Legal service procurement - fee arrangements

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For the in-house legal team running to a budget, legal fees are a critical issue. In the worst cases, fee arrangements that have not been properly negotiated or agreed may result in a complete breakdown of the lawyer–client relationship.

This Lexis®PSL Practice Note provides guidance on the various types of legal fee structures and fee models available to in-house legal teams when negotiating the purchase of legal services with a panel of law firms or other legal services suppliers. It also explains the added value options, such as secondments and training, which are sometimes offered by legal services suppliers to in-house legal teams when negotiating fee structures, as part of a procurement process. For a generic example of an invitation to tender (ITT) see Precedent: Invitation to tender—template. See also Lexis®PSL Precedent: ITT schedule—criteria—legal services, which is intended to be annexed to an ITT for the procurement of legal services and which provides an example of the criteria which the legal service provider tenderer will need to show it is capable of meeting in responding to the ITT, including proposed fee structures.

The growth of more sophisticated purchasing by in-house counsel together with ever-present financial pressures, have led to some significant developments and changes in how legal fees are structured.

There are now several options and combinations available including:

  • hourly rates
  • blended rates
  • capped fees
  • fixed fees
  • value billing
  • retainer
  • mix of these

Each of these is explained below.

Hourly rates

How does it work?

Hourly rates do what the name suggests—the legal service provider charges an agreed rate per hour of work spent. This is the traditional method by which law firms bill their clients. The rate will vary depending on the seniority of the fee earner, from paralegal up to senior partner.

This method is often adopted when it is difficult to define how much work will be required or when the work involved is very specific and specialised.

Pros and cons

Pros

Cons

Clear and easy to understand
Easy to compare the rates of competing panel firms and legal services suppliers

Can result in surprises in the bill
Rewards inefficiency and incompetence
Does not reflect value, merely time spent
Makes no distinction between the very competent and the incompetent
Hourly rates are set by the individual firms so that the costs of equivalent fee earners can differ across different firms

Blended rates

How does it work?

Blended rates are a variant of the hourly rate model. The work is charged at a single rate per hour no matter which level of lawyer in the firm does the work. The rate is calculated by reference to the mean average of the hourly rates of all the lawyers in the law firm.

This method of charging works well when a law firm is providing you with a full range of work across different levels of fee earners. However, care should be taken when adopting this method to ensure it is cost efficient for example by checking some previous bills to check how beneficial the blended rates are for your organisation. In cases where the work involves a junior lawyer doing many hours of the work required, and spending longer doing it than a more senior lawyer might do, due to lack of experience, it is possible that the blended rate of the firm may result in a more expensive rate than the hourly rate of the junior lawyer alone would have been.

Pros and cons

Pros

Cons

Works well when you need a senior lawyer leading the work with a more junior lawyer assisting (eg doing research on new points of law)—although you will need to make sure that the blended rate is not weighted towards the senior lawyer

Does not work well for high-volume, low-risk, repetitive work, where low expertise is required


Capped Fees

How does it work?

Capped fees are hourly or blended rates which are capped at a particular figure. The final fee may end up being less than this capped amount, but can never exceed the cap.

The more thoroughly the capped figure is planned, the better the outcome for all concerned. The parties will need to negotiate a scope of work for the services to be provided. If the scope of work is exceeded, fees will usually revert to hourly rates, so it is important to properly agree and define the scope of work and the conditions and assumptions surrounding the fees.

This approach to fees is usually appropriate when you need certainty or for charging in relation to particular stages in a major transaction.

The benefits for both parties are eroded if they are forced to re-negotiate fees as a result of the project evolving and growing unexpectedly.

Pros and cons

Pros

Cons

Provides a degree of certainty
Simplifies budgeting
Reduces potentially contentious billing issues between you and law firm

If the cap is not set at a realistic level it can lead to dissatisfaction for the legal services provider and in turn potentially lower the quality of the work

Value billing

How does it work?

The basic concept of value billing is that the bill reflects the amount which you are willing to pay the legal services supplier to achieve the outcome you require, rather than the time expended in providing the legal service. Value billing is subjective and requires a tailored approach which takes into account individual preferences. Some typical factors which might be used in determining a value-based bill are:

  • speed of delivery
  • complexity of the matter
  • the skill, labour, specialised knowledge and responsibility involved
  • the importance of the matter to you
  • cost savings generated for you

Pros and cons

Pros

Cons

The bill reflects what you are willing to pay

Encourages focus on goals

Can be difficult to determine or measure value

Subjective rather than objective

Retainer

How does it work?

This is not really a fee arrangement, rather it is a method of budgeting for fees by making payments on account of costs on a recurring basis. The costs ultimately charged could be calculated under any of the methods described above. Generally, the legal service provider is paid a fixed periodic retainer in advance, usually based on an estimate of how much the work will cost ahead of the work being done.

This method can work well for both parties as it provides the legal service provider with a regular income stream, while allowing you to budget for legal services.

Pros and cons

Pros

Cons

Certainty of legal budget

Simplification of administration

Setting up and agreeing the retainer fee can be time-consuming and challenging to calculate accurately

Terms and conditions of the relationship need to be carefully defined

Mix of options

How does it work?

This involves a mix of the various types of fee structures and rates described above. These are usually split across different types of work, eg low-value, high-volume work which can be fully delegated might be conducted on a fixed fee, while complex highly strategic and high-value work might be charged on an hourly or blended rate, which may or may not then be subject to a cap.

Pros and cons

Pros

Cons

Offers appropriate rates for appropriate type of work

Requires careful planning and consideration in advance usually during the procurement process

Added value offerings

It has become increasingly common for legal services providers to go the extra mile for clients and offer ‘added-value’ services, either free of charge or as an add-on to procured legal services. These added value offerings are a ‘win-win’ as they are beneficial both for the in-house legal team and the legal services provider. They offer some useful additional services for the in-house lawyers, an opportunity for the legal services provider to build and develop the relationship with you, its client, and ultimately a more efficient working relationship.

Some of the more common value-added services offered are set out below:

Type of added value items

Description

Bespoke legal updates, newsletters and know-how

Legal services provider offers regular bespoke legal updates to you either ad hoc or in a regular newsletter format. Can also include webinars, and know-how work

Secondees

Legal services provider sends (usually junior) staff on secondment to you, either for the duration of a particular transaction or for a defined period of time. This provides additional legal resource for you while also giving the legal services provider valuable insight to better understand your business

Trainee secondments

Either a trainee from the legal services provider joins your legal team or one of your trainees joins the law firm or legal services provider. This provides more diverse training for an in-house trainee for part of their training contract

Training for the organisation

Bespoke seminars or training programmes delivered on-site by legal services providers to you, tailored to your needs. Offering updates on the latest legal and regulatory requirements facing your organisation and industry, and how to deal with them

Facilitating industry networking groups

Industry forum facilitated by the legal services supplier, providing opportunities to bring together industry players to discuss developments across the relevant industry and how to deal with these. The legal services supplier’s involvement can range from organising a very informal gathering to running a fully-fledged industry association. Some examples of ways of engaging with the industry include hosting roundtable discussions, organising conferences and undertaking industry-specific research