A recent Law.com story by Abgail Adcox, “Big Law Takes Bigger Bet on Contingency Fee Practices”, reports that, in a quest to maximize profitability, Am Law 200 law firms have grown their share of business tied to contingency fees, a gamble that has paid off for some firms in recent years.  Kirkland & Ellis, Crowell & Moring, Quinn Emanuel Urquhart & Sullivan and Susman Godfrey are among the firms that have represented plaintiffs on a contingency fee basis, agreeing to take on certain litigation in return for a portion of any recovery in a settlement or judgment.

And it’s not just these firms, say litigation funders.  ”It’s fair to say we’ve seen a noticeable increase in interest in building out plaintiff side practices among the more traditional defense-oriented law firms,” said Evan Meyerson, director at Burford Capital, in an interview.  “There’s a growing desire to become—and comfort level with becoming—truly the one-stop shop for their institutional clients.”

Last year, Burford executed multiple portfolio-style transactions with first-time counterparties in the Am Law 50, Meyerson reported.  Firms are seeking new ways to “differentiate their businesses,” with plaintiff-side litigation being a “pretty powerful differentiator in the marketplace,” according to Meyerson.  ”We’re definitely seeing an increase in appetite among what were traditionally the more risk-averse law firms in growing their contingency practices.”

Law firms such as Kirkland & Ellis have trumpeted a concerted effort to expand its contingency docket in recent years.  In 2021, Kirkland brought home a $200 million contingency fee for its representation of client Huntsman Corp. in a dispute.  Overall, in 2022, Kirkland said it had secured more than $2 billion in recoveries in trials for clients such as Motorola and Trizetto.

“We launched what’s now a very successful plaintiff-side practice on the view that we’re uniquely positioned in the market to arm our top trial lawyers with unlimited resources and a willingness to invest whatever it takes for the right cases,” Andrew Kassof, a leader of Kirkland’s litigation practice and a member of its executive committee, said in a statement this week.  “This practice has remained really active, with a number of new litigation matters filed last year and more coming in 2024,” Kassof added.

Other firms are also seeking out more contingency fee work.  For instance, at DLA Piper, the firm is “looking to exploit contingency fee opportunities more.  That’s part of our strategy for the firm.  We’re not going to do it wholesale, but where the opportunity works for our philosophy, we’re going to do it,” said global co-CEO, co-chair and Americas chair Frank Ryan.

Financial Swings

However, due to the unpredictable nature of when cases lead to recoveries, firms’ contingency practices have sometimes resulted in sharp swings in financial performances over the years for some.  A slow year for contingency collections contributed to Fish & Richardson’s 2.4% decline in gross revenue, firm president and CEO John Adkisson said.

“At a high level, I’m thrilled with where our business levels are,” said Adkisson, noting that the firm’s “core” or non-contingent revenue rose for the seventh year in a row.  “On the contingent side, our principals here recognize that that is going to ebb and flow.  We have a number of very exciting opportunities in the pipeline but 2023 was a slower year in terms of contingency fee recoveries.”

Crowell & Moring’s gross revenue growth slowed last year, inching up 0.9% to $595.5 million, as receipts from the firm’s contingency docket returned to lower levels in 2023.

In previous years the firm has reported hefty contingency fees supporting double-digit percentage revenue growth.  In 2020, a year in which the firm recovered more than $2.2 billion for clients in affirmative recoveries, the firm posted an 18.7% increase in gross revenue.

Crowell chair Phil Inglima said in an interview that the firm is “balancing prudently how much we’re investing in contingent docket versus how much we’re deriving from the traditional strengths of the firm.”

Inglima reported that the firm only factors a “small amount” of contingency matters into the firm’s budget each year and that attorneys spend no more than 10-12% of their time overall on the matters.  “We do anticipate with some precision when the claim funds will be paying, when distribution events will occur from that.  So that’s the only part that we really budgeted at all,” Inglima said about 2023.  “We did achieve at the level that we expected in the budget last year, but we didn’t have extraordinary receipts to have a windfall of any kind in 2023 for the contingent docket.”

Meanwhile, at Quinn Emanuel, gross revenue increased nearly 28% to $2.07 billion in 2023.  Approximately 8% of the firm’s revenue came in the form of contingency fees, a slightly higher proportion than 2022, but not materially, Michael Carlinsky, one of three co-managing partners at the firm, told The American Lawyer in an interview.

Trial firm Susman Godfrey nearly doubled its revenue in 2023 and more than doubled its profits per equity partner.  According to Kalpana Srinivasan, co-managing partner at Susman, 71% of the firm’s fees in 2023 came from contingent-fee work, compared with 43% contingent-fee in 2022.

Those percentages reflect the lifecycle of litigation, Srinivasan said. “We have 40-plus years of experience in contingent-fee matters.  We know you can’t precisely designate when a case is going to resolve or generate revenue, but that’s OK, because we have so many of them in the pipeline,” she said.

King & Spalding and Dorsey & Witney leaders also said contingency fee cases contributed to their firm’s financial gains last year.  For 2022, Lowenstein Sandler cited litigation and contingency fee work as a driver of a double-digit percentage gains in revenue and profits that year.

Lit Funding Terms

In light of the risks that come with contingency work, firms have increasingly sought out funders such as Burford Capital, which will fund a portion of their fees and expenses.  “Our deals are what we call non-recourse,” said Meyerson, adding that means, “if a case we finance loses, our counter-party on that deal keeps that financing and has no further obligations to repay Burford.”

“Probably unsurprisingly, our pricing reflects that risk,” he added.  “We’re usually seeking some combination of a multiple on our investment amount, percentage of the outcome or an interest rate that in aggregate typically resembles a law firm contingency rate.”  As a result, there is not a “one-size-fits-all model” for Burford’s pricing, Meyerson said.

“It is typical for firms to come to us asking for something close to full coverage on expenses, whereas on fees, there’s greater variability with firms who are willing to take on more or less of that risk,” Meyerson later said.  While, overall law firms typically only see a small portion of their revenue derived from alternative fee arrangements, which includes contingency work, the percentage has grown in recent years.

The Citi Law Firm Leaders Survey found that 20.6% of 2022 revenue came from AFAs, which is the highest average the survey has recorded.  In 2023, similar proportions are expected, according to the 2024 Citi Hildebrand Client Advisory.  By 2025, 72% of law firms expect revenue from AFAs to increase, the advisory said.

A recent Law 360 story by Jeff Montgomery, “Epic Tesla Fee Bid May Blaze Extraordinary Chancery Path”, reports that an unprecedented $5 billion-plus stock-based fee award sought by class attorneys who recently short-circuited Tesla CEO Elon Musk's 12-step, $51 billion compensation package has set up an equally unprecedented test for Delaware Court of Chancery fee guidelines and a potential award one law expert described as "dynastic wealth."

Class attorneys who have battled Tesla's compensation scheme for Musk since mid-2018 last week sought more than 11% of the 266,947,208 Tesla shares freed up Jan. 30, when Chancellor Kathaleen St. J. McCormick ordered rescission of the options that Tesla's board awarded to Musk in an all-stock compensation plan.  The value had been estimated initially at $5.6 billion, but would fluctuate with the value of Tesla's stock.

While the process of seeking a stock fee award instead of cash is not unprecedented, it is an unusual posture for Delaware Chancery litigation, and its scale is likely to reopen what were once considered settled questions over counsel risks, rewards, and just how much attorneys can command for corporate benefit fees, experts told Law360.

"Given the order of magnitude here, I suspect that the case will not set any records in terms of percentage of the recovery awarded to the plaintiffs attorneys, but in absolute terms it'll still amount to dynastic wealth," said University of Connecticut School of Law professor Minor Myers. He described the fee as "destined to be epic, if only because it involves the invalidation of a pay package that was itself comically large."

Chancellor McCormick put the fee in play with an order rescinding Musk's 12-tranche, all-stock compensation plan Jan. 30, after a week-long trial in November 2022.  The ruling cited disclosure failures, murky terms, conflicted director architects and Musk's own conflicted influence in Tesla's creation of an Everest-sized mount of fast-triggering stock options.

"Plaintiff won complete recission of the largest pay package ever issued," the fee motion, filed last week, said.  "Our research demonstrates that the court's decree of recission, conservatively valued, was the largest compensatory award in the history of American jurisprudence by multiples," driven by "the gargantuan size of the tort underlying this action."

But class attorneys are seeking an equally gargantuan fee, even after departing from calculation customs that Vice Chancellor J. Travis Laster stressed last year in declining to apply a size reduction to a nearly 27%, $267 million award to stockholders who challenged a Dell Technolgies stock swap in 2018.  In his fee ruling, the vice chancellor said the calls to reduce the Dell fee conflicted with court efforts to reward attorneys for going deeper into litigation and taking greater risks in pursuit of legitimate claims.

"Of course, everyone involved will try to fit this into an existing framework, but the reality is that a $5.6 billion fee award is staggeringly high, whatever factors are considered," said Lyman P.Q. Johnson, Robert O. Bentley professor of law, emeritus, at Washington and Lee School of Law.  "I think Chancellor McCormick will find a way to go a fair bit lower, while still providing the attorneys with a very high award of some amount."  Johnson added: "The shock of Musk's compensation, undone by the chancellor, is unlikely to be followed by what many would regard as a shockingly high $5.6 billion fee award."

Vice Chancellor Laster's most recent big fee ruling established, pending appeal, a $266.7 million fee last year for attorneys who secured a $1 billion settlement for minority stockholders who sued over a $23.9 million Dell Technologies stock swap in 2018.

In Dell, the vice chancellor rejected investor arguments that large "mega-fund" settlements justified throttling back on fee payouts because customary fee percentages can produce massive, windfall payouts.  Instead, Vice Chancellor Laster defended the use of customary, variable percentages, including 15% to 25% shares of awards for settlements after "meaningful litigation and motion practice" and up to 33% post-trial.  He also acknowledged the tension between successful plaintiffs' counsel seeking appropriate compensation and large investors working to minimize carve-outs from court awards.

In Tesla, class attorneys, wary of blowback over big recoveries borne of typical fee ratios, acknowledged the Dell ruling's guidance, but also pointed to an earlier ruling that produced the current largest court-approved fee, a $304 million award approved in 2011 by then-Chancellor Leo E. Strine and upheld by Delaware's Supreme Court a year later.

That decision required Grupo Mexico to return to Southern Peru Copper Corp. nearly $1.3 billion worth of Southern Peru stock — rather than cash — after finding that Southern Copper had been coerced by a conflicted, controlling stockholder into overpaying for a Grupo Mexico mine in 2005.  With pre- and post-judgment interest, the award reached more than $2 billion, with class attorneys awarded 15%, or $304 million, for fees and expenses.

Tesla class attorneys referenced the 15% fee carve-out approved in Southern Peru, but adjusted even that percentage downward — to just over 11% — to reflect value added by the absence of a holding period for any award of Tesla shares before they could be sold.  Case costs included more than $13.6 million in attorney fees and more than $1.1 million in expenses during the multi-year Chancery action.  Requested fees would equal a $288,888 hourly rate that the fee motion said was justified by the case's complexity, results and attorney skill levels, among other factors.

Jill E. Fisch, Saul A. Fox distinguished professor of business law at the University of Pennsylvania Carey Law School, said use of stock for attorney fees was once "kind of frowned upon," but is not unprecedented.  "They are repeat players" in Delaware's courts, Fisch said of the attorney teams that prevailed in the Tesla case.  "They want credibility before the court.  The numbers, I think, reflect the benefit and risk of this kind of litigation, and traditionally, Chancery Court has acknowledged those risks."

The suit, led by stockholder Richard Tornetta, branded Musk's compensation package as unprecedented and unfair, noting that Musk had already qualified for some $20 billion in awards by the time the suit was filed, "making him one of the richest men on Earth" at the time.  It alleged in part that he relied on two in-house Tesla attorneys for work on the plan before the board's conflicted compensation committee took up the issue.

Ann M. Lipton, the Michael M. Fleishman associate professor in business law and entrepreneurship at Tulane University Law School and associate dean, pointed to another Tesla- and Musk-related case to illustrate the risks stockholder attorneys take.

Last year, after about seven years of litigation, Delaware's Supreme Court upheld a post-trial dismissal of a suit filed by stockholders of rooftop solar venture SolarCity, seeking damages tied to Tesla's $2.6 billion purchase of the company, for which Musk was CEO and also held a big share of company stock.

At one point during the case, the SolarCity stockholders suggested a damage award amounting to a $13 billion giveback of Tesla stock Musk received for his SolarCity shares. Dismissal of the case and rejection of class claims, however, wiped out class attorneys' hopes for a share of a big award.

In the more-recent scuttling of Musk's Tesla stock awards, Lipton said, shareholders benefited from the stock award cancelations by being dramatically less diluted in their holdings.  "That the attorneys are asking for a little bit of dilution" through their fee, "but far less than the shareholders would otherwise have suffered, seems like a real benefit that was provided, from a financial point of view."

Lipton said she was not familiar enough with the current Tesla fee motion to comment on the percentage sought, but cited the enormous risk and stockholder counsel loss in SolarCity and said that "attorneys deserve to be compensated" when they prevail.

University of Michigan Law School professor Gabriel Rauterberg said the fee bid in Tesla appears excessive, despite the importance of fee as a motivator.  "It seems to me extremely implausible that an award this large is necessary to provide the right incentives, given that plaintiffs attorneys' fixed costs for investigating lawsuits, conducting research, and prosecuting cases can be significant but not on this scale," Rauterberg said.  "It seems like a windfall to me. You can give the attorneys a large award, while still falling short of billions."

Counsel for the Tesla stockholders have pointed out that Delaware's Supreme Court has in the past declined to replace the current fee approach with declining percentages.  "Under Delaware law, the unprecedented size of the benefit conferred does not alter plaintiff's counsel's entitlement to 33% of that benefit," attorneys for the Tesla stockholders wrote.  They also pointed to voluntary concessions reducing the total ask to around 11%, with features that reduce the cost to the company.

Some of the sting felt by Tesla, the brief indicated, could be taken away by federal tax law terms that will make 21% of the fee award cash tax-deductible, reducing the post-tax fee award cost from $5.63 billion to $4.45 billion.  State corporate income tax and payroll tax deductions and allowances also could offset the share payout.

UConn's Myers said the Tesla stockholder attorneys won a landmark victory and "deserve to be compensated handsomely" for taking a risky case through trial, while also predicting that the court will "take a hard look at the magnitude of the benefit actually achieved here — that may be a figure in some dispute."  The case nevertheless also stands as an example of "how the Delaware system effectively harnesses the efforts of folks like the plaintiffs attorneys to generate powerful incentives for good governance at public companies," Myers said.

A recent Law 360 story by Jeff Montgomery, “Tesla Investors Weigh In On $5B Fee Proposed For Class Attys”, reports that Tesla Inc. stockholders are sounding off to Delaware's chancellor after class attorneys sought a stock-based fee potentially worth more than $5 billion at current share prices following the Court of Chancery's reversal of Elon Musk's $55.8 billion stock-based pay plan on Jan. 30.  Chancellor Kathaleen St. J. McCormick said in a letter that the judicial code bars her from considering communications outside the case process.  But she directed attorneys for the class to come up with a method for "handling" the stockholder communications ahead of a yet to be scheduled hearing and argument on the fee.

Nothing in the chancellor's letter characterized the aims or identities of those attempting to contact the court.  Founder Elon Musk owns 20% of Tesla's shares followed by institutional investors, with individuals accounting for less than 1%.  The proposed fee seeks just over 11% of the total formerly earmarked for Musk and now available for company use, well below the 33% sometimes awarded in complex cases that proceed through a full trial.

"I have not read these communications because, as you all are aware, Rule 2.9 of the Delaware Judges' Code of Judicial Conduct prohibits me from considering ex parte communications concerning a pending proceeding," the chancellor wrote in the latest entry of a derivative action launched in 2018.  Some of the letters apparently originated with small stockholders, some of whom have gravitated to X, formerly known as Twitter, to share thoughts on Tesla, Musk, the case, the fee and letters sent to the chancellor.  Some, using the hashtag #DelawareCourt81, have proposed sending letters directly to the parties or to Tesla for forwarding.

Tesla's top five institutional holders hold about 19% of the business, led by The Vanguard Group at nearly 7%.  Blackrock accounts for 5.8%, with State Street Corp. at 3.3%, Geode Capital Management at about 1.6% and Capital World Investors at about 1.3%.  None of the top five immediately responded to requests for comment and counsel for the stockholders did not provide details.

Lawrence Hamermesh, former director of the University of Pennsylvania Carey Law School's Institute for Law and Economics and professor emeritus at Widener University Delaware Law School, said he would not be surprised if the letters Chancellor McCormick referred to were sent by larger investors opposing the requested fee.

"That'd be my guess," Hamermesh said. "Without knowing everything about it, I harbor a certain lack of sympathy with them.  The upshot of the case is they're avoiding dilution" that would have resulted had Musk won.  "The award would dilute them back in a real small way, at least in terms of proportional interest. They're way better off" with the decision.  Nevertheless, Hamermesh said, given the 29,402,900-share cut of the 266,947,208 shares freed up by Chancellor McCormick's decision, the court is certain to be pondering the billions involved.

"She has to be thinking to herself: 'There's no case, no effort, no measure of success that's worth that much to lawyers. You don't need to give them that much to incentivize them to take this case."  In the absence of precedent or clear rules, he added, "it's a gut-level, gut-check thing. How much is enough? Either they become more rich, or fabulously rich."

Chancellor McCormick put the fee in play with an order rescinding Musk's 12-tranche, all-stock compensation plan on Jan. 30 after a week-long trial in November 2022. The ruling cited disclosure failures, murky terms, conflicted director architects and Musk's own conflicted influence in Tesla's creation of a mountain of fast-triggering stock options.

At the time of the ruling, Tesla's stock was trading at more than $191 per share, putting the potential maximum award at around $5.6 billion.  Slipping since has pruned the potential maximum by hundreds of millions.  Costs for the derivative case included more than $13.6 million in attorney fees and more than $1.1 million in expenses during the multi-year Chancery action.  Requested fees would equal a $288,888 hourly rate that the fee motion said was justified by the case's complexity, results and attorney skill levels, among other factors.

A recent Law 360 story by Lauren Berg, “Tesla Stock for Fees? Attys Who Got Musk’s Pay Cut Say Yes”, reports that the lawyers who convinced the Delaware Chancery Court to scuttle Elon Musk's proposed $55 billion Tesla compensation package filed a request for legal fees that came with a twist — they want to be paid in Tesla stock that rounds out to about $5.6 billion.

The attorneys from Bernstein Litowitz Berger & Grossmann LLP, Friedman Oster & Tejtel PLLC and Andrews & Springer LLC, who represent the shareholders who in November 2018 challenged Musk's pay package as unfair, asked for more than 29 million Tesla shares and an additional $1 million to cover their litigation expenses, according to the motion.

They are seeking about 11% of the 267 million shares they say are now available for Tesla's use as a result of Chancellor Kathaleen St. J. McCormick's decision in January striking down Musk's 10-year compensation plan, the motion states.  She found that disclosure failures, murky terms, conflicted director architects and Musk's own hand on the tiller warranted an order to roll back the award.

"Rather than debate the value conferred to Tesla by canceling the options or the value of the underlying stock returned to the Tesla treasury free of restriction, plaintiff's counsel instead seeks a fee award in kind — a percentage of the shares returned for unrestricted use by Tesla (rather than cash)," the lawyers said.  "In other words, we are prepared to 'eat our cooking.'"

"This structure has the benefit of linking the award directly to the benefit created and avoids taking even one cent from the Tesla balance sheet to pay fees," they added. "It is also tax-deductible by Tesla."  The plan went to a week-long trial in November 2022 after it was challenged by stockholders led by plaintiff Richard J. Tornetta.  The compensation scheme included 12 tranches or performance milestones that Musk had to meet before qualifying for a portion of the total, once estimated at as much as $56 billion.

In her order squashing the plan, Chancellor McCormick found that "Musk dictated the timing of the process, making last-minute changes to the timeline or altering substantive terms immediately prior to six out of the ten board or compensation committee meetings during which the plan was discussed."  Although the defendants argued that Musk was "uniquely motivated by ambitious goals," with Tesla desperately needing him to succeed, the opinion observed, "these facts do not justify the largest compensation plan in the history of public markets."

The price was no better than the process, the chancellor concluded, observing that "Musk owned 21.9% of Tesla when the board approved his compensation plan.  This ownership stake gave him every incentive to push Tesla to levels of transformative growth — Musk stood to gain over $10 billion for every $50 billion in market capitalization increase."

In their motion for attorney fees, the shareholders' attorneys from the three firms said they collectively logged nearly 19,500 hours throughout the case, which came out to about $13.6 million in lodestar, as well as $1.1 million in out-of-pocket expenses.  And although a typical attorney fee request seeks about one-third of a settlement or verdict won in favor of their client, in this case, the attorneys said they are asking for a conservative 11% of the recovery.

"We recognize that the requested fee is unprecedented in terms of absolute size," the attorneys said.  "Of course, that is because our law rewards counsel's efforts undertaken on a fully contingent basis that, through full adjudication, produce enormous benefits to the company and subject the lawyers to significant risk."

"And here, the size of the requested award is great because the value of the benefit to Tesla that plaintiff's counsel achieved was massive," they added.  And this isn't the first time a court has awarded plaintiffs a fee of recovered shares, according to the motion.  The attorneys point to the 2000 case Sanders v. Wang, in which the Chancery Court granted plaintiffs judgment on the pleadings over the improper issuance of 4.5 million shares, approved a settlement and then awarded the plaintiffs a fee comprising 20%, or 900,000, of the 4.5 million recovered shares.

Overall, the attorneys said their fee request is supported by their history as experienced stockholder advocates, the substantial effort they put forth, the complexity of the case, and the "unprecedented result" they achieved in this case.

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.

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