One method of controlling legal costs has been the use of Alternative Fee Arrangements (AFAs). AFAs are portrayed as a key tactic to combat the ravages of the billable hour. AFAs include a host of options such as fixed fees, discounts, lower fees with incentives, and so on.
AFAs seem to be most popular with larger law firms and bigger corporate clients. While some studies show AFAs are gaining in popularity, the majority of legal services are still charged out using an hourly rate. Some GCs simply don’t have the time to negotiate an exotic, convergent AFA over many months. Others see the savings as more contingent than certain. And their CEOs and CFOs expect certainty when it comes to budgets.
So if a GC wants to get X work done cheaper, you have to lower the unit cost. One way to do this is to use contract attorneys.
Historically, contract attorneys were used on more of an on-call basis: discovery for a surprise class action, HSR review for M&A or for responding to a time-sensitive regulatory matter. Sort of down-market, document-intensive stuff.
What is happening now is that more GCs are seeing contract attorneys in a different light. It’s not just an episodic option, it can be a regular enhancement to full-time staff. Why the change?
The main reasons stem from three problems facing most GCs: (1) more work than the capacity to do it; (2) little flexibility to hire full time help; and (3) extreme pressure to keep costs under control.
After bringing in a contract attorney, the first surprise for a GC is often how capable they are. This fact is even more pronounced in the last two years as the downturn has increased the pool of highly experienced attorneys with solid knowledge and good people skills. Many are from law firms, others have been in-house. Some have experience in both environments.
The second (welcome) surprise for a GC using a contract attorney is typically how affordable they are. Many start to see the contract attorney model as a true AFA.
Let’s look at the numbers. What GCs are seeing now is that attorneys that might have been in a law firm commanding $500+ per hour are now available on contract for less. Much less. Say $200 per hour and below. Sometimes way below that. Understand what I am saying: these are the same attorneys they might have been using before, not a discount off-brand substitute. The contact attorney thus moves up-market, as it were.
The hourly rate of $500-plus to $200-minus above works out to a 60% savings by the hour. In practice, the savings can even be higher, as a single good senior lawyer avoids the over-staffing tendency that some law firms exhibit.
The hours can be capped so the GC knows exactly what the budget hit is. Full time or part time. Put the lawyer on a 90 day contract, and see how things go. You can get someone on-site, or working remotely, in a matter of weeks. Sometimes days.
Compare 50%+ savings to a law firm trying to keep work flowing from current clients with an AFA that gives a 5-10% savings off regular rates. The wariness that some GCs have with AFAs is that it involves splashing in the traditional law firm pool, and being confident that you are smarter than your law firm in designing an incentive formula. Because we all know that law firm managing partners generally will not approve AFAs that involve too large a risk of leaving money on the table.
So while the use of a contract attorney here or there will not shake the AmLaw 200 to its core, it does represent an end-run of the law firm community entirely. It takes new work away and keeps some old work from going back. Law firms doing high-end work have nothing to fear. Yet. They had just better make sure all their lawyers are really doing high-end work. They surely can’t play in the $200 per hour pool and not drown.
I want to be clear that the example above is drawn from a real deal, and it involves a very large legal department. Exactly the sort of client any large law firm would welcome in a heartbeat.
The key learning moment for GCs: using contract attorneys gives a tangible reference of the true market value of certain legal services. And that value is sometimes way below what they’ve been paying. This GC knowledge, over time, will translate into power.
More on the consequences for law firms of this new-found power on Friday.