If fees too high, GCs will quietly look elsewhere

A new report from TGO Consulting says in-house counsel will avoid difficult fee negotiations with law firms with whom they’ve had long-running relationships. Instead, they’ll move the work in-house, or send it to a lower-tier firm or an alternative service provider in order to meet budgetary needs.

This means while law firms say they do not experience pressure about their rates, the report says “for most firms the blow is yet come.”  

“[I]nstead of hard negotiation on price with their lawyers, the in-house department has found an easier and far less confronting way to realize savings on the budget; instead of negotiating they push work down. In effect they ‘vote with their feet’. Work that is deemed too expensive is simply taken from one law firm and given to another that is less expensive to start with,” says the report, called The Trend is Clear, the Blow is Yet to Come.

The report is based on face-to-face interviews with 15 general counsel or people in charge of managing outside legal services for international companies spanning a broad range of sectors, from the financial sector to heavy industry. TGO Consulting focuses specifically on the legal sector and its ownership structure.

Some of the findings of the report may be hard to confront, especially for law firms that see their work as bespoke.

“From the client’s perspective, for the vast majority of legal matters there are multiple law firms and numerous lawyers that can perform the same task equally well,” said the report, which focuses on the increasing “commoditization” of legal services. The report later said: “When judging if a service is a commodity or not, is the opinion of the client that counts.”

So, how does this pull by the client to pull down costs manifest?

The report says that “surprisingly” the biggest savings haven’t happened thanks to “negotiating special rates, whether during a panel appointment round or on ad-hoc basis.” Lawyers feel it’s important to have a good relationship with their “incumbent” law firms, so a pattern of avoidance emerges.

“Instead of confronting the trusted outside legal advisors they work with, nearly every single general counsel speak of ‘pushing work down.’ The same work that a client would hand to a firm in Tier 1 of its panel is increasingly being given to a firm from one tier below,” said the report.

Law firms are not feeling the pain, said the report.

“A pattern clearly emerges from this survey: the erosion of work for upper mid-market firms. By being able to shift work down when they need to cut cost, without having to compromise on the results, general counsel can reach their budget taregts. But for most lawyers this has been done in stealth,” said the report.

David Felicissimo, general counsel for Valnet Inc., says the legal industry is ripe for disruption.

He says negotiation around price is a careful area for in house counsel with law firms where they have an established relationship. For example, he points to section of the report that said “in-house lawyers also typically have an excellent working relationship with their outside counsel. A relationship they do not want to spoil by breaking bad news on the pricing and the hourly rates.”

“That I find absolutely true,” says Felicissimo.

Felicissimo says in terms if negotiation, he does not negotiate with his external law firm as much as he negotiates with “everybody else."

“I’m sure that has to do with or it does have to do with, the personal relationship you have with them, the excellent service they provided — obviously if you’re still with them for many years it means they’ve provided excellent service in return. When you have a history with a certain firm, and you’ve been through a lot of battles with them, they’ve done a lot of great work, excellent advice, it kind-of feels like you’re watering down their services when you’re trying to negotiate a rate. That’s how I feel,” he says.

 

Helen Fotinos, national co-chairwoman of McCarthy Tétrault LLP’s franchise and distribution group, says she challenges “clients to leverage their position by selecting firms they can truly partner with.”

Price should not be the only focus, she says.

“I agree with the report’s findings that clients have the upper hand, but I would also challenge clients to leverage their position by selecting firms they can truly partner with, and not focusing on price alone, they would be doing themselves and their companies a disservice if that’s the only metric,” she says in an e-mail to Legal Feeds.

Using many firms to do many things costs time and money, not to mention how cumbersome it is to manage, says Fotinos.

“The majority of in-house legal departments are lean, with resource challenges of their own. Given the option, why wouldn’t a client invest with a single service provider, who similarly invests in the client’s business, and who could work as an ally to manage portfolio risk and control legal spend?”

Update 2:30 p.m.: Comments from David Felicissimo updated.

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