A recent Law.com story by Amanda O’Brien, “’Seriously Inflated’ Duane Morris Bill Highlights Risk When Big Law and Public Clients Lack Alignment”, reports that, as Duane Morris faces scrutiny over publicly obtained emails alleging that the firm delivered “seriously inflated” bills to a suburban Philadelphia school district following its investigation into allegations of rampant bullying against LGBTQ+ students, the dustup underlines how law firms’ work on behalf of public-sector clients demands a heightened level of communication.

The firm landed in the spotlight in the aftermath of a 151-page internal investigation report for the Central Bucks School District put together in April 2023 by a team led by partners Bill McSwain, the former U.S. attorney for the Eastern District of Pennsylvania, and Michael Rinaldi.  The report ultimately refuted allegations made by the American Civil Liberties Union in 2022 claiming that the school district created a hostile environment for queer students.

The investigation leading to the report took approximately six months, with the district bringing on McSwain and the firm in November 2022.  The bills referenced in the memo span from November 2022 to the end of October 2023, and outside reporting by The Philadelphia Inquirer indicates the bills, totaling around $1.1 million, were paid in December 2023. 

“One could spend countless hours picking apart this bill,” the email, authored by Edward Diasio, a partner at Montgomery County-based Wisler Pearlstine, said.  “The bottom line, from my standpoint, is that it is seriously inflated, and should be reduced considerably.”

Among the issues highlighted in the email were complaints of inefficient time management, vague time entries for hundreds of thousands of dollars of work, and an excessive number of attorneys engaged in repetitive tasks.   “The issue is that the Engagement Letter indicated two attorneys would lead the matter, and rely on help (where appropriate) at lower hourly rates,” the email raids.  “This was a good strategy in theory, but it was poorly implemented by Duane Morris.  The District should have benefitted from the efficiencies such a structure should have generated…”

“What happened, though, was that an army of attorneys was brought in and any efficiencies that could have been achieved were dramatically outweighed by the inefficiencies associated with managing such a large team and all of the internal communication and coordination that come along with that,” the memo’s introduction concludes.

Keeping the Client in Mind

According to several consultants, establishing client expectations around billing practices is a weak point, even a “lost opportunity,” for law firms. At the center of the issue, consultants said, is keeping in mind the client’s expertise when it comes to litigation or other legal matters.

“With corporate clients, often the client is an in-house lawyer. With public sector clients, you’re frequently dealing with people who aren’t lawyers,” Mantra Partner founder and CEO Marci Taylor explained.  “It’s more of an incentive to be as descriptive as possible about the nature and complexity of the task.  You’re writing knowing that there’s a high likelihood that your invoices will be made public.”

Law firm consultant Tim Corcoran also acknowledged that billing isn’t a one-size-fits all practice.  “There is quite a bit of forethought that goes into billing strategies because different circumstances call for different approaches,” Corcoran observed, contrasting in-house lawyer clients to government and public sector clients, and these also to third-party bill reviewers used by many corporate clients. 

Corcoran and consultant Stephen Ruben indicated that billing strategies and professional responsibilities change slightly according to the type of client.   “Normally if you’re dealing with a large corporation or corporations that have a lot of legal matters, they’re [used to] dealing with legal matters over time and have a greater ability to manage the relationship … they know what to ask for, they know what to expect,” Ruben explained.  “The firm has a different obligation when a law firm is dealing with people who are less experienced and sophisticated in dealing with lawyers and litigation.  Litigation is messy by nature.  One would think that when you are dealing with people who are not as experienced in litigation, you have a greater obligation to take them through the process step by step.”

And as for third-party billing reviewers, Corcoran noted that some firms take into account that reviewers might shave off some of the bill.  “It’s like the shopping trick.  Some firms will bill accordingly knowing that clients who put them through this review process will shave off some eventually,” Corcoran said.  “They may also take the exact opposite approach by only billing for the specific things enumerated … in the outside counsel guidelines, because they don’t want to risk the relationship knowing anything outside of that scope will have to be justified or defended.”

Setting Expectations Early

Law firms often fail to set client expectations on billing, Corcoran noted.  As a result, Corcoran said, it is often on clients to take the initiative and set expectations on billing for law firms.  And while some corporate clients may have the sophistication and resources to take charge here, public sector clients—with a shorter history in turning to Big Law for complex engagements—don’t have the same knowhow.  That can be a recipe for frustrations, as the Central Bucks School District’s review demonstrates.

“Failure to set or manage client expectations … is probably the greatest missed opportunity [at law firms],” said Corcoran.  “What lawyers believe is that because they cannot predict with absolute certainty how long something will take, the outcome, and what it will cost, they view it as binary, so few will provide a budget or cashflow guidance to help a client squirrel away funds.”

“It’s up to the client then to impose restrictions or guidelines or checkpoints to say ‘you need to let us know what your work in progress is, we need to be ahead of the pace of your billing,’” Corcoran continued.  “As a former CEO myself who’s managed the law department, I cared about the total amount we’ve got to budget for this … [I’d ask to] get me in the ballpark [of how much something would cost], even on a quarterly basis.”

“Few law firms do that because clients don’t ask for it,” Corcoran added.  The risk, of course, of avoiding early billing discussions is an unhappy client when the bill comes due.  “Not giving a heads-up is zero risk unless the client is unhappy … [then] the risk is that [clients] will subject the invoices to deeper scrutiny,” Corcoran said.  “The risk is you will expect one income stream and get something less than that … [and that] repeated behaviors like that can cause clients to go elsewhere.”

“Client defections are based on dissatisfaction not with the legal work but how the client is treated by the firm almost as an afterthought,” Corcoran continued. “They’re missing out on the ability to retain the client.”  Ruben suggested that firms address billing expectations early on in the relationship with a client, noting that “in generally, a good law firm will state expectations.  That’s what the retainer agreement is about.”

“It should include terms about how [the client] is going to be billed, and there should be conversations about that,” Ruben said.  “You’re dealing with people and when people are involved in a transaction, there’s often going to be a miscalculation of expectations on either side … when you have a monthly bill, issues that need to be managed more quickly come to the attention of both parties.”

A recent Law.com story by Abigail Adcox “ ‘D.C. Was Our Best-Performing Region’: Billing Rate Increases and Demand Growth Drive Strong Year in the Beltway”, reports that law firms based in Washington, D.C., finished out 2023 with a strong financial performance, propelled by billing rate increases, expense control and robust demand within regulatory and litigation practices, according to results from a bank survey.

Among D.C.-based firms, gross revenue was up 7.6% in 2023 over the previous year, higher than the industry average of 6%, as the average billing rates in the region rose 8.8% compared with the industry average of 8.3%, according to Wells Fargo’s Legal Specialty Group’s year-end survey results.  Those results included eight firms headquartered in the D.C. region.

“D.C. was our best-performing region,” said Owen Burman, senior consultant and managing director with the Wells Fargo Legal Specialty Group.  “When talking to firms to really find out what drove it, the regulatory side was on fire for so many firms. And litigation overall has been supporting many firms this past year.”  In average revenue growth, D.C. firms exceeded peers in New York City (7%), California (6.6%), Texas (6.3%), Florida (5.9%), Chicago (5.2%), Philadelphia (4.7%) and Atlanta (4.4%), according to Wells Fargo data.

“The practice mix was very much in favor of D.C.-headquartered firms” in 2023, Burman said, citing robust demand within restructuring, antitrust and litigation practices, as other firms saw the impact of slowdowns in the transactional market.  It follows a lackluster 2022 for D.C. firms, which “underperformed,” as anticipated enforcement activities under the Biden administration didn’t come to fruition as expected, according to Burman.

However, in 2023, as demand picked up within regulatory and litigation practices, D.C. firms were able to control expenses and were less aggressive in hiring, contributing to their revenue growth.  Profits per equity partner were up 10.7%, compared with the industry average of 4.9%.  The number of full-time equivalent lawyers at D.C. firms also grew by 2%, slightly below the industry average of 2.8%. However, productivity at D.C. firms was down 1%, still better than the industry average (down 2.1%).

Demand among all lawyers was also slightly better at D.C. firms (0.9%) than the industry average (0.7%), but fell short of peers in New York City, which saw a 2% increase in demand.

Controlling Expenses

Meanwhile, total expenses grew 4.1%, the best out of all eight regions tracked, and above the industry average of 6%.  “They were able to control the expense growth much better than peers,” Burman said.  “Last year they were able to control the lawyer compensation pressures a bit more than other markets.”

Billing rate increases were in large part able to compensate for increases in lawyer compensation at D.C. firms last year.  “All together the rate increases are covering it.  The problem is that they were hoping it would cover other investments and now they have to redirect that money into supporting the lawyer compensation,” said Burman, adding that artificial intelligence and innovation investments are other top priorities for firm expenses.

Because of these expenses and other priorities, in 2024, D.C.-based firms may see more expense pressure, and they may be more in line with the industry averages in expense growth, he said.  Still, entering the year, D.C. firms are “optimistic,” Burman added, expecting strong demand within litigation and regulatory practices to continue.  “Their growth estimates are quite optimistic,” Burman said.  “Litigation, restructuring practices are still quite strong.  So those haven’t tailed off as we’re anticipating this rebound in transactions.”

A recent Law.com article by Rosemarie Griffin, “Seven Key Metrics to Evaluate Spend on Outside Counsel”, reports on metrics to monitor outside legal spend.  This article was posted with permission.  The article reads:

Gartner research shows that external spend comprises approximately 45% of overall spend for the median legal department, yet legal leaders often have trouble understanding where much of that spend originates.  Legal leaders continue to invest in spend management solutions to improve their insights into external spend data.  However, many of these same leaders find it difficult to translate that data into insights to inform decision making, even when spend data is accessible in dashboards or reports. 

When it comes to improving how external spend is evaluated, legal leaders should first determine the goals they want to achieve (e.g., reducing costs or improving quality) and then identify and track data to inform strategic decisions.

Gartner experts have prepared seven example metrics that legal leaders can use to inform their external provider management and align it with their organization’s overall strategy.  The following examples provide a framework for assessing needs and working with vendors and/or internal teams to build similar reports.

1. Total Spend Over Time Comparison

Comparing spend over time, especially in a visual dashboard, enables legal leaders to quickly spot trends or instances that could lead to overspending  This type of comparison also provides a holistic picture of historic spend in given periods, allowing for better budgeting.  One of the most valuable means of displaying comparative spend is with total spend per month, compared year over year.

Better historical spending data allows for more accurate budgeting, enabling legal departments to base projected future spending data on similar spending during that period in previous years   Historical spending trends can also help determine potential upticks in seasonal work and how much spending might be expected to fluctuate.  Comparing this information makes it easier to spot outliers when reviewing spend reports.  When legal leaders notice outliers from previous periods, they can analyze individual matter budgets from that period to see if a unique event explains that spending and, if not, adjust future spending, renegotiate with law firms and/or adjust the quantity and type of work sent to external providers.

2. Spend Compared to Budget

Once legal teams create a budget, they can also leverage data to manage that budget by tracking law firms’ spend.  While budgets with law firms are not always accurate, legal leaders should still track budget overages and use any overages to save money by renegotiating the amount billed and increasing scrutiny in future bills with that firm.

If a law firm is consistently over budget on matters, legal leaders should take a deeper look into the matters being billed by that firm.  It may be possible that one matter is significantly over budget, for known and expected reasons, but all matters coming in consistently over budget indicates a larger issue.  This might mean the in-house team member responsible for managing firm spend is not effectively managing a firm, or it could mean the firm is consistently ignoring budgets when making staffing and billing decisions.  Monitoring this data at the macro level can allow teams to proactively address any budget issues without waiting until large matters are completed.

Once a potential issue is spotted, legal leaders should speak with the matter owner(s) in the department working with a firm to see if there is an adequate explanation for the deviation.  From there, they should work with the firm to create a plan to readjust spend or rework the budget if necessary. It is important to track these overage conversations and any improvements on budget compliance to use in vendor evaluations.  Having conversations with vendors about their budget compliance legitimizes the budget and ensures a firm will monitor the available budget when making staffing and billing decisions in the future.

3. Blended Rate

Another helpful tool for monitoring law firm billing is the blended rate.  A blended rate, the average rate of all roles by hours billed, helps clear any confusion and identifies the true hourly cost the firm is billing, instead of just the rates billed by each role at the firm.  An effective report might visualize the average blended rate for top vendors as ranked by their total fees billed.

Understanding the blended rates first helps identify which firms are charging more, on average, per hour.  Using a blended rate ensures firms cannot hide costs by overusing staff with high billing rates.  Legal leaders can then take a closer look at potential over billers to see whether the matters billed by that provider justify the higher billing rate, or if they may be using high-cost attorneys unnecessarily.  Leaders can then negotiate rates or staffing or take advantage of alternative fee arrangements (AFAs).

4. Matter Staffing

To complement the data from blended rates (or provide a proxy, if the department cannot access that data), legal leaders benefit from a breakdown of the percentage of roles (paralegal, attorney, partner, etc.) billing the department from each firm.  If staffing is too senior, the department is paying higher rates than required for a task.  If the staffing is too junior, the work may not be adequate for the quality expected by the firm.  One way to visualize this data in a report is by displaying staffing allocation, by vendor, for vendors that bill the most fees, or a selected list of vendors.

Understanding what type of role executes the work will allow legal leaders to quickly see if a firm may be over- or underusing expensive law firm partners or attorneys for the work billed.  For some workstreams, such as major litigation, extensive use of experienced attorneys may be required.  For these cases, legal leaders may look to ensure partners and high-value attorneys have devoted considerable time to that work.  Blended rates alone cannot provide this information.

However, if a firm is generally used for low-complexity work, significant partner use could be unjustified, leading to unnecessarily high rates.  Visualizing this information is especially useful when combined with data on blended rates and billing guidelines, as blended rates will support an overbilling hypothesis and guidelines allow the legal department to clearly lay out what roles should be executing each type of work managed by a firm.

5. Turnaround Time

Aside from direct costs, another important outcome to report is the turnaround time for individual matters.  Slow turnaround time can delay matters and increase costs. However, if turnaround time, for similar matters, decreases significantly without explanation, it could be an indicator of lower work quality.  Turnaround time alone cannot adequately explain cost overruns or outcome quality, but it can be used as an indicator to take a closer look at a firm’s work.  Legal teams can visualize turnaround time by sorting matters by priority and plotting median turnaround time for matters at each priority level. 

Legal leaders can monitor firms’ work speed and compare them to the previous year to check in when turnaround times are longer than average, meet with firms to diagnose the issue (if times are unjustified), and create a plan to improve performance and maximize value.  This approach can also reduce cost if additional time is leading to more billed hours.  Any significant slowdowns could be from the complexities of a major individual matter or other factors, but it is an indicator that legal leaders should take a closer look at that individual firms’ work to evaluate whether the slowdown is justified.  Turnaround time metrics can be valuable, but they rely on legal staff to close out matters properly for accurate data.  This metric is only effective alongside established expectations for closing matters.

6. Strategy Versus Complexity

Another way for legal leaders to monitor their use of outside counsel is through the distribution of external matters by complexity and strategic value.  While this requires legal staff to accurately gauge and input the information, it can be extremely useful to evaluate the mix of work sent to external providers.  Some departments and external spend management solutions provide legal leaders with the tools to rate matters by qualitative metrics (including strategic value and complexity) when opening a matter and presenting these matters in a grid.

One of the most effective ways of reducing outside counsel costs and increasing the value received by in-house resources is to consider the strategic value and complexity of a matter when deciding whether to send something outside.  Legal leaders should aim to keep matters of high strategic value (other than major litigation) in-house as much as possible, where they have the best knowledge of the business.

Any matters of high complexity and low strategic value are good candidates for outsourcing to law firms, while low complexity, low strategic value matters are good candidates for alternative legal service providers (ALSPs.)  If legal departments see a large percentage of high strategic value matters sent outside, they may reduce outcome quality for the business and reduce the strategic benefit of in-house resources.  At the same time, if low complexity matters are being sent to law firms, then legal departments have an opportunity to insource those matters or shift that work to lower-cost ALSPs.

7. Grid Summary Report

To better compare spend across firms and practice areas, legal leaders can use a grid summary report that displays spending in a grid with the top 10 to 20 practices as rows, and the top 10 or 20 firms as columns.  Ideally, this report would classify rows into tiers of firms.

A grid report typically visualizes the gaps and overlaps and can help inform opportunities for consolidating spend.  At minimum, seeing this grid should allow the department to ask, “Are we making the right allocations?” If the report indicates a law firm is not often used, or is used for only one stream of work, then it may be a suitable candidate for consolidation.  Often, legal leaders report they are unaware that a single attorney is engaging with a firm until they get a complete spend report.  Tiering by practice area allows the department to notice this behavior more easily.

Strong relationships with law firms are valuable, as they will have better knowledge of the business and can provide better opportunities, including bulk discount on fees, secondments, and additional services, such as those provided by a captive ALSP.  These benefits can often be increased (particularly for organizations with smaller overall legal spend) by consolidating work to a smaller number of firms.  If a firm is being underused across practice areas but provides good value for work in other practice areas, legal leaders can also instruct their teams to shift work away from other firms to that firm.  This shift increases the value provided in a practice area while minimizing the loss of relationships that may occur by bringing on new firms for a practice area.

Other Metrics to Consider

The list of metrics above is not comprehensive of all metrics available from spend management platform vendors, or all metrics that may be useful when making strategic decisions on outside counsel.  Other recommended metrics (that may or may not be available from vendors) include spend by firm tier, average vendor rating (from after-action reviews at matter close), and top matter owners by spend.

External spend management platforms can provide some options for reporting, and legal teams can build on these systems to create their own reports to ensure they have the data required to make effective external spend decisions.  These reports can also help legal show the value it provides to the business, by showing how it has increased the efficiency of theory spend or reallocated work to better outcomes.

Rosemarie Griffin is a Senior Research Principal at Gartner.