some cases to reduce their own costs and enable them to be more profitable under fixed fee and similar arrangements, and in others to offer their clients a lower total cost for the matter by incorporating the services of an LPO provider as a pass-through expense. Some firms have come to these choices kicking-and-screaming, while others have embraced the strategy more proactively. Those who have been more proactive have had the opportunity to make choices between building/expanding their own low-cost service delivery centers and partnering with LPO providers.

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On the way to cost reductions: Make or Buy?

Danny Ertel — Fri, 22 Jun 2012 18:09:00 GMT

Most large law firms seem to have gotten the message: clients want to bring under control the cost of legal services. As firms respond on the revenue side with lower rates, fixed fees, or other arrangements, they must also either lower their own costs or face declining margins. While the latter may indeed prove inevitable for many, there have been widely reported efforts to reduce costs – both in the “back office” and in the delivery of legal services.

Bringing costs down in a law firm is in some ways a simple proposition: the highest costs are generally people and real estate, with most other costs categories lagging far behind. Real estate costs are usually hard to adjust in the very short term, unless you happen to be approaching the end of your lease. To reduce people costs, many firms have simply cut staff. However, while the savings (after severance and related costs) may be immediate, headcount reductions are neither repeatable nor sustainable. While there is nothing wrong with running a little leaner, significant cuts tend to leave the firm less, rather than more, capable of meeting client needs, of being innovative, or of growing their portfolio of work.

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Better adaptions

Danny Ertel — Thu, 07 Jun 2012 20:33:00 GMT

I recently returned from a much anticipated vacation that included a visit to the Galapagos Islands, about 600 miles off the coast of Ecuador. The Galapagos are famous, in part, because of the role that Charles Darwin’s visit there in 1835 played in his thinking about evolution and natural selection. To some, the islands’ unique flora and fauna are living examples of a process described as “survival of the fittest,” suggesting a bare-knuckled competition for resources and opportunities to reproduce. Given the abundance of articles and email alerts related to Dewey’s rapidly worsening situation that coincided with my vacation, you might think that I would have been inspired to write a post about Darwinian competition or to add my two cents to the many post mortems already out there. Instead I want to take a different lesson from the remarkable ways that life has adapted to some fairly inhospitable volcanic islands.

What I found interesting about how some creatures have evolved in the somewhat isolated ecosystem of the Galapagos Islands was less about competition and more about adaption to local conditions. Take the case of the flightless cormorant (Phalacrocorax harrisi), a species of bird found nowhere on earth but on two islands in the Galapagos. Their wings are too small for flight, but they are highly efficient swimmers and feed on the abundant sea life. While they would be unable to thrive in an environment filled with toothy predators, these cormorants have been successful on the Galapagos. They need not be the biggest, fastest, or toughest birds in town; they just need to be good at what they do, including sharing responsibilities for feeding and brooding, and reproducing multiple times each year. Similarly, the marine Iiuanas (Amblyrhynchus cristatus) found nowhere else but on this archipelago have thrived despite the limited food supply on these islands by learning to eat marine algae. To do so successfully, these iguanas had to evolve salt glands that allow them to expel the salt they take in as they feed underwater, and to learn to use their powerful tails for swimming and diving.

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Change comes hard

Danny Ertel — Tue, 22 May 2012 14:20:00 GMT

There has certainly been a lot in the media of late about changes in the legal profession. We talk about the “death of the billable hour,” the “unbundling” of services, and the more efficient delivery of legal services through “knowledge management.”

But change is hard. Take the billable hour. Think about all the systems, structures, cultural artifacts, training, and more that has gone into a model that maximizes the hours billed by law firm associates: bonuses (or job retention in an era of layoffs) tied to hours billed; pressure to track time in 6 minute increments and submit time report daily; rules about when/how meals or transportation can be billed back to the firm or client; and reports about “utilization rates.” Making lawyers more conscious of being efficient, rather than being “fully utilized” will take more than just saying it should be so, or even changing how law firms bill clients. Making clients better at articulating what they really need and what trade-offs they do or do not want to make will be essential if non-hours based fee arrangements are going to be sustainable. (Fixed fee models, for example, will simply not work if clients treat them as “all you can eat buffets.”)

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How do you manage chaos?

Danny Ertel — Tue, 08 May 2012 16:19:00 GMT

That’s a question I hear surprisingly frequently from individual partners when I work with a firm that is trying to embrace legal project management (LPM) as a discipline. For better or worse, most firms seem to like to start the process by rolling out a fairly generic version of training on LPM methodologies across their entire partnership. Such training tends to describe, in an ideal world, how legal matters can be efficiently managed. But few of us live or practice in an ideal world, and even the best-laid plans lose some of their sharpness when put into practice. As the oft-quoted line goes “no plan survives contact with the enemy.”

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Whos winning this relationship?

Danny Ertel — Fri, 27 Apr 2012 21:13:00 GMT

I hope you found the title of this post a bit jarring; yet it doesn’t seem all that strange a question to ask, if you look at what many law firms and their clients are saying, if not to each other, then amongst themselves, when they discuss their fee arrangements. Implicit in many comments about the results of a fee negotiation are assumptions about what “success” may mean for one side or the other, and what it takes to achieve it. Indeed, the WSJ Law Blog headline that followed the release of the ACC 2011 Census Report put in very much those terms, “In-House Lawyers Gaining the Upper Hand”.

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What do law firm rates tell us?

Danny Ertel — Tue, 17 Apr 2012 18:57:00 GMT

Some of you may have noticed that the latest edition of the Real Rate Report is out from Tymetrix and the Corporate Executive Board, and it contains some tantalizing figures. Let’s start with the headline, that rates are rising. Not rising quite as fast in the recovery as in the boom and not rising equally across all regions and all sizes of firms, but rising overall. According to Tymetrix, their “2012 report saw lawyer rates continue to rise through the recession and recovery. After increasing 8.2 percent from 2007-2008, rates moderated briefly in 2008-2009 (just 2.3 percent increase), but resumed growing at a rate of more than 4 percent per year since 2009.” What does that tell us?

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Sourcing takes another look at Legal

Danny Ertel — Tue, 10 Apr 2012 16:36:00 GMT

I recently had the privilege to moderate a panel discussion with some of the most thoughtful practitioners in the area of legal sourcing, and I just realized I hadn’t even mentioned it here. At the Sourcing Interests Group (SIG) Global Sourcing Summit, on March 28th, we enjoyed a lively discussion featuring Jill Zunshine, VP for Americas Region in Global Procurement at HP; Ojas Sampat, Director of Strategic Sourcing at Cigna; and Ganesh Natarajan, CEO of Mindcrest.

I won’t try to reproduce the entire hour-long discussion here, but I will share the slides for those of you who are interested, as well as highlight a couple of interesting points. In the slides, you will see a couple of observations about the market and its dynamics, and the specific questions we drilled into. The entire discussion was structured around the “sourcing lifecycle” from understanding why companies might outsource legal processes, to exploring what is happening in the supply market, to developing and executing on a strategy, to then managing relationships and optimizing performance. Sourcing professionals in the audience vastly outnumbered the lawyers, as might be expected given the forum, and interestingly more than a third had actual experience sourcing legal process outsourcing (LPO) services, and another third were starting to look at the category.

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Danny Ertel on Legal Fees, Outsourcing, and Legal Process Outsourcing (LPO)

What the business needs to know about the changes in the Law Department

Do you speak AFA? (and if so, is it just talk?)

Youve decided to outsource, now what?

On the way to cost reductions: Make or Buy?

Better adaptions

Change comes hard

How do you manage chaos?

Whos winning this relationship?

What do law firm rates tell us?

Sourcing takes another look at Legal

Youve decided to outsource, now what?

Whos winning this relationship?