Negotiating legal fees

EDITOR’S NOTE: Abridged with permission from Buying Legal Council’s The Definitive Guide to Buying Legal Services

There are many types of successful negotiations for professional services with law firms. It can be useful for law departments and procurement professionals to have a road map to make the negotiations as effective and efficient as possible. In this case, negotiations are in respect of multi-year portfolios of legal work rather than for single legal matters. The focus is less about the art of negotiating with law firms and more about practical advice in preparing and conducting negotiations.

Building Blocks

My last article on Pricing advocated in favor of non-hourly fees as the predominant financial arrangement for most categories and complexities of work. It argued in favor of alternative fee arrangements that stimulate and reward effectiveness, efficiency and innovation in legal services provided there is a measurable contribution for each of these.

Provisional allocations and comparative pricing of law firm proposals at different stages of the RFP / ISP and negotiation process are described later in this article.

What to Negotiate

There are specific questions to be asked in the RFP / ISP. These can be expanded for both the financial and non-financial elements. The answers will assist in qualifying firms and accelerating the negotiation process. Consider the firms’ written responses to be the early stage of negotiations.

Some of the non-financial elements to discuss with firms include:

• a commitment to detailed matter planning and budgeting to manage the number and distribution of hours before they are worked by the firm,
• coverage by the firm for each legal specialty, for various levels of partner / associate / paralegal experience, and by jurisdiction,
• the expertise and availability of the law firm’s team members at all levels of experience,
• service level guarantees with key performance indicators, covering all offices of the firm as well as the allocation of work by primary firms to secondary firms,
• a relationship partner accountable for all aspects of the firm’s professional and financial performance,
• acceptance of the transfer of administrative and management reporting from the company to primary and coordinating firms to minimize the company’s investment in infrastructure.

Some of the financial elements to cover with the RFP / ISP and in meetings with firms include:

• the company’s preferred staffing distributions by category of work,
• the use of alternative fee arrangements,
• the prices and related conditions/discounts for the work proposed by the firm,
• the stability of prices over the RFP / ISP reference period,
• fees for performance and / or innovation as part of hybrid alternative fee arrangements,
• the admissibility of disbursements,
• the speed of payment and its relationship to price,
• the annual review and adjustment mechanisms based on work type and volumes.

The project manager should prepare two reports for the working group. These are useful guides to the other members as they read all the proposals. The reports are a Qualitative Analysis of the Responses to the RFP/ ISP, including a score for each firm and a Financial Analysis of the Responses to the RFP (or ISP). The financial analysis is prepared prior to any discussions with law firms and before any provisional allocations of work to firms.

Experience suggests that working groups should eliminate proposals which score less than 75 per cent on the qualitative (non-financial) analysis. At this stage, the project manager should press the working group to reduce the number of proponents without regard to the financial analysis. It makes little sense to engage with law firms for three or more years when their competitors out-score them significantly on multiple fronts. Law departments prefer a gradual approach to eliminating firms for non-financial reasons rather than on price before negotiations commence.

Provisional Allocations

Law firm proposals should indicate the amount and type of available work that they wish to acquire for each jurisdiction. The law department representatives to the working group will have read the proposals and the reports prepared by the project manager. The working group should then be ready to provide the specifications for a provisional allocation of work before the first round of negotiations with the remaining firms. For example, they could indicate that the litigation portfolio for a given region be allocated 60 per cent to Firm A, and 10 per cent to each of four other firms. The project manager can then cost the allocation using each firm’s initial pricing proposal.

None of this information is shared with the law firms. However, it represents the projected legal spend for each portfolio of work prior to the start of negotiations. And it illustrates any gap with the financial targets set out in the agreed sourcing program. Experience suggests that some law departments are reticent to develop provisional allocations. In such cases, the project manager can prepare an allocation based on historical usage patterns, the proposed pricing of the firms remaining after the first elimination round, and the results of the financial and non-financial analyses. This allocation and costing should be shared with the members of the working group to serve as a baseline for the first round of negotiations.

Provisional allocations and costing should be prepared after the first elimination round as well as after each round of negotiations.

The First Round of Negotiations

Law firms invest considerable resources to prepare comprehensive proposals for legal services, especially for multi-year portfolios of legal work. It is recommended that the first round of negotiations take place face-to-face and that two hours be set aside for each meeting, especially if there is a list of non-financial items to cover and if there is to be a departure from the historical pricing model. Most law departments consider their primary law firms to be relationship-based professional business arrangements. An in-person meeting recognizes that relationship, acknowledges the work put into the proposal, and allows the working group to better compare each firm’s proposal and responses in a compressed time period.

No more than five individuals should attend from the law firms. At a minimum, these should include the relationship partner, two or three other partners, responsible for primary categories of work such as litigation, and mergers and acquisitions, etc., and the firm’s chief pricing officer. The firm should identify its proposed attendees by name and role in the letter accepting the invitation to meet.

An agenda should be sent to each law firm three to four weeks prior to the meeting to ensure the availability of each participant and of each member of the working group. Provided that logistics allow it, primary firms and legacy firms should be met early in the sequence. Three meetings per day are sufficient to allow pre-meeting briefings, tardiness by group members, breaks and lunch, and the end-of-day briefing of the group. Schedule a secondary firm if a fourth meeting is necessary on a given day.

The project manager should schedule a half-day preparatory meeting for the working group on the first day of law firm meetings to discuss:

• the two reports, namely The Qualitative Analysis of the Response to the RFP/ISP and The Financial Analysis of the Responses to the RFP/ISP,
• the costing of preliminary allocations,
• the roles and responsibilities of each member of the working group, with attention to the questions to be asked by each group member,
• the agenda and issues particular to each firm,
• the timeline for the conduct of each meeting,
• the 30-minute end-of-day debriefing session.

Firms should be discouraged from making a general presentation lasting more than 15 minutes. Any presentation should be customized to the company’s RFP / ISP requirements and should address as many of the agenda items as possible. For the sake of efficiency and effectiveness, the first four agenda items and the presentation should be completed within the first 60 minutes.

The financial portion of the meeting should be led by the working group’s pricing specialist. Specific changes to the firm’s initial pricing proposal are typically requested, and may include

• coverage by jurisdiction
• practice patterns and staffing ratios
• the configuration of alternative fee arrangements
• annual rate and/or price increases
• discounts and related conditions

Firms can rely on a mix of variables to offer more favorable prices for the RFP/ISP reference period. At this stage, the company can suggest a specific target and price together with the relevant conditions, such as volumes and categories of work, that would have to be met by the company to achieve it. Experience suggests that this level of specificity by the company always yields a better result than asking for a bigger discount.

Many working groups elect to eliminate some firms after the first round of meetings. There are several reasons

• some firms were met for legacy business and relationship management purposes but with few chances of work in the future
• a new firm was invited to propose but did not “align” well with the law department members of the working group
• the firm’s responses to the non-financial and financial discussions offered little chance of significant work allocation in the future
• the projections for the cost of services will fall outside of the range acceptable to the company

The project manager should request a reduced list of eligible firms from the working group to limit the number of participants for the final negotiations.

Finally, the Project Manager should ask for a revised financial proposal – either as revised spreadsheets or detailed in a cover letter – within two or three days. The firm should also answer any non-financial questions raised during the meeting. Expect the firm’s Chief Pricing Officer to request access to the working group’s pricing specialist while preparing the firm’s revised prices and terms.

Once the revised proposals or letters are received, a summary should be prepared for the working group with a costing of the remaining firms based on the previous allocation, or if a new allocation is available a revised provisional allocation by jurisdiction and category. The summary may include recommendations from the project manager for a different allocation to achieve improved discount thresholds and company targets.

Alternatively, the project manager and the working group members may prefer a final round of negotiations with one or more of the remaining firms. Experience suggests that this round is likely to be primarily financial. In-person discussions are not necessary for this. Instead, one representative of the law department, the project manager, and the company’s legal pricing specialist can arrange a video call with each firm.

At this point, the company should be prepared to suggest a provisional allocation of work to each firm in exchange for best and final pricing offers incorporating alternative fee arrangements, fees for performance and innovation, limits to annual increases, as well non-financial arrangements. provisional allocations should only be revised once the working group considers each of the law firm responses. Allocations will influence each firm’s resource allocation, pricing, and workflow management all the while remaining provisional rather than guaranteed.

Once all the revised proposals and related correspondence are on hand, the working group should meet to review its planned allocations and costing. Adjustments can be finalized at this stage. The project manager can then develop Terms of Engagement / Master Service Agreements with each firm.

Experience suggests that accelerated terms of payment in the context of non-hourly fee arrangements will leverage a lower overall price. There are examples where anticipated volumes of work are pre-paid and fees reconciled on a quarterly or annual basis.

MSAs and partnering arrangements that cover three to five years cannot accurately anticipate the volume and distribution of work for each year. Variations by complexity and jurisdiction are inevitable. Agreements should include annual review mechanisms which are both retrospective and prospective. Adjustment to price may be appropriate when work allocation falls outside an agreed range.

Not all legacy law firms are retained after the sourcing process. It may be necessary to leave certain matters and hours with these firms in the first year while allocating work to successful firms.

*Adapted from R. Stock, Legal Procurement in Brief, Sept. 2015