How to avoid overpaying on law firm billing rates

Kara Wen | December 15, 2022 | Articles

In-house legal departments allocate 93.5% of their external spending to law firm bills, according to a Gartner report. And with law firm billing rates on the rise, the best way to cut legal costs is to identify ways to avoid overpaying for law firm billing rates. In this guide, you’ll learn 5 ways to do that.

1. Benchmark your vendors to identify areas where you are overspending

Benchmarking is a powerful tool to help you understand if you’re getting the best value in the legal marketplace, and it gives you insights into where you’re spending more than you should.

This process involves evaluating your outside counsel against each other or against industry averages using the same criteria, such as average hourly rates, current market data, overall performance, results, responsiveness, and expertise.

By benchmarking against other firms, you’ll identify how your billing rates stack up against what others are paying for similar work. This enables you to objectively determine which prices are fair, uncover areas for cost savings, and identify law firms that provide the best value.

An equity firm, for example, saved 17% on their rates and saved $27M in one year after using Bodhala’s Benchmarking Suite to do a competitive analysis of their 10 firm panels.

Benchmarking also gives you concrete evidence to support rate negotiations with current and potential vendors. Say your outside counsel asks you to increase their hourly billing rate by 10%. You will have all the information in front of you to determine whether or not to approve the request or negotiate a lower rate.

Your in-house counsel can also use benchmarking data to analyze what other firms in the industry are doing and explore other alternative fee arrangements beyond hourly billing.

2. Consider alternative fee arrangements for more control over legal spend

In the face of rising hourly billing rates and mounting economic pressure, more and more corporate legal teams are turning to alternative fee arrangements (AFAs) to reduce costs and bring predictability to legal departments. An alternative fee arrangement uses payment terms that are not based on billable hours. Instead, you pay outside vendors for the type of work they perform.

AFAs offer greater pricing certainty and financial predictability. For example, switching from an hourly rate to a fixed per-matter fee allows you to accurately predict the overall costs of your legal needs. It also provides outside counsel with predictable income and gives in-house counsel more flexibility to decide how many services they want to use a lawyer for. For example, you can choose between a firm’s unbundled legal services or more structured payment options, such as a fixed total cost.

Common types of alternative fee arrangements include fixed total costs, retainers, blended rates, vendor rate cards, task-based fees, volume discounts, caps on rates, flat fees, etc.

3. Review your vendor relationships to uncover opportunities for costs savings

Effective vendor management is an important management insight that can help you control your outside legal spend. It also allows you to assess the work performed by your vendors to identify areas where work can be reduced, consolidated, or reassigned.

According to the 2021 EY Law Survey, 83% of General Counsel believe they have too many vendors to manage. Working with numerous vendors makes it more difficult to manage these relationships and can lead to overbilling or the commissioning of unnecessary legal work, which further increases legal spending.

After your review, you might find, for instance, that some legal work can be shifted to lower-cost providers or to alternative legal service providers (ALSP). ALSPs are growing in popularity, and they offer many of the same services as traditional law firms, often at comparable or higher quality and at lower prices. For example, ALSP Percipient saved a client around $400,000 just by taking over document review and subpoena compliance for them.

With vendor management software, you can easily track key vendor metrics like spend by firm, average hourly rate by firm, and spend compared to budget. With this information, you can make data-driven decisions that reduce legal spend.

4. Bring work in-house to reduce spend on outside counsel

Paying a vendor to perform legal tasks costs 2.5 times more than doing the work internally. Bringing some aspects of your work in-house can reduce your spend on outside counsel. It also offers the potential for greater control and more integration with the business.

More legal departments are bringing work in-house for tasks such as due diligence, legal research, labor and employment, intellectual property matters, and litigation case management. Outsourcing intellectual property, for example, is more expensive than hiring vendors to perform general tasks like document review. In the long term, it’s more cost-effective to bring that work in-house.

To weigh up the extra value that external lawyers bring compared to the additional cost that they incur, analyze your spend by practice area to find opportunities to move high-volume, high-cost work in-house. With this practice, you might find, for example, that your company constantly outsources intellectual property work to outside counsel. You can use this insight to advise leadership to save more money upfront by moving that work in-house.

5. Predict and control outside legal costs with legal spend tech

59% of GCs believe technology offers very significant cost savings, far ahead of any other business opportunities. Legal spend tech helps you unlock potential savings by automating processes for collecting, reviewing, and reporting on your legal spend.

A lot of overbilling and unnecessary legal spending results from timekeeper overbilling that goes unchecked, missed billing errors, complex legal invoices, or human oversight made by a tired in-house lawyer.

With robust legal spend management software, your legal department can automate the invoicing and payment process and create detailed real-time reports and dashboards. This removes human error and increases your spending data’s reliability, accuracy, and efficiency.

Legal spend management software can quickly spot and resolve any instances of overbilling or billing that can occur from incorrect timekeeper rates. In addition, automated enforcement allows the legal department to set rate caps for each timekeeper role and law firm. This prevents double billing and bill “padding,” where firms overcharge to compensate for time spent on non-billable work.

SimpleLegal gives you insight into legal spend management

Some things in life are out of your control. But fortunately, what you can control is how much you spend on law firm billing rates.

Our legal spend management solution gives you complete control over all your financial data. You can track and monitor spend and accurately forecast for future projects. You can also ensure your costs become more predictable and your ROI is easier to measure.

Unlock more opportunities to avoid overpaying on your law firm billing rates

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