Most general counsels like to have their ship in order. But the reasons to start thinking about Outside Counsel Management (OCM) are often external. Finance, running another cost reduction program, wants to reduce the external legal fees. Compliance wants to sign standard agreements with the law firms and onboard them properly. Sourcing wants to be involved in the engagement of law firms and the related commercial terms.
What follows is a standard playbook. Appoint an OCM manager and buy an e-billing platform. Run RfPs to get panels in place, start signing up law firms to standard engagement letters with discounted hourly rates and volume discounts. Push all firms through the compliance process and develop some kind of legal fee specific reporting.
Pitfall 1: Immediately jumping to creating panels.
If there is a lot of pressure from Finance to reduce costs, it is tempting to immediately get OCM to put panels in place. Instead, get them to focus on demand management first. Quickly get a clear understanding of who is engaging outside counsel, for what exactly and for approximately how much.
Anything that captures your need for outside counsel services when it arises in your organization will work. This can be procurement platform or an ebilling platform, but it can be as simple as a Microsoft form. Run it for 6 months and you will know where your focus should be for concrete cost reduction activities and for what areas to create the first panels.
Pitfall 2: Focusing too much on rates and discounts.
Don’t get me wrong, hourly rates can get out of control and I’m not saying anyone should pay rack rates – just as a matter of principle. Having said that, the time I have spent arguing over hourly rates and base rate discounts, annual rate increases, and matriculation is just not in proportion to the savings it is intended to yield.
Instead, I recommend having OCM and Sourcing focus on getting a standard rate card based on timekeeper level in place. The rates should reflect a decent discount on the firm’s usual rates as a sign of willingness to invest in the relationship by the firm.
On top of that, negotiate a good volume discount because it benefits both the company and the firm. Don’t agree to any term for the rates of under two years. Allow associates to matriculate once a year.
You have now achieved a few things:
- At least two years of calm around rates and commercial terms
- An easy way to approve and check the rates for billing purposes
- Ready to use and agreed rates if something urgent comes up
- The partners at the firm get to keep a decent realization rate1
With that behind you, focus on getting the best price for the actual engagements you have for the firms by using proper scoping, structured pricing (AFAs) and quick competitive sourcing when a matter arises.
This is where you will see the cost come down. And even if the legal costs go up temporarily due to circumstances, you can show Finance that you are getting the best firm at the best price for the matter at hand.
Pitfall 3: Ignoring the signs of Compliance closing in.
Even if you don’t have Compliance already knocking on your door, have OCM focus on understanding the third-party risk compliance criteria in your organization. The first time I was responsible for rolling out OCM, I just assumed that we had to follow the program no matter what or that somehow, miraculously, we would be exempt.
Spoiler: We were not.
In the second company, I sat down with the Compliance department in my first month. Together we hashed out what their key concerns were in third party risk management and to what extent these concerns are relevant in the relation to law firms. The result was a much more fit-for-purpose third party risk management framework that reduced the amount of work enormously – both for OCM as well as for Compliance.
1 One of the metrics partners at a law firm is measured by is the ‘realization rate’. That is, a percentage of the rack rate a partner can charge a client. The reliance on this metric at the firm is obviously completely self-inflicted (they set the rack rate and they agree on the discount) but it is good to know it exists because it is one of the reasons why firms are fighting tooth and nail over avoiding discounts on their hourly rates.
Alexander De Nerée