Legal cost control

With cost uncertainty a pain point, Thomson Reuters’ Paresh Khushal examines how law firms and their clients can work together to get the best deal.

In a world transformed by the economic downturn, there is escalating pressure on legal firms to provide clients with better value and to prove constantly that they are worth the investment. In the Middle East and North Africa (MENA), these challenges are intensified by sliding oil prices and the volatile political environments in some nations, which contribute to slow economic growth in the region.

Legal budgets are not what they used to be and clients have fewer resources to spend on external counsel. In this environment, in-house legal teams are growing and many large companies have the capacity to question the market value of every service, and the technology to track performance and analyze every invoice.

This puts law firms in a position where they need to be as transparent as possible about costs, and pressures them to offer a high-quality service at a more competitive price. In many cases, this means rethinking the traditional per hour billing model.

A question of time
For many companies that pay their legal firms by the hour, cost uncertainty is a pain point. If no budget has been set, these clients often feel that they have little control over costs, which creates a feeling of insecurity that can impact the professional relationship. 

"Furthermore, the billable hour model can encourage the client and legal service provider to pull in different directions. The client is concentrating on wrapping up the matter as fast as possible, while the law firm has no incentive to work efficiently (other than to keep the business, of course)."

In this context, a growing number of companies are negotiating alternative fee arrangements (AFAs) with their law firms – or favoring firms that are willing to move away from hourly billing. 

A recent Client Insight study entitled Bridging the Gulf: An Investigation of the GCC and Middle East Legal Market found that 87 per cent of the businesses surveyed expect their need for external legal advice to increase or remain the same in the coming year. However, they will be demanding reduced or alternative fee arrangements from their law firms.1

The alternative
In response to clients’ demands for greater predictability and desire to control legal costs more effectively, more law firms are devising non-hourly billing strategies. 

Ideally, these alternative fee arrangements (AFAs) should be mutually beneficial for both the client – who wants cost certainty and better value – and the law firm – which wants to remain profitable despite no longer being assured of payment for every hour invested in the engagement. 

To cap or not to cap?
In the MENA region, many law firms bill transactional work through capped fee arrangements, where they bear the risk for cost overruns if they are not able to conclude the matter in time or if it takes a lengthier course than anticipated. 

While some lawyers are able to define the scope of work tightly and proceed efficiently enough to stay within the cap, the market is less tolerant of heavily qualified fixed fees that delineate every aspect of the engagement, from the number of meetings to the number of drafts. 

In this landscape, where there are an increasing number of legal practitioners on the ground and more competition from in-house counsel, clients have the bargaining power and they are well advised to take advantage of this to secure better deals for their outside legal costs. 

Fixed or flat fees
One system that arguably works better in both parties’ favor is the fixed-fee approach. In the MENA region, this approach to billing is becoming more common. Almost half (49 per cent) of the in-house counsel and c-suite professionals interviewed in the Bridging the Gulf study2 want to see their law firms offer fixed fees in future. 

Under this arrangement, the firm agrees to a specified fee for the legal service required, regardless of how many billable hours are spent completing the task. This offers predictability for the client, who no longer has to worry about the matter running over budget. 

However, flat fees may not be more affordable than hourly billing. If the firm resolves the matter efficiently, the client may end up paying more than they would have by the hour. 

One way to make this billing strategy beneficial to both the client and the law firm is to share in the savings. The firm could keep track of their hours and then calculate at the end what the hourly bill would have been. If these fees are less than the flat fee, the client and the law firm could share the savings 50/50. This encourages the law firm to work faster, which benefits the client, and the firm stands to earn more per hour than they would have under the traditional billing system.3

Conditional or success fees
This is a high-risk, high-return business model for lawyers, where clients agree to pay nothing or a heavily discounted fee in the event that the desired outcome is not achieved. This can be very attractive for clients who may only be able to cover the legal costs if a case succeeds. Of course, most firms would only agree to pursue this payment model on matters that are expected to have a successful outcome.4

How to make AFAs work in your favor
As a law firm, you may be clinging to hourly rates because you think they’re less risky. However, it is possible to retain – and perhaps even improve – profitability with a strategic AFA that is carefully thought out and managed. 

If you’re planning to be more flexible about your billing arrangements going forward, it is advisable to implement systems or invest in technology that enables your team to work faster and more collaboratively to reduce your chances of a cost overrun. 

There are plenty of tools available on the market today that enhance productivity by making the following knowledge resources readily available: 

  • Practice notes and checklists, providing reminders of the law and how it works in practice
  • Precedent templates, standard documents and clauses
  • Market analysis, legal updates and alerts ensuring you are aware of important developments in your areas of practice 
  • Workflow tools that save time and avoid duplicating effort, including automated drafting and information sharing tools 

For clients, the current environment is conducive to negotiating better fee arrangements with external law firms that provide not only cost predictability, but also faster and higher-quality legal services. 

The key is to find a fee structure that shares the risk between your firm and your external counsel, and enables both parties to benefit from any cost savings achieved.

 Paresh Khushal

Bio: Paresh was appointed Head of Professionals for Thomson Reuters, Middle East & North Africa in January 2016. He is responsible for serving legal and consulting customers, and managing growth in the segment. Paresh was most recently Head of Finance for several business units at Thomson Reuters within the Middle East & North Africa. He has also held finance-related roles at large media companies, such as Disney and Universal Music. He earned his Chartered Accountancy qualification at Ernst & Young in the UK, and graduated with 1st-class Honors in Mathematics with Italian from the University of East Anglia, UK.