So we come to part 5 in my continuing rant about fee negotiations. If you’ve stayed with me so far, you’ve seen me complain about how badly many law firm partners and their clients handle what should be a relatively minor negotiation between them, compared to how well they handle the much larger negotiations with counterparts in transactions, disputes, or dealings with regulators. I followed this with a discussion of the need to keep relationship issues and pricing issues separate and deal with both, sandwiched between discussions of the importance of preparation and creativity in fee negotiations. Today I want to tackle the seeming arbitrariness of rates, and the value of using standards of legitimacy to help both client and counsel explain the deal to their respective stakeholders.
Let’s start with a simple premise: no one likes to feel they were taken advantage of in a negotiation. We all seem to need to explain the results of our negotiations, to supervisors or peers, to spouses, or even to ourselves when we look in the mirror. When we don’t have a good way to articulate the legitimacy of the outcome, we feel badly and defensive; we wonder whether we should have done better, and whether the other side was chuckling all the way home. That’s a terrible way to have clients feel after discussing fees with their outside counsel, and an equally bad way to have counsel feel about how they were retained by a client.
In-house counsel come in for a lot of criticism when they have to explain why they pay the rates they do for work they send out, and why those rates keep going up year by year, even while their peers in other corporate functions are driving down what they pay their suppliers. Neither the rates law firms charge, nor the invoices they submit as a function of rates times hours, are easily explained to CFOs or heads of business units, except by reference to the high starting salaries of junior associates and the profits that partners want to take home. When pressed, about the only other thing in-house counsel can point to as evidence of their success is that they were able to get an X% discount off the firm’s standard rates. But negotiating about discounts is a lousy way to manage a trusted advisor relationship.
Law firm partners don’t have it much better when they have to explain things to their stakeholders. Discounted rates start you in a hole with respect to realization, which only gets worse if you have also set some unrealistic expectations in your estimate of the likely total cost of the matter. Explaining to your management committee that you had to make those concessions or lose the work does not exactly put you in a strong light as a rainmaker and a manager of client relationships.
The funny thing is that as lawyers we all rely heavily on being to articulate and defend the legitimacy of our actions and our views. We cite precedents in court; we look to comparables in negotiating transactions; we invoke industry norms and best practices in regulatory proceedings. As practitioners, objective criteria are our friends. But when it comes to negotiating fee arrangements, we seem to forget all of that.
A couple of providers have stepped into this vacuum, using data culled from law firm billing systems, and have developed offerings to equip in-house law departments with the ability to compare the rates they pay with the rates charged by a variety of firms to many of their clients. The data is not perfect, but in many cases it is much better than relying on anecdotes and rumors about “what is the market rate” in different cities or for different kinds of expertise. Some law firms have learned from the practice of consulting and accounting firms, and have started looking at their own billing data to be able to demonstrate to clients that they are indeed being treated fairly in comparison to the firm’s other, similarly-situated clients. Both of these steps are reasonable ones, compared to the current state of fee negotiations.
But should be able to do even better. We need to look beyond the hourly rates charged by firms in the current market and articulate other measures of legitimacy. For example, we could all do a better job connecting fees to the value of the work, relative to the business problem addressed or the legal risks managed. We could look for ways to connect legal spend to the company’s business and the legal risks associated with its ebbs and flows. Law departments do some of their budgeting this way, recognizing that, for example, product liability risks are related, at least in part, to the number of products shipped and that employment risks are related, at least in part, to the number of employees on the payroll. Why not integrate some of that thinking into external fee arrangements? For a great article by Susan Hackett considering standards drawn from comparables, replacement costs, and economic value analysis, take a look here.
Even better that trying to find a point solution for the price of a legal matter would be to agree on a process for making good choices together about scope and level of effort. Such a process starts at the outset, when counsel and client define a budget based on some measure of the value of the work, and devise a legal strategy that can be executed within that budget. But the process doesn’t stop with an agreed-to budget. Things change, often before the ink is dry on the plan. So counsel and client must continue to work together – making new choices about how to stay within the budget, and when to change the budget given new information about the stakes or the counterparty’s actions. And, as Ron Friedmann recently reminded us, at the core of such a process is effective communication between lawyer and client.
Lawyer and client talking regularly about how the matter is progressing, what the choices are before them, and what the implications are for the matter’s budget? Sounds radical. Maybe the profession is really transforming this time.