Frankfurt-based legal tech start-up Lintum successfully closed its second financing round with BMH Beteiligungs-Managementgesellschaft Hessen mbH and leading figures from the German legal market in May 2021.

Frankfurt-based legal tech start-up Lintum successfully closed its second financing round with BMH Beteiligungs-Managementgesellschaft Hessen mbH and leading figures from the German legal market in May 2021. The total volume of the financing round was €800,000, of which €400,000 came from BMH via the Participation Fund Hessen Kapital III (EFRE) GmbH, which it manages. With its disruptive idea, Lintum aims to optimize companies’ existing procurement processes in the legal market.

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;
  • 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.
  • Discounts on hourly rates could in practice easily be neutralized by a proportional or even greater number of billable hours charged, and

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.