Are Law Firm panels and auction-based RFPs mutually exclusive, and do panels deliver the expected results?

In recent years, a number of the largest German corporations have created so called ‘Panels of Law Firms’, ‘Preferred Law Firm Lists’ etc. in the hope to considerably reduce their legal spend (According to a survey published in 2015 by JuVe, panels in Germany are often not operated “whole-heartedly”, and there are major differences among mid-size and large, internationally active corporations in the way how professionally those programs are run). A number of clients have asked us recently whether holding a ‘request-for-proposal’ (RFP) based auction, i.e. a competitive process organized between various laws firms to pitch for a concrete mandate, is excluded if the company already has a legal panel. The first answer is: That depends – it depends on the Panel Agreement entered into with the preferred suppliers (practical hint #1: Every smart GC will ensure and vigorously defend that in his/her Master Panel Agreement there is no exclusion in that regard).

Secondly, however, and economically more importantly: From experience, setting up legal panels frequently does not have the desired effect of truly reducing legal spend. The remainder of this article will explain the reasons for this:

Admittedly, setting up a law firm panel has a number of advantages from a corporation’s point of view – the company will

  • Get acceptance for the corporation’s outside counsel policies, as well as implementation of preset billing guidelines;
  • Diminish organizational burden in managing a major number of firms, across multiple areas of law and jurisdictions, and
  • Enable a qualitatively closer business relationship with the selected law firm(s).

At the same time, law firm panels show a number of weaknesses that put a question mark behind the statement that the pure panel approach will in itself deliver cost-savings for the corporation. Reasons for this are the following

  • Panel Agreements may (and, anecdotally: do) contain above average rate increases, i.e. increases which are de-coupled from market developments;
  • Discounts on hourly rates could in practice easily be neutralized by a proportional or even greater number of billable hours charged, and
  • Relying solely on the billable hour as a metric does not set the appropriate incentive from a corporation’s point of view, given that the company’s interest is to ensure that work is handled cost-efficiently than by a relatively highly paid fee-earner; law firms have an in-built reverse tendency.

As a result, companies in the US have started a number of years ago using panels only as an initial step of their outside counsel programs, aiming at getting an optimal price-quality-ratio. As a reaction to those disadvantages, further advanced legal departments in the US have complemented their panel-model by a standardized process for engaging outside counsel on a matter-by-matter basis by way of so-called ‘reverse auctions’. Market developments have proven that this additional process guarantees optimal savings, maintaining qualitative standards from the best firms, whilst guaranteeing market-adapted revenues for participating law firms. Moreover, such competitive approach avoids the pitfalls of the pure panel approach described above. In terms of fee models applied, this approach usually includes elements of agreed hourly rates, but also both fixed fees and caps on certain priceable elements of any given assignment.

As part of this complementary process, clients invite both law firms to participate in the competitive process (practical hint #2: Corporation could consider whether they’d like to admit non-panel law firms, such that Panel Law Firms  are ‘set’ only, but have no predisposition as likely winners of this process), describe the task to be fulfilled and request an appropriate fee structure, depending on the specifics of the matter. This means that certain slices that can be capped or outsourced (e.g. a due diligence package), and hourly rates only for that fraction of the deal/assignment that truly demands bespoke and high-end treatment. This approach, conducted on a matter-by-matter-basis, with certainty avoids unexpected fee outcomes, and guarantees considerable savings opposite a panel approach: Market comparisons have shown savings in the region of 15-35% on each single mandate. Thus, the results by far exceed the (supposedly) hard-fought savings achieved in panel ‘negotiations’ with pre-select legal providers.

To sum up, whilst legal panels deliver certain benefits to companies, they are far from being sufficient as a comprehensive cost-saving mechanism. Truly professional and up-to-date US inhouse teams today operate matter-level RFPs as the second layer to their first layer panel program.

This way, client can continue working with their usual panel firms and do not have to deviate from their existing agreements: The existence of agreed hourly rates does not hinder clients to subsequently agree to discounted fixed fees for a particular matter or project. On the contrary, in any renewal of existing schemes, corporates should ensure that their Template Panel Agreement explicitly grants them this freedom-to-operate (practical hint #3). Likewise, adopting matter-level RFPs does not disrupt the law firm-relationship as laws firms will continue to strive being the winner for the respective RFP. The biggest advantage, from the corporations’ point of view: This RFP-based mode of operation will both (i) show massive, resource-efficient and business-specific cost-savings, and (ii) increase the quality of legal work assigned.

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