The only three ways to lower outside-counsel spending

by Jay Shepherd. Average Reading Time: about 3 minutes.

Nickels and dimesThere are three ways — and only three — to reduce your company’s spending on outside law firms. Two will seem fairly obvious, and they are the most common methods used today by far. They are also fraught with problems: some obvious, some less so. The third way avoids these problems, but it is hard to find law firms who will offer it.

Here they are:

  1. Use less. This might sound flippant at first, but it’s not meant to be (for once). A company can reduce its spending on outside law firms by choosing to use them less. For some matters, this is doable. For example, certain tasks usually handled by outside counsel can be reassigned to in-house lawyers. But many matters require the specialization that is easier to get from outside law firms. Unless a company has a large law department, it’s hard to have the handful of in-house counsel specialize in the many areas that a company might need help in. And oftentimes, especially with litigation, using outside counsel just can’t be helped.

    Now think about this for a moment: Why does in-house counsel tend to cost less? Because in-house lawyers aren’t paid hourly — they’re paid an annual salary. They have no financial incentive to take longer to complete a job; instead, they have a built-in incentive to be efficient. Fixed costs lead to efficiency, and efficiency saves money. If you don’t believe it, answer one question: Do you track your inside lawyers’ hours? I didn’t think so.

  2. Use lower-quality counsel. Once again, sounds flippant; isn’t meant to be. Just as you can spend less money on a car by buying a Dodge Avenger instead of a Lexus ES 350, so too a company can spend less by hiring lesser outside law firms. Both the Dodge and the Lexus will get you where you need to go. Do you really need the best law firm for every matter?

    Granted, your overall cost of ownership might actually end up being higher with the cheaper car. Lower fuel efficiency, less reliability, more time in the shop. Usually, whether it’s cars or lawyers, you get what you pay for.

  3. Used fixed-price lawyers. This is the much-less-common option. But it has the benefit of lowering your costs without lowering the quality or forcing you to make do with less than you need. Why? Because fixed-price lawyers have a financial incentive to be efficient. Unlike hourly billing lawyers, they don’t get paid more money for taking longer to solve your problems. What is more, fixed-price law firms can staff your cases without regard to billing requirements and billing-rate structures. If having four lawyers working on your case at a crucial point will lead to a better, faster result, then the fixed-price law firm will do that. At a fixed-price law firm, the “cost” of the extra lawyers is irrelevant.

    “Wait!” you cry. “What about forcing our law firms to give us discounts?”

    Discounts, schmiscounts. See “Legal advice: 30% off! (Why discounts don’t always save you money)” for an explanation on why discounts are just a whitewashed version of Door No. 2.

    To be sure, a law firm only gets the true efficiency bump from fixed pricing when its entire business model is based on fixed pricing. An hourly billing firm can always give you a fixed price for a particular job, but if they still pay their associates and staff their cases based on billable hours, the economic efficiencies of fixed pricing won’t come into play.

Now I’m not claiming that all fixed-price lawyers are high quality. There are better fixed-price lawyers and worse fixed-price lawyers, just as there are better hourly lawyers and worse hourly lawyers. The pricing structure alone is not a measure of quality. But what I am saying is that a high-quality fixed-price lawyer will save you money over a high-quality billable-hour lawyer. Often between 20 and 30 percent.

So if you want to lower your outside-counsel spending, you have three choices, and only three choices: lower usage, lower quality, or fixed pricing.

Choose wisely.

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