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Legal Services Are Not a Commodity – The Importance of RFPs in Outside Counsel Selection
One of the first law departments I advised did a great job of infusing into its regional legal teams the importance of reducing outside counsel costs. As I worked with leadership in the global general counsel’s office to improve outside counsel arrangements, I would often receive a call from a regional general counsel’s office announcing a great discount they had just negotiated with a law firm.
Their enthusiasm was wonderful. Their negotiations, not so much.
If a discount is negotiated during the last five minutes of another meeting, how good could it be? Here are some actual situations:
- The discount was given at the end of a rate year. The rates were going to increase in a month. If accepted, the value of the discount was minimized and eliminated the ability to negotiate other, better arrangements.
- The regional general counsel was responsible for $100,000 of spend, but because the larger organization spent $3M with the firm, the discount was much smaller than what it would have proposed if all cost was considered in a formal RFP process. Further, it wasn’t clear if the discount applied to all of the law department’s spend or just the regional general counsel who negotiated it.
- The law firm did not have in place data security consistent with the organization’s requirements.
- There was no comparison to confirm the discount was good or bad. Was 10% of $100,000 or even $1,000,000 in spend worth the risk? Was there another firm that could handle the same work for lower rates or using a better commercial arrangement?
- The discount did not consider whether hourly rates were the right commercial arrangement or if the firm was the best option to handle work.
Lessons Learned
Getting a 10% discount with no other questions asked is like using a Request for Quotation (RFQ). An RFQ is a process buyers use to purchase basic commodities like office supplies or lab supplies, which is exactly what the legal industry has pushed back on for decades. If most legal services are not commodities, why use the same method to purchase legal services as you would for office supplies?
Unlike decades ago, law departments are buying more than a partner’s skills and experience. They are buying a law firm’s technology capabilities, data security, billing personnel, vendors, staffing practices and more. An RFP process provides transparency in revealing a law firm’s cost and value. Here are some issues an RFP process could have managed to produce a better result than siloed discount negotiations.
Preparation
Focusing on discounts ignores many other factors that impact outside counsel cost. Understanding other levers in the big picture is critical to improving the decision-making process. Avoid putting the burden on leadership, such as a regional general counsel. Others in the organization can shoulder much of the responsibility to maximize leverage and relationships with law firms. An RFP would likely result in improved hourly rates from the original firm and provide the opportunity for the client to do the following:
- Identify other firms to provide similar legal work with better commercial terms, such as lower hourly rates, AFAs, or a combination of the two. Even if the company’s attorneys use their favorite firm regularly, the RFP process provides options for new matters. Just seeing better terms in a proposal shared among RFP evaluators makes it difficult to decline better offers, especially if the law department faces cost pressure.
- Ask questions that investigate the impact of proposed commercial terms. For example, if Firm A proposes hourly rates that are 10% lower than Firm B, develop analysis to test the real impact on the bottom line. If a law department accepts discounts without knowing the answers to these questions, it is hard to determine a discount’s true value.
- What are the firm’s partner-associate ratios?
- Do the firms use lower-priced non-partner track attorneys?
- If matters are routine, can the firm identify a typical range of hours?
- Will some firms agree to hold rates steady for more than 12 months?
- Include in the RFP a proposed engagement agreement that formalizes commercial terms to avoid misunderstandings and unexpected costs. The letter can mandate other terms like data privacy and security requirements.
There are additional aspects that impact the cost of service and outcomes. In the coming weeks, we will spotlight them as we dig deeper into the value of RFPs and the RFP process.
