Corporates rail against time-charging

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This article by Chris Meritt was published by the Australian on 19th October 2012. (Click here to view the original)

Corporates rail against time-charging

A MAJOR survey of in-house legal departments has revealed that billable hours are on the nose with the people who count: corporate consumers of legal services.

Most in-house legal departments dislike being confronted with time-charging by their external law firms but are not being presented with alternatives.

The survey of 346 organisations debunks the notion that law firms are under pressure to keep using time-charging in order to satisfy client demand.

It found that just 4 per cent of in-house counsel endorsed the use of billable hours as the best approach to billing and 24 per cent said they were dissatisfied with billable hours.

Another 52 per cent believed the use of time-charging was not ideal but they were not being offered alternatives.

The widespread dislike of billable hours has come to light in a benchmarking study of in-house legal departments conducted by the Australian Corporate Lawyers Association and the Corporate Lawyers Association of New Zealand.

While most in-house legal departments did not like time-charging, the survey found it was reluctantly being accepted; 57 per cent of organisations paid standard hourly rates and 55 per cent - generally the larger consumers of legal services - paid discounted hourly rates.

Of those organisations with turnover of more than $1 billion, 68 per cent had won discounts from normal hourly rates. At organisations with turnover of less than $25 million, just 35 per cent were on discounted hourly rates.

ACLA chief executive Trish Hyde said the key message from the survey was that in-house legal departments wanted greater certainty about their legal bills.

"There is a gap between what law firms are able to offer and what in-house would like," she said.

She believed law firms and their in-house clients needed to use the survey's findings as the basis for discussions about future pricing strategies.

In order for that to happen, she said ACLA would today launch a separate version of the survey's results that has been repackaged for use by law firms.

"That conversation needs to start because there are more effective ways of doing things," Ms Hyde said.

The survey found that 28 per cent of legal departments commonly use alternative billing methods and 24 per cent are planning to implement alternative billing methods.

It also found that legal departments were very selective about the type of work they would do in-house instead of sending it to their panel law firms.

The areas of work that were most commonly sent to outside law firms were litigation, arbitration and alternative dispute resolution.

The survey found 62 per cent of legal departments sent this work to their law firms.

The area of work that was most likely to remain in-house was privacy. Just 12 per cent of legal departments sent this type of work to law firms.

Ms Hyde said that even though litigation was the most likely area of work to be outsourced, some legal departments were building up their in-house capability in this practice area.

She said Shell, the international oil company, had brought all of its litigation work in-house.

"I presume they use some law firm support but their strategy was to insource their litigation because they know their organisation best and are best placed to decide when a case needs to be settled and when it needs to be fought," Ms Hyde said.

The decision to outsource legal work was also being complicated by the rise of what she referred to as project management principles.

"It's quite a different decision-making process," she said.

Legal departments now considered whether their work should go to top-tier, mid-tier or boutique firms. They also considered whether they should develop a direct-briefing capacity in order to take litigation work directly to the Bar.

They also needed to consider the relative benefits of legal process outsourcing and whether they should engage lawyers on short-term contracts for particular projects.

"There are now more options and unless the relationship between client and firm can overcome the differences, there will be more of these in-house decisions made on how they can best achieve their business objectives."

Despite the widespread unhappiness about the use of time-charging, the survey also found widespread satisfaction among legal departments with the standard of work completed by outside law firms.

It found that 34 per cent of legal departments were extremely satisfied with their main outside law firm and 50 per cent were satisfied, leading to an overall positive rating for the primary outside firms.

"For law firms, this is a pivotal time. It is a real opportunity," Ms Hyde said.

"If law firms can get it right, they will unblock a big problem that has existed in the relationship in pricing."

When pitching for work, she said law firms needed to break down the complexity of legal matters and look at them as projects that needed to be managed so they came in on time and on budget.

She said law firms needed to understand that it was no longer acceptable for the general counsel of corporate clients to approach their chief financial officer and simply assert "we had this over-run".

"Every other function is asked to meet budgets and the legal function is also asked to do this."