61% of legal departments seek alternate billing structures from the outside counsel they hire

By: Achal Madhavan

According to this week’s Corporate Counsel magazine, more and more legal departments are paying less and less to their outside counsel and they are adopting a variety of strategies to achieve that reduction in spending. The list of these strategies vary from the traditional (keep more work in house) to the more novel (ban first-year or even second-year associates from working on their projects), but what is noteworthy about them is their increasing popularity. 61% is a lot.

At Brightleaf, we talk to a lot of in-house and outside counsel. From the latter, we occasionally hear commentary–usually from very senior partners–that alternate billing is nothing new. Their argument usually goes like this: “Back in ‘88 (…or ’01..or whenever), another bubble burst in the economy. That bursting also caused clients to pull back on expenses just like this one has. We survived that. Therefore, everything will be back to normal when the economy rebounds just a bit further.”

And, they’re at least partially right. In tough economic times, clients will naturally spend fewer dollars and will naturally expect more for the dollars that they do spend. But when law firms make this argument, I think they ignore several trends that suggest that not all of the traditional legal billing toothpaste is going back into the client tube when the Dow hits 10,500.

Here are just a few of those trends:

* Increasing realization by client that they don’t pay for anything else the way they traditionally have paid for outside counsel.
* Emergence of technologies (like e-billing and matter management systems) that have made legal cost structures more transparent to clients
* Increasing client dissatisfaction with the effects that the so-called “Cravath model” of associate recruitment and compensation have had on billings
* The still-rare, but increasingly popular practice where large, influential clients ban 1st and 2nd year associates fromworking on their matters.
* Continuing disaggregation, where partners pinch off from large firms to form tech-savvy high-end boutiques that scale far better today than they would have ten or twenty years ago.
* The growing influence of Purchasing or Finance departments on selection of outside counsel, and the resulting focus on cost structures.
* The growing glut of associates and the effect it will have on the ability to charge to dollar for their services.
* The influence of high-profile corporate counsel — Mark Chandler, Mike Dillon, Amy Schulman, Jeffrey Carr, Rich Baer – who speak and write and blog about their efforts to ref0rm client-firm economics.
* Competition from firms that do offer alternate billing models.

I guess that only time will tell. It will be interesting to see where that 61% number is next year. From what we hear, it’s not likely to go down.

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