THE BUSINESS CASE
Companies are changing the way they buy legal services – gradually in some instances,
drastically in others. The hourly rate billing model that has ruled for decades is giving way to a
greater focus on terms emphasizing value delivered instead of time spent. This is evident from
anecdotal accounts at legal industry conferences, and is defined even more clearly in recent
client survey data.
;In a 2009 survey, 43% of legal departments reported spending more than 10%
of their budgets on non-hourly billing arrangements – up from 27% of legal
departments that did so in 2008.1
;In a front-page article, the Wall Street Journal reported that alternative fee
arrangements totaled $13.1 billion in 2009 vs. $8.6 billion in 2008, citing another
2 effectively moving the focus away from the internal chatter of the
“legal trades” and onto the C-suite’s radar.
This growth is not surprising when you consider the reported benefits. Savings
estimates range from 15%3 to over 30%,
4 along with corresponding benefits like reduced
administrative burdens (in not having to scour the minutiae of hourly rate invoices),
better-aligned incentives (when law firm compensation is correlated with results achieved
for the client), and increased productivity/efficiency accompanied by more predictable and
These financial and management benefits have come so prominently to the fore
because of the perception in many circles that legal fees have spiraled “out of control,” largely
due to the impetus of firm-driven profitability expectations, rather than market exigencies.
This, too, is borne out by the numbers.
Over the past ten years, overall costs to U.S. companies rose 20%, while legal costs
5 In fact, legal fees have continued to escalate through the recent recession. While
the global economic crisis forced many producers to hold prices flat or even reduce them, on
average U.S. law firms actually increased hourly billing rates during the “Great Recession” of
2009.6 Moreover, in a recent survey, approximately 90% of law firm respondents said they will
raise rates in 2010.7
What impact is this having? Corporate counsel describe their “single largest unmet
need” as “better value from law firms.”
8 And the concerns are not limited to the General
Counsels’ office. Fifty-four percent of CEOs / CFOs in another survey stated they are “very
highly” or “highly” interested in reducing outside counsel costs.
Against this backdrop, value-based fee structures are seen as an effective way to
manage cost. But it goes beyond just the dollars. Many have described it as an improved
approach to management necessary in a more competitive global business environment. This
is especially true in companies where other divisions have increased productivity via innovative
use of technology, knowledge sharing and similar management tools – all to improve the
company’s bottom line. The refrain that “legal is different” is increasingly falling upon deaf ears.