Management of Law Firms
5.1 Framework Agreements
Once a complex tender process has been conducted and the desired law firm is selected, I recommend that the result obtained is contractually sealed in order to facilitate implementation and to avoid any misunderstandings.
Framework agreements are particularly useful in those cases when it is expected that there will be regular assignments between the parties in the future and that the points to be negotiated will be repeated. Such agreements also make sense when multiple parties are involved—such as in international law firms with different locations or in a network of law firms. With the one-time negotiation of all key points set down in a framework agreement, the subsequent process of placing orders should be facilitated and become more efficient. This will also replace the retention and engagement letters prepared by the law firms. If a framework agreement is to fulfil its purpose, it should be designed in a detailed way and must, from a content point of view, be more than just a letter of intent. It should, inter alia, provide information on the range of services and the content of the work (including accessibility), conflicts of interest, the nature and extent of staffing and team structures, communications and reporting as well as contact persons, fees and compensable work and expenses (in particular the extent of it) and invoicing (including outside counsel retention and billing guidelines).5.2 Control of Law Firms
A company has already achieved a great deal with the proper selection and adequate instruction of outside counsel. However, this reflects only one side of the coin. In order to achieve the goals—especially the financial ones—related to the procurement of outside counsel services, a continuous management of the lawyers and the related mandates is required. Otherwise, there is a risk that hard-fought and successfully negotiated positions, as well as the attained rights and benefits that accompany them, may ultimately not be enforced and realized.
This management task requires time and resources, and that must be considered in the annual budget and underlying structures of a legal department. The increasing monitoring of the relationship with outside counsel is based on the assumption that they may perform more efficiently and effectively when obligated to keep their customers informed. This customer behavior is based on the fact that cost controls have become more important for them as well, which is why regular reporting and updates by suppliers on the status of actual costs versus the agreed budget is necessary. Furthermore, outside counsel has to provide summaries on the assigned mandates to identify possible alternative resolutions during a mandate and to perform a critical assessment at the end of a mandate (post-mortem evaluation) in order to map out any room for improvement for future cases.5.3 Alternative Fee Arrangements
If an outside counsel is entrusted with a mandate, it is quite common that it will be settled and paid for on the basis of hourly fees. At most, the hourly rate may be further graded depending on the subject area, country or seniority of the lawyer, and apparently also on gender. When charged by the hour, the customer is paying solely for the lawyer's activities, which is basically paying for the lawyer having worked. However, an efficient and qualitatively accurate performance of the lawyer is neither agreed upon nor guaranteed. The customer thus has an interest in building an appropriate incentive structure to steer a lawyer's performance in these areas. From a customer's point of view, a fee should not be calculated according to the time spent on a mandate (input) but rather on the basis of the benefit or (added) value the lawyer has generated for the customer (output).
Various developments show, however, that alternative remuneration methods are steadily on the rise, which will lead to changes in the future. Customers are demanding more cost transparency and they expect explanations regarding the fee compensation system.
This is probably not least of all due to CEOs and CFOs demanding that such models should be applied. These models often do not only deliver cost savings, but also promise better performance by outside counsel. Further, alternative billing methods are based on the presumption that someone who claims to be a specialist or an expert (here: for legal advice) should know how much time is required for the completion of pre-defined tasks.Fixed fees are the easiest way to use an alternative fee arrangement (AFA). For the avoidance of doubt, discounts or rebates as well as blended rates are not considered to be an AFA. With such mechanisms, a general price reduction is granted on existing standard hourly rates only. With so-called “volume discounts”, a discount will be granted—in terms of a loyalty rebate—upon reaching an agreed sales target. Therefore these mechanisms do not constitute a real alternative compensation model since they do not change the incentive model. The same applies to cost and budget estimates, since they are often not binding and simply constitute an indication of the expected total fees. For the sake of argument, however, these mechanisms are not worthless and should be viewed as an appreciable attempt to provide at least some comfort to the customer.
5.4 Invoicing and Evaluation
After a legal service provider is invited to present itself and its services, then also successfully wins a pitch and does an excellent job throughout the mandate, there is one final moment of truth left: the invoice. This last element should not ruin the valuable reputation a provider has built up with a customer over a long period before. Unfortunately, reality is somehow different, and it is not unusual that customers are surprised with this very last item of deliverables. This is a pity since it goes against the cheapest form of customer acquisition and retention: customer satisfaction that leads to re-mandating a service provider on the one hand, and providing recommendations and references to further potential customers on the other hand. Customers maintaining a panel of service providers usually conduct evaluation reviews every year to assess whether the selection is still adequate. If required, e.g., when the service is not as promised or agreed upon, the required corrective measures are taken.
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