The above from a headline in Corporate Counsel (subscription required) last week.
Nathan Cemenska is an attorney who is Director of Legal Operation and Industry Insights at Wolters Kluwer ELM solutions. In a report issued earlier this month, LegalVIEW Insights volume 2023-1: Law firm rate increases, he contends that intimidation confines corporate Legal’s negotiation efforts to “where it matters least”:
“In smaller, less expensive firms where both rate increases and the underlying rate tend to be lower, limiting opportunities for savings …
“As long as corporate law departments continue to stand in awe of their largest firms and steer away from the application of any serious pressure to rates at the biggest firms, hourly rates at those firms will compound year over year and become outrageous by any definition.”
This Matters to Your Business
The corporate Legal function needs to summon the courage to negotiate, and to assign legal work to the most suitable provider.
On summoning the courage to negotiate, a few years back law practice consulting firm Altman Weil surveyed general counsels on why they don’t bargain more robustly on price with their law firms. Here are the results:
- 55% reported that they lacked enough buying power to do so,
- 51% reported that law firms resist discounting, and
- 30% reported that they did not want to “damage good relationships with external counsel by asking for greater discounts.”
Thinking back on my days as an M&A executive at GE, I can only imagine then-CEO Jack Welch’s response if told that failure to get a good deal for the company had been prevented by any of the above three excuses.
On assigning legal work to the most suitable provider, when I once asked iconic GE general counsel Ben Heineman, Jr. how best to control corporate Legal’s costs, he replied: “Segment, segment, segment”.
Heineman defines “segmenting” in his The Inside Counsel Revolution (p. 11):
“In thinking about what resources to use on a corporation’s legal matters, a first and fundamental step is to segment the type of work according to degree of expertise and judgment required and degree of complexity and risk / opportunity presented.”
Applying segmentation analysis to the task of reducing law firm fees, Nathan Cemenska suggests that corporate Legal:
“Can better control costs by switching more work to alternative legal service providers, midmarket law firms and other vendors that act less entitled to big rate increases year after year.”
Nathan Cemenska condenses his point into one sentence:
“Rate increases are not, as the defeatists would argue, always inevitable and always high, although they are more likely to be both in the case of a buyer with a lackadaisical approach to rate management.”
As Wolters Kluwer observed in a report (subscription required) last year, many legal departments do not even attempt to exercise any central control, but decentralize rate negotiations out to in-house counsel, many of whom lack the skills, desire and /or temperament to take an arm’s-length tone in rate negotiations, with results that are all too predictable.”
Corporate Legal can do better.