A recent ½Û×ÓÊÓƵ report provides excellent insight into what in-house counsel is doing to reduce legal costs and get the most out of their law firm spend.
According to the report, 81% of in-house teams use AFAs to reduce costs. While only 18% of law firms use AFAs to reduce costs, 85% said they use AFAs because that is what clients demand. According to a 2021 BigHand Survey, client demand for AFAs has grown by 28% in North America since the pandemic and 26% in the UK.
The most common reason for in-house teams to request AFAs is to save costs (81%), followed by cost certainty (65%) and general efficiency (49%), according to Bloomberg. Although 73% of lawyers said they still use billable hours, they are under pressure to pivot to AFAs if they want to satisfy clients' demands and remain competitive. Panel firms won't want to lose their panel seats to competing firms willing to pivot to AFAs.
Law firms have used billable hours for decades. And in some cases, billable hours will remain the best way to go. Billable hours might be the only option for unpredictable, complicated matters since there is no other way to estimate costs accurately.
In some cases, billable hours are the easiest way to pay for urgent legal advice or to address a matter that needs to be resolved quickly. "In some ways, the billable hour is the smallest possible fixed fee, and so often that's what people revert back to just because it's simple," said Alan Guy, managing director of underwriting and value optimisation at top 200 US law firm Kobre & Kim, and who is responsible for negotiating AFAs on litigation matters.
Certain courts also use the billable hour to assess costs and reasonable rates.
Billable hours, however, do have downsides. Billable hours are criticised for being outdated, inefficient, creating negative incentives and running counter to clients' interests.
Alex Hamilton, CEO and founder of Radiant Law, had this to say: "You've got to kick the habit of the timesheet as well as the billable hour because as long as you keep telling people that more hours is a good thing, you're going to get more hours—and that's not good for the client, the lawyer or the firm if they are trying to figure out how to add more value more efficiently."
"People who work more efficiently are unduly penalised because they bill less than someone who maybe took twice as long to do the same piece of work. We should be rewarding people for efficiency, not penalising them." said a senior lawyer in the UK who has worked in both private practice and in-house.
Andrew Cooke, general counsel at TravelPerk, a business travel provider, said many lawyers are stuck in the mindset that sees the job as a high-touch profession where the client wants face time. Cooke, however, says, "I don't want high-touch outreach; I want a solution". Cooke said that he has noticed that working on a fixed-fee model tends to sharpen the mind and reduces the number of unnecessary phone calls and interactions. He also expressed concern that there is a danger that the billable hour can be a proxy for other things.
To see Cooke's video, go to the Do billable hours offer value for money? section of the report.
Moving away from the billable hour model makes sense for in-house teams wanting cost certainty, increased efficiency, and reduced cost. Larger organisations are also more likely to have greater clout when agreeing on AFAs with their panel firms, given that those firms won't want to lose their panel seats.
Kerry Phillip, legal director at Vodafone, said: "Vodafone does most of its work on fixed rates since that gives budget certainty and allows a comparison of costs from firms when responding to an RFP. The firms on our panel expect to provide fixed fees or alternative arrangements."
"Our starting point is always an alternative fee arrangement because it gives us price certainty," said Bob Mignanelli, chief operating officer for legal at FTSE 100 consumer healthcare business, Haleon. "We would expect that all our law firms, whether a panel firm or someone we're engaging on a one-off basis, would at least have the conversation with us around some type of alternative fee arrangement, whether it's fixed fee, milestone-based or success-based. I would be hesitant to move forward with a firm that wouldn't at least engage in the conversation to see if a fixed fee is appropriate for a matter."
Andrew Cooke says, "We're looking for value, not cost".
Cooke points out that technology, such as Open AI, opens information to anyone. Technology that impacts workflow is here. He added that in-house teams have already embraced and implemented such technology to save time and reduce costs.
Cooke added that innovation, using technology, and forming partnerships with law firms can be mutually beneficial and create a value exchange. Instead of adding up billable hours, law firms should invest in more scalable technology that opens up know-how. This type of technology saves time, the benefit of which should be passed on to clients. According to Cooke, any general counsel who is not considering utilising alternatives to the billable hour is already behind the game.
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Instead of strong-arming external counsel to accept AFAs, Cooke mentioned that in-house teams are willing to form partnerships with law firms to create value exchange and assist law firms with developing their tech products.
Shared innovation and partnerships can help in-house teams reduce costs and get the most out of their law firms. It could also pave the way for law firms to use AFAs because it is mutually beneficial, instead of doing so simply to stay on the panel and satisfy clients' demands.
For more information on how to maximise law firm spending, see the report on Calling time on the billable hour.
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