Law departments have long developed and published outside counsel guidelines (“OCGs”). These documents are intended to set the stage for the relationship between the client and its outside firms. The growing complexity of OCGs demonstrates a need for firms to better monitor the terms of each OCG.
Law departments have long developed and published OCGs. These documents are intended to set the stage for the relationship between the client and its outside firms. Traditionally these documents would cover basic aspects of the relationship, primarily focused on the billing requirements.
Recently these documents have become more complex and a broader range of clients are adopting them. This has been primarily in response to cost savings pressures legal departments are getting from their corporate leadership and internal clients.
So what’s the big deal?
First, an observation: from reading many of these documents, the overall evolution of OCGs seems to reflect a growing chasm between clients and law firms. The documents go to great lengths to describe and list restrictions on what clients will not pay for, how rate increases will be handled, and even describing acceptable language for time entries. This reflects a presumed relationship of mistrust. Having to go to such lengths demonstrates that clients, on some level, feel that law firms are not being fair with them. So, in order to bring back a perception of fairness, in-house departments are creating these rules in an attempt to level this playing field again.
To peel back these layers, we will explore the general topics found in most OCGs these days.
First and foremost, OCGs develop lengthy lists of “non-billable” items, both in terms of activities and for expenses. The more obvious ones include not billing for online legal research costs, such as Westlaw and Lexis. Another newer, but quite common one is not allowing first-year associates to bill on client matters. From here the lists get long and add many detailed items.
Next up, OCGs go into great detail on e-billing requirements. Typically this spells out the use of task codes required for each time entry, with most codes sets unique to each client. Some clients even push the cost of their e-billing systems back onto law firms. For instance, a client may take 1 to 3 percent off a bill to pay for the e-billing software systems.
Of course, many of these special requirements increase costs for law firms. But the OCGs will also spell out that firms cannot bill for the time and expenses spent complying with the requirements.
Related to billing, more recent OCG versions place limitations on billing rates. A new trend is only allowing rate increases every other year. Another variation on that is locking in rates for the life of an engagement. Cost savings is a logical reason for these restrictions. However, an unspoken reason is limiting the number of conversations about rates.
The more aggressive OCGs request “Most Favored Nation” (“MFN”) status. This means matching the lowest rate a firm gives its “best clients.” This request is problematic for ethical reasons and for practical ones. A client giving a firm HK$1 million in work should not expect to receive the same rates as a multimillion dollar, long-term client.
Most OCGs suggest or encourage alternative fee arrangements (“AFAs”). Most of these requests are general and a bit vague. Some do note that AFAs are favored when bidding for work. A few even required AFAs.
Another emerging trend is requiring budgets. One firm estimates that 70 percent of new incoming OCGs require these. A typical variation requires budgets for matters expected to exceed a certain fee threshold, ranging from about HK$200,000 to HK$2 million. A few even state that the client will not pay fees on matters that do not have a budget. The budgets essentially become fee caps, setting a fee expectation with the client. Usually adjustments are allowed, but only when material changes in scope occur. This assumes well thought out scope and that firms monitor scope closely – which is a poor assumption.
A corollary to budgets is accruals. Clients have their own financial reporting needs, so they have firms report “best guess” fee estimates in the form of accruals typically at the end of the month or the beginning of the next month. This allows clients to book the expense at the time it is incurred, versus actually billed. Like budgets, accruals are types of fee caps, because once the client has booked the fee amount, an expectation has been set.
In addition to the use of e-billing and task codes, a growing number of clients are setting requirements around when bills must be submitted. Most often this will be by the end of the month following when the work was performed (eg, time for June needs to be billed by 31 July). Bills not submitted timely may receive extra discounts. Bills submitted very late (eg, 90 days or more) can sometimes be rejected completely. The 90-day rule can apply to time entries, too. If a bill has time entries older than 90 days, that time will be rejected.
Many OCGs now include a security requirement describing the measures firms must take to protect client data. Audits may be required and any data breaches need to be reported to the client within predefined timeframes.
A few OCGs now include requirements around records management. The simple ones state the firm must comply with the client’s policies. More complex ones might require data to be returned to the client at the conclusion of a matter. Requirements like this will force firms to update their records management policies and procedures.
Requiring diversity has been a common component of RFPs, and some OCGs highlight the need for the work to actually be performed by timekeepers consistent with proposals.
The growing complexity of OCGs demonstrates a need for firms to better monitor the terms of each OCG. This evolution has made OCGs effectively contracts, requiring law firms to manage them that way. Firms will need defined processes and new technologies to stay on top of this need. At the time of writing this article, only one product was found in the market. Intapp released its Terms of Business software in early 2016 specifically to deal with OCGs. Presumably more providers will enter the market with law firm-specific tools in the future.
Compliance in the short run may not be that pressing though. Since all of the new OCG requirements also increase the operational burden for clients. This begs the question of how consistently clients will be enforcing OCG requirements. Legal departments being charged with reducing costs may be limited in how effectively they can enforce all of these new requirements. Some can be enforced by e-billing systems, but many will require new roles for in-house departments and they may not have the budget to add those people.
Overall we can expect the flood of OCGs to continue. Law firms should be committing resources to capturing the content of these documents and making it accessible and actionable so that firms stay on top of their client demands. Hopefully in the long run, clients and law firms will find a more productive way to rebuild any broken trust. But in the meantime, OCGs present a growing challenge for both firms and the clients who write them.
This article originally appeared in Practice Innovations, a newsletter published by Thomson Reuters that communicates best practices and innovations in law firm information and knowledge management to legal professionals. To subscribe, please visit http://info.legalsolutions.thomsonreuters.com/signup/newsletters/practice-innovations/default.aspx.