A mechanic pushes his invoice across the table: it’s $1,000 over the original estimate. Sure, it’s for extra work discovered during the course of the tune-up, but the larger bill wasn’t pre-approved.
Question: how do you suppose the car owner reacts? Ask Howie Wong, general counsel for the Toronto Community Housing Corp., whose outside law firm bills regularly mushroom beyond original budgets. Law firms “just don’t get it,” he says, adding that in “frustration,” he developed an internal administrative position to deal with monitoring and tracking the firms’ budgets.
Wong predicts that change may be coming, pointing to what he sees as the law firms’ main competition — in-house counsel themselves, rather than other firms, due to an upswing in the hiring of internal legal muscle. The shift to a bulkier stable of in-house lawyers to do the lifting could trigger positive developments in the current way bills are handled by outside firms, he says.
Wong adds that another emerging trend could also be an answer: lawyers putting out boutique shingles at reduced rates. “Outside law firms are pricing themselves out of the market. It’s not affordable anymore and we have to find options. I have a budget, too. I can’t accept hourly rates that keep going up and up.”
He thinks law firms don’t seem to understand “that when they commit to a fee budget they should not exceed it without speaking to us. They should perform to the fee budget they gave us; it’s that simple.”
Or, at least keep an eye on the budget and when it gets to a red zone, make contact, he says. “They never, ever do that,” notes Wong, adding the root problem is firms are “still wedded to the hourly rate . . . and when they go over the hours they are not willing to eat the difference and they keep coming back for more and more and more.”
Wong says another billing burr is that “partners don’t manage the file from a financial perspective, they mange it legally, and while most of them do a good job as lawyers, they don’t from a business perspective.”
Gawain Smart, Oxford Properties Group’s vice president legal, says while generally, “law firms are great partners and we wouldn’t be able to get anything done without their able help,” it would be forward-thinking if they’d take a look at what he sees as a hitch in their billing practices: integration. He says many firms have various practice areas that have different lawyers all billing separately, and not necessarily knowing what the others are charging.“
When you get the bills back you add them all up and say, ‘That doesn’t make sense given what we thought it would cost.’ So I think law firms need to better co-ordinate internally in terms of how the bills are sent to clients and how the time is managed,” he says.
Smart says law firms may not be as efficient as they should be in terms of who does the work, particularly with smaller practice areas where you don’t have the same number of associates. “You find partners are working on things like resolutions when they should not be. It’s quite costly when someone is charging $800 an hour to do a resolution. That is an extreme case, but (firms) need to do a better job in terms of their hierarchy and how they get the work accomplished.”
There are solutions for managing the billing issue with the firms, says Wong, including the aforementioned internal administrator. Four years ago, he carved out 40 per cent of the board secretary’s position to administer and track their large annual legal budget, because, “I found the law firms weren’t doing that work for us, even though our agreement requires that they track it and advise us on a monthly basis where they are at.”
In fact, he says every year there’s a quarter of the original quote “extra that’s being asked of us,” before they typically negotiate the overages back down. “We have actually not paid some of our law firms for five or six months until we’ve gotten satisfaction on 1) what they were doing, and 2) that the fees they were charging were on budget,” says Wong. “A lot of times they basically ignore their own fee quotes, and we have to do this to protect the agreement that they provided to us. The law firms were just sending in bills without regard to their original budgets.”
But, Janice Lewkoski, who was TCHC’s legal administrator until recently, adds the process is needlessly time consuming on both sides, particularly in December when the job becomes full-time requiring intensive tracking and reconciling the amounts.
Lewkoski says a large part of her job has been to get the law firms to “understand that when we get a budget that’s what we expect the matter to cost and when they go over that it’s not like we have this endless amount of money to go ahead and pay what they want to charge.”
She says the job has had its moments. “A few years ago there was a firm that charged us for coming up with a fee quote!”
Wong recently negotiated a flat rate on a litigation matter; it’s a system he says works and he will explore doing it more, but for him, the answer may be in hiring more in-house counsel. “The law firms think they are competing against each other. I don’t think they realize they are actually competing against hiring more in-house counsel. The competition is going to be whether we hire another lawyer in-house,” he warns. “I’d rather hire another lawyer than give more work out — it’s a lot cheaper and I know exactly what it’s going to cost me.”
TCHC has grown from two to nine lawyers working in-house, three of whom were hired in the last year. “It’s great because I hire from Bay Street, so they’re already well trained.” Six years ago TCHC had 10 outside law firms and now there are three.
Smart says he doesn’t see Oxford “being a competitive force with our outside counsel, (but) I do see us demanding more for less. I also see us demanding less from the law firms from a strategic perspective and needing them more for a lot of the due diligence, organizing a deal, and making sure all the i’s are dotted and t’s are crossed.”
Smart says Oxford’s system is based on a review of the bill. “We certainly ask for budgets beginning on any transaction and the law firms typically will provide a budget or a range.”
But, he notes, just like with the mechanic, the scope of the work can grow. He suggests the firms appoint someone to manage their bills and the time for the various areas of the law firm to monitor whether they’re going over budget or how much they need to invoice at the end of a transaction. In fact, Smart says Oxford asks for bill monitoring. The bottom line, he says, is that if there isn’t an electronic system, the law firms need to manage their own costs better in terms of how they do things. As for in-house counsel, Smart says, “Our obligation is to get a budget, ask the law firm to better monitor the bills and who does what, and be vigilant in terms of getting updates on a regular basis to see where things are so they don’t get out of control.”
Barry Fisher, special adviser to the Association of Corporate Counsel Ontario Chapter board of directors, and vice president of SAP Canada, says it’s in-house counsel who should manage the relationship and monitor not just the billing, but also who is delivering the services. It’s also vital to develop a budget at the outset, not just an estimate and have the right level of person on the job. “If you get the right person to find the result quickly then it’s the overall cost in value, not the hourly rate that it takes to get there,” he says, noting he’s speaking personally and not on behalf of ACC. “It is our responsibility as the consumer of legal services to make sure that those providing it to us are doing so in an efficient way, delivering value.”
Fisher suggests looking at the ACC’s Value Challenge, a series of suggestions on how inside counsel and outside legal advisors should be managed so the law firm will deliver value.
Wong is counting more on his legal team to track and manage their law firm relationships themselves. “It’s a lawyer-to-lawyer discussion. They are going to work with the law firms directly when it comes to working on the budgets.”
That takes the conversation from their administrator dealing with a billing department that has no authority to make changes to a bill, directly to the lawyers.